1. ESNA Economic Outlook 2016: Alberta’s Fiscal and Environmental Challenges “It could be worse…..” Mike Percy Ph.D. December 3, 2016 1

2.  Position of Finance Minister of Alberta is likely most challenging ministerial position in Canada  When addressing policy shock Minister has to answer correctly two questions and then design policy accordingly:  1. is the shock, in this case the oil price decline, short- term or long-term in nature?  2. is the resulting deficit, structural or cyclical,and if the latter, can it be financed in the absence of incremental tax revenue Challenge Facing Policymakers 2

3.  Capital Investment returns based on expectation of $100 real WTI over next 20 years key driver of capital investment in Alberta since 2010 until 2 nd or 3 rd quarter 2014  Now expectations for next 20 years based on $60 to $80 WTI with many observers tending to lower range. Key Challenge: Regime Change in Expectations 3

4. GFCF/GDP 2009 2014 Canada 21.5% 23.3% Alberta 26.7% 35.7% Statistics Canada, 13-016 (market prices) Why Important? 4

5.  “Capital investment continued to have a major impact in the 2013 period accounting for 71% of Alberta’s total GDP growth ”  Per capita capital spending in Alberta was 3 times the national average  The energy sector accounted for 60.7% of Alberta capital spending  Capital expenditures 2015 by conventional oil and gas expected to drop by 21.% to $17.7 billion  Capital expenditures in 2015 by oil sands is expected to decline by 16.6% to $25.1 billion  Capital expenditures in 2015 by organizations providing support services to mining and oil and gas extraction industries anticipated to drop by 69.5% $1 billion Economic Commentary, “Capital Investment in Alberta Anticipated to Decline in 2015”, July 21, 2015, Government of Alberta Key Driver of Growth 5

6.  Capital investments in oil sands, Edmonton and Calgary still underway providing positive impact on economy at least thru 2016  But will we be back to the “see thru building “ phenomena of the 1980’s? 6 Ongoing Capital Investment

7.  Most models very robust in capturing cycles around trend  But difficulties in forecasting turning points and significant difficulties in capturing changes in expectations by consumers and investors When Economic Modelling Becomes Difficult 7

8.  More pessimistic regarding personal income tax, corporate tax and royalty revenues anticipated in the October 27/15 budget and for that matter the March 26/15 budget  One shoe has dropped – Carbon tax proposal, the second and perhaps more important the Royalty Review due in December  In the absence of carbon tax revenues and given spending projected in budget and $60 WTI I would expect a structural deficit to remain in 2019.   larger deficits for a longer period  more debt and debt servicing costs  possible crowding out of other expenditures Bottom Line 8

9.  Alberta’s Program spending per capita in 2013-14 was 13% above national average  Alberta’s 2014 age-gender adjusted health care expenditures 34% above the national average  But pressures for incremental spending in social services, immigrant services (ESL), and local rural governments will increase more than anticipated. Spending Pressures vs Efficiency/Outcome Gains 9

10.  An incremental $3 billion anticipated 2017 but directed to low and middle income families impacted by tax, funding transition from coal-based electricity, and supporting adversely affected coal-based rural communities  Segregated or part of general revenues?  Some portion to fund existing expenditures and reduce deficit?  Precursor to sales tax as Province is addressing regressivity issue of carbon tax? Whither the Carbon Tax Revenues 10

11.  Province has net financial assets and fiscal capacity so pressure on bond rating four to five years down the road unless deficit continues to grow past 2017-18  Net inter-provincial migration continues to be positive although declining with Alberta leading the country 2 nd quarter of 2015  StatsCanada survey of Capital Spending Intentions for 2015 (11/27/2015) indicates $81 billion in non-residential construction, machinery and equipment expenditures in Alberta – still highest $ value among provinces How Could It Be Worse…? 11

12.  Oil sands industry operates 24/7 and multi-billion dollar supply chain and demand for sustaining capital investments – significant buffer to what occurred in 1982 - 89 downturn.  Interest costs remain low so debt financing of government less expensive and high debt to personal income ratio of Alberta residents easier to finance so long as employed.  Infrastructure programs of provincial and federal government will offset partially loss of private sector investment How ……. 12