1st-quarter-budget.update.pdf

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http://slidepdf.com/reader/full/1st-quarter-budgetupdatepdf 1/12 August 2012

2012-13 First Quarter Fiscal Update andEconomic Statement


http://slidepdf.com/reader/full/1st-quarter-budgetupdatepdf 2/12

First Quarter 2012-13 • fiscal Update and economic statement

ii

Table of Contents

ACTUAL RESULTS 1

ECONOMIC OUTLOOK

Alberta economy stays strong amid global uncertainty 4

Key energy and economic assumptions 7

REVENUE IMPACTS

Impact o recent economic developments on government revenues 8

VOLATILITY

Alberta’s revenues remain highly volatile and dicult to predict 9




1

ACTUAL RESULTS

For the rst three months of 2012-13

Method of Consolidation

Tis nancial summary is prepared on the same basisas used in Budget 2012.

Te results o all government departments, undsand agencies, except those designated as governmentbusiness enterprises, are consolidated on a line-by-line basis Revenue and expense transactions betweenconsolidated entities have been eliminated

Te accounts o provincial agencies designated asgovernment business enterprises are included on themodied equity basis, the equity being computed inaccordance with International Financial Reporting

Standards applicable to those entitiesTe accounts o the Alberta Innovates corporationsand the Crown-controlled SUCH sectororganizations such as school boards, universities,colleges, technical institutes, and Alberta HealthServices that are controlled by the government arenot included in this scal summary Tese Crown-controlled entities are consolidated on a line-by-line basis in the consolidated nancial statementsorming part o the Government o Alberta AnnualReport

Basis of Financial Report ing

Te consolidated scal summary reports revenue(including gains rom disposal o tangible capitalassets), expense (including amortization, loss ondisposal and write-down o tangible capital assets),and surplus / (decit)

Revenue and expense are recorded using the accrualbasis o accounting Cash received or goods orservices which have not been provided by period endis recorded as unearned revenue

Expense includes the province’s cash paymentstowards the ununded pension liabilities Expense

excludes the change in the ununded pensionliabilities, which is a non-cash expense that does notaect borrowing requirements

Debt servicing costs include interest payable andamortization o discount on debt issues

Compliance with Fiscal Responsibility Act

Under the Fiscal Responsibility Act , operating expenseincreases, excluding those or dedicated revenue-operating expense, are limited to 1% o total budgetedministry operating expense In addition, actualexpense or a scal year shall not exceed revenue plusany amounts allocated rom the Sustainability Fund

Te results or the rst three months o 2012-13 arein compliance with the requirements o the Fiscal Responsibility Act.




2

CONSOLIDATED FISCAL SUMMARY a for the three months ended June 30, 2012(millions of dollars)

2012-13

Budget Budget Actual

Revenue:

Income taxes 13,785 3,197 3,298

Other taxes 4,106 931 929

Non-renewable resource revenue 11,198 2,779 1,891

Transfers from Government of Canada 4,915 1,226 1,285

Net income from commercial operations 2,279 570 605

Premiums, fees and licences 1,391 348 644

Investment income 1,794 449 437

Other 795 199 220

40,263 9,698 9,309

Expense:

Program Expense:

Investing in Families and Communities:

Culture 233 50 40

Health 16,642 3,826 3,819

Human Services 4,282 1,020 1,019

Justice and Solicitor General 1,293 349 354

Municipal Affairs (excluding Municipal Sustainability Initiative) 433 98 122

Municipal Sustainability Initiative 896 896 896

Tourism, Parks and Recreation 182 46 44

Securing Alberta's Economic Future:

Education 6,542 1,505 1,488

Enterprise and Advanced Education 3,011 661 650

Infrastructure 1,361 231 232

Service Alberta 318 64 63Transportation 1,885 339 346

Treasury Board and Finance 1,327 217 218

Advancing World-leading Resource Stewardship:

Aboriginal Relations 154 32 32

Agriculture and Rural Development 1,000 150 144

Energy 543 95 88

Environment and Sustainable Resource Development 609 120 105

International and Intergovernmental Relations 36 5 5

Disaster / emergency assistance 44 8 71

Executive Council 54 14 11

Legislative Assembly 133 33 26

Total Program Expense 40,978 9,759 9,773

Debt Servicing 531 133 124

Less: In-year Savings (360) - -

Total Expense 41,149 9,892 9,897

Surplus / (Deficit) (886) (194) (588)

First Three Months

a Budget numbers have been restated to reect the re-organization of government ministries established by Orders in Council under the Government Organization

Act, on May 8, May 24 and July 11, 2012.




3

CONSOLIDATED FISCAL SUMMARY a for the three months ended June 30, 2012(millions of dollars)

2012-13

Capital Investment: Budget Budget Actual

Investing in Families and Communities:

Culture 3 1 -

Health 77 8 9

Human Services 11 3 3

Justice and Solicitor General 109 37 37

Municipal Affairs 64 14 -

Tourism, Parks and Recreation 14 3 2

Securing Alberta's Economic Future:

Education 4 1 1

Enterprise and Advanced Education 5 1 1

Infrastructure 398 68 49

Service Alberta 53 3 3

Transportation 1,384 180 137

Treasury Board and Finance 33 8 2Advancing World-leading Resource Stewardship:

Agriculture and Rural Development 11 3 2

Energy 17 4 2

Environment and Sustainable Resource Development 32 1 1

Legislative Assembly 3 1 -

Total Capital Investment 2,218 336 249

First Three Months

a Budget numbers have been restated to reect the re-organization of government ministries established by Orders in Council under the Government Organization

Act, on May 8, May 24 and July 11, 2012.




4

ECONOMIC OUTLOOK

Alberta economy stays strongamid global uncertainty

Source: Alberta Treasury Board and Finance

FIGURE 1. Contribution to Alberta Real GDP Growth

-15

-10

-5

0

5

10

15Consumer Government Net Exports

Investment Real GDP

(percentagepoints)

Despite a dicult global economicclimate, Alberta’s economy hasared well so ar in 2012 Businessinvestment has been robust, mainly ueled by gains in oil-related activity

A strong labour market, including nation-leading job gains, has attractedlarge numbers o migrants and drivenup consumer spending and housing activity

Overall, real GDP is on pace to expand

by 38% this year, unchanged rom

Budget 2012 Solid gains in businessinvestment, consumer spending andhousing are expected to uel growthin Alberta’s economy this year (Figure1) Tis comes ater Alberta led allprovinces with estimated real GDPgrowth o 52% in 2011, up rom35% estimated in Budget 2012

As a trade- and commodity-driveneconomy, Alberta is highly susceptibleto developments in the global

economy A resuracing o Euro

Source: Alberta Energy

FIGURE 2. Oil Prices

0

20

40

60

80

100

120West Texas Intermediate (WTI)

Western Canada Select (WCS)

(US$/bbl)

WTI - WCS Spread

zone debt tensions combined withmoderating emerging market growthhave already injected resh uncertainty into nancial markets Tis has

contributed to a pullback in oil pricesand put downward pressure on thevalue o exports and corporate prots

While the real economic growthorecast or 2012 is unchanged, thenominal outlook and underlying realgrowth drivers are somewhat dierentthan expected at Budget 2012:

n A downward adjustment to energy prices has lowered expectations oroil and gas exports, nominal GDPand corporate proits

nResidential construction andconsumer spending have beenrevised higher because o better-than-expected results so ar this year

n While the employment orecast isunchanged, stronger-than-expectedlevels o interprovincial migrationto Alberta have led to an upwardadjustment to population growthhis has helped moderate expected

wage gainsDownside risks to the Alberta outlook remain elevated due to unresolvedproblems in Europe and ongoing turmoil in nancial markets

Alberta Business Sector

Oil prices remain volatile

Oil markets have been volatile this year,reacting to heightened uncertainty inthe global economy (Figure 2) Ater

averaging well above $US100/bblin the rst quarter o calendar year2012, West exas Intermediate (WI)dropped to a 10-month low o justover $US78/bbl in late June WI hassince rebounded to over $US90/bbl aso mid-August and is now orecast toaverage $9275/bbl in 2012-13




5

i i

-10

0

10

20

30

(y/y % change)

Source: Statistics Canada

FIGURE 3. Alberta Export Growth

-4

-3

-2

-1

0

1

2

34

5

6

(y/y % change )

Alberta Rest of Canada

Source: Statistics Canada

FIGURE 4. Employment Growth

ECONOMIC OUTLOOK

Business activity stays healthy

Business investment is expected to posta solid increase in 2012, despite oil andgas price declines Led by spending in

the oil sands, energy-related investmentremains a key growth driver

Rising oil production continues todrive up energy exports, more thanosetting continued declines in naturalgas shipments Since May, lower oilprices have pulled down Alberta’syear-over-year growth in nominalexports (Figure 3), and hurt producercash fow and prots Growth in theaverage number o rigs drilling has alsostarted to ease when compared to last

year’s levels

Outside o oil and gas extraction,business activity has been briskManuacturers have seen shipments

jump 106% in the rst hal o 2012over last year, propelled by renedpetroleum products, machinery andequipment and abricated metals

Alberta crop producers are primedor a much better year, as growing conditions have been relatively avourable and crop prices have soaredamid drought conditions in the US andEastern Europe Farm cash receipts hita record in the rst quarter, rising by 283% over the same time last year

Corporate profts revised lower or 2012

Te orecast or corporate protshas allen, mainly refecting developments in energy markets Temoderation in WI combined withthe wider-than-expected dierential

between the WI price and the priceo Alberta oil (eg Western Canada Select), as shown in Figure 2, havecontributed to the revised 2012corporate prots outlook A sharp dropin orecast natural gas prices, rom$3/GJ to $2/GJ in 2012-13, has also

weighed on prots Overall, corporateprots are now expected to increase by only 26% in 2012

Alberta Household Sector

Alberta leads the nation in job growth

Firmly set in expansion mode, Alberta

companies continue to add to payrolls Alberta employment is up 32% inthe rst seven months o 2012 overthe same time last year, the strongestgrowth in Canada Te provincecontinues to create jobs at a time whenCanadian employment growth hasvirtually stalled With year-over-year

job growth now starting to moderate(Figure 4), the Budget 2012 orecasto 27% or 2012 remains on track

Alberta’s unemployment rate is the

lowest in the country at 46%, and is

expected to average 49% this year,unchanged rom Budget 2012.

Net migration jumps

Attracted by job opportunities, Alberta

has become the destination o choiceor migrants Alberta gained 13,396people rom other provinces between

January 1 and March 31 o 2012, thestrongest quarterly gain since 2006and the ninth straight quarter o netinterprovincial infows (Figure 5)Given higher-than-expected infowso provincial migrants, Alberta’spopulation is now expected to expandby 21% in 2012, up rom theBudget 2012 orecast o 18%




6

ECONOMIC OUTLOOK

FIGURE 5. Alberta Net Interprovincial Migration

Sources: Statistics Canada and Alberta Treasury Board and Finance

i i

-2.5

2.5

7.5

12.5

17.5

22.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5Interprovincial Migration (RHS)

Population Growth (LHS)

(000s)(y/y % change)

Weekly wage growth moderates

Te large infows o workers to Alberta has helped keep weekly wage growthcontained In the rst ve months,

average weekly earnings (AWE) haveincreased 24%, a deceleration romthe 46% growth recorded last year

While AWE has slowed, average hourly earnings in the Labour Force Survey have continued to grow at a strong pace, and hours worked continues totrend higher Ater an estimated 67%gain in 2011, total personal income isorecast to increase 62% this year, inline with Budget 2012.

Housing market on the upswing

Alberta’s housing market has picked upmarkedly this year, lited by increasedmigration to the province and recordlow mortgage rates Housing startsare up 46% through the rst sevenmonths over last year, bouncing back rom an unusually weak rst hal in2011 As a result, housing starts arenow orecast at 29,500 this year, uprom Budget 2012 orecast o 28,200In the resale market, Alberta has movedinto seller’s territory Home resaleshave outpaced new listings, bringing the sales-to-listing ratio to 061 as o

July, just above the 060 seller’s marketthreshold

Alberta’s consumers boost economy

Households are doing their part tosustain Alberta’s expansion A robustlabour market and infows o migrantshave contributed to more consumerspending in Alberta Retail sales havesurged 88% in the rst hal o 2012

over last year, the astest growth among the provinces As a result, the outlook or real consumer spending growthin Alberta has been revised upward to44% in 2012

Infation stays in check

Trough the rst seven months o the year, consumer price infationhas remained tepid, averaging only 14% Weak growth in housing and

vehicle prices, along with lower energy prices, have kept infation containedHowever, there is a risk that infationcould creep higher Lower energy prices have already subtracted rominfation and are unlikely to have thesame moderating eect going orwardDrought conditions in key producing regions should put upward pressureon ood prices, and there is a risk thathousing price gains could pick up giventhe uptick in housing demand Overall,consumer price infation is expected toaverage 19% in 2012, down romthe Budget 2012 orecast o 25%

Global Outlook and Risks

Alberta’s solid expansion comes ata time o weakness in the globaleconomy Global economic growthis expected to slow this year, mainly refecting the eects o the Euro zone

debt crisis Although the Alberta economy has perormed well todate, risks remain elevated given theuncertain state o the global economy

nhe Euro zone economy is expectedto mildly contract in 2012 as thedebt crisis continues without a long-term solution in sight Anescalation in the crisis could urtherdampen economic growth and couldimpact global inancial stability

nEuro zone woes have spilled over toother regions o the global economy including emerging markets, whichhave already decelerated A urtherslowdown o emerging marketgrowth could test the resiliency o the global economy, and urtherpush down commodity prices

nRising North American oil suppliesand a lack o pipeline access to

alternate markets have aectedthe price received by Alberta oilproducers Further pricing pressurepresents a downside risk to the

Alberta economy

nhe Canadian dollar has seen boutso volatility throughout this yearCurrently, Canada is viewed as a sae haven or international capital,

which has contributed to the loonie’srecent appreciation Continued

strength in the value o the Canadiandollar poses a risk to export growth

n Alberta has the lowest unemploymentrate in Canada A urther tightening in the labour market could worsenskilled labour shortages and drive upbusiness costs




7

Fiscal Year Assumptions 2011-12 Actual 2012-13 Budget 2012-13 1st Quarter

Prices

Crude Oil Price

WTI (US$/bbl) 97.33 99.25 92.75

Alberta Wellhead (Cdn$/bbl) a 88.31 90.18 82.07

WCS @ Hardisty (Cdn$/bbl) 80.72 83.28 72.11

Natural Gas Price

Alberta Reference Price (Cdn$/GJ) 2.98 3.00 2.00

Production

Conventional crude oil (000s barrels/day) 504 524 545

Raw bitumen (000s barrels/day) 1,785 2,045 1,998

Natural gas (billions of cubic feet) 4,439 4,085 4,111

Interest rates

3-month Canada treasury bills (per cent) 0.89 1.00 1.10

10-year Canada bonds (per cent) 2.47 2.80 2.30

Exchange Rate (US¢/Cdn$) 100.7 98.6 98.6

Calendar Year Assumptions 2011 Estimates 2012 Budget 2012 1st Quarter

Gross Domestic Product

Nominal (millions of dollars) 303,494 b 306,657 322,487

per cent change 10.6 b 7.0 6.3

Real (millions of 2002 dollars) 192,801 b 196,913 200,173

per cent change 5.2 b 3.8 3.8

Other Indicators

Employment (thousands) 2,094 2,151 2,151

per cent change 3.8 2.7 2.7

Unemployment rate (per cent) 5.5 4.9 4.9

Average Weekly Earnings (per cent change) 4.6 4.2 3.5

Personal Income (per cent change) 6.7 b 6.2 6.2

Corporate Profits (per cent change) 10.1 b 11.8 2.6

Housing starts (number of units) 25,704 28,200 29,500

Alberta Consumer Price Index (per cent change) 2.4 2.5 1.9

Population (thousands) 3,779 3,848 3,859

per cent change 1.6 1.8 2.1

Key Energy and Economic Assumptions

a Refers to the average price per barrel of Alberta light, medium and heavy oil.

b Alberta Treasury Board and Finance estimate.




8

REVENUE IMPACTS

Avg

Avg

85

90

95

100

105

110

115

120

125

Budget 2012 First Quarter Update

Max

Min

(WTI, US$/bbl)

Max

Min

FIGURE 1. Private Sector Oil Price Forecast Range 2012

Sources: Alberta Energy and Alberta Treasury Board and Finance, Survey of PrivateSector Forecasters

Economy stays strong, butvolatility in energy marketsweighs on royalties andoverall revenues

Amid a slowdown in the globaleconomy, Alberta is expected tomeet the real economic growthand employment projections rom Budget 2012

Despite Alberta’s strong economy,overall government revenues have been

negatively impacted by developmentsin global energy markets sinceBudget 2012 was tabled Markets havebeen highly volatile since the beginning o 2012-13, reacting to Europeansovereign debt concerns, slow growth inadvanced economies, and a decelerationin emerging market growth Declinesin oil and natural gas prices received by

Alberta producers since Budget 2012 have lowered price expectations or thisscal year, with negative impacts on

royalties paidRoyalties rom crude oil and bitumenproduction have been the most aectedby lower orecast prices A numbero actors have contributed to weakerroyalties paid by Alberta oil producers:

Impact of recent economic developmentson government revenues

Natural gas royalties have also beenadjusted downward on lower orecastprices, as North American supply growth continues to exceed demandgrowth

Alberta land sales, which were orecastto decline in Budget 2012, are now projected to be even lower Tis partly refects the impact o reduced prices onproducer cash fows

Income taxes tracking slightlyhigher than Budget

Many Alberta businesses have benetedrom strong economic conditionsin the province Despite downwardrevisions to the corporate protsestimate or 2012, corporate incometax revenue has been revised marginally higher or 2012-13 Tis refects muchhigher-than-expected tax collections inthe rst our months o the scal year

Albertans have the highest earnings

in the country, with average weekly earnings nearly 20% above thenational average Driven by strong employment and wage growth,personal income taxes are expected toincrease signicantly this scal yearTe estimate or personal income tax revenue has been revised slightly higheras a result o a better-than-expectedinitial orecast o personal income tax collected in 2011-12 Tis results ina higher base upon which to grow in

2012-13

Higher Decit Forecast

Primarily due to a lower estimateor resource revenue, Alberta’sdecit could range rom $23 billionto $3 billion in 2012-13 TeSustainability Fund balance couldthereore range rom $37 billion to$3 billion on March 31, 2013

nhe orecast or crude oil pricesin North America (eg WI) has

weakened due to global economicuncertainty, weakened demandand increasing US production hedownward revision is consistent withprivate sector orecasters, who havealso lowered their expectations or

WI oil prices (see Figure 1) Asprices all, producers are also subjectto a lower royalty rate, thereby paying less royalties

nhe dierential between WI and what Alberta oil sands producersreceive on bitumen (eg WCS) isnow much wider than expected atBudget 2012 , relecting pipelineconstraints and reinery shutdowns

nhe spread between world prices(eg the Brent price) and WI is

wider than expected at Budget 2012 due to strong increases in North

American oil production and limitedUS pipeline access to marketshis aects producer costs, andhence royalties, because the priceo condensate (imported to dilutebitumen or transportation) tracksthe Brent price




9

VOLATILITY

0

20

40

60

80

100

120 Budget Estimate Actual

(WTI, US$/bbl)

FIGURE 2. Annual Oil Prices: Actual and Budget Estimate

Sources: Alberta Energy and Alberta Treasury Board and Finance

0

20

40

60

80

100

120

140

160

(WTI, US$/bbl)

FIGURE 1. Daily Oil Prices

Source: Alberta Energy

-

4,000

8,000

12,000

16,000 Actual Budget Estimate

($ Millions)

FIGURE 3. Non-renewable Resource Revenue

Sources: Alberta Energy and Alberta Treasury Board and Finance

Non-renewable resources (NRR)provide an important source o revenueor the Government o AlbertaIn 2011-12, revenue rom NRR accounted or about 30% o totalgovernment revenue

A major challenge with NRR revenueis that it is volatile and thereoreinherently dicult to predict Teprices or Alberta’s energy productsare determined in global markets,and fuctuate widely depending oneconomic conditions, geopolitical risk and supply considerations A smallchange in the price o oil has a largeimpact on the revenue Alberta collects

Figure 1 shows that the oil price hasfuctuated a great deal over the last10 years As a result, the estimatedprice has deviated rom the actualprice, and oten signicantly Ingeneral, as seen in Figure 2, the Alberta government has under-estimated oil

prices at budget As a result o market volatility,adjustments to the Budget estimatesare common Figure 3 shows thatover the last ten years, NRR revenuehas deviated rom budget estimates asmuch as $67 billion in a single scalyear

Figure 3 also illustrates that theGovernment o Alberta has in itsbudgets under-estimated NRR revenue

in each o the last 10 years: the actualrevenue collected was more thanestimated at budget I current trendsin NRR revenue collections continueor the remainder o the year, 2012-13

would be the rst time in the last10 years that NRR revenue has beenover-estimated at budget*

Alberta’s revenues remain highly volatileand difcult to predict

* The last time was 2001-02, when NRR

revenue was over-estimated by $1.3 billion.



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1st-quarter-budget.update.pdf