Sometime in the few next weeks, federal Finance Minister Bill Morneau will release the amounts Canada’s have-not provinces will receive in equalization payments for the 2020-2021 fiscal year. And, needless to say, most Albertans won’t like what they see.
Quebec, whose economy has been on a roll, is expected to see its equalization take rise slightly next year, to about $13.2-billion, according to the province’s own estimates. While that 0.6-per-cent rise is a far cry from the 12-per-cent increase in equalization Quebec got this year, it comes as the province posts record budget surpluses and pays down its debt.
Many Albertans might be angry about the fact that Quebec is getting any increase at all while their province continues to suffer from the fallout from lower oil prices and the absence of pipeline capacity needed to enable Alberta crude to reach new markets. Alberta’s public finances are on the opposite trajectory as Quebec’s and its debt is surging.
If the wealth gap between the two provinces is shrinking, Albertans ask, why does Quebec continue to receive more in equalization every year?
The answer to that question is as hideously complex as the equalization formula itself. But as Alberta Premier Jason Kenney ramps up his crusade for equalization reform, he is misleading Albertans and feeding into longstanding myths about the program. As a member of the federal Conservative government that adopted the current equalization formula in 2007, and tweaked it in 2009, Mr. Kenney knows what the truth is. He should start telling it.
What’s more, he needs to come clean with Albertans about why his proposals for reforming the equalization formula would not help his province one bit in its quest to put its finances on a sustainable track. Nor, more importantly, would they reduce Quebec’s equalization take. If his goal in reforming equalization is to penalize Quebeckers for opposing the construction of an oil pipeline through their province, Mr. Kenney is way off track.
Indeed, Quebec would have received an additional $10.1-billion in equalization payments over the past decade if Mr. Kenney’s current demand that resource revenues be excluded from the formula had been implemented in 2010, according to calculations prepared for The Globe and Mail by University of Calgary economics professor Trevor Tombe.
The basis for determining whether any province qualifies for equalization payments is whether its fiscal capacity – the amount of revenue it could raise if it applied average tax rates, combined with its natural resource royalties – is below the national average. Despite a recession in Alberta following the 2014 crash in oil prices, and a slow recovery since, that province’s fiscal capacity remains far above the national average.
If Alberta is experiencing budgetary woes, it has nothing to do with Albertans being forced to finance generous equalization payments for Quebec, but rather stems from provincial tax rates that are nearly 30 per cent below the national average. Quebec’s tax rates are almost 30 per cent higher than the Canadian average, which in part explains why its budget is in surplus.
However, removing resource revenues from the equalization formula would lead to a reduction in Quebec’s fiscal capacity, and hence, to higher equalization payments from Ottawa. The reason is that Quebec has substantial resource revenues of its own, largely owing to its vast hydroelectric dams, which filled provincial coffers to the tune of $2.9-billion in 2018-19.
Under the equalization formula adopted in 2007, only 50 per cent of a province’s resource revenues are included in calculating its fiscal capacity. Under an additional step, resource revenues are removed entirely from the equation. Whichever calculation is most favourable – that is, whichever one leads to higher equalization payments – is then used.
That is not the end of it, however. Under what’s known as the fiscal capacity cap, Ottawa claws back a portion of equalization payments if the fiscal capacity of any equalization-receiving province exceeds that of a non-equalization-receiving province as a result of equalization. Quebec has seen billions in equalization clawed back in recent years as a result of this rule.
However, the fiscal capacity cap would not exist if resource revenues were excluded entirely from the formula. That explains why Quebec would have received an extra $10-billion over the past decade under Mr. Kenney’s plan.
While the Alberta Premier has talked about removing non-renewable resource revenues from the equalization formula, the current formula does not distinguish between non-renewable resource royalties (from oil and gas and mining) and renewable resource revenues (from water rents and forest stumpage fees).
Mr. Kenney has provided no good reason for distinguishing between the two types of resource revenues. Indeed, the federal government that Mr. Kenney was part of correctly decided that it would be unfair to do so. And what was truth then remains true now.