Does Kenney have a point when it comes to equalization reform?
OTTAWA –Alberta Premier Jason Kenney is putting a spotlight on the age-old equalization reform debate in Canada and demanding the federal government take action to make sure his province gets a sweeter deal – but is there legitimacy to his argument?
The outspoken critic of Prime Minister Justin Trudeau said in a speech to the Alberta legislature last week that provincial taxpayers have gotten the short end of the stick for years having "been the great engine of jobs and prosperity for the entire country, contributing over $600 billion more to the rest of Canada than we received back from Ottawa over the past six decades."
Kenney is referring to the equalization formula that disperses federal tax dollars to provinces based on their ability to generate income and is aimed at neutralizing wealth across Canada.
"It’s about [a province’s] fiscal capacity. Fiscal capacity is the ability of each province to raise their own money through taxes and natural resource revenue," said Ben Eisen, a senior fellow with the Fraser Institute.
"The idea is that it’s meant to help less profitable provinces provide public services that are similar to what exists in the provinces that have higher incomes."
According to Finance Canada’s website, Quebec is the highest beneficiary of the equalization payment in 2019-20 at $13.1 billion in funds, followed by Manitoba at $2.2 billion, Nova Scotia and New Brunswick both at around $2 billion, and Prince Edward Island at $429 million.
Newfoundland and Labrador, Ontario, Saskatchewan, British Columbia, and Alberta don’t receive any money from equalization because these provinces still have higher per person income and more ability to raise revenue.
"There’s no conceivable way that [an equalization formula] could be designed where Alberta would receive money under the equalization program," said Eisen.
Asked whether there’s a loss in productivity, as some critics of the formula have suggested, when have-not provinces are given funds without incentive, Eisen said some studies show that theory to be true.
"Certainly there is evidence that the equalization formula creates some policy incentives that aren’t optimal for growth," he said. "There’s some evidence that there is a discouragement to natural resource development."
On Tuesday Kenney made note of this as he delivered the inaugural State of the Province address at the Chamber of Commerce in Edmonton.
"We know the equalization program is unfair to this province. It allows other provinces to get constant increases in equalization throughout which is largely derived from Alberta even if they choose not to develop their own resources."
However, Eisen holds that no province would sensibly choose an equalization payment over enhanced economic growth and job creation.
Pitfalls with the current system
Eisen did note that there are pitfalls with the current system that would "reasonably" spur frustration with Albertans – namely the rule that allows equalization payments to increase year-after-year even as the discrepancy between rich and poor across the country evens out.
"In recent years when Alberta and Saskatchewan have struggled very badly, equalization payments have continued to be driven up by this rule," said Eisen.
"What’s hard to accept for a lot of people is that if that gap is shrinking, as it has quite a bit in recent years, for those payments to keep getting bigger and bigger there’s currently no mechanism by which the size of the equalization envelope can shrink."
Eisen and his team released a report on Thursday, which spotlights this "flaw" of the program and while a fix wouldn’t send money to Alberta, it would "show a response to concerns and anxieties in that part of the country."
Economic hardships misplaced?
Calgary-based economist Trevor Tombe says the political response to Alberta’s economic hardships by provincial leaders, like Kenney, are misplaced entirely.
"The way the frustration is being directed towards the equalization program rather than other types of federal changes that might benefit workers going through a tough time here is disappointing," said Tombe.
Like Eisen, he added that because no tweak to the formula would result in Alberta qualifying for equalization payments, it’s not only a meaningless debate but it’s being used as political leverage to advance other priorities.
"Equalization is a convenient tool to use in political messaging to connect with pipelines I think for no reason other than Quebec is a large recipient province and more visible opponents of pipeline construction," said Tombe.
Calls for support from the federal government on behalf of Kenney and his team should be directed instead at reforms to employment insurance or bolstering skills training for displaced oil sector workers, he said.
"Retraining is something where historically the federal and provincial governments offer job training programs together," said Tombe. "It would be a productive conversation to have."
Kenney is not the first provincial leader to criticize equalization and demand more for their province.
In 2005, Ontario Premier Dalton McGuinty was prepared to wage a war with the federal government over the offshore energy deal between Ottawa, Nova Scotia, and Newfoundland and Labrador.