For years now, provincial governments have complained about a “fiscal imbalance” in reference to Ottawa’s ongoing surpluses while many provinces have been running deficits. But recent times have also highlighted another fiscal imbalance that is much more divisive to Confederation: Alberta’s oil-filled coffers.
Private sector forecasters are pegging Alberta’s surplus at $7 billion this year. The Alberta government says it is lower, but they are notorious for lowballing budget estimates. Last year (2004/05), the Alberta government received just shy of $10 billion in resource royalties, about double what was budgeted.
Astonishingly, these royalties covered a full 40% of Alberta’s budget expenditures. Alberta’s black ink is entirely the result of black gold — without resource royalties, Alberta’s $5 billion budget surplus would have been a $5 billion deficit.
These royalties have been a powerful tonic for Alberta’s fiscal situation. Unlike other provinces, Alberta has not needed to institute a provincial sales tax. Alberta has been able to afford the right’s dream of a flat income tax. More recently, Alberta’s surpluses have paid down its provincial debt. And to top it off, Alberta can afford to pay top dollar to attract public service professionals, such as doctors, nurses and teachers.
Albertans now talk gleefully of getting rid of income taxes altogether, moving to a world where all of their public dreams can be purchased with petrodollars. Low taxes are not the cause of Alberta’s prosperity, as some commentators have asserted, but merely the convenient result of oil and gas revenues.
What is of concern for the rest of us is that Alberta is engaging in what economists call "beggar-thy-neighbour" policies with regard to taxes. As they drive tax rates down, other provinces feel compelled to follow, so that businesses are not lured away to the oil patch. The flipside is that to stay "competitive" they risk seriously under-funding public services.
So what to do about Saudi Alberta?
One way forward would be to go back to the Constitution and the principle of equalization. Section 36(2) of the Constitution states:
Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonable comparable levels of taxation.
The federal Equalization program is one that Canada's right loves to hate. And Alberta Premier Klein is guilty of making rhetorical attacks, falsely depicting equalization as taking money out of Alberta’s pocket to give to the less fortunate.
In reality, the Alberta treasury does not pay anything into equalization. Rather, equalization is just another federal program funded out of general revenues. Albertans only pay more to the extent that there are more high-income people in Alberta who pay federal taxes.
This discussion is timely because the federal government is engaged in a process to determine a new formula for equalization by the end of the year. Historically, a complex formula determined a “fiscal standard” to which provinces would be topped up.
One catch was that this was calculated based on five “middle-income” provinces, excluding the Atlantic provinces and Alberta. This needs to change – all provinces should be in the pot for the purposes of calculating equalization.
The federal government can also take advantage of current large surpluses to make the equalization pie larger. The federal government has already committed to increasing the size of the equalization pie by 3.5% per year. But this is insufficient to provide the balance to Confederation called for by the Constitution.
Revitalizing the equalization program would be a good first step in restoring some fiscal sanity to Canada’s dysfunctional family unit. This move would be precisely the opposite of the radical decentralization of federal taxation powers called for by Canada’s right, an initiative that would only exacerbate regional inequality.
Four decades ago, Alberta was among those who received equalization payments. Arguably, these contributions and other federal infrastructure investments helped shape today’s Alberta. Sharing the wealth made sense back then, and in the name of national unity, it still makes sense today.
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Marc Lee is an economist in the BC office of the Canadian Centre for Policy Alternatives.