Alberta spends and N.L. taxes, on different paths after oil price crunch

They say timing is everything. AlbertaFinance Minister Joe Cecishould send a thank-you card to Cathy Bennett, his counterpart inNewfoundland and Labrador, for tabling her provincial budget the same day as Alberta's.

The Newfoundland and Labrador budget captured the country's attention with its tax and fee hikesand a provincial debt that will jumptonearly 50 per cent of GDP within a year.

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It provided an interesting contrast to Alberta's budget, which offered up new money for families, for low-income Albertans, for small businessand for investors. It didn't introduce new taxes and offered subsidies for the carbon tax that will come into effect in 2017. All while running a deficit this year that is big, $10.4 billion, but smaller percapita than Newfoundlandand Labrador's forecast deficit of $1.83billion.

In short, Newfoundland and Labrador made Alberta look good. Well, maybe not good, but OK.

At least on the surface.

Drill down a little bit and it becomes clear that the two provinces are looking to solve their oil-royalty addiction differently.

"Newfoundland's interpretation ofthe fall in the oil price is that oil is not going to come back any time soon," said Ron Kneebone, an economist with the School of Public Policy at the University of Calgary.

"So rather than accumulate a whole bunch of debt, waiting, hoping, praying that oil prices will come back, they decided to take action to close the deficit. Alberta seems to be deciding to do the opposite."

Getting off the royalty roller-coaster

The oil price shock was a theme in both budgets. When oil priceswere high two years ago, Newfoundland and Labradorearned nearly a third of its revenue from energy royalties, Alberta's number was just above 20 per cent.

The drop in oil prices was disastrous for both provinces' budgets, but it's not fair to call it a shock, said Tim Pickering of Calgary's Auspice Capital.

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"We've been through this many times," said Pickering. "And we're going to go through it many more times, because as the marginal barrel in North America, we swing high and we swing low. So this oil price shock was not a shock. We should have prepared for it. That is not the NDP's fault. But what I didn't hear is how are we going to prevent that in the future."

Pickering thinks the solution is to hedge, or lock in a price for oil on the futures market, while others suggest spending cuts and a sales tax.

Newfoundland and Labrador took the route ofhigher taxes and restrained spending.The province istrying to shift its revenue away from a dependence on energy royalties byincreasing the tax burden on its citizens.

Alberta is not.

AsCeci said in his budget speech, Albertahas no sales tax, no health-care premiumand, overall, the lowest tax regime in the country.

Economist Trevor Tombehaspointed out thatAlberta could solve most of its deficit problem simply by adopting the tax regime of the province next door, British Columbia. It has chosen not to do that.

That raises the question of what happens the next time oil crashes.

"Ithink that any government in this situation has to recognize that the reason for theirdeficit is the fall in oil prices," said Kneebone.

"And then you have to decide: Are oil prices going to come back any time soon?It's a very high risk budgeting strategyto just hope that they do, and do nothing in between."

Alberta has more options thanN.L.

Albertais spending its way through the downturn because it has the option to do so. It came into the oil price downturn with little debt and a positive net worth.That changed in the last fiscal year, but the province still has very low debt relative to other provinces and the country as a whole.

"So there's a lot more flexibility there to run with a stimulus program, to offset some of the weakness in the economy," said Robert Kavcic, a senior economist with BMO Capital Markets.

Kavcic said that Newfoundland and Labradorrealized that it was heading into troubled waters, specifically that it might not have the credit rating to easily borrow to fund itsdeficit.

"They would have a really hard time going out on the road and sellingbonds to investors without something like this to show."

An economic experiment

Alberta's goal, of course, is to spend its way back to economic growth. Newfoundland and Labradordoesn't have that choice. As time marches on and oil begins its slow creep upward, it will be interesting to watch how the two economies react.

Alberta tends to have strong economic growth, in general, but is also pushing billions into the economy, as Newfoundland and Labradorpulls money out through higher taxes and less spending.

"You'll see a pretty sizable gap open up, as oil prices goup over the next two years."

That is certainly the hope in the West.Alberta is now set to run a deficit for a total of 10 years, though, at which point it will be carrying $57.6 billion in debt.At that point, the province is clearlyhoping it will be riding up on that oil priceroller-coaster, not down.