It was Alberta time again in Ottawa with the province’s demands for a re-jigging of the previously obscure Fiscal Stabilization Program (FSP) dominating coverage of this week’s annual meeting of Canada’s finance ministers.
Other longstanding issues – such as increased health transfers – were shoved into the background as attention was focused on Alberta’s appeal for $2.4 billion from the feds. Also known the “equalization rebate,” the potential payout is being framed as a peace offering to the demons of western alienation, an opportunity for the Trudeau government to connect its money with its post-election soothing words.
The FSP, a 52-year-old program designed to protect provinces from extraordinary year-over-year revenue declines, has for the time being replaced equalization as exhibit one in Alberta’s case against the federal transfer system.
On its face, Alberta’s case looks strong. The drop in oil prices led to an $8-billion decline in its provincial revenues between 2015 and 2016. In response, the FSP delivered a paltry $250 million. That parsimoniousness is attributable to the formula the feds use to calculate how much of the loss is covered and to a $60 per person cap.
Alberta’s demand focuses on the cap, and asks the feds to recalculate back to 2016 as if the cap did not exist. That’s apparently how they came up with the $2.4 billion ask, well below some of the amounts suggested by a conservative-friendly think tank at the University of Calgary.
In a policy paper published this past summer, the university’s School of Public Policy suggested three FSP reform scenarios, the least costly of which would enrich Alberta by almost $5 billion while netting Saskatchewan $192 million and $872 million for Newfoundland and Labrador. The most costly scenario is in the range of $12 billion a year for the three provinces.
With numbers like that in play, the feds, who say they are open to changing the FSP, may be tempted to give Kenney the relatively modest payoff he’s seeking and hope that the issue, and a chunk of alienation, will go away. And the Liberals established something of a precedent earlier this year, gifting hard-pressed Newfoundland with $1.9 billion from revenue the feds earn from part ownership of the Hibernia offshore oil project.
But simply giving in to Alberta’s demands raises several questions.
- Does Alberta really need this federal assistance? It still has the strongest fiscal capacity of any province, and the potential to raise billions in own-source revenue by joining its provincial counterparts and imposing a sales tax.
- Has the province already missed the boat? Should the matter not have been pursued back in 2016 when the inadequacy of the FSP became apparent? Improving the stabilization program may be a good idea, but making it retroactive five years back is another matter.
- Do the feds want to increase the deficit or break election promises to accommodate Alberta? The fiscal update released this week revealed that because of the tax cut in the Liberal platform and a change in pension valuation the deficit for this year has gone from $19.8 to $26.6 billion. The projected deficit for next year is $28.1 billion – before any additional costs that may be associated with platform promises.
And then there’s another reason for giving a thumbs down – one that I’ve been on about a few times in the past, most recently here. Over the last decade and more, less wealthy provinces have watched as the federal transfer system has changed in ways that have most benefitted Alberta.
In conjunction with the finance ministers’ meeting the feds released details of major transfers to the provinces for health, other social programs and equalization for the coming fiscal year. The new numbers confirm the trend – since 2007-08, per capita transfers to Alberta have increased by 88 per cent, compared with a national average of 50 per cent. The Maritimes have had increases below the national average and Newfoundland’s transfers have been cut in half.
As explained in detail here this has happened because equalization receiving provinces suffered from a cap on that program while Alberta, and to a lesser extent Ontario and British Columbia, benefitted from changes to the formula for health and social transfers imposed by the Harper government, featuring cabinet member Jason Kenney. A switch to per capita funding, introduced back when Alberta was flush, added $800 million to the province’s base health transfer in 2014-15, with that extra cash impounded from transfers to the other provinces. Because of that federal shell game, Nova Scotia received an increase of less than two per cent in its health transfers in 2014-15, instead of the usual increase of about five.
Increments since 2014-15 have been calculated on the base established that year, meaning that Alberta has received billions of dollars more in health transfers than it would have received under the long-established formula that took into account the value of tax points transferred from the feds to the provinces. Table 1 is an estimate of the value to Alberta, in millions of dollars, of the changed formula.
Source: Finance Canada (my calculation)
As the table shows, actual health transfers to Alberta totalling $30.26 billion is $8.78 billion more than the unchanged notional amount derived by applying actual percentage increases to the 2013-14 base. Table 2 shows the cumulative loss to Nova Scotia as a result of its diminished base.
Source: Finance Canada (my calculation)
Nova Scotia will receive about $6.78 billion in health transfers from 2014 to 2020-21, about $233 million less than a notional amount based on an unchanged and undiminished 2014-5 base. A similar exercise using data from other provinces would produce analogous results.
Premiers be wary
Provincial premiers who gathered in Toronto earlier this month seemed to be onside with Kenney’s pitch for changes to the Fiscal Stabilization Program. And why not? More federal money to the provinces is usually something every province can get behind.
However, most of the current crop of Premiers was not around when Harper pulled a fast one on health transfers. As they prepare for the big conflab with Trudeau next month they should bear in the mind the caution expressed in the idiom “once bitten twice shy” and keep a close eye on equalization.
The cap that was introduced in 2008 to put a lid on equalization has evolved over the years into a floor, guaranteeing annual increases in equalization cash in line with growth in the economy. With the drop in oil prices reducing the amount needed to equalize resource revenues, conservative think tanks have suggested removing the guaranteed growth factor, reducing spending on equalization.
One analysis, by the same outfit that produced the ASP scenarios, found that last year only $17.20 billion of the $18.96 billion equalization pot was needed to equalize up to the current standard, with the surplus created by the growth factor distributed as adjustment payments. Payments from the surplus went mainly to Ontario and Quebec, but Nova Scotia received $66 million.
There is some ambiguity about whether the floor is mandatory or can be removed at the government’s discretion. This could provide an opening for any surplus to be re-directed from adjustments payments to the equalization receiving provinces into the kind of fiscal stabilization, or equalization rebate, being sought by Kenney’s government.
The best defence against another shell game is, as I wrote a year ago “to recite recent history, a history in which a succession of changes to the whole package of federal transfers – for health, social programs and equalization – have generally favoured the larger, wealthier provinces at the expense of the poorer ones.” It will be interesting to see in the coming weeks whether anyone tries to make such an argument, or if the western alienation card has bludgeoned them into agreeing to whatever Kenney wants.
 Not fun fact: 13.5 per cent of the 2019-20 deficit is directly attributable to an expected drop of $3.6 billion in corporate income tax due to the corporate tax incentives announced last December. The cuts in personal taxes will cost $690 million this year and $3 billion next year.
 Nova Scotia’s per capita increase over the 13-year period is 40.9 per cent; PEI is 38.9, New Brunswick 46.1 and Newfoundland and Labrador is down 48.1 per cent, from $2882 to $1495 per person, the same transfer amount as Ontario and the three westernmost provinces.