(Editor’s Note: over the next little while, I will be publishing articles on topics related to Western Canada, for all of my subscribers out west. This piece on Alberta’s equalization referendum is the first of three. Or four. Or maybe only two. Also the editor is me, by the way. This is just a me note.)
What if I told you that there was a province in Canada where a movement for provincial autonomy was growing? And that in that province, a new political party had gained ground in a recent election by pushing for outright separation from Canada? And that this province was also holding a referendum to try to change the terms of the constitutional arrangement between itself and Ottawa?
You might respond by saying “I get it, you’re drawing a clear parallel with Quebec in 1980 but you’re obviously talking about Alberta.” And, dear reader, you would be right.
I am of course speaking, not of la belle province, but of wild rose country. Not the birthplace of Céline Dion and Cirque du Soleil, but of Jann Arden and The Greatest Outdoor Show On Earth. The Rockies, not Roch Voisine. Cowboys and country bars, not coureurs des bois and comedy festivals. Nickelback, not Simple Plan. The Great One, not the Rocket. Berta Beef, not smoked meat… well, you get the idea.
Alberta will be holding municipal elections on Monday October 18th, and included on the ballot will be a question on whether the section in the Canadian constitution on equalization “should be removed.”
Folks, that is a very big question for such a small amount of words, and it’s going to require some unpacking. Spoiler alert: the correct answer is “no”, but as we will see, the journey is more important than the destination here. So buckle up and get set for a scenic ride through some rocky mountain passes with me, won’t you?
Equalization: what’s that?
Time for a quick bit of Constitutional Studies 101! Canada’s constitution sets out the division of powers between the federal government and the provincial governments, and it also outlines other cool stuff like the Charter of Rights and Freedoms, Canada’s official bilingualism and multiculturalism policies, and Indigenous rights. The constitution is the highest law in the land, meaning that other laws passed by Parliament or provincial legislatures must comply with the constitution, or else they are null and void. And most importantly for our purposes, it is very hard to amend.
The constitution contains a little bit called Section 36(2) which 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 reasonably comparable levels of taxation.”
So what does this mean? In a nutshell, it means that the federal government uses its taxing and spending powers to redistribute money from richer provinces to poorer provinces. It does this by taking in more money than it needs each year through federal taxes (think: your federal income taxes, the GST, corporate taxes, etc), and then giving that money to provincial governments through various transfer programs, including equalization. The amount that each province receives is based on a complicated formula that determines its “fiscal capacity.” That’s a fancy way of saying, how much tax revenue could a provincial government hypothetically generate, if they set their provincial tax rates to a level standard?
Let’s use an example. Take two provinces: say, Alberta and New Brunswick. These two provinces have very different tax rates. For instance, New Brunswick has a provincial sales tax of 10%. Alberta has no sales tax at all (they call that “the Alberta Advantage” and let me tell you as someone who used to live in Alberta, when you’re doing last minute holiday shopping before flying home to Manitoba, the advantage is real). However, for the purposes of the equalization formula, the actual tax rates don’t matter. What matters is how much each province *could* raise in a hypothetical world where their tax rates were equal. So, let’s imagine that Alberta and New Brunswick both had a provincial sales tax of 5% (meet in the middle why don’t we?)- how much money would that generate for each government? Now, obviously, the populations of the two provinces are different too, so the calculation is on a per-capita basis: how much revenue per person would a 5% sales tax generate for Alberta, vs for New Brunswick?
What you’d find is that Alberta would generate far more tax revenue than New Brunswick. That’s because Alberta has a younger population, meaning more working-age people earning and spending more money, and a higher concentration of high-paying jobs meaning more disposable income to spend on things like cars and TVs - things that generate sales tax revenue for governments. In this way, it can be said that Alberta has a higher fiscal capacity than New Brunswick: all else being equal, Alberta’s government has a much easier time raising revenue to pay for things like healthcare and education than New Brunswick’s government does, because it is a richer province.
The equalization formula is meant to smooth out these differences in fiscal capacity by topping up the poorer provinces so they can provide relatively equal levels of public services compared to the richer provinces. The formula calculates fiscal capacity based on all the different types of tax revenue that exist, and produces a total amount that each province should get. Some provinces get a little, some get a lot, and some (like Alberta) get nothing at all. That is the point, after all: to level up the “have-nots” to something closer to the “haves.”
To be clear, the equalization formula does not fully “equalize” the fiscal capacity of all provinces. It just brings them closer together. But even after receiving equalization dollars from the federal government, the “have-not” provinces still have less fiscal capacity than the “have” provinces. It’s not full-scale government socialism- a bit more like “third way” social democracy, if you will. Less Bernie Sanders, more Joe Biden? Clinton, not Castro… ok ok you get the idea.
Why does Alberta want out?
I suspect you know the answer to this one already, don’t you! In case it’s not obvious already, Alberta is a “have” province, meaning that it gets zero dollars from equalization. This of course is how it should be: Alberta is the richest province in the federation on account of the enormous sums of money it receives in royalties from its oil & gas reserves, as well as the tax receipts from the many high incomes and corporate profits in that sector. This remains true even in spite of the fact that Alberta has experienced a deep economic recession in the wake of falling oil prices since 2014.
Alberta also contributes an above-average share of federal tax revenue on a per capita basis, for the same reason that it doesn’t receive equalization: because Alberta is rich. High personal and corporate incomes combined with high levels of consumer spending mean that Ottawa receives more in tax revenue per person from Alberta taxpayers than it does from, say, Quebec or Nova Scotia taxpayers. This is not new: Alberta has been paying more in taxes to the federal government than other provinces, and receiving less (i.e. nil) in equalization payments, for decades. And by and large, Albertans have accepted this reality as simply the price of success. With great power comes great responsibility, Uncle Ben once said.
What has changed, however, is that in recent years Alberta has been struggling with high unemployment rates, declining investment in the oil & gas sector (largely due to the exorbitant cost of extracting bitumen from the tar sands in northern Alberta coupled with depressed global oil prices), and an increasingly challenging regulatory environment for oil & gas under the Trudeau Liberal government. Policies like the federal carbon tax, an enhanced environmental assessment process, and new legislation to protect ocean coasts and waterways, have conspired in the minds of many Albertans to hamstring their most lucrative industry and put them in the poorhouse. And it is in this context that political agitators in Alberta have decided that it’s time to start playing hardball with the eastern elites who, as they see it, are quick to thumb their nose at the resource industries of Western Canada, but happy to take the money that they generate.
Alberta Premier Jason Kenney, who actively courted the aggrieved Alberta separatist (or “Wexit”) movement when running for the leadership of his United Conservative Party, came under pressure from that wing of his party to do something tangible to direct the simmering discontent in his province. Although there was a long list of grievances to choose from, it was equalization that he seized upon as the talisman representing all the ways that Ottawa was screwing Alberta over. And so it was decided that Albertans would vote on whether or not they think the equalization program ought to be scrapped altogether.
Can they really vote to get rid of Equalization?
You may have noticed, wise reader, the passive voice used in my previous sentence. You see, Albertans are not voting to actively get rid of equalization; they are merely voting on whether they feel it ought to be gotten rid of. That’s because Alberta does not have the power to eliminate a federal government program- much less one that is enshrined in the Canadian constitution. The federal government is free to tax its citizens however it pleases (and last I checked, Albertans are still Canadian citizens), just as it is free to spend that tax revenue however it pleases. Eliminating the equalization program would require a constitutional amendment, which is basically a non-starter in Canada because it would entail many months and years of protracted negotiations between the provinces and the federal government, and just about every effort to do so in the past four decades has ended in failure.
Which is not to say that the equalization formula couldn’t be tweaked. Indeed, it is regularly reviewed by the federal government and approved by parliament every five years. (And snarkier folks than me will be quick to point out that Jason Kenney sat at the very cabinet table that approved the current equalization formula, back when he was a minister in Stephen Harper’s government. But why let history get in the way of a good showdown?) After all, Section 36(2) of the constitution merely commits Canada to the principle of equalization, not to any specific formula for redistribution.
And at the heart of it, that’s what this is really about. The Alberta government knows that it will not achieve the outright elimination of equalization, even if 90% of Albertans vote for it in Monday’s referendum. Their hope is that, with a strong enough mandate for change, they can force the federal government’s hand into renegotiating some of the specifics of the formula that will allow Alberta to keep a bit more of its riches; or, perhaps, to use that leverage to extract concessions on some other policy negotiation. Carbon tax? Pipelines? Oil tanker ban? Time to dust off that list of grievances.
For what it’s worth, it should be pointed out that much of the narrative used in Alberta to sell the “Yes” side of the equalization referendum is rooted in half-truths and oversimplifications. Chief among them is the notion that Alberta sends billions of dollars to Quebec each year to subsidize that province’s cheap daycare. The actual fact is that, while Quebec does receive the largest sum of money from the federal government in equalization, that is largely on account of the fact that Quebec has 8.5 million people, while the other “have-not” provinces are much smaller. On a per-capita basis, Prince Edward Island and New Brunswick receive, by a substantial margin, the most help from the federal government, followed by Nova Scotia, Manitoba and finally Quebec. Ontario, BC and the three oil-producing provinces (Alberta, Saskatchewan and Newfoundland & Labrador) don’t receive any equalization - although Ontario did become a have-not province (just barely) for about a decade following the ‘08 recession and years of deindustrialization, and Newfoundland historically was as well before striking oil.
Below is a chart showing the dollar values each province has received in the last ten years under the Equalization program:
As you can see, Quebec does receive the lion’s share at over $13 billion of the total $21 billion program. But again, this is the population effect: per person, Quebec is receiving less than all of the other “have-not” provinces. What the chart also obscures is where the money comes from: general federal tax revenues. Equalization is not a direct transfer from rich provinces to poor provinces. Federal taxes are paid by all Canadians in every province and territory. So of that $21 billion, a chunk of it is money that citizens of the have-not provinces paid to begin with, that their provincial government is getting back. The rest of course comes from taxes paid by residents of the “have” provinces, but again, the population effect is relevant here: close to 40% of federal taxes are paid by residents of Ontario, because Ontario has a very large population. So when it comes to that $21 billion of equalization, it’s Ontarians who are actually footing most of the bill, not Albertans. Perhaps we ought to have a referendum too?
To Sum Up…
At the end of the day, Alberta’s referendum on equalization is more of a gimmick than a genuine attempt to alter Canada’s constitutional architecture. No one seriously expects it to lead to Canada abolishing equalization. Quebec, Manitoba and the Atlantic provinces will still receive money from the federal government next year and the year after that. There may be some tweaks to the formula, and that’s all fine and well. But ultimately, equalization is a good program and it should stay. It ensures that Canada is more than just a loose collection of communities, but an actual country where people care enough about each other to ensure we all have access to good schools and hospitals, roads and bridges and the like- not just those of us fortunate enough to live in a province blessed with oil & gas reserves or a global stock exchange.
And just because Alberta is a “have” province that receives nothing from equalization, there is no guarantee that will remain the case indefinitely. Alberta was a “have-not” province until the mid-1960s. Ontario, despite being the industrial engine of the country, was a have-not province through much of the past decade. Perhaps the lesson here is that nothing lasts forever, and most good luck runs out eventually.
I suspect that most Albertans are aware of this, and even though the referendum might pass (I suspect it will, based on recent polling), it is my genuine belief that most Albertans are kind, generous people who still support the basic principle that all Canadians deserve to share in the wealth that is created across this country. If Alberta votes “yes” in Monday’s equalization referendum, the real message it will send is not that they wish to rip up the constitution, but merely that all is not well in Alberta, and it’s time we had a frank discussion about it.
And it is certainly true that Alberta faces immense economic challenges. Simply put, the world is rapidly moving away from fossil fuels, and Alberta still has far too many eggs in that basket. And unemployment rates still remain stubbornly high in wild rose country. The downtown office vacancy rate in Calgary sits at a whopping 29% (no thanks to Covid-19 of course). But for my two cents - and as someone who lived in that province for many years, I feel qualified to say this - Alberta’s problems are largely of its own making, and it is time to reckon with that reality. No amount of sabre-rattling at Ottawa will change the fact that Alberta has failed to meaningfully diversify its economy and prepare for the structural changes that they knew would eventually come. It is not the fault of the federal government that oil prices fell by half overnight in the mid-2010s, and no amount of fiddling with the equalization formula will bring the boom days back.
Alberta doesn’t need more money from the federal government, any more than it needs more pipeline approvals for projects that have already been abandoned by their proponents. What Alberta needs is a credible plan for building a 21st century low-carbon economy. There is no shortage of talent, ingenuity and resources in the province to make that happen. Unfortunately, its leaders are more intent on fighting 20th century battles and making scapegoats out of eastern Canada. Perhaps, to quote the late Alberta Premier Jim Prentice, it’s time they looked in the mirror.
For more information on Alberta’s equalization referendum, see the Elections Alberta website here.
If you’re interested in reading the “Yes” argument, see Jack Mintz’ op-ed in the Financial Post, here (I don’t endorse it, or really anything written by Mintz, but I leave it for you to judge.)
For Trevor Tombe’s more cogent argument in favour of the “No” side, see his op-ed in the Calgary Herald, here.