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Equalization sparks western anger; 1 economist says that anger is a political tool

How does equalization play a role in western alienation?
WATCH: When it comes to western alienation, a lot of the debate centres on equalization. Many western politicians have pointed out that the formula hurts western provinces, especially Alberta. Fletcher Kent has a closer look.

This story is part of a special on western alienation. Click here for more coverage. 

Many Albertans may already be confused and upset by equalization. A retired economics professor says some politicians like it that way.

“I think many politicians find it advantageous to confuse the issues,” said Melville McMillan, a professor emeritus of economics at the University of Alberta.

“At the moment, it seems advantageous because it paints Alberta as a victim of federal policies.”

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Lately, the federal program has been a favourite target of premiers in Alberta and Saskatchewan. They portray it as a cause for growing western alienation.

Premier Jason Kenney repeatedly brings up transfer payments when talking about pipelines or federal energy policies.

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Shortly after the spring provincial election, Kenney met with Prime Minister Justin Trudeau. After that meeting he again asked, “Why does the federal government want us to take our tax dollars and redistribute them, but not allow us to develop the wealth that pays for those bills?”

READ MORE: Alberta Premier calls equalization format ‘fundamentally unfair’

McMillan, who has studied and written about the federal transfer program, says he hopes more people learn about equalization and the politics surrounding it. He explains that in the simplest terms, equalization uses federal tax dollars and distributes a set amount to “have-not provinces.” Recipients use the money to pay for “reasonably comparable services” which “have” provinces can afford.

Currently, Alberta, Saskatchewan, British Columbia, Ontario and Newfoundland & Labrador are “have” provinces. All the rest are considered “have-not.” Equalization does not include the territories.

“This is what is embedded in the Constitution and the one that is generally accepted — widely accepted by the population — when you ask them about that,” McMillan said.

READ MORE: Alberta Election Fact Check: Could Alberta end or change equalization?

In practice, McMillan notes western provinces do not write cheques to have-not provinces. The federal government collects taxes from all Canadians and Canadian businesses. Provinces with more rich people and companies, however, take on a higher per-capita share of that tax burden.

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Despite the recent economic downturn, Alberta still contributes a lot to federal coffers.

For example, the average 2015 wage in Alberta was 29.9 per cent higher than the average Canadian wage.

READ MORE: Western frustration fuels Wexit separatist movement

Although Alberta is home to a little more than 11 per cent of the Canadian population, Albertans contribute 14 per cent of Canada’s tax revenue.

The federal government calculates who is a have province and who isn’t based, in part, on determining how much tax revenue a province can raise if it adopted the average Canadian tax rate.

Alberta tops that list.

In 2017, the province’s per-capita GDP was 41 per cent higher than the national average. Saskatchewan was next at 27 per cent above the national average.

“We are still a rich province and end up making larger contributions to the federal government than our population’s share. The fact that we’re running deficits is a choice of our provincial government.”

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Alberta has historically used oil and gas royalty revenue to help pay for public services. Taxes are lower than what exists in other provinces and Alberta does not collect a Provincial Sales Tax. Those decisions, says McMillan, have been choices of successive governments and Equalization is not intended to offset such problems.

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READ MORE: ‘Pick a lane’: Kenney calls out Quebec’s use of equalization payments after Blanchet’s meeting with Trudeau

He adds there’s a difference between equalization and what many people are debating.

“I would like people to understand there is a difference between what I call the the ‘Big-E’ and the ‘Small-E’ equalization. You naturally get transfers between provinces through the federal expenditure and tax system.”

These, he points out, are per-capita transfers for health and education programs. The lion’s share of those go to the biggest provinces. That money is what McMillan describes as ‘Small-E equalization.’ It’s also what Kenney and other equalization critics reference when saying Alberta is making a net annual contribution to Canada of $20 billion.

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The actual equalization program, however, is much smaller. It will pay all have-not provinces a total of just under $20 billion this year.

“You can argue whether there are advantages or disadvantages to various provinces but overall, I think it’s hard to say that any particular group of provinces is being disadvantaged particularly.”

McMillan does say there is room for federal improvements.

Earlier this month, Kenney and other provincial premiers asked Ottawa to remove a cap on the fiscal stabilization program.

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READ MORE: Provinces demand changes to fiscal stabilization program – here’s what that means.

The program currently helps provinces forced to deal with dramatic changes to their Gross Domestic Products. Alberta qualifies for aid but it is capped, which means the province receives approximately $250 million each year it applies.

McMillan says the premiers make a good point.

“The federal government could step in and say the stabilization program should have been better and maybe make some compensation to reflect that fact.”

If the cap is removed, Alberta stands to receive $1.7 billion this year from the federal government.

McMillan believes the debate is an important one. That’s why he has been studying equalization for decades. Big-E and Small-E equalization are both worthy of discussion, but he really wants Albertans and all Canadians to understand the differences first.

“I think it is potentially dangerous or at least confusing. I think people are better able to make decision if they understand the facts.”