Ottawa's funding formula needs a rework

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In cutting a $250-million cheque for Alberta this week, Ottawa touted the emergency funding as a shining example of how the Canadian federation co-operates to help those jolted by an economic shock. Finance Minister Bill Morneau expressed pleasure at being able to provide "much-needed relief" to the beleaguered province.

Well, not to look a gift horse in the mouth, but where are the teeth here? It is a reminder that not a lot is working in the federal government funding systems set up to aid ailing regional economies when they need it most.

The obscure funding provision under which Alberta has landed this payment, called the Fiscal Stabilization Program, has become a well-meaning anachronism. Set up nearly 50 years ago, it is designed to help out a provincial government when its non-resource revenues have plunged more than 5 per cent from one year to the next due to economic conditions. The formula for determining how much a province can receive is a bit complicated, but the bottom line is that in 1987, Ottawa capped the maximum payment at $60 per person in the province's population. For nearly 30 years, that cap has not changed.

At the time the cap was put in place, that did not seem unreasonable – it amounted to about 1.7 per cent of the median provincial per-person program expenses. But today, for the average province, it is a paltry 0.6 per cent of per-person program expenses. For Alberta, it is only 0.5 per cent.

That is not a lot of help when your total budget revenue has fallen nearly 12 per cent, as it has for Alberta in the 2015-16 budget year. Alberta's new fiscal update issued on Wednesday estimated that it has lost more than $6-billion in revenue this year; $250-million does not do much to fill that crater.

Of course, the provinces have never really counted on the Fiscal Stabilization Program to shore up their budgets when they have gone into an economic funk; in nearly a half-century of its existence, the program had paid out a grand total of $2-billion before this latest payment to Alberta.

(With Newfoundland now also planning to apply for stabilization funds, the bill will go up a little; but due to its smaller population, its payment would max out at about $30-million. Saskatchewan, which is less reliant on the slumping oil sector, may not have suffered quite enough to qualify.)

Provinces that slump into weaker-sister status have grown to rely much more on the vastly bigger fiscal equalization program, which aims to help out any province with below-average "fiscal capacity" (i.e. ability to raise revenue). The program will dole out nearly $18-billion to six provinces in the next fiscal year, shared proportionally based on how much each of these provinces' per-capita revenue capacity is below the national average.

But get this: Alberta is not one of those provinces. Despite its patently obvious loss of revenue capacity, it will have to wait a couple of years more before it qualifies.

The formula for equalization payments is not based on a single year of revenue generation, but rather a three-year weighted average. What's more, there is a two-year lag in the years used to calculate this average: e.g. if you are trying to figure out who qualifies for payments in the 2016-17 budget year, it would be based on fiscal capacity from 2014-15 (50 per cent), 2013-14 (25 per cent) and 2012-13 (25 per cent).

So, Alberta's miserable 2015-16 is not even part of the calculation yet. And since the province's economy was still quite strong in the two years preceding this slump, it probably does not have much hope of receiving any equalization payments until 2018-19 – likely years after the provincial economy was in greatest need.

On the other side of this absurd coin is Ontario, which will table a budget on Thursday that will likely map out the path to eliminate a nearly decade-long string of deficits within the next two years. It helps that the Ontario economy is now indisputably one of the strongest in the country. It also helps that Ontario has received nearly $13-billion in equalization payments over the past five years, and is due to collect another $2.3-billion in 2016-17.

Indeed, Ontario might get its budget balanced just in time to get the equalization rug pulled out from under it, as the funding formula catches up to its economic upturn – even if its economy is no longer riding high when that funding dries up.

The equalization system is nowhere near timely enough to reflect and respond to the business cycles of the country's many and varied regional economies. And the stabilization system that is in place to address shorter-term economic shocks is far too small to do any good.

Short of a major overhaul of the equalization system – one that would open a huge can of worms in federal-provincial relations – here's an idea: Ottawa could remove the miserly $60-per-person cap on the stabilization formula. The additional funding this would make available could be treated as essentially an advance against future payments that would eventually come due to these provinces under the equalization formula; the equalization payments would be reduced by the amounts received in earlier years through the stabilization plan. That way, provinces hit by major economic shocks could get help quickly, rather than wait for equalization payments that would arrive years after the crisis has passed.