Ottawa’s changes to fiscal stabilization fail to address Alberta’s volatile economic situation

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If Ottawa’s fiscal stabilization program is an emergency insurance policy for provinces that experience an unexpected shock to their economies, Alberta would argue it doesn’t offer enough in the way of protection.

And if a COVID-19 vaccine rollout allows Canadian politicians more breathing room to focus on issues beyond the pandemic, it will again be a federal-Alberta battle in 2021. The changes Ottawa made to the program in late 2020 don’t go far enough in addressing the problems distinct to an oil-producing jurisdiction such as Alberta.

The fiscal stabilization program was created to help provinces that suffer a dramatic drop in revenues. It’s available when any province is faced with a year-over-year revenue decline greater than 5 per cent. In Alberta’s case, it also must be accompanied by a decline in resource revenues greater than 50 per cent. It’s a much smaller, and separate, program from federal equalization.

Finance Minister Chrystia Freeland announced changes to the fiscal stabilization program in her fiscal update at the end of November. Her department tripled the amount the provinces receive per capita – going to about $170 a person from $60. It also indexed the cap to nominal GDP, meaning the potential payments will increase over time. Federal officials argue it’s the biggest-ever expansion to the program since its creation in 1967. And they add fiscal stabilization is far from the only federal support to the provinces and territories.

The change is meaningful – especially in this dark year. Provinces will be able to claim the new rate in the 2019-20 fiscal year. University of Calgary economist Trevor Tombe estimates that five or six provinces, including Alberta, are likely to qualify for stabilization payments totalling about $6-billion.

Still, Premier Jason Kenney described the changes as shortchanging his province by billions, and a “slap in the face for the people of Alberta.”

Why is he so unhappy? The provinces – led by Alberta – had asked for far more, including the total removal of the per-person cap and the lowering of revenue thresholds. They also asked Ottawa to allow for retroactive payments, to address the past limits of the program.

The changes to stabilization announced by the Finance Minister appear to be another way of helping a large number of provinces during the pandemic, and don’t address Alberta’s grievances that go back five years. The $60 per-person maximum, set back in 1987, is viewed by anyone paying attention as arbitrary and out-of-date when set against current economic realities. Yet it was used by Ottawa as a starting point.

Mr. Kenney was asking for a retroactive change because the program has already failed Alberta. Prior to 2015, there was an 18-year period in which no provinces qualified for payments under the program. In that period (and well before), Alberta being focused on the production of oil and natural gas was mostly a good thing for the federal balance sheet. The province’s taxpayers have long been net contributors to Canada, to the tune of about $20-billion a year.

But Alberta’s revenues fell nearly $9.2-billion, or 21 per cent, between fiscal years 2014-15 and 2016-17, Dr. Tombe said. This was because low oil prices reduced both resource revenues and the income-tax base. In response, the fiscal stabilization program made two payments totalling $500-million, which “covered only a fraction of Alberta’s loss.”

Under the new framework, this federal insurance policy still only covers a small percentage of losses. Dr. Tombe said it expands the program from one that insures roughly 1 per cent of provincial revenues for non-resource revenue declines above 5 per cent to one that insures roughly 3 per cent. The new formula would give Alberta about $750-million this year, he calculates, when the province is again expected to experience a multibillion-dollar drop in resource revenues.

Albertans are not particularly politically united these days. There is unhappiness in the province regarding the governing United Conservative Party’s handling of the pandemic, the environment and the economy. Certainly, not everyone is keen on Mr. Kenney’s drive to hold a referendum on equalization in 2021. To note, under the criteria for that very different federal program, Alberta is still a “have” province, for now.

But on the issue of fiscal stabilization, there is broader agreement that the province should receive more than is on offer. Opposition NDP Leader Rachel Notley, the former premier, doesn’t often see eye-to-eye with Mr. Kenney. But even she said Ottawa’s changes to the program don’t address the issues for “a province like Alberta where the revenue is so, so volatile, and can literally go up or down by 25 per cent in one year.”

Ottawa’s decision to not create a much stronger fiscal stabilization program in a time of political turmoil on the Prairies is also a missed political opportunity. Fairness Alberta, an advocacy group, argues the provinces most susceptible to sudden revenue drops are the resource-based provinces. Allowing these “have” provinces to get significant help in those rare years of fiscal calamity would likely strengthen Canadian unity.

“If they ever wanted to throw federalists in Alberta a bone, this was the time,” said Bill Bewick, the group’s executive director.

Alberta is often criticized for both being too reliant on risky resource revenues and not having a steadier stream of income, such as a provincial sales tax. Dr. Tombe makes the argument that to have the consequences of these decisions shifted to Canadians elsewhere “dampens the province’s incentive to adopt fiscal reforms to improve its own budget.”

There’s no doubt Albertans are facing years of financial reckoning, and difficult budgetary decisions. But the province’s financial challenges are not easily fixed and won’t turn on a dime. Economic diversification is a decades-long process. It’s not unreasonable that Ottawa, which has long benefited from Alberta’s resource booms, would provide a bit more in a time of busts.

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Editor’s note: A previous version of this column included an incorrect spelling of Bill Bewick’s surname.