Alberta projects $6.5B deficit as natural resource revenue slumps in Q1 update

Alberta is falling deeper into the red, with a projection of a $6.5-billion deficit in its first quarter economic update.

CALGARY — Alberta is forecasting a $6.5-billion deficit for 2025-26, as falling oil prices and global uncertainty weigh heavily on the province’s finances.

The figure, released Thursday in the government’s first-quarter fiscal update, is $1.3 billion higher than projected in the spring budget. The increase is largely due to a steep drop in non-renewable resource revenue, which is expected to fall to $15.7 billion this year — down 38 per cent from recent highs.

Finance Minister Nate Horner said the government is facing significant pressures but will stay the course.

“We know the road ahead has its challenges, but with disciplined financial management and smart investments, we will stand by families, rein in the deficit and secure a stronger future,” Horner said.

He added the province has been hit hard by volatility in global energy markets.

“We were expecting some weakness in resource revenues, but the pullback has been more severe than anticipated,” Horner told reporters. “It underscores the importance of our work to diversify the economy and reduce our reliance on these revenues.”

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Oil and gas downturn drives deficit

Oil is forecast to average US$63 per barrel this year, down from US$74 in the budget and well below the US$89 seen in 2022.

Horner said the government built flexibility into its fiscal plan in case prices slip even further.

“It’s much talked about the royalty roller coaster Alberta has been on, that’s very true, but the way it affects Albertans is when governments ratchet up spending in surplus years to try to catch up and then drastically cut in deficit years,” he said.

“What our commitment has been is that we’ll use the surpluses appropriately to improve our net fiscal positioning through debt repayment or savings in the Heritage Fund and by managing the surpluses appropriately, we can weather some of these deficit cycles.”

ATB Financial chief economist Mark Parsons said Alberta notes that there has been a big revise down on the North American benchmark price for oil (West Texas Intermediate), but that’s being offset by a narrow differential with Western Canadian Select Oil.

“So it could have been much worse if that differential stayed wide,” Parsons said. “The government’s revenue would have been even lower than in this update, but thankfully the arrival of the Trans Mountain expansion has helped narrow that differential.”

Rory Johnston, an oil and gas analyst and founder of Commodity Context, adds that geopolitical factors are at play causing a dip but notes that oil prices have still sat relatively stable over the last couple of months.

He pointed to factors driving the slump which include weaker demand expectations, and at the same time stronger supply expectations.

“U.S. trade policies are also creating uncertainty, creating reduced economic growth and reduced demand for fuel like gasoline, diesel and other petroleum products,” Johnston said.

“At the same time we’re seeing weaker demand growth out of China, ongoing OPEC supply management and generally softer conditions across energy markets. So we’re moving from a market that was fundamentally tight, backwinded curves, low inventories, to now, we’re starting to flip into a surplus, but inventories are still low, so we’re in this kind of transitional period where the market’s shifting from strength to relative weakness.”

Rising population adds pressure

The update also pointed to rising costs at home. Alberta’s population is expected to grow by 2.4 per cent this year, pushing up demand for health care, education and other core services.

Operating expenses are now pegged at $65 billion — about $679 million higher than budgeted — due in part to wage settlements with public-sector workers.

Parsons said those pressures are still creating economic struggles.

“We’re still seeing stronger population growth in Alberta than the rest of Canada and we think a big part of that is more affordable housing, and we don’t expect that to slow too much in the future,” Parsons said.

“So that’s going to be a trend that we’re going to see in Alberta for some time, higher oil production, you know, pretty strong population growth, and pretty decent home construction as well.

Economic growth still leads Canada

Despite the widening deficit, the province still expects Alberta’s economy to lead the country.

Real GDP is forecast to grow by two per cent in 2025, while employment is expected to rise by 2.5 per cent.

Consumer spending and housing starts are stronger than anticipated, although the unemployment rate is projected to reach 7.2 per cent.

On unemployment, Parsons specifically notes that youth unemployment has elevated right now.

“A big part of that story is, yes, we’re creating jobs, but more people are looking for work coming into this market, and so that’s putting upward pressure on the unemployment rate. We see unemployment staying fairly elevated this year before edging down next year.”

Horner acknowledged the higher unemployment rate, but says his government still remains committed to protecting key services while keeping spending under control.

“We carefully save during the good years and in years like this one, we stick to our fiscal framework and make responsible fiscal decisions so that important government services remain viable for our kids and grandkids,” he said.

CFIB warns of fiscal strain

Small business owners, however, are expressing concern about what deficits mean for them.

The Canadian Federation of Independent Business said Alberta needs to rein in costs and avoid new burdens on entrepreneurs.

“It’s troubling to see such a large deficit forecast, especially when small businesses are still struggling with higher costs and uncertainty,” said CFIB Alberta director Kayode Southwood.

“The government must focus on fiscal responsibility to ensure small businesses aren’t left carrying the load.”

Southwood also highlighted specific measures the CFIB believes could provide relief without straining the province’s bottom line:

“While we recognize the challenges ahead, there are practical, low-cost affordability measures that could deliver immediate relief for small business without straining the province’s bottom line, helping them reinvest in their communities,” he said.

“Small businesses understand the pressures the province is facing with lower-than-anticipated energy prices. The government must address affordability concerns for the province’s small businesses. This up-front investment in entrepreneurs will pay dividends in the long run by helping small businesses grow and contribute to their community and the economy moving forward. Sixty per cent of Alberta small business report they would use tax breaks to increase employee compensation (wages and benefits).”

CFIB is urging the province to reduce the small business tax rate to zero per cent, lower the insurance premium tax, and advocate for the federal government to return any tariff revenues to the business community. According to the group’s Monthly Business Barometer, taxes and regulatory costs remain the top cost constraint for Alberta businesses.

“Between tight finances and ongoing economic uncertainty, the government must do everything in its power to ease these pressures and rule out any tax hikes on small business,” Southwood added.