Alberta's budget-busting election

All politics is local, said Tip O’Neill, the 1980s-era leader in the U.S. House of Representatives. 

That may be true, but government budgets—especially in Alberta—are increasingly anything but local. International events and economic developments regularly affect economies and government finances on the other side of the planet.

One century ago, few would have wondered how a sovereign debt default by a Greek government might affect British, American and Canadian economies.

Today, the prospect of a Greek (and other European) defaults worries finance ministers from London to Beijing.  

In Alberta, we’re about to see how far-flung realities and local affairs can interact, and in particular, what the interplay will mean for Alberta’s finances.

On the local side, in their recent analysis of election-time spending promises, the Canadian Taxpayers Federation (CTF) attached cost estimates to the goodies promised by Alberta’s four main political parties: $3.4 billion for the Progressive Conservatives; a $1.9 billion price tag for NDP policies; a $770-million bill for the Liberal platform; an extra $308 million bill if Wildrose forms government.

Given that political promises are often more expensive than initially forecast (by anyone), one might want to look at the above figures as cautious underestimates.   

Now the world’s relevance to Alberta: The day after the CTF released its analysis, the World Trade Organization forecast worldwide trade growth this year: just 3.7 per cent, down from five per cent last year and 13.8 per cent in 2010.

“We are not yet out of the woods,” said WTO Director General Pascal Lamy last week, in reference to slower trade growth and the still wobbly world economy. Indeed, as the WTO notes, that 3.7 per cent forecast is an average of both developing and developed countries, with average trade growth among the latter forecast at just two per cent this year.

Decelerating trade growth can mean a number of things, including slower economic growth than previously forecast and likely weaker energy prices. That doesn’t have to be the outcome, given trade is just one component of an economy but it would be folly to ignore a trend.

Which brings us to Alberta’s 2012 budget. In February, my colleagues Nadeem Esmail and Niels Veldhuis pointed out how the province’s balanced budget target for even 2015—the real target, not the fake one for 2014 based on transfers from the Sustainability Fund—was based on optimistic growth forecasts for the economy and revenues.

For example, while the budget assumes average oil prices at $105 per barrel over the next three years—quite possible—even a slight decrease of $4 per barrel would result in nearly a billion-dollar drop in revenues for 2012 alone. In a minor economic slowdown, such a drop in oil prices is not inconceivable.

Esmail and Veldhuis also noted that to balance the books by 2015, the government estimate on economic growth was 14 per cent higher than private sector forecasts. The province is also banking on personal income growth to be 37 per cent higher than estimates from private forecasters (including the banks).

Now consider recent developments: natural gas prices are below $2 per gigajoule and headed lower, this according to multiple private forecasters. The province’s budget hoped for $3. If natural gas averages out at two dollars over the course of the year, that’s a $280-million drop in provincial revenue.

Now, on the other side of the ledger, add in extra election-time spending promises that range from just over $300-million to $3.4 billion. All the math adds up to this: an additional barrier to getting Alberta’s budgets back into the black.