Reversing the growing inequality among provinces

The decade long petro-boom has caused major distortions in the Canadian economy, and has driven growing interpersonal and interprovincial inequality.

The flood of petro-revenue into Alberta— the source and destination of the  vast  majority of  petro-wealth— pushed up its per capita GDP from 10% above the Canadian average in 2002, to 49%  above the Canadian average in 2010.

Petroleum revenues are recycled throughout the Canadian economy through federal and provincial tax and transfer systems; personal earnings and income from petroleum-related investments; and through inter-provincial trade and employment shifts. These mechanisms, as currently constructed, are recycling petro-dollars in a highly unequal manner.

Federal-provincial transfers—health, social and equalization—are important vehicles for reducing disparities among provinces.  Provinces have different fiscal capacities, that is, in their potential ability to raise tax revenue compared to the Canadian average.

The equalization program, which is enshrined in the constitution, seeks to ensure that all provinces are able to provide comparable levels of public services at comparable levels of taxation.

Alberta’s fiscal capacity has risen to the point where it is now at a record 166% above the provincial average—double Quebec’s (83%), and almost double Ontario’s (93%) fiscal capacity. The projected increase in Alberta’s bitumen production will raise its fiscal capacity 180% or more above the provincial average over the next few years.

The gap between Alberta’s fiscal capacity and that of the non-oil provinces is further skewed by the fact only half of its oil revenues are included in the equalization formula.

At the same time as the petro-boom has exacerbated fiscal capacity disparities, federal changes to the equalization program have weakened its ability to reduce these disparities— from 40% in 2001 to only 30% in 2012.

And it is getting worse.  The tax-cutting Conservative government has changed the federal provincial transfer formula— reducing the magnitude and distribution capacity of health social and equalization transfer programs—which will exacerbate these inequalities in the coming years.

Overall taxes in Canada have been cut dramatically—from 36% of GDP to 31% of GDP since the late 1990s. If they had remained at the same level, governments would currently have almost  $100 billion more per year to pay for social programs and other public services essential to reducing inequality.

Federal governments have cut corporate income taxes in half since 2000. Oil companies now pay just 7% of their revenues in federal taxes (net of subsidies)

Both federal and provincial taxes on earnings and investments of wealthy Canadians have been slashed, weakening their redistributive capacity to the point where the top 1% of Canadians pay in taxes overall, a smaller share of their incomes than the bottom 10%.

Alberta has used the influx of petroleum revenue to cut taxes—including a highly regressive flat personal income tax—to the point where they are by far the lowest in Canada. This has put pressure on other provinces to lower their taxes and reduce programs and services in an effort to stem the outflow of capital and labour.

Alberta’s level of inequality is the highest in Canada. The incomes of richest 1% are 18 times greater than those of the bottom 90% in Alberta. This compares to an average of 15 times in Canada as a whole.

Calgary is the most unequal city in Canada, with the incomes of richest 1% 26 times greater than those of the bottom 90% of its citizens. The top 1% of Calgarians have seen a staggering inflated adjusted $570,000 increase in their incomes since 1982, while those of the bottom 90% have edged up by a mere $2000.

The petro-boom has caused unprecedented imbalances in the Canadian economy, primarily by rapidly driving up the exchange rate to parity with the US dollar.

This has wreaked havoc on manufacturing and other traded goods and services sectors, especially manufacturing and related activities, which have experienced massive output and job losses.  On the other hand, petroleum and related jobs created during the boom have been far fewer than those displaced.

Goods exports from central Canada to Alberta declined in absolute terms despite the rapid rise in Alberta’s demand. This was to a large extent offset by the growth in services exports to Alberta (notably financial and engineering services). However, the benefits of these internal trade shifts have been unevenly distributed. Manufacturing workers who lost their jobs moved largely into low income—often temporary and precarious— services jobs.

Going forward, the GDP and jobs benefits of oil sands development (estimated by an industry think tank) are concentrated in Alberta; and to lesser extent in the US with relatively minor benefits going to the rest of Canada.  For example, the projected 25-year GDP benefits to the United States are five times greater than the benefits to the rest of Canada, and the employment benefits to the US are almost four times greater than to the rest of Canada. Illinois gets a bigger jobs benefit than Ontario.

Growing interprovincial income and fiscal capacity inequality among provinces, if left unchecked, will heighten social, economic and political tensions within the Canadian federation.

There is much that the federal government can do to mitigate these inequalities. Here are a few recommendations:

• • Increase its share of petro-revenue by increasing oil company taxes and eliminate tax subsidies to the industry. Redirect this revenue through an expanded equalization program to reduce interprovincial disparities.
  • Include 100% of resource revenues in the equalization formula deducting only those revenues that are saved in sovereign wealth funds.
  • Increase taxes on incomes and investments of the wealthiest Canadians, notably by reversing the cuts to the capital gains tax and increasing the marginal tax rates on the wealthiest Canadians.  Use this revenue to increase health and social transfers to the provinces.
  • Implement active industrial policies to encourage valued added production and related training and infrastructure investments outside the core petro-regions in order to foster more balanced economic development.
  • Use monetary policy to maintain the dollar exchange rate in a range that is line with its purchasing power parity.

Bruce Campbell is the Executive Director of the Canadian Centre for Policy Alternatives.