TD Bank warns in a new report that falling oil prices will take a big bite out of the federal government’s coffers — likely turning projected budget surpluses into deficits this year and next.
“Falling oil prices are expected to have a significant impact on federal coffers,” Randall Bartlett, senior economist at TD Economics, wrote in a research report.
Using TD’s economic model and updated oil projections, and assuming that the federal government continues its practice of subtracting $3 billion from revenues and setting the funds aside for contingencies, deficits “can be expected over the next few years,” he wrote.
“With not much cash left in the kitty, further tax reductions or additional spending will likely be difficult to come by.”
However, those deficits can be avoided if Ottawa dips into its contingency fund, TD said.
Federal Finance Minister Joe Oliver said in early January that the Conservatives are on track to balance the budget in 2015.
“With balanced budgets in sight, our government can provide further tax relief for Canadian families. The Harper government has remained steadfast in its commitment to returning Canada to balanced budgets,” Oliver said in a release issued Jan. 2.
In its November fiscal update, the federal government reduced revenue forecasts based on October spot prices for North American crude that had slipped to $81 (U.S.) per barrel. The projections also preserved the $3 billion contingency set-asides, as they’re called.
“What they did at the time was prudent in terms of fiscal planning,” Bartlett said in an interview. “But nobody expected oil prices to go to $45 per barrel.”
In its projection, TD assumes that oil prices will average $67.50 (U.S.) per barrel in 2015 and $80.25 in 2016.
It forecasts that revenues from corporate income taxes would take a bigger hit than revenues from either personal income taxes or the federal Goods and Services Tax.
Using this approach, the expected surplus of $1.9 billion for 2015-16 becomes a deficit o $2.3 billion. The following year, the projected $4.3 billion surplus turns into a deficit of $600 million.
Were the government to assume an oil price of $50 — the average price recorded so far in January — for its projections, those deficits would balloon to $3.2 billion and $900 million, respectively, TD said in its report.
“In short, the current fiscal environment would make introducing additional policy measures difficult,” TD wrote in its report.
The federal government has pledged that once its budget was balanced, it would double the contribution limit of the Tax Free Savings Account, known as the TFSA, and introduce an Adult Fitness Tax Credit.
TD has estimated the cost of these two measures at about $3.2 billion over five years.
TD expects oil prices to rebound from current levels, Bartlett said. “I think we’re getting close to the bottom, but we don’t know where that bottom is going to be and when we’re going to get there.”
The fall-out from the oil-price slump hit again in the private sector Tuesday, as Suncor Energy Inc. announced it was reducing its workforce by 1,000 and cutting $1 billion from its capital budget in response to plummeting crude oil prices.
The Calgary-based oilsands giant said the job cuts will mainly affect contractors, but include some employee positions as well. In November, Suncor predicted capital spending for 2015 would range between $7.2 billion and $7.8 billion.
Projects that haven’t yet been given a final go-ahead by Suncor's board are being deferred, such as expansions to the MacKay River project in northeastern Alberta and the White Rose development off the east coast.
But major projects under construction such as the $13.5-billion Fort Hills mine north of Fort McMurray, Alta., and the Hebron field in offshore Newfoundland are moving ahead as planned.
Oil hits another low
Oil touched a six-year low on Tuesday with U.S. crude, or WTI, reaching parity with its global benchmark counterpart, Brent crude, for the first time in three months, Reuters reported.
U.S. crude fell to an April 2009 low of $44.20 (U.S) in early trading before pulling up to $45.89 per barrel, down 18 cents on the day, on the New York Mercantile Exchange.
The price for Brent slid 84 cents to $46.59 a barrel on the London-based ICE Future Europe Exchange.
“Prices continue to free-fall and there is little that can stop them,” Amrita Sen, chief analyst at consultants Energy Aspects Ltd. in London, said in a report, Bloomberg reported. “OPEC remains the only factor that can stabilize markets in the short term. But with the group out of the picture, the market is looking elsewhere for a tangible reaction.”
Prices for both reached $46 a barrel at one point in trading for the first time since October. Brent, which typically trades at a higher level, is down 8 per cent and U.S. crude down about 5 per cent so far this week.
Oil prices have fallen by about 50 per cent since last year amid faltering global demand, higher production in the U.S., and a reluctance by the Organization of Petroleum Exporting Countries, known as OPEC, to cut its output.
“It’s a classic case of supply overwhelming demand,” Michael Hiley, head of energy OTC at LPS Partners Inc. in New York told Bloomberg. “U.S. production will continue to edge higher. OPEC keeps reminding us that they are going to continue to produce.”
Meanwhile, The Conference Board of Canada expects that Alberta's oil-heavy economy will likely dip into recession as oil prices plunge.
The economic think-tank said the western Canadian province's latest employment and new housing start numbers are holding steady, but that Alberta’s economy will shrink if oil prices stay low.
Alberta has the world's third-largest oil reserves after Saudi Arabia and Venezuela. Its oil sands are the single largest source of U.S. oil imports.
“Going forward, the province is certain to suffer, especially on the employment front, from the drop in oil prices — and it is likely to slip into recession,” Daniel Fields, an economist at the not-for-profit research organization, said in the report, released late Monday.
Last year, Alberta's economy grew by 3.9 per cent, according the province's website. Alberta has led all of Canada's provinces in GDP growth over the past two decades, due in large part to its oil industry revenues.
- With files from Toronto Star wire services