Provincial Budgets

February 27, 2025 | 19:36

Alberta (FY25/26) — Tariff Accounting

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

The Province of Alberta is projecting a $5.2 billion deficit in FY25/26, or just over 1% of GDP, a significant swing from a $5.8 billion surplus now estimated for FY24/25—but the bar appears to be set very low. Indeed, this budget effectively builds in significant tariff action, a resulting economic slowdown, widening of the light-heavy oil price differential, but with limited impact on the Canadian dollar, all while also incorporating a further $4 billion contingency. That said, the large contingency will also be used to cover the impact of public bargaining settlements so, while it's easy to cast all the blame on tariffs, there is actually some upward pressure on spending for a government that doesn't love to show an eagerness to spend. Still, if the economy doesn't get hit hard on trade, there is meaningful upside to this fiscal outlook.

Further ahead, Alberta sees modest deficits of $2.4 billion and $2.0 billion in FY26/27 and FY27/28, respectively, with large contingencies still built into each of those fiscal years. Net debt holds below 10% of GDP through the forecast horizon.

The major new measure in this budget is an earlier-than-planned reduction in personal income taxes. The new personal income tax bracket (announced last year) of 8% on the first $60,000 of income will be implemented as of January 1, 2025, and mark a reduction from 10% currently (it was previously set to be gradually implemented by 2027). The cost will run at $1.2 billion for FY25/26.

Total revenue is projected to fall 8.1% to $74.1 billion in FY25/26 after the prior fiscal year has come in much better than expected. While personal income tax revenue will dip on the back of the tax cut, bitumen royalties take the largest hit, down $4 billion. These revenue estimates are based on WTI oil prices averaging $68 in FY25/26 versus $74 in the prior year, with a light-heavy differential of $17.1 (widening from $13.2). The loonie is pegged at 69.6 U.S. cents, which in nearly right in-line with levels on budget day. This paints a scenario where the differential widens amid U.S. tariffs, but the currency doesn't weaken—we'd expect a significant fallout in the currency, which would act as a revenue support. As such, we view the assumptions behind this fiscal plan as a conservative starting point.

Revenue sensitivity: A $1 increase in WTI prices would lift revenues by roughly $750 million; a $1 improvement in the WCS spread would add $740 million; while every 1 cent increase in the value of the Canadian dollar will trim about $560 million.

The Province's economic assumptions build in an effective 15% U.S. tariff on Canadian goods imports; a 10% tariff on energy imports; and wide retaliation by Canada. In this environment, Alberta has cut its 2025 real GDP growth forecast to 1.8%, down from 3.0% in 2024. That leaves growth tracking below BMO Economics' 2.3% call for 2025, but we have yet to build in any tariff action. That said, we would view Alberta as among the least exposed to such action from an economic perspective, and growth of slightly below 2% would be consistent with our view, if we were to have to make revisions.

Beyond any tariff risk, underlying economic conditions in Alberta are arguably the strongest in Canada. The energy sector is solid in this oil price environment, even if most capital spending continues to go toward maintenance rather than new projects breaking ground. Demographics remain very supportive, with net inflows from the rest of Canada near all-time highs as international immigration begins to slow. That has buoyed housing demand despite elevated mortgage rates, where most local markets have experienced very little correction.

Total expenses are expected to rise 5.9% in FY25/26, with operating expenses rising at a 3.6% clip. Measures targeting health care, education and disability support are focus areas. Public-sector compensation appears to be an upside spending risk, and the larger-than-normal contingency attempts to account for this. Meantime, the capital spendingprogram remains robust, running at $8.6 billion in FY25/26, compared to $7.7 billion in the prior fiscal year and $6.3 billion in FY23/24. Some of the priority areas (such as health care capacity) continue to flow through this area of the budget, along with transportation infrastructure spending.

The Province borrows to fund the capital plan, operating deficits and GBEs. Total borrowing requirements are expected to run at $11.4 billion in FY25/26 ($9.1 billion in term debt), after accounting for almost $10 billion in pre-borrowing ahead of the fiscal year—FY25/26 will see chunky maturities, and pre-borrowed funds are currently held in the debt retirement fund. Term borrowing then rises to $11.1 billion in FY26/27 and further to $16.6 billion by FY27/28. The swing to deficit and sturdy borrowing will lift net debt this year to $43.0 billion, although that weighs in at a still-low 8.9% of GDP. While that ratio will rise through the forecast horizon, increases are modest and the ratio holds below 10% by FY27/28, still the lowest in Canada by a wide margin.

The Bottom Line: Alberta maintains the strongest fiscal position in Canada, even after building significant tariff action into the economic and budget outlook. While the Province is also dealing with some upward cost pressure, we suspect the risk to this fiscal plan is tilted quite heavily to the upside barring a much more significant spill in oil prices.