Wouldn’t it be nice, as the Alberta government struggles with a deficit and an impaired oil sector while bristling at being ineligible for federal equalization funds, if the country had a transfer program to help the country’s relatively wealthy provinces in times of economic and fiscal shock? Something that might make equalization less inequitable for a net contributor to the federal system that finds itself in need?
The country does have such a transfer program. Maybe you’ve never heard of it. Probably because it doesn’t work.
It’s called the Fiscal Stabilization Program, and it has been around for more than 50 years, although rarely used. The general idea is this: If a province gets hit by an economic shock that deals a big blow to its finances, it can apply to Ottawa for funds to top up provincial revenues and soften the blow.
The formula for this is a bit complicated (would we expect anything else from a Canadian federal-provincial program?), but basically, if your non-resource revenues fall more than 5 per cent, you are eligible for federal help.
Only it’s not much help. Tragicomically little help, in fact.
It wasn’t always supposed to be that way. But in 1987 – a time, notably, that the federal government was dealing with some pretty monstrous deficit problems of its own – Ottawa put a cap on payments under the program at $60 a person.
You can guess how $60 a person works in the case of a major shock, such as the one Alberta suffered with the oil collapse of 2014-15. In the 2015-16 budget year, Alberta saw its total government revenues plunge $7-billion. In return, it received $250-million in fiscal stabilization. Drop, meet bucket.
There are a few obvious issues with fiscal stabilization that need addressing. One is the treatment of resource revenues, which, unlike non-resource revenues, need to plunge 50 per cent or more in a single year before they would be taken into account under the program. Another is the program’s focus only on revenue declines over a single year; as Alberta’s now-four-year slump reminds us, serious economic shocks take considerably longer to run their course, yet the program offers no continuing support, unless your tanking economy tanks further.
(Unfortunately for Alberta, its economy has. The severe downturn in prices for Alberta crude prompted a second-round slump last year, prompting the province to apply for another $250-million payment.)
But the big, glaring flaw, one that effectively renders the program next to useless, is the $60-a-person cap. It fights a forest fire with a watering can. It stabilizes nothing.
Alberta Premier Jason Kenney has begun publicly lobbying Ottawa to remove the cap. That alone, if applied to the two claims under the program that Alberta has made since 2016, would mean an additional $1.7-billion into provincial coffers. It doesn’t make up for the revenues Alberta has lost, obviously – but it’s a meaningful amount that could help smooth the way as the province wrestles its costs under control.
Mr. Kenney has been referring to the Fiscal Stabilization Program as an “equalization rebate." It’s not. Alberta does not directly pay into the equalization fund that gets distributed to provinces with weaker revenue bases – that’s paid out of Ottawa’s general tax revenue. And any province is eligible for fiscal stabilization, not just the “have” provinces, such as Alberta, that don’t receive equalization payments.
Still, it’s not hard to envision a better-built Fiscal Stabilization Program as a potential support for the country’s strongest provinces that, in times of economic and fiscal strain, don’t have the safety net of equalization.
In a paper from the University of Calgary School of Public Policy earlier this year, economist Bev Dahlby said the Fiscal Stabilization Program could function as a risk-sharing mechanism between the country and its “rich but risky” regions – economic powerhouses whose downside of their potency is a tendency toward volatility. While Alberta is the obvious case in point, it’s notable that many of the provinces with large resource-revenue streams – leaving them more susceptible to fiscal volatility – are also those that do not, typically, receive payments under Ottawa’s equalization program.
Dr. Dahlby suggests that fiscal stabilization could be redesigned to provide a form of “insurance” to protect these resource-dependent provinces that the country leans on as net contributors to the federal system. At the same time, that fiscal insurance would provide a greater benefit from the Canadian federation for its richer members.
A repaired Fiscal Stabilization Program could act as, essentially, an equalization equalizer. And a big part of the fix is easy. Remove the nonsensical cap.