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What's the state of the Alberta UCP government’s finances?

The UCP has been giving all sorts of mixed signals about the state of Alberta’s finances.

When the government released its 2021-22 Mid-year Fiscal Update a few weeks ago, the government projected a massive increase in revenues for Alberta – an increase of 25 per cent from earlier forecasts.

Most of this massive $14.2 billion change from the 2021 government budget is from a $6.1 billion increase in bitumen royalties (from $1.48 billion in the 2021 Budget to a projected $7.6 billion).

That still leaves a projected $5.8 billion deficit by the time next year’s budget rolls around.

But that hasn’t stopped Jason Kenney from popping the champagne.

“Alberta’s Recovery Plan is working!”, the Premier tweets.

Premier Kenney is keen to get re-elected, so he’s mused about all sorts of goodies in the next provincial budget, such as a return to the 10 per cent flat tax. That would decrease revenue by about $1.7 billion and benefit only wealthy Albertans.

He’s also talked about some sort of government aid to “blue-collar people spread throughout rural Alberta” and “white-collar people in Calgary” in the next budget.

The reality of this apparent reversal of fortune for provincial revenue has nothing to do with government policy whatsoever and can evaporate overnight.

The jump in forecasted government revenue should be viewed cautiously. Alberta’s seen plenty of boom-bust cycles when it comes to energy prices. And the threat of another wave – a fifth wave – of the COVID-19 pandemic looms in the background, which could affect peoples’ health and therefor the economy.

The predicted increase in bitumen royalties is based on factors like the amount sold, the price, and the royalty structure of oil sands projects. The price is the most volatile part of this equation. Our benchmark oil price rallied to more than $83 per barrel, but has since dropped to the $60 to $70 range. Oil prices even went negative last year. Volatility is the name of the game.

Nevertheless, Alberta hit record-levels of oil exports in October: 3.84 million barrels per day. We’ve never exported more oil than we have recently and we’ll probably export even larger amounts of oil in the coming months.

Also, the royalty structure changed for at least one large oil sands operation. Last month, Suncor’s Firebag project (215,000 barrels per day) moved to a “post-payout” royalty regime. The post-payout royalty regime means the company pays more to the province for the bitumen it sells to the market.

All this means a big jump in forecast oil and gas revenue this year. We’re not in an oil boom. Not yet. Albertans should be cautious about this “good news”.

Even with the increased revenue, government spending outstrips income by about $5.8 billion, which is a concern because UCP campaigned on eliminating the deficit by 2023 through cuts and freezes.

Also, the Fiscal Update is a forecast; it’s not money in the bank. We’re half-way through the budget year and the numbers above are price projections based on a number of factors.

The latest Fiscal Update assumes oil prices will average $70.50 per barrel for the entire fiscal year of 2021-22. If true, this would be a big increase from the Budget forecast of $45.50 per barrel. The government clearly low-balled forecasts for the year, but the last Budget was built during the pandemic, so perhaps this can be forgiven.

$70.50 per barrel of oil would help Alberta’s finances, but oil prices have recently dropped over fears of the COVID-19 variant Omicron and its effect on people’s heath.

The UCP’s mishandling of the COVID-19 pandemic led to the disastrous fourth wave. The UCP’s “Open for Summer, Open for Good” and “Best Summer Ever” slogans? Those slogans were grounded in the loosening of public-health rules that led directly to increased case counts, increased people in hospitals, increased deaths.

Despite a recent jump in the COVID cases from the Omicron variant now in Alberta, the UCP has loosened the rules for social gathering allowing for unvaccinated people to mingle with their families over Christmas even as the Chief Medical Officer of Health Dr. Hinshaw warns we are at risk of a fifth wave of infections.

It goes without saying that the economy will suffer as peoples’ health and wellness suffers. Demand for goods and services drops when people are sick. When demand drops, prices drop.

The reported jump in oil and gas revenues should be viewed cautiously. The main driver of the projected revenue increase is the international price of oil, something the UCP government has nothing to do with.

Even with the jump in oil and gas revenues, the government still has a budget deficit, which the UCP promised to eliminate through cuts and freezes. The deficit is larger now than they thought it would be during the election, so there may be even deeper cuts to public services going forward.

The main concern, however, is how the UCP government will manage the ongoing COVID-19 pandemic. A fifth wave of the pandemic could have serious impacts on peoples’ health, which will affect the economy.