Alberta’s equalization referendum may come back to haunt the province

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“That’s why Alberta will be holding a referendum to scrap equalization from the Constitution in October, 2021. Albertans demand a fair deal from Ottawa, and we will not give up that fight.”

Thus spoke Jason Kenney, in response to the federal government’s Fall Economic Statement – a document that promised to substantially increase payments to the province under the federal Fiscal Stabilization Program, though not by as much as the Alberta Premier had hoped.

In fact, Mr. Kenney has been promising to hold a referendum on equalization since before he came to power: equalization, not stabilization. It’s a completely different program. Nevertheless, the insufficiency of stabilization payments to Alberta has become another argument in support of Alberta’s perennial campaign to slash equalization payments to other provinces – the real point of the referendum, so far as a referendum on a federal program held in one province can be said to have a point.

Welcome to the bizarro world of Alberta grievance politics, in which basic facts regarding the province’s fiscal position, how equalization works, and the constitutional division of powers are pureed into a generalized narrative of the province’s mistreatment at the hands of the federation.

There is, to be sure, a grain of truth in Alberta’s complaint. Stabilization payments, designed to compensate a province for a sudden and calamitous decline in revenues, were arbitrarily capped at $60 a person in 1987. Indexing the cap to economic growth per capita, as the fall statement proposes, makes the program slightly less arbitrary, but only slightly.

Equalization, likewise, is a widely acknowledged mess. In theory, equalization is about equalization: closing the gap between different provinces’ “fiscal capacity” (the potential for their economies to generate revenue for their governments) in order that they might be able to provide, as the Constitution puts it, “reasonably comparable levels of public services at reasonably comparable levels of taxation.”

In practice, equalization has nothing to do with equalization. The fiscal capacity gap between the richest and poorest provinces has narrowed steadily over the years, yet the cost of the program continues to escalate – as it must, in line with the rate of growth of the economy, thanks to an amendment inserted by the Harper government.

But there, the grain of truth gives out. Equalization is not, contrary to popular myth, a revenue-sharing scheme among the provinces. It is a federal program. Alberta does not “pay into” equalization: Albertans do, as federal taxpayers, the same as taxpayers in every province do. Albertans pay more federal tax than other Canadians, per capita, because Albertans are richer than other Canadians, on average. Alberta has not, likewise, been eligible for equalization payments, historically, not because the feds are conspiring against it, but because its fiscal capacity has been higher than average: the highest in the country, in fact.

The same holds more generally. That Albertans have historically paid much more in taxes to the federal government than they get back in services – about $20-billion per year more, according to some calculations – is mostly because of Alberta’s relative good fortune as not only the richest province, but also the youngest, with one of the lowest unemployment rates.

We used to hear the same complaint from Ontario, back when the federal government was Conservative and the provincial government was Liberal, and for the same reason: because Ontario was richer than most other provinces. The problem was resolved easily enough: between 2004 and 2010, Ontario’s per capita GDP fell from 3.2 per cent above the national average to 5 per cent below it. Presto – no more fiscal gap. Indeed, for some years after 2010, Ontario was an equalization recipient, for the first time in its history.

Remarkably, the same may be about to happen to Alberta. A new study for the Fraser Institute finds the province’s fiscal capacity is rapidly converging on the national average, driven by the worldwide collapse in the price of oil. A decade ago, it was nearly twice that of the other provinces; today, it is just 4-per-cent higher. On current trends, Alberta could soon be an equalization-receiving province.

On the one hand, this may make Alberta’s case a little more palatable to the rest of Canada. It may still have the lowest taxes in the country and the second-highest per capita spending, but at least now when the province demands the feds bail it out it is not asking taxpayers in other provinces to foot the bill for a province whose government is, on average, richer than they are.

On the other hand, the province will be holding a referendum this year aimed at hobbling a program from which it may soon be drawing funds. I’m not sure that’s what the Premier originally had in mind.

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