A new report from Canadian think-tank the Fraser Institute shows the oil price shock has driven Alberta’s fiscal capacity to nearly the national average, and suggests if the economy doesn’t turn around, the province could slip into have-not status.
“It’s actually conceivable within three to five years that Alberta could be an equalization recipient province,” said Ben Eisen, a senior fellow with the Fraser Institute, and one of the report’s co-authors.
“This is not a good news story at all. The major driver of this has been falling fiscal capacity in the particularly oil-rich provinces in the country.”
Fiscal capacity is a measurement of a province’s ability to generate tax wealth, using the average tax rates across the country. Alberta has led the nation in capacity since the measurement was first devised in 1967, but the recession in 2016 saw the gap begin to shrink, and the oil shock caused by the COVID-19 pandemic has only accelerated the decline.
“The gap between the lowest income province and Alberta in 2007, per person, was about $11,000 worth of fiscal capacity. That’s gone all the way down to about $4,000,” Eisen said.
Whether that gap continues to shrink will depend on whether world oil markets rebound, and how Alberta comes out of the COVID-19-caused recession.
“It really might change how we view the pros and cons of that program,” said Trevor Tombe, associate professor of economics at the University of Calgary. He believes the narrowing of the fiscal gap in the country could lead to some interesting conversations.
“It will spark questions like, ‘How should we design a program when the gap between the have and have-not provinces is smaller than at any time in history?'”
Albertans have long had suspicions about equalization, and the UCP government has used it as a wedge issue with Ottawa. Premier Jason Kenney has promised to hold a referendum on the program. While it wouldn’t have any impact on the formula, he has said it would put Alberta’s concerns on the national agenda.
Despite the dramatic shift, Finance Minister Travis Toews believes it’s a conversation that still needs to be had because the government still has fundamental concerns about how the program is structured. He’s also not convinced Alberta will be seeing any payments any time soon.
“I’m confident that this province will continue to be the wealth creation engine in the future for the nation,” he said.
If it moves forward, a provincial referendum would be held in conjunction with municipal elections in the fall of 2021.