Today the Alberta government revised its forecasted deficit to $6.9 billion, up from the $4.7 billion forecasted last quarter. Almost the entire $2.2 billion can be attributed to a $2.1 billion decrease in revenues.

Eighty six percent of the decrease in revenues was due to a $1.8 billion decrease in forecasted natural gas royalties. The Alberta government projected gas prices of $5.50/GJ, but has lowered this forecast to $3.75/GJ.

The problem is the price of natural gas is currently $2.30/GJ. Some energy analysts say that because of the increase of natural gas extracted from shale in the Horn River Basin in northeastern British Columbia and from the Haynesville in Louisiana, the price of natural gas could even go below $1/GJ.

If the price of natural gas continues to decrease the deficit will continue to increase. The Alberta government was forecasting that 62% of its royalties ($3.687 billion) were to come from natural gas. Now it is only at 49% ($1.861 billion).

With the forecasted price of crude oil raised by $5.50 per barrel, crude oil royalties are expected to increase by $31 million to $1.28 billion. Tar sands royalties though are expected to decrease $364 million to a measly $644 million because of lower production and higher industry costs.   

Revenue also decreased $180 million by the rescinding of liquor mark-ups and gaming revenues have decreased by $84 million.

Despite a net decrease of $210 million in operating expenses, the Alberta government has had to draw from its Sustainability Fund to cover the deficit. The result is the Sustainability Fund has decreased from $16.8 billion to $10.4 billion.

What has become apparent is that unless revenue increases by $6.9 billion next year, the Alberta government will continue to run a deficit and the Sustainability Fund will be depleted perhaps in the next two years. What then?

Something has to give. You either decrease expenses, increase revenues, or do both. Our government is hoping that oil and gas prices boom once again.

Health care is 35% ($12.937 billion) of the Alberta government’s budget ($36.447 billion), while education is 17% ($6.158 billion). These are the most likely place to try to recoup the $6.9 billion.

I do not favour large spending cuts. I do not think a small percentage of workers should take the brunt of the cuts, while the rest of us make no sacrifices. I don’t like the all or nothing scenario. I prefer that everyone sacrifices, for we are all in this together.

Therefore we need to look at our tax revenues. Personal income tax revenues are expected to slightly decrease from $8.559 billion to $8.027 billion. Of note, corporate income tax revenues remain unchanged at $2.447 billion.

Once the Sustainability Fund is depleted then our government needs to increase our income tax rates. Alberta has a 10% flat personal income tax. This should be eliminated and replaced with a progressive tax.

With 3.65 million people living in this province, on average each person would have to pay about $1,971 more in taxes to erase the deficit. This amount would be lower if business shouldered their fair share of the load. It would be even lower if we would create a health care system that rewarded health (click here for more on this).

Instead of increasing personal and corporate income taxes, we will be whipped up into a deficit hysteria looking for expenses to cut. We can’t fall for this again.