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Varcoe: Alberta's new budget on course to collide with its own fiscal guardrails

The bottom line is that the same financial problem has cropped up time and time again. Alberta is too reliant on volatile oil and gas prices for a huge chunk of its revenues

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It was only 36 months ago, but it might as well be a lifetime for Alberta budget watchers.

Varcoe: Alberta's new budget on course to collide with its own fiscal guardrails Back to video

Oil prices were high. The economy was strong.

Multibillion-dollar budget surpluses were rolling in like the tide — and long-term deficits were seemingly being legislated away by the provincial government.

Well, that didn’t last long.

On Thursday, Finance Minister Nate Horner unveiled the province’s budget for the upcoming fiscal year, showing a tsunami of red ink — including $9.4 billion in the new 2026-27 financial blueprint.

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With rising expenses and low oil prices, deficits are expected to keep falling like raindrops in the coming years — $7.6 billion in 2027-28, and then $6.9 billion the following year.

If we include the projected deficit for the current reporting period that ends in March, it would add up to four straight years of bruising budgets — a combined $28 billion of spending outstripping revenues.

And there’s no clear path back to a budget surplus.

It also means the rules in the UCP government’s “fiscal framework” — touted in the 2023 budget as a way to “secure Alberta’s future by requiring balanced budgets, limiting operating expense growth and setting out rules to pay down maturing debt” — are likely to be broken.

“I recognize that this is a tough pill to swallow, but this deficit reflects our commitment to providing top quality services . . . while managing substantial drops to the price of oil,” Horner told reporters on Thursday.

“If anybody can point to $4.5 billion that they would have had me cut out of this budget to stay within the rules — and think that that’s in the best interest of Albertans or what Albertans want — they should show me where.”

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Those fiscal guardrails were announced by former finance minister Travis Toews in 2023, aiming to require future governments to balance their books, with certain exceptions, and use budget surpluses to pay down debt and put money into savings.

It includes a rule that once a deficit is reported by the province in its year-end financial statement, it has three years to get back to balance. (Through a complex calculation, it also limits the size of the deficit in the new budget year, and the province is forecasting it will exceed that level by about $4.5 billion.)

While the books aren’t quite closed on the 2025-26 budget, the deficit is forecast to top $4 billion — meaning the province wouldn’t meet its own fiscal guardrails.

If the government can’t meet its commitment, it does have the ability to simply change the rules.

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A review of the government’s fiscal framework will be undertaken, as significant deficits are projected in budget 2026 “resulting from an unprecedented combination of challenges,” the document states.

“This was the first test of the framework, and it failed,” said Trevor Tombe, an economist at the University of Calgary’s School of Public Policy.

“The whole point of a fiscal anchor is to affect fiscal policy, to help ensure sustainable public finances.”

The bottom line is that the same financial problem has cropped up time and time again. Alberta is too reliant on volatile oil and gas prices for a huge chunk of its revenues.

“In a period of economic uncertainty that we are in right now, I think it’s something that we could forgive, as long as a plan is developed to deal with the challenge,” said Business Council of Alberta chief economist Mike Holden. “If you’re not willing to cut spending, then you have to revisit the revenue side of the equation.”

It’s also worth pointing out the Klein government also passed balanced-budget legislation in the 2000s, which was repealed in 2009.

“The consequences are political. We created these rules and I’m breaking them. It bothers nobody more than it does me,” said Horner.

“We created them to constrain us, help us make good decisions in tough times, because Alberta’s tax structure, royalty revenue, is unique . . . Our plan is to amend what we must and continue moving forward and work to stay with them.”

In the new budget, the province projects benchmark West Texas Intermediate (WTI) crude prices will average just US$60.50 a barrel in the coming year — down $6.50 from last year’s initial budget forecast, and nearly $75 a barrel seen in 2024-25.

However, it’s also below current prices, with WTI crude closing Thursday at US$65.21 a barrel, rising recently due to geopolitical tensions.

In the new budget, natural resource revenues are projected to clock in at $13.2 billion.

Benchmark oil prices are expected to remain weak during the first half of this year due to rising global inventory levels, and expectations of a deeper discount on Western Canadian Select crude from current low levels. (The differential is expected to increase about $2 to $13 a barrel in the new year.)

Oil production is forecast to keep setting records, rising by almost three per cent, or another 118,000 barrels per day, this year, according to the document.

Output will keep increasing in 2027 as new pipeline capacity is added. Within the oilpatch, capital spending is projected to edge up to $33.5 billion this year, an increase of almost four per cent from 2025 levels.

As for the broader economy, the government expects Alberta’s GDP will grow by 1.8 per cent this year, falling from 2025 levels, but still leading the country. Population increases, which have been cooling, will slow to 1.1 per cent.

Job growth is expected to throttle down compared with last year, but the unemployment rate will also drop, averaging 6.6 per cent.

With more borrowing, Alberta’s debt levels will grow.

However, most attention will be on the deficit, despite the fiscal guardrails put in place.

As Tombe cautioned about the rules back in February 2023: “It’s not simple, it’s not transparent, and it will almost surely be abandoned by future governments.”

And with upcoming changes to the fiscal framework, we will see how it survives.

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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