November 30, 2021 | 14:26
Alberta FY21/22 Fiscal Update (Q2)
The Province of Alberta again reduced the size of its FY21/22 deficit, now estimating a $5.8 billion shortfall (1.7% of GDP) compared to $7.8 billion in the Q1 update, and $18.2 billion in the budget plan. Those massive swings come on the back of higher oil prices, which are now pegged at $70.50 (WTI) this fiscal year. While that looked like an easy number to hit even just a few days ago, it could prove a few dollars too high if prices stay at current levels for the rest of the fiscal year—such is budget forecasting in Alberta.
That said, lets keep this a good-news update, which it is. While this year's deficit was cut again, the Province also laid out a medium-term forecast for the first time since February, and it too is miles better than first thought. Next year's deficit has been cut to $3.3 billion (from $11 billion) and FY23/24 is down to $2.3 billion (from $8 billion). WTI oil is assumed to settle in at $63.50 by FY23/24, which is about as reasonable an assumption as one can make.
Alberta's revenues are now tracking a massive $14.2 billion higher than in the budget plan for FY21/22. Read that again—the improvement alone is roughly 4% of GDP. Royalty revenues are up by $6 billion, keeping in mind that Alberta's take increases as prices rise, and as more projects reach payout status (which is sped up by higher prices). Also, various taxation streams are significantly stronger thanks to much higher-than-expected nominal output and income levels. Real GDP is now expected to grow 6.1% in 2021, versus 4.8% assumed in the budget. That is roughly in line with our 6.0% forecast. Growth then cools to 5.1% next year and 2.9% by 2023. Notably, nominal growth is tracking up a monstrous 18.1% this year on higher inflation and resource prices.
Total spending is modestly higher versus the budget plan and about $1 billion higher than in the Q1 update. Contingencies of just over $2 billion remain in place for disaster/COVID-related spending, should it be necessary.
Total borrowing requirements are now estimated at $13.0 billion this fiscal year, down from $17.6 billion in the Q1 update. Of that total, long-term borrowing comes in at $11.8 billion.
Alberta still has some work to do on this front, with more than $7 billion still to complete this fiscal year (through March 2022). By FY22/23, total borrowing ebbs to $12.4 billion, then falls more significantly to $7.6 billion by FY23/24. To put this all in perspective, Alberta's cumulative three-year borrowing is now pegged $18 billion lower than expected early this year. Thanks to a smaller borrowing program and much higher levels of GDP, the net debt-to-GDP ratio is now estimated at just over 19%, compared to almost 25% in the 2021 budget. At the current pace, that will be back under 18% within two years, an encouraging turnaround.
Aside on the other oil-producing provinces... Saskatchewan and Newfoundland & Labrador also posted mid-year updates in recent days. Saskatchewan is still looking at a $2.7 billion deficit this fiscal year (3.1% of GDP), as higher revenues were offset by drought-related expenses. Newfoundland & Labrador chopped its FY21/22 deficit to $595 million, from $825 million in the 2021 budget. Higher resource prices have helped across the board in these jurisdictions.
All told, with the mid-year fiscal update season now largely wrapped up, the combined provincial deficit is tracking at $38.0 billion, down massively from $77 billion at the end of the 2021 budget season. The shortfall now weighs in at a very manageable 1.6% of GDP, and you'll be hard-pressed to ever find a fiscal year that turns so suddenly for the better. Why? Ottawa continued to shoulder the pandemic load with direct funding of support programs and transfers to the provinces; local economies rebounded more vigourously than Finance Ministers thought; incomes surged on the back of employment gains and taxable benefits; and, if there is one area that some heated inflation helps, provincial revenue lines are it.