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Despite lower energy prices, western provinces to increase infrastructure spending

0 152 Economic

by John Clinkard last update:May 13, 2015

Given the sharp (50 per cent) drop in oil prices since mid-2014, attention has been focused on the potential impact of a significant decline in energy-derived tax revenues, and corporate profits on both public and private investment primarily in Alberta, and to a much lesser extent, in Saskatchewan over the near term.
Despite lower energy prices, western provinces to increase infrastructure spending

At the same time, there is growing evidence that the impact of low energy prices is having a positive impact on activity in British Columbia, as well as in Manitoba.

Turning first to Alberta, against the headwind of a projected 11.4 per cent drop in consolidated revenues in fiscal 2015-16 stemming primarily from a 21 per cent drop in future corporate income tax revenues, the province announced plans, in the 2015-16 Budget, to spend $29.5 billion on capital projects over the next five years.

In the previous 2014-15 Budget, the government planned to spend $19.2 billion over the ensuing three year period.

Comparing the previous capital plan to the current one, on average, the government now projects that it will invest a total of $6.3 billion per year in fiscal 2015-16 and fiscal 2016-17 — essentially the same amount that it projected in the final two years of the 2014-15 fiscal plan.

However, it is worth noting that over the next three years the Alberta government plans to spend slightly more on capital projects than it has since 2009.

Major projects scheduled include $2.9 billion on the Calgary/Edmonton Ring Roads; $926 million on planning and increasing the capacity of metro centre; $3.8 billion on the municipal sustainability initiative; $526 million for water and waster management projects; and $4.1 billion on building and modernizing schools.

Against the background of a relative improvement in British Columbia's economic health in 2014 and the prospect for above national-average growth in 2015, the provincial government's 2015-16 budget projects that total capital spending over the next three years will remain close to the $6.2 billion it planned to spend in fiscal 2014-15.

Although the size of the total spending envelope is projected to remain roughly constant, spending on primary and secondary school construction is projected to increase from $405 million in fiscal 2014-15 to $550 million per year over the next three years.

Planned projects over the next three years include a New Clayton North Secondary School in North Surrey, B.C., the replacement of the Oak Bay High School in Victoria, and a seismic upgrade to Lord Strathcona Elementary School in Vancouver.

Although the government plans to hold its total spending on transportation projects over the next three years at close to the $1.01 billion it spent in 2014-15, it announced plans to boost spending on highway rehabilitation from $193 million in the fiscal year just ended to $213 million a year through 2018.

In addition, spending on transit infrastructure is projected to rise from $163 million in fiscal 2014-15 to over $200 million per year in 2015/16 and 2016/17, largely due to Evergreen Line Rapid Transit work which will link Coquitlam to Vancouver via Port Moody.

There is no doubt that lower oil prices will exert a drag on the Saskatchewan economy over the near term.

Nevertheless, we expect that the combination of stronger global demand for potash and a rebound in agricultural output will cause the province's economy to grow by 2.0 per cent to 2.5 per cent in 2015 compared to an estimated gain of 1.1 per cent in 2014.

Factoring in the impact of lower energy revenues, the provincial government scaled back its forecast of total revenues and expenses in fiscal 2015/16 and 2016/17.

However, despite this scaling back of growth of total spending, the government announced plans to boost its core capital spending by 50 per cent to $1.3 billion.

According to the provincial budget, $581 million is committed to transportation projects including the next phase of the Regina Bypass (estimated at $221 million) and the twinning of Highway 16 east of Saskatoon.

Also, the government plans to spend $74.5 million on new schools and education and $74.5 million on municipal infrastructure.

After posting relatively modest growth of 1.8 per cent in 2014, we expect that the impact of stronger exports, due to the combined impact of the weaker Canadian dollar and a strengthening U.S. economy, will cause growth in Manitoba to accelerate from 1.8 per cent in 2014 to between 2.8 per cent and 3.2 per cent in 2015, its strongest showing since 2012.

Consistent with the stronger pattern of overall growth and the concomitant rise in government revenues, the Manitoba government recently announced plans to invest $78 to upgrade its roads and bridges which are, according to a recent planning and performance report, among the oldest in the country.

According to the report, Manitoba has 110 bridges on the national highway system and 67 per cent of them are over 40 years old and close to the end of their 50-year design life.

In light of the province's heightened concern about the age of its transportation infrastructure, we anticipate the province will continue to increase its spending on bridge and road repair in the near term.

John Clinkard has over 30 years' experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada. Send comments to editor@journalofcommerce.com.

last update:May 13, 2015

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