University of Calgary economist Trevor Tombe discusses reports he helped write about the impact of separation on Alberta’s economy with Alberta Primetime host Michael Higgins. This interview has been edited for length and clarity. Michael Higgins: You have authored a report for the Calgary Chamber of Commerce about the impact of separation on Alberta. What’s different about this assessment from the one you helped produce at the University of Calgary School of Public Policy for the provincial government? Trevor Tombe: There have been a number of reports: the Canada West Foundation, the (University of Calgary) School of Public Policy, as you noted, and the C.D. Howe Institute’s been putting some out, as well. Different reports, different authors, different analysts have different economic models, perhaps different modelling assumptions that are used. The report that was produced here at the school for the Government of Alberta, the economic implications of separation, in particular, was modelled primarily by a colleague of mine here, professor Kent Fellows. Where we differ is in the range of scenarios that were considered was much much broader in the University of Calgary report, and that made it a little difficult, perhaps, to really zoom in and pin down what the economic implications might be. And so I could do that for the chamber, suggesting Alberta’s economy could contract, roughly speaking, on the order of about 10 per cent, plus or minus a few percentage points here and there, which is a sharper conclusion, the most reached in the School of Public Policy report. MH: You weigh a lot in this report for the chamber from impact on trade to trickle down impact on employment dynamics. What should really stand out for Albertans? TT: Albertans might not be fully aware of just how much of our economy is tied to trade. Certainly oil and gas exports to the United States receive considerable attention – rightly so; lots of employment and income generated in that sector. But less than half of the income generated by exports are from those oil and gas exports to the U.S. We depend in Alberta for 55 cents of every dollar earned on exports – a large number going abroad, but also interprovincially. And one in three jobs in the province also depends on those exports, and an even larger share here in Calgary at a little over 36 percent of employment. And so, small changes in trade frictions or costs that would result from setting up a new national border between Alberta and the rest of the country can add up to significant negative implications for productivity, investment, employment, and future wage growth. MH: On that point of trade with other provinces, why would that come into question? Even with the emergence of an international border, would there not continue to be market demand, and a degree of established dependence on goods and services coming from Alberta? TT: Indeed; a considerable amount of that trade would still continue. And so we are not talking about all trade collapsing to zero between Alberta and the rest of the country. What we’re talking about are small trade frictions that would result from growing regulatory differences between a future separate Alberta and the rest of the country. We saw with Brexit, for example, that though U.K. firms can still access Canada, the European Union and other countries largely tariff-free as they could before, it’s the regulations and the standards and certifications and inspections that now add costs to businesses – not very large (costs). I estimate for Alberta the relevant cost increase might be between five to eight per cent, which might not sound like a lot, but that can detract from how much we trade, and therefore productivity and growth to an extent that adds up to quite a bit, just because of how much of our economy is tied to trade. MH: Regarding added costs, what impact could this have on taxation? TT: A smaller economy means naturally lower incomes and therefore lower government revenue, because most of our government revenue is from taxes on personal and corporate income, and our consumption. So if the economy shrinks by something on the border of about 10 per cent, then we would be looking at considerable reductions in a future separate Alberta government’s revenue. Then you add to that the costs of setting up and operating all of the functions of a separate state, and all of a sudden, what many view as a potential fiscal windfall that would accrue to Alberta if we no longer pay federal taxes to the extent that we do, actually turns into a fiscal burden. For the chamber, I estimate that might represent about a $9-billion fiscal hole for the province. And if we were to overcome that hole through taxation, then think about a broad-based sales tax. It’d be something on the equivalent of about eight per cent just to cover that deficit. Or if we were to increase corporate income taxes – very much of interest to the business community in the province – we’d have to increase the corporate tax rate by about 10 percentage points. And now all of a sudden, the Alberta advantage in terms of taxation and productivity and economic strength would evaporate. MH: The Calgary chamber in the past has expressed concern over impact on investment. With your report, how measurable is that impact longer term? TT: There’s a lot of uncertainty, of course, around what Alberta separation would mean. We’ve never had a province leave Confederation, but if we look abroad, we do have examples like the United Kingdom leaving the European Union, and I think that’s an easier endeavour than what Alberta leaving Canada would entail. But even in the United Kingdom, there have been a lot of estimates on this, a lot of real rigorous research for their experience, and the range of investment effects there is that it’s contracted by between 12 to 18 percent relative to what it would otherwise be. So, for Alberta, if all we were to experience is an investment decline of the same amount that we’ve observed for the United Kingdom – which in my view is an optimistic scenario – but even that would represent about $10 billion to $15 billion per year in investment that is happening now, but would no longer happen in a separate Alberta. That would naturally detract from economic growth because lower investment means fewer machines, equipment, technology, and so on available for workers here. MH: The pro-independence Alberta Transition Council recently released a budget and costing plan of its own, suggesting roughly $5 billion in one-time expenses, annual surpluses of $20 billion to $30 billion annually thereafter. Sounds like a pretty good deal compared to assessments you’ve been involved with. So, what do you make of their claims? TT: I think there are a few large missing pieces in some of their fiscal analysis, not the least of which is they presume that a separate Alberta would not take on any federal debt, and that is not a realistic scenario that anyone should count on. We would take a share of the national debt, and that would mean interest costs for a separate Alberta. They also take what are currently federal transfers, like old age security, and remove that from the provincial budget, artificially increasing the presumed surplus that Alberta would have, and to cover those benefits, they lump it in with the pension plan, which would mean higher contributions by workers, though that’s not something that’s quantified in their reports. They take a lot of optimistic assumptions around what separation would look like, and I think depart from fiscal reality, especially with respect to the federal debt.
