Alberta Budget Deficit Soars to Record on Oil Collapse

Alberta will increase gasoline and income taxes and introduce a new health-care levy to counter a record budget deficit after oil prices plunged by half.

Canada’s biggest oil-producing region forecast a budget gap of C$4.99 billion ($4 billion) this fiscal year, marking the seventh time in eight years the province will fail to balance its books. The deficit will narrow to C$3.05 billion next year before shifting to surplus the following year, according to budget documents released in Edmonton.

Premier Jim Prentice, facing an economy on the brink of recession, choose to target income taxes and user fees along with record borrowing to help close the gap rather than impose drastic spending cuts or raise corporate taxes. Fees for insurance, permits, tobacco, alcohol and gasoline will all rise.

“We are asking those who can afford it to pay a little more,” Finance Minister Robin Campbell told reporters. “This is not the time to raise corporate taxes.”

Higher personal taxes and levies will contribute an extra C$1.5 billion in the fiscal year ending March 31, 2016, while slower spending growth and contingency funds will help ease a C$7 billion hit from plunging oil prices. Revenue will fall 11 percent to C$43.4 billion this fiscal year while spending is forecast to be little changed at C$48.4 billion.

“We had the best tax structure in North America,” said Scott Hennig, a spokesman for the Canadian Taxpayers Federation, in an interview in Edmonton. “The government didn’t want to make the tough decisions. Are they spending too much? Absolutely.”

Oil Collapse

Sworn in last September as the price of oil began to collapse, Prentice has promised to reduce Alberta’s dependence on petroleum revenue while keeping pace with a growing population for 4.2 million people. Alberta, with the lowest taxes in the country, faces more job cuts as corporate profits for its leading industry sink 50 percent this year and energy investment falls 30 percent, according to budget documents.

To wean itself off the oil habit, Alberta will devote 50 percent of its energy revenue to finance its budget by 2019-20, down from 100 percent now. A portion of the energy royalties will be used to restock its savings funds. The oil collapse forced the government to draw down C$4 billion from its contingency fund for fiscal year 2015-16, reducing the balance to C$2.5 billion.

“We need to get off the roller coaster of oil,” Campbell said.

Alberta relied on royalties from oil and gas for almost a fifth of its revenue this current fiscal year, which led to a budget surplus of C$248 million. In the next fiscal year it will account for less than 7 percent, rebounding to 17 percent in a decade.

Higher Fees

Higher taxes and fees will help fill the budget gap, bringing in a combined C$11.4 billion over the next five years.

The province’s income tax rate of 10 percent will increase to 10.5 percent for those earning more than C$100,000 starting in January, rising to 11.5 percent by 2018. Albertans earning more than C$250,000 will see their tax rates rise to 12 percent over three years.

Gasoline taxes will increase by 44 percent to 13 cents a liter, effective at midnight, generating more than C$500 million a year in additional revenue. Buyers of wine and cigarettes will pay more, while traffic fines and motor vehicle fees will increase.

Health Levy

“The revenue items that they introduced were the least damaging to what can be described as a fragile economy,” said Justin Smith, policy director of the Calgary Chamber of Commerce, in an interview in Edmonton. “This is a strong step in the right direction.”

A new health-care levy will be imposed when residents file their tax returns. Workers earning more than C$50,000 will pay C$200 a year, rising to C$1,000 for those making more than C$130,800.

Clients of Manulife Financial Corp. and other insurers will pay higher taxes on premiums, rising to 3 percent from 2 percent on life and accident policies.

Capital Spending

Prentice still plans to spend C$29.5 billion on fixing crumbling roads and building new hospitals and schools, little changed from a proposal when he became premier and oil was more than $90 a barrel. To pay for the new infrastructure and other spending, Alberta will borrow a record C$9.7 billion, mainly in Canadian markets. This includes borrowing done for agencies. Direct borrowing by the government will almost double to C$5.68 billion, from C$3 billion last fiscal year. The increased borrowing will lift Alberta’s total capital debt to C$31.2 billion by 2018-19, from C$17.7 billion this year.

The plunge in oil prices threatens to push Alberta to the brink of recession. The C$321 billion economy will grow 0.4 percent in 2015 and accelerate to 1.7 percent next year, according to budget estimates. The unemployment rate will reach 5.7 percent from 4.7 percent in 2014.

Alberta’s forecasts assume a rebound in oil prices in the next few years. The price of West Texas Intermediate, the North American benchmark crude, will average $54.84 a barrel this fiscal year, the government estimates. WTI has averaged $48.57 a barrel this year and traded at about $51 in New York today. The government expects oil to average C$63 in the next fiscal year and C$75 the year after.

“I don’t expect to see oil above $80 for a while,” Campbell said.

Bitumen Output

The government expects oil sands production to increase 52 percent over the next five years, reaching 3.57 million barrels a day by 2020. Conventional oil output will fall over the same period to 510,000 barrels from 585,000 now. The differential between Canadian heavy crude and WTI will increase to about $23 a barrel over two years due to pipeline constraints.

Prentice chose to avoid additional taxes for corporations as well as a sales tax, a politically unpopular option for the only province in Canada without one. A family of four with an income of C$100,000 will still pay less in provincial fees and taxes than in other parts of Canada after the changes, according to the budget documents.

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