If Albertans are looking for someone to blame for the apparent unfairness of the federal equalization program, it should be former Conservative prime minister Stephen Harper.
After all, in quietly renewing for five more years the equalization formula first adopted by Mr. Harper in 2007, Liberal Prime Minister Justin Trudeau is merely following the pattern set by the Tories. That pattern involves avoiding at all costs a clash with Quebec, ensuring the province continues to collect more each year in equalization payments from Ottawa. Indeed, by Quebec's own calculations, the province is set to receive more than $13-billion next year alone, up from $11.7-billion this year.
Mr. Harper pulled off a fine balancing act, neutralizing longstanding equalization gripes in the rest of the country, in part by topping up health transfers to provide extra federal cash to “have” provinces such as Alberta, Saskatchewan and British Columbia. Mr. Trudeau has been somewhat stingier with health transfers, and the Alberta and Saskatchewan economies aren’t as quite as strong as they once were, which helps explains why politicians in those provinces are now picking a fight over equalization.
Alberta’s New Democratic government can only play along as the opposition United Conservatives under Jason Kenney – who was part of the Harper government that adopted the current formula – indulge in myth-making regarding the what, how and why of equalization.
It’s not that Alberta and Saskatchewan, and particularly Newfoundland, do not have legitimate gripes about how Ottawa divvies up the $75-billion in cash transfers it sends to the provinces each year – a princely sum that accounts for 21 per cent of federal program spending. Equalization alone will cost Ottawa $19-billion this year.
Federal Finance Minister Bill Morneau may claim to have conducted “intense” talks with the provinces before renewing the current equalization formula until 2024 in the budget implementation bill that received royal assent last week. But with the federal Liberals dependent on retaining or adding to their 40 seats in Quebec in the 2019 election, there was no prospect of his government rejigging the formula in any way that would penalize the province by as much as a single penny.
That’s why Saskatchewan Premier Scott Moe’s so-called 50-50 proposal, under which Quebec’s equalization haul would plunge by 30 per cent, is so laughable.
Under Mr. Moe’s plan, half of equalization payments would be split among have-not provinces according to the current formula, while the other half would be divided among all provinces on a per capita basis. This flies in the face of the constitutionally mandated intent of equalization, which is to enable poorer provinces to provide comparable services to those that richer ones can afford on their own. Mr. Moe’s formula would exacerbate inequality and force Quebec and the Maritime provinces to run up unsustainable debt loads.
There is a reason that would be bad for all of Canada, including Alberta. The strength of Canada’s fiscal union, in contrast to the inherent weakness of the euro zone, lies in the transfers that smooth out regional imbalances that would otherwise undermine the common currency.
To understand the particular political bind Mr. Trudeau is in, however, you need to go back to Mr. Harper’s 2007 overhaul of transfer payments. Back then, the Conservatives aimed to turn their minority government into a majority one by winning seats in Quebec, the very province had been complaining about the “fiscal imbalance” between Ottawa and the provinces that it claimed was endagering public services.
The equalization formula adopted in the 2007 Harper government budget was billed as a compromise. Indeed, it was based on the recommendations of an expert panel set up by former Liberal prime minister Paul Martin and led by former Alberta deputy finance minister Al O’Brien.
The most controversial aspect of the equalization formula has always revolved around whether non-renewable resource royalties should be included in calculating each province’s so-called “fiscal capacity” or ability to raise revenues. Including resource revenues has the effect of increasing the wealth gap between Alberta and the have-not provinces, including Ontario.
From the archives:
The formula adopted by Mr. Harper in 2007 included 50 per cent of resource revenues in the equalization calculation, which had the effect of significantly boosting Quebec’s haul and turning Ontario into a have-not province. Still, the new formula created far less sticker shock for Ottawa than if had it included 100 per cent of resource revenues, as many have-not provinces had sought.
Even so, in 2008, Mr. Harper sought to prevent equalization payments from spiralling out of control if oil prices surged by pegging the amount Ottawa spends on equalization to growth in the economy, capped at 3 per cent. That upset Quebec, which still calls for the cap to be removed.
Alberta went along with the new formula then mainly because Mr. Harper also promised to distribute future health transfers on a per capita basis instead of based on a province’s wealth. This produced a windfall for Alberta, whose total cash transfers from Ottawa doubled to $6.2-billion in the current fiscal year from $3.1-billion in 2009-10. During the same period, Quebec has seen its total cash take from Ottawa increase by 43 per cent to $23.8-billion in 2018-19.
Mr. Harper dramatically increased transfers to have and have-not provinces alike. Mr. Trudeau does not have quite the same fiscal room to manoeuvre. Therein lies his dilemma, and Alberta’s.