August 31, 2022 | 14:54
Alberta Fiscal Update: Surging Surplus
The Province of Alberta revised its FY22/23 budget projection, and is now looking for a hefty $13.1 billion surplus (2.9% of GDP), up from $511 million (0.1%) projected in the 2022 budget back in February.
This now officially confirms what we have long been expecting—a massive revenue windfall on the back of higher oil prices. Recall as well that this follows a $3.9 billion surplus in FY21/22 (which the 2022 budget had pegged as a $3.2 billion deficit), so Alberta is now well into the black for a second year running.
Revenues are tracking a massive $13.3 billion higher than in the budget. Resource revenues drove the increase (up $14.6 billion), while broader tax revenues are up as well, offset partly by lower investment income. This update is based on an assumption of $92.50 for WTI, up from $70 in the budget plan; $19.20 for the light-heavy differential (just under $5 wider); and $77.4 US cents for the loonie (versus 79.0 US cents). In addition to higher WTI prices themselves, Alberta is benefiting from a subdued loonie (typically the currency would follow oil prices more closely and carve into the revenue gain), a royalty structure that gets more favourable for the province at higher price levels, and more oilsands projects reaching ‘payout’ status.
Economic assumptions have also been updated, with Alberta now expecting 4.9% real GDP growth this year and 3.2% in 2023. While those reflect downgrades from the budget (5.4% and 3.5%, respectively), they are more than offset by a much stronger deflator and, therefore, higher nominal GDP growth. Nominal growth in Alberta should come in around 24% this year!
Meantime, spending was lifted by a very modest $635 million for FY22/23, largely thanks to higher operating expenses. This update also incorporates indexation of personal income tax brackets, as of January 2022, as previously announced.
The hefty surplus leaves the borrowing program almost bare this fiscal year. Borrowing for its own needs has been cut to zero from $2.2 billion in the budget (and $3.7 billion last fiscal year), while $1.2 billion in requirements remain for provincial corporations and GBEs. This is a long way down from two years ago when the province was in the market for almost $25 billion. And, with the level of GDP marked considerably higher, the net debt-to-GDP ratio falls to just 10.3%, the lowest in Canada by a wide margin.
All told, Alberta has quickly moved to the front of the fiscal pack in Canada, thanks to the surge in oil prices and some past spending restraint. Long-term yield spreads now reflect this, with the province trading at the tightest level of the group versus Canadas, and near the low end of the three-year range versus Ontario. Even still, we remain relatively positive on Alberta from an economic and fiscal perspective for a number of reasons: We expect oil prices to remain firm, with WTI expected to average $95 in 2023; the housing-market fallout will be much less severe than in other regions; and, Alberta is now drawing in labour from other provinces again. More colour on these issues can be found here.
What’s the downside risk? It always comes back to oil, and the $92.50 assumption for this year is a pretty strong markup to current prices (WTI is trading at $90 upon release). With that in mind, it will take $85 WTI for the rest of the fiscal year (through March 2023) to hit this assumption. Also, there is a provincial election coming early next year (before the end of May 2023), which could add some spending pressure to the 2023 budget. All of that said, there is plenty of room for Alberta to maneuver.