Storm clouds may be brewing for Alberta’s finances

Recent news from the Alberta government forecasting a budget surplus of $2.9 billion for 2024/2 masks possible dark storm clouds brewing on the horizon for the province’s finances in 2025/26 and 2026/27. This could entail significant reductions to the province’s three-year spending plan, as outlined in this year’s budget, and/or potentially delay full implementation of the $1.4 billion personal income tax cut, now promised for next year.

These are among the major findings of my latest update to the province’s three-year Fiscal Plan, first presented in Budget 2024. The three-year update is essential for openness and transparency, since the Smith government has decided to no longer publicly release a full update of its three-year fiscal plan at the end of November 2024.

Using the Budget 2024 sensitivity of a $1 per barrel decline in crude oil prices leading to a $630 million drop in overall revenues, and incorporating a moderation in crude oil prices (now projected to average US$75 per barrel in 2024/25 and $70 US per barrel in both 2025/26 and 2026/27), Alberta’s projected budget surplus is estimated at $2 billion in 2024/25, slipping back to projected $1.1 billion deficit in 2025/26, and a very slim $120 million budget surplus in 2026/27.

These projected numbers do not include full implementation of the tax cut, which Premier Smith promised is coming in the very near future. The tax cut would see the creation of a new 8 per cent bracket on income under $60,000, representing a 20 per cent reduction in provincial income taxes for an individual Alberta earning under $60,000. For Albertans earning $60,000 or more, the savings from the tax cut are estimated at $760 annually.

Assuming the full tax cut is brought forward in Budget 2025, projected budget deficits would rise to $2.5 billion in 2025/26 and $1.3 billion in 2026/27.

While Alberta’s fiscal framework permits deficits in defined circumstances, the Smith government will likely have to reduce spending, in the absence of economically damaging tax increases.

The immediate question is whether the government will now back off the full implementation of the promised tax cut in 2025/26. Even then, spending adjustments of $1.1 billion in 2025/26 are needed to get back to budget balance. And if the full tax cut goes forward in 2025/26 as planned, spending adjustments could be in the order of $2.5 billion in 2025/26 and $1.3 billion in 2026/27.

As noted in earlier commentaries, good fiscal planning is about making prudent choices. The fact that significant spending adjustments may be needed, and full implementation of the tax cut continues to be in jeopardy, is due to the excessive spending choices made by the government thus far.