The NDP’s monumental election victory in Alberta On Tuesday night is likely to have economic and fiscal implications for the province, including higher government spending, higher taxes, bigger deficits, and uncertainty for the energy sector, says National Bank Financial (NBF).
In a new report, the firm notes that while last night’s provincial election results may be considered ‘stunning’, given the long history of Conservative rule in the province, “the outcome was largely in line with a number of pre-election polls which showed popular support for Rachel Notley’s NDP surging and the incumbent PCs failing to connect with voters as decision day approached.”
Nevertheless, NBF points out that with 53 seats, the NDP will have a clear majority in Alberta’s 87-seat legislature. And, this represents a huge jump from the four seats it held prior to the election. Indeed, NBF notes that the NDP won more seats in this election than it had won in the prior 12 elections combined; and, it decisively ends more than 40 years of Conservative rule.
“So just what have Albertans voted for? In general, the NDP favour a more progressive tax system, a more “realistic” royalty structure and stable/secure funding for core public services,” the report says.
The NDP has promised more spending on health care and education, which NBF says amounts to an extra $1.75 billion of spending in 2015-2016, rising to about $3 billion annually by 2019-2020.
On the revenue side, the top 10% of earners will pay more personal income tax, it reports. “The NDP platform sees higher rates kicking in for income over $125,000 and a new top provincial rate of 15% applying to income over $300,000,” it says. Additionally, the general corporate income tax rate would rise two percentage points to 12%.
However, it also notes that the NDP have proposed eliminating certain user fees, and reversing other recent fee increases, restoring the charitable tax credit to prior levels, and introducing a job creation tax credit. And, there will continue to be no sales tax in the province.
Overall, this means that the timeline for a return to balance in the provincial budget will be pushed back one year to 2018-2019. “All told, the NDP platform projects a five-year cumulative deficit of more than $10 billion through 2019-2020, representing a net fiscal erosion of $7.1 billion relative to the last PC budget,” it says.
The energy royalty regime will also face possible reform, NBF says. “Notley favours striking a commission to review the province’s energy royalty regime, with a focus on processing more crude in-province and securing a full/fair return for Albertans. The commission would be instructed to report to the legislature within six months, with the new NDP government acting on recommendations in the first year of its mandate,” it says.
And, it notes that the NDP “have indicated they would not actively push development of two high-profile oil pipelines: Keystone XL and Northern Gateway.” Yet, it does have a more favourable view of the Energy East pipeline, which would move Alberta oil to Québec/New Brunswick, it says. Additionally, the new government will likely aim to phase out coal-fired electricity generation and carbon capture/storage projects.
“A new government means a new vision for the province, including incremental program spending, a more progressive personal income tax system and higher corporate taxes relative to the outgoing government’s plan,” NBF concludes. “Notwithstanding the province’s strong balance sheet and noted fiscal flexibility, the prospect of extra red ink on the bottom line and a slower return to balance has contributed to some underperformance in Alberta’s credit spreads. And although a recent recovery in oil prices hints at some potential revenue upside for the province, a proposed royalty review could add some near-term uncertainty to an oil and gas sector still under pressure.”