Removing resource revenue from equalization would do nothing for Alberta

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Appeared in National Newswatch, October 5, 2017

Recently Jason Kenney (pictured above), candidate for the leadership of Alberta’s United Conservative Party, called for reform to Canada’s equalization program.

Specifically, he suggested a referendum in Alberta to force the federal government to consider removing non-renewable resource revenue (in Alberta’s case, mostly revenue from oil) from calculations used to determine each province’s fiscal capacity (their ability to raise revenues to fund programs).

The treatment of non-renewable resource revenue under equalization is an important and controversial issue, and there is a case to be made that under some circumstances they should be excluded entirely. But nevertheless, it’s important to recognize that Kenney’s reform proposal would have no impact on the amount of money Alberta receives under equalization or the amount of money Alberta taxpayers pay into federal coffers to support the program.

To understand why this is true, it’s helpful to look at the two sides of the ledger (expenditures and revenues) in turn. The expenditure side is easy. The federal government will spend $18.3 billion this year on equalization. None of that money goes to Alberta, because (despite the recent downturn) Alberta is too rich to receive equalization, which flows to lower-income provinces.

If natural resource revenue was excluded from the formula, Alberta would still have the highest fiscal capacity in Canada and therefore still receive nothing in equalization.

On the revenue side, if you remove resource revenue from the equalization program the fiscal capacity gap between “have” provinces such as Alberta and ”have not” provinces (which receive equalization payments would generally shrink.

You might assume that as the gap between “have” and “have not” provinces shrinks, the equalization burden on “have” provinces such as Alberta would also shrink—that essentially, Alberta taxpayers would pay less into the program. You might think that, but you’d be wrong.

Why? Because under current equalization rules, the cost of the program must grow every year roughly in line with national economic growth even if the fiscal capacity gap between richer and poorer provinces becomes smaller.

Which takes us back to Jason Kenney’s reform proposal. Even if natural resource revenue was excluded completely, next year’s overall program costs would still rise to $18.9 billion, as per equalization rules. The distribution of payments would be somewhat different, but Alberta would still get nothing. And the tax burden on Albertans to support the program would be the same as if the policy change never happened.

Complaints about equalization are not exclusive to Alberta. Earlier this year, Saskatchewan Premier Brad Wall complained that the time-lags used to calculate equalization are unfair, since they use old data to determine provincial fiscal capacity. And he’s right—the wisdom of using data from 2013/14 to determine the size of equalization payments today, especially given how much things have changed in provinces such as Alberta and Saskatchewan, is questionable to say the least.

But again, because of the rule—that equalization payments must grow every year—and the fact that Saskatchewan is still too rich to receive payments, eliminating the time-lags completely would have no impact on the equalization burden shouldered by hard-hit energy jurisdictions of the West.

Both Mr. Wall and Mr. Kenney have raised important issues. However, it’s important to recognize that in order for the reforms they have proposed to have any effect, the rule requiring equalization payments to increase every year must first be reformed.

In 2019, the equalization program is due for a regular five-year review and so a window of opportunity will open during which large and small reforms can be considered. However, the available options for reform are severely limited so long as a rule requiring program costs to escalate every year remains. For those who wish to see major changes to the equalization program, eliminating the requirement of constant growth in program costs should be seen as a prerequisite for additional reforms.

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