Misplaced Anger

Western alienation and the battle over equalization

By Trevor Tombe

Should Alberta ditch Canada? This simple yet ominous question—blazoned on two Alberta billboards earlier this year, and asked by many in the recent provincial election campaign—reflects a deep feeling of frustration and resentment throughout the province, much of it directed at Ottawa.

Environics, in their 2019 Survey of Canadians, found 71 per cent of Albertans feel the province does not receive the respect it deserves. And Angus Reid recently found 76 per cent feel they contribute more to Canada than they get back and only 17 per cent say Canada treats Alberta fairly. Concern over equalization tops the list of grievances.

“Every year, Alberta sends $20-billion in transfers to other provinces through the federal government,” wrote Jason Kenney in a pre-election fundraising email. “It’s time to fight for fairness in the federation.” He proposed a referendum on the topic.

Other issues were similarly causing anxiety, bitterness and even fear about the future, including pipeline challenges, tanker bans, large budget deficits, years of recession and a slow recovery.

We can’t, however, lose sight of the country we’re in. Canada is a vast nation, a wealthy nation and a diverse nation. We naturally identify more strongly with our home province than with the country as a whole. And Ottawa will inevitably make decisions, especially economic ones, that benefit some at the expense of others. It has always been so.

“But what is not inevitable,” Prime Minister Pierre Trudeau said 50 years ago, speaking on western alienation at the time, “is the kind of dissatisfaction that falls from each decision. This dissatisfaction is because not enough people are speaking for the total picture… and this is the danger to Canada… it’s the kind of alienation and dissatisfaction which comes from only talking from one regional point of view.” This insight remains relevant today.

Alberta isn’t a victim of unfair treatment. Rather, much of what is lamented today is a side effect of Alberta’s economic strength. Especially when it comes to equalization.

Canada’s 1982 constitution, which Alberta helped craft as a member of the Gang of Eight, commits the federal government “to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services and reasonably comparable levels of taxation.” Though this vague and political language does not enshrine a particular formula—and may not even be enforceable in the courts—the broad goal and intent is clear: All Canadians should have access to comparable education, healthcare and other services regardless of a region’s wealth.

Therein lies the challenge. Provinces with lower incomes, older populations and weaker economies naturally have a harder time funding public services. Average family incomes, according to the latest census, were nearly $94,000 per year in Alberta but only $60,000 in Quebec. The same income tax rate in Alberta will therefore raise more dollars than in Quebec, so higher tax rates in Quebec are needed to deliver comparable public services. This is where equalization comes in. It’s a federal transfer program that tops up below-average provinces to the national average level.

Though the formula can be complex, its core intuition is simple. First, the federal government calculates “average” provincial tax rates. It looks at income taxes, sales taxes, property taxes and more. Second, it estimates what each province would raise if they each adopted those average rates. It’s a thought experiment meant to measure a province’s “capacity” or “ability” to raise revenues. If Alberta had average tax rates, for example, we’d raise roughly $12,000 per person. But at those same average rates, PEI would raise barely $6,500. The average province, meanwhile, would raise a little over $9,000. Equalization tops up provinces such as PEI to that average level. There are many complexities, to be sure. But few that matter in most public debates.

It’s easy to attack equalization, as many politicians do. Alberta receives nothing from it, and hasn’t in over a half century. But this isn’t because the program is unfair. Among the ranks of “have” provinces, Alberta reigns supreme. No tweak to a program meant to transfer funds to lower income provinces should ever transfer to the richest.

Importantly, nothing depends on a province’s actual tax rates or spending policies. This is a frequent source of confusion. Former Alberta Finance Minister Ted Morton, for example, lamented in an op-ed during Alberta’s last election that “Alberta, with a budget deficit of $9-billion, is still paying into equalization; Quebec, with a budget surplus, is still receiving equalization payments.” This does not make equalization unfair.

First, and most importantly, none of the equalization dollars are paid by Alberta—it’s a federal program. The federal government pays equalization out of general revenue—the same pot of money it uses to pay for everything from paper clips to fighter jets.

Alberta isn’t a victim of unfair treatment. Rather, much of what is lamented today owes to our economic strength. Especially equalization.

Second, the equalization formula doesn’t (and shouldn’t) care whether a province runs a deficit or not. It doesn’t directly depend at all on a province’s tax rates or spending levels, but instead depends only on a province’s ability to raise revenue. Quebec’s taxes are roughly double Alberta’s. If we adopted their tax system, Alberta government revenue would increase by almost $21-billion this year, producing a surplus of $14-billion.

Alberta’s deficit is a choice. We choose low taxes. We choose high spending. And we pray resource revenues make up the difference. Sometimes this works out, sometimes (like today) it doesn’t. It’s not Ottawa’s fault, nor is it equalization’s. It’s our own choice. Period.

Whether fair or not, though, equalization is important to Quebec and this fact might explain why many Albertans oppose it. This year Quebec will receive over $1,500 per person in equalization payments—making this a more important source of government revenue to Quebec than resource revenues are for Alberta. So, the argument goes, if Quebec is going to actively oppose an industry that provides significant public funds for Alberta, then we should return the favour. Whether this strategy will succeed in gaining broad national support for pipelines is an open question. It might or it might not. Either way, it’s a political strategy that has nothing to do with the actual workings of the program. We should be honest about that.

To be sure, equalization is just one of many federal programs that are unequally distributed across provinces. The “$20-billion in transfers” frequently cited in attacks against Ottawa speaks to this broader issue. But again, a broader perspective reveals Alberta is not the victim of unfair treatment here either.

Since 2007, Alberta families and businesses contributed 17 per cent of federal revenue—much higher than Alberta’s share of the population, which is less than 12 per cent. And in 2017 the federal government collected $24-billion more in revenue from Albertans than it spent in the province. Since the early 1960s, I estimate the total implicit transfer out of Alberta has exceed half a trillion dollars. While this fact animates much discussion, and sometimes alarm, we shouldn’t lament its existence but celebrate its cause.

Albertans contribute 17 per cent of federal revenue for the simple reason that Alberta’s economy is 17 per cent of Canada’s. Two-thirds of federal revenue is from taxes on income, plus another one-quarter from taxes on consumption through sales taxes, excise taxes and import tariffs. Overall, 90 per cent of federal revenue comes from taxes that are directly related to a region’s economic strength. Stronger economies mean more high-income individuals and businesses, more consumption, more employment and, yes, more taxes.

Federal income tax rates are the same for all Canadians. They aren’t higher for Albertans because we’re Albertans. A high-income Albertan pays the same federal taxes as a high-income Ontarian. And a low-income Albertan may pay no federal income taxes at all. Federal revenues are higher from Alberta because, on average, we have high incomes, work more and are young. In 2018 our economy produced nearly $84,000 per person, according to the Conference Board of Canada. This is significantly higher than the $60,000 national average or even the $70,000 produced in the next-highest province, Saskatchewan. Employment is also higher here. In 2018, despite the incomplete recovery, 67.2 per cent of Albertans over 15 years old were employed. The next-highest province, again Saskatchewan, had an employment rate of 64.5 per cent. Meanwhile, the average age in Alberta is under 38—less than any other province—so fewer CPP payments flow here.

Of course, some federal programs are explicitly redistributive. But if we look just at programs that are regionally biased, I find only a $4.5-billion gap—less than a fifth of the $24-billion total. And even some of that is unavoidable. Defence purchases, for example, are higher in Nova Scotia, home of Canada’s Atlantic fleet, for good reason.

If these fiscal transfers are a problem, reasonable reforms exist. If we raise the GST back to 7 per cent, for example, we could use the proceeds to lower federal income taxes by 10 per cent. This would shrink fiscal outflows from Alberta by half a billion dollars annually. Reasonable people can disagree over specific reforms such as this, but anger and bluster will get us nowhere and separation is not the answer. Alberta would no more see a return of $24-billion supposedly transferred to the rest of Canada than Brexit would return £350-million per week to the NHS—as the “Leave” campaign bus famously claimed.

None of this is to diminish feelings of frustration and alienation in Alberta. It’s to help us guard against opportunistic partisans hoping to stoke anger and fear for short-term gain. Ultimately the questions we have to ask ourselves are whether and how we—as a country—balance the competing interests of Canada’s diverse regions.

These difficult questions are central to the Canadian experience. Alienation in Alberta today is merely the most recent in a long history of regional divisions. Our country was founded on such tensions; in part, it exists because of them.

Dial back the clock over 150 years to when Ontario and Quebec were a united colony (the “Province of Canada”). Upper Canadians (now Ontarians) in the 1860s were increasingly frustrated that they paid three-quarters of the government budget yet received only half the spending and half the votes. Splitting with Lower Canada, and creating a federation, was part of the solution.

To get the Maritimes on board was no easy task, and almost failed. Not because they were poor, but because they were rich—Nova Scotia was the Alberta of its day. At the time, government revenue overwhelmingly came from taxes on imports, and Halifax—a large port—generated significant revenues at lower tax rates than the rest of British North America. In 1866, tariffs averaged 13.5 per cent in Canada but 8.5 per cent in Nova Scotia. Despite their lower taxes, Nova Scotia raised $4.20 per person, while Canada raised $3.45. Joining Canada not only meant higher taxes, but all proceeds would flow to Ottawa. It was, in terms relevant for Alberta today, equivalent to tens of billions per year in outflows. Little wonder they weren’t happy. Federal transfers tried and failed to bridge the gap. Separatists swept the first provincial and federal elections in Nova Scotia, winning all but two provincial seats and all but two federal ones. They soon voted unanimously to repeal Confederation. (They were ultimately unsuccessful.)

Alberta too was born into deep tensions with Ottawa.

John A. Macdonald’s National Policy featured high tariffs that harmed Western interests to benefit central Canadian manufacturing. And Alberta’s Social Credit supporters in the 1930s and 1940s had disputes with Ottawa that make today’s look cordial. The Alberta government—under William Aberhart—introduced bills to regulate banking, censor the press and restrict access to courts, among many other harebrained and dangerous schemes. The federal government wouldn’t have it, and nearly every piece of Social Credit legislation in their first term was either disallowed by the federal government (an immense and rarely used power), set aside by the provincial Lieutenant Governor or struck down by the courts. Some Social Credit supporters called for blood.

More recently, the National Energy Program led to an organized separatist movement in Alberta. By keeping domestic oil prices low, the NEP transferred vast sums from western producers to eastern consumers—roughly equivalent to one-quarter of Alberta’s economy in 1980, or nearly $19,000 per person today. Gordon Kesler of the Western Canada Concept party (the WCC), in winning Olds-Didsbury in 1982, was the first separatist member in generations to be elected to a provincial legislature outside of Quebec. In the provincial election that year, the WCC received nearly 12 per cent of the Alberta vote.

Our history of regional alienation is long and difficult. Canada’s scale and diversity makes this inevitable. It’s hard to govern the country and harder still for citizens to gain a national perspective. Debates over language, culture, energy, the environment, taxes, spending and so on will never be easy.

There’s much to debate on federal policy, but much of what ails our province can be solved ourselves or through co-operation with others. We have to work together. We have to cooperate. We have to be flexible. Blaming Ottawa in general and equalization in particular may feel good, but misplaced rage distracts from the thoughtful, practical solutions Alberta needs today.

Trevor Tombe is an associate professor of economics at the U of C. Send feedback to letters@albertaviews.ca.

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