On April 14, 2016, the Alberta Government released Fiscal Plan 2016-19, dubbed the "The Alberta Jobs Plan" ("Budget 2016"). The Budget was the NDP Government's first full fiscal year budget since being elected in May 2015, and follows on the heels of the Government's October 2015 "shock absorber" budget ("Budget 2015"), which BLG discussed in further detail in a prior blog post. Since Budget 2015, West Texas Intermediate ("WTI") prices have dipped below $30, more recently recovering to the $40 range. As a natural resource revenue dependent economy, Alberta continues to face rising unemployment and plunging resource royalties, among other fiscal issues. Facing these challenges, the Alberta Government structured Budget 2016 around four key pillars:
- Supporting families and communities;
- Investing in infrastructure;
- Diversifying the provincial economy; and
- Supporting Alberta businesses.
Highlights of Budget 2016
The 2015-16 fiscal year projects expenses of $51.1 billion, revenues of $41.4 billion, and a deficit of $10.4 billion, representing a marked increase of $5.0 billion from Budget 2015.
Highlights of Budget 2016 include:
- Reduced sensitivity to oil prices and modestly optimistic projections and risk adjustments
- The introduction of a Carbon Levy
- New and updated provincial tax credits
- Introduction of new, and restatement of previously announced, economic diversification initiatives
- $34.8 billion in infrastructure spending over five years
- Removal of the Government's previously legislated 15% cap on Alberta's debt to GDP ratio
- Reiteration of the "revenue neutral" nature of the previously announced changes to Alberta's oil and gas royalty regime – for BLG's analysis of the announcement of those changes, please click here.
Notable Energy and Economic Assumptions
Budget 2016 has projected provincial finances with a reduced sensitivity to oil, as compared against Budget 2015. Whereas Budget 2015 estimated negative impacts of $170 million to the provincial treasury for each US$1 drop in the WTI price, Budget 2016 estimates only a $130 million negative impact. This indicates a provincial budget that is 24% less sensitive to the price of oil. The Government notes that volatile sources of Government income, which includes resource revenues, have shrunk to 20% of Budget 2016's income, as compared against 35-55% figures over the past dozen years.
The Government has also included a risk adjustment figure in the Budget 2016 deficit. This $700 million figure is derived from a WTI low price scenario of US$36, which roughly corresponds to the average of today's WTI price and the recent low for WTI reached in January 2016.
Budget 2016 projects an 8% decline in conventional crude oil production in Alberta, and a 31% increase in raw bitumen production over the next three years, while also projecting real GDP growth of 2.8%, unemployment of 6.5% in the Province by 2019 – below and above, respectively, pre-oil crash figures. Budget 2016 also projects slower population growth of between 1.0 and 1.3% over the next three years, primarily as a result of net outflows of interprovincial migrants.
The Government also projects an increase in the Western Canadian Select to WTI price differential to widen to US$18.50 over the next three years, as well as aggregate crown land lease sales revenue of only $400 million over the next three years. Transfer payments from the Federal Government are projected to be roughly flat on a year over year basis.
Climate Leadership Plan
Budget 2016 also includes the implementation of Alberta's Climate Leadership Plan:
- Phasing out coal-fired electricity generation;
- Developing renewable energy;
- Legislating a limit on oil sands emissions; and
- Targeting a 45% reduction in methane gas emissions from the oil and gas sector.
Click here for BLG's recent assessment of opportunities flowing from the Climate Leadership Plan.
The implementation of the Climate Leadership Plan by Budget 2016 also includes preliminary details of a Carbon Levy that will become effective on January 1, 2017. The Carbon Levy will initially feature a $20/tonne price on carbon emissions, rising to $30/tonne effective January 1, 2018. The Government expects the Carbon Levy to generate approximately $9.6 billion over five years, with approximately one third of that amount being returned to Albertans in the form of (i) rebates for low and middle income Albertans and (ii) a reduction of the small business income tax rate from 3% to 2% upon the introduction of the Carbon Levy, bringing the combined Federal and Provincial rate to 12.5%.
Generally, the small business tax rate applies to active business income of Canadian-controlled private corporations earned in Canada below the small business income threshold (currently $500,000). The balance of the revenues generated by the Carbon Levy will be directed towards (i) large scale renewable energy projects, (ii) technology development, (iii) bioenergy initiatives, (iv) green infrastructure such as public transit, and (v) Energy Efficiency Alberta, a new provincial agency that will support energy efficiency and micro-generation initiatives.
Budget 2016 indicates that legislation enacting the Carbon Levy will be released in Spring 2016, while also suggesting that the Carbon Levy will be implemented as a hybrid system. For transportation and other refined fuels, such as gasoline, the Carbon Levy will be administered at the point of sale in a manner similar to existing fuel taxes. For heating fuels, natural gas, coal and other fuels, the Carbon Levy will be remitted by entities higher in the distribution chain, such as producers and importers. This remittance system may be similar to the system imposed by British Columbia's Carbon Tax Act. If a similar approach is taken in Alberta, we expect an increased administrative burden for entities involved in the production, importation or distribution of fuels. A number of exemptions to the Carbon Levy are listed in Budget 2016, but it is not yet clear how they will be implemented.
Click here for BLG's analysis of the initial announcement of the Climate Leadership Plan.
In addition to the introduction of the Carbon Levy and corresponding reduction in the small business tax rate, Budget 2016 has introduced new tax credits and expanded the Alberta Family Employment Tax Credit.
- The Alberta Investor Tax Credit and the Capital Investment Tax Credit will provide incentives to those who invest in eligible Alberta small to mid-sized enterprises and eligible capital assets respectively – the Government will be releasing more details on these credits later this year;
- A new Alberta Child Benefit will provide families with net incomes lower than $41,220 with up to $2,750 per family; and
- The Alberta Family Employment Tax Credit will be expanded to more families and in greater amounts.
Budget 2016 introduced the following new economic diversification initiatives:
- The Alberta Investor Tax Credit and the Capital Investment Tax Credit, discussed in Tax Changes above;
- $25 million for the Alberta Enterprise Corporation ("AEC"), to be invested in early stage and clean technology focused venture capital, in addition to the $50 million allocated to AEC in Budget 2015.
- $10 million in support to entrepreneurs and small or medium-sized enterprises commercialization efforts;
- $10 million to expand the Agrivalue Processing Business Incubator in Leduc; and
- $5 million to attract major new business investment or company headquarters to Alberta.
The following economic diversification initiatives, other than those related to the Climate Leadership Plan, were previously announced and included in Budget 2016:
- The North West Upgrader Project, which is tentatively scheduled to begin operations in 2017; and
- Petrochemicals Diversification Program, which will provide royalty credits for investment in new petrochemical facilities in Alberta.
The Government's $34.8 billion Capital Plan spans over 300 governmental infrastructure projects and programs as small as $1.0 million and including the following funding allocations over the next five years:
- $9.0 billion in municipal infrastructure support;
- $4.6 billion for roads and bridges – including $3.0 billion of funding for Calgary and Edmonton ring roads, $160 million for the Peace River Bridge and approximately $100 million for each of the Gaetz Avenue interchange in Red Deer and Highway 63 twinning to Fort McMurray;
- $3.5 billion for health facilities and equipment, including $1.2 billion for the new Calgary Cancer Centre;
- $3.1 billion of funding for affordable housing, new and modernized schools and transportation infrastructure;
- $1.0 billion in unallocated funding; and
- $262 million for Sports, Arts, Recreation and Culture infrastructure, with funding for expansions of the Calgary Zoo and Fort Edmonton Park, as well as the Royal Alberta Museum, Royal Tyrell Museum and for a refurbishment of the sliding track at WinSport (formerly Canada Olympic Park).
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