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The Smith government will soon release a budget report that will show the state of the government's finances, and Treasury Secretary Nate Horner recently warned that the deficit, currently projected at $6.5 billion this fiscal year, could be higher than previous forecasts if today's low oil prices persist.
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And this is just the latest bad financial news. The government projects its finances are already $14.8 billion worse than last fiscal year, when it had an $8.3 billion surplus.
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Roller coaster of resources and income
It's all part of Alberta's ongoing resource revenue rollercoaster. Indeed, 43% of this financial deterioration can be attributed to a decline in resource revenues (such as oil and gas royalties) compared to last year. In fact, if resource revenues this year were the same as last year, the budget would be nearly balanced. Unfortunately, the situation can only get worse. Horner said the deficit could rise by a “couple of billions of dollars” thanks to lower oil prices, which have fallen below US$57 a barrel, while the government budget was originally projected at US$68 a barrel. And some forecasters expect oil prices to fall even lower in 2026. By comparison, every $1 drop in the price of West Texas Intermediate, the common benchmark oil price, reduces the Alberta government's profits by $750 million.
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Simply put, Alberta could be in for another period of business-as-usual deficits. The last time this happened, the province lost its coveted debt-free status and plunged into more than a decade of red ink, resulting in $60 billion in net debt by 2020/21 (total debt minus financial assets, including the Heritage Fund). Consequently, interest payments on the government's debt increased that year to $2.5 billion (or nearly $600 per Alberta)—money that could have been used for health care, education, and/or to create fiscal space that would allow the government to cut taxes.
Curb costs
So what can the Smith government do to mitigate the damage from more red ink? Oil prices are out of his control, so he should focus on what he can control: spending. For example, the Alberta government spends billions of dollars annually on subsidies to select businesses and industries (called corporate welfare). It is true that grants are one of the largest expenditure items for many government departments, but empirical evidence suggests that corporate welfare contributes little to broad-based economic growth. It's time to finally move away from this kind of wasteful spending and put Alberta's finances on a more stable footing, in good times and bad.
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Albertans should prepare for more bad news in the Smith government's upcoming budget report. And while the price of oil is beyond the government's control, the government has the ability to mitigate the damage and help avoid larger shortages in the future. All you need is will.
Tegan Hill is the Director of Alberta Policy at the Fraser Institute.
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