Alberta can’t blame the equalization system for its economic mess

Empty pockets
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By Ben Eisen
and Steve Lafleur
The Fraser Institute

In William Shakespeare’s Julius Caesar, one of the conspirators encourages his ally not to blame fate for his misfortunes, but rather to recognize his own responsibility. “The fault, dear Brutus, is not in our stars, but in ourselves,” says Cassius.

Steve Lafleur

When it comes to the state of Alberta’s finances, and the role of Canada’s equalization program in the big deficits and rapid run-up in debt that Alberta is experiencing, the province’s political leadership would do well to paraphrase Shakespeare’s famous line.

The fault is not in equalization – or any other federal policy – but in themselves.

Recently, politicians from both major parties have blamed equalization for Alberta’s large deficits and implied the province should have received payments during the recent recession.

Alberta New Democratic Finance Minister Joe Ceci complained “the program has not worked for Alberta, even during the depths of our recession.”

Ben Eisen

United Conservative Party Leader Jason Kenney said Alberta deserves “an equalization system that will be there when times are bad.”

And it’s certainly true that the equalization program has many problems. We have written about several of them at some length. However, the program’s failure to deliver payments to Alberta is entirely appropriate.

The equalization program works by taking federal tax revenue collected from across the country and distributing it to the governments of provinces with weaker economies. A complicated formula is used that doesn’t precisely mirror economic strength or income levels, but the stated objective is to help governments of economically weaker provinces provide public services reasonably comparable to other provinces at comparable levels of taxation.

The problem with saying Alberta should have received equalization payments during or after the most recent recession is that, even then, Alberta still had the largest per-capita economy in Canada.

For Alberta to become an equalization recipient, money would have to be taken from taxpayers all across Canada and transferred to the richest province in the country. Clearly, it doesn’t minimize the economic pain experienced during the recession to note that this is precisely the opposite of the program’s purpose.

Of course, it’s reasonable to note other flaws in the equalization program that produce unfair results. For instance, program design quirks mean Ontario still receives equalization payments this year despite reasonably strong recent growth that would have pushed the province out of the program in their absence. The solution to such problems, however, is to fix the flaws rather than make matters worse by devising an equalization formula that somehow sends money to higher-income Alberta.

Commentators and analysts frequently point out the apparent irony that Alberta is running big deficits while equalization recipients such as Quebec enjoy balanced budgets, suggesting that this must mean something is wrong with the program.

This is where Alberta’s political class should accept responsibility for our fiscal problems, which are homemade. Successive governments have increased spending significantly faster than the rate of economic growth or inflation plus population. When times were good, deficits remained relatively small. But when oil prices and revenues dipped, the province’s free spending caught up to it and the deficits widened. Since then, the provincial government has refused to strike at the root of the problem by reducing and reforming spending, so the deficits have remained stubbornly large.

Undisciplined spending is responsible for Alberta’s fiscal problems, not equalization. And the notion the program should have been there for Albertans during the recession is mistaken. That would only create worse incentives for overspending during periods of strong revenue growth.

Equalization is a flawed program but it’s not responsible for Alberta’s deficits. And changing federal transfer policy is not the way to eliminate them.

Alberta made its fiscal mess and Alberta must clean it up by addressing the province’s long-standing spending problem.

Ben Eisen and Steve Lafleur are analysts with the Fraser Institute.

alberta economic equalization

The views, opinions and positions expressed by columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

By Ben Eisen

Ben Eisen is a Senior Fellow in Fiscal and Provincial Prosperity Studies and former Director of Provincial Prosperity Studies at the Fraser Institute. He holds a BA from the University of Toronto and an MPP from the University of Toronto’s School of Public Policy and Governance. Prior to joining the Fraser Institute Mr. Eisen was the Director of Research and Programmes at the Atlantic Institute for Market Studies in Halifax. He also worked for the Citizens Budget Commission in New York City, and in Winnipeg as the Assistant Research Director for the Frontier Centre for Public Policy. Mr. Eisen has published influential studies on several policy topics, including intergovernmental relations, public finance, and higher education policy.

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