Alberta recommends changes to Canada’s equalization formula

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Alberta’s government has released a series of proposals to reform Canada’s equalization system, including a combination of measures that if imposed immediately would slash the pool of money redistributed among the provinces by about 80 per cent, just days after it was revealed Ottawa plans to lock in the current regime.

Alberta and Saskatchewan have been among the existing system’s most vocal critics. The conservative leaders of the two provinces argue the program largely favours Quebec at their expense.

The equalization program, which is entrenched in the Constitution, is designed to ensure provinces across the country enjoy comparable levels of service at comparable levels of taxation. It tries to do this by distributing varying amounts of federal tax dollars to provincial governments. The amounts are based on estimations of each province’s “fiscal capacity,” meaning those that are more capable of self-funding receive less money. Alberta and Saskatchewan are among four provinces that receive none at all.

Canada’s equalization formula expires next March. This week, the federal government tabled an omnibus motion related to the budget that included a five-year extension to the current equalization calculation.

The Alberta government has no power to change equalization unilaterally, but on Friday Premier Danielle Smith released a campaign video promoting her United Conservative Party’s proposed reforms to the program. The proposals are also detailed in a position paper.

The province’s general election is scheduled for May 29. The UCP, since its inception in 2017, has used equalization as a lightning rod to attract support.

“We have just released a fully costed, practical plan to end the costly, unfair, equalization gravy train,” Ms. Smith said in the video.

The size of the current equalization program is tied to the three-year moving average of Canadian nominal GDP growth. In some years, that means the pool of cash available exceeds the amount necessary to bring the have-not provinces up to par. When this happens, the Alberta government’s position paper notes, the federal government makes “floor payments” to recipient provinces, beyond what would be necessary to make them equal to richer provinces.

The provincial government is proposing distributing excess money in the program based on population, rather than triggering the floor payments, for the first four years of a new regime. In the fifth year, it wants Canada to do away with calculating equalization payments based on fiscal capacity, in favour of a system focused on macroeconomic indicators, such as GDP per capita.

Trevor Tombe, an economist at the University of Calgary who was involved in the development of the paper, said in an interview that the new formula would be simpler. But he noted that such a change could come with hiccups. British Columbia, for example, has a high fiscal capacity, owing to its ability to generate revenue from property. A formula based on GDP would not fully account for this source of prosperity.

Alberta also wants Canada to target 95-per-cent fiscal equality between the provinces, rather than the current target of 100 per cent, within a decade of adopting a new system. It is also suggesting the country consider calculating the national average GDP per capita based on six provinces rather than 10. The paper suggests dropping the two strongest and two weakest provinces.

If Canada immediately implemented the provincial government’s most dramatic proposals, the equalization pool would shrink to $4.67-billion in 2023-2024, compared to $23.96-billion under the current system, according to the province’s calculations. Even the most generous combination of measures, if enacted now, would reduce the program to $16.77-billion in 2023-2024, according to Alberta’s math.

Ken Boessenkool, a consultant at Meredith Boessenkool Policy Advisors, said the proposals would anger Quebec. While that may appear politically useful in Alberta, it would deprive the western province of an ally in its larger quest to push Ottawa to decentralize power, he said.

Roughly 62 per cent of voters in a 2021 Alberta referendum supported removing equalization from the Constitution.

“This paper will have about as much impact on equalization as the referendum did,” Mr. Boessenkool said. “Which is to say: No impact whatsoever.”

Shannon Phillips, the Alberta NDP’s finance critic, said in a statement that her party has always pushed for reform, rather than dumping the program entirely.

“The UCP’s new proposal to reform equalization is an abrupt reversal of the UCP’s previous demands to abolish it,” she said.

The federal Finance Department acknowledged a request for comment, but did not immediately provide a response.