The 2019 Provincial Election in Alberta, Canada was agonising at times, full of suspicious-at-best claims like ‘demand curves don’t slope down which is why carbon taxes are bad’, and sometimes it seemed like the thing would never end.

The election also made it clear just how misunderstood the Canadian Equalization Program is despite its unique unpopularity with, and constant citation by, the Albertan centre-right.

So, with Equalization-sceptic Jason Kenney now becoming Albertan Premier, it currently seems as good a time as any to correct a few misunderstandings.

‘No pipelines, no equalization payments’

For those not intimately familiar with federal economic systems in Canada, the Equalization Program is a federal program that provides a ‘top up’ of resources to provinces with poor fiscal capacity – a relative inability to generate tax revenues – to ensure that each province, regardless of circumstance, can provide a similar standard of public services to its inhabitants.

Fiscal capacity is measured through an Equalization Program funding model that aggregates the revenue level of a range of taxes and up to 50% of a province’s natural resource revenue, and then compares each province’s overall level with the average level of taxation amongst the rest of the provinces. It is on this basis that decisions on funding are then made.

Whilst a seemingly uncontroversial policy, the Program was a key talking point on the campaign trail of Premier Jason Kenney, and is still a favourite mention when talking about anything even tangentially related to Trudeau or pipelines — something notably symbolised by his well-worn sentiment of ‘no pipelines, no equalization payments’.

Outside of the strict confines of the Albertan provincial election, Kenney’s rhetoric represents an increasingly popular perspective in the region: Alberta is unfairly paying for the rest of Canada’s provincial deficits, whilst those same deficit-running provinces are stymying the go-ahead for pipeline projects that would be beneficial for Albertans.

‘This injustice must not stand’: Albertan politicians beating the drum of playing tough with Ottawa, whilst quietly dog whistling to secessionists who feel Alberta would be better off if they left the Confederation altogether.

Premier Jason Kenney, 2019.

The Right ain’t right

Whilst a popular narrative touted by the Albertan right, the nature of how the Equalization Program works, and what leaving it would mean, simply does not accurately reflect the impression this rhetoric tries to give.

In reality, Albertans pay federal income tax and federal sales tax (GST) just like the rest of Canada, and all of this revenue goes into a general pool shared by and contributed to by all the provinces.

Some of this revenue is then transferred back to Alberta in the form of the Canada Health Transfer or Canada Social Transfer (used to support post-secondary education and social services), and some of the revenue is transferred to provinces with a low fiscal capacity via Equalization payments.

In other words, Albertans are contributing and benefitting from exactly the same pool of resources as that of the Equalisation recipients. It is wrong on this ground, therefore, to characterise Equalization payments as anything even slightly resembling Albertans writing another province a check.

The ‘haves’ and ‘have nots’

Alberta also has a high fiscal capacity – and therefore pays more in income and consumption taxes – because Albertan median income is considerably higher than it is in the rest of Canada. For instance, Alberta’s median after-tax income was consistently around 30% higher than the Canadian average between 2013-2017.

Comparatively, Quebec is often a recipient of Equalization payments due to its relatively low fiscal capacity. On the contrary to Alberta, Quebec’s taxes are relatively high, and income is relatively low. In 2015 for instance they were 11.3% below the Canadian average, and in 2017 their median after tax income was $52400 compared to Alberta’s $70300.

Alberta is a “have” province, and Quebec is a “have not” province.

In other words, Alberta is a ‘have’ province, and Quebec is a ‘have not’ province. It is this fundamental disparity that drives the difference in payments they each receive through the Equalization Program.

Again, despite the rhetoric invoked by individuals like Kenney, characterising Equalization payments as an Albertan favour is deeply misleading, and all criticism launched at the program on this basis should not be taken seriously.

The issues of Equalization

This is not to say that there aren’t issues with the program worthy of analysis, however.

Under the Equalization funding formula that determines how much fiscal capacity a province has, for every dollar the province’s economy grows their calculated fiscal capacity also increases — thereby decreasing any payment they may receive.

This, in turn, may lead to provinces becoming more cavalier about their economic policies in the knowledge that Equalization payments will bail them out if things go badly.

They may decide to jack up tax rates without worrying about revenue implications (because on some level the Laffer Curve is a thing), or forego natural resource development since they know that equalization payments will fill the gap left by a lack of investment.

So, to some extent, Albertan gripes about Quebec’s bad economic policy may be valid (even though Quebec still owns its bad social policies like the “Burka Ban”).

A map of Canada broken down by province.

The end of Equalization; the end of Confederation

Fine, so that’s dispelling some of the baseless rhetoric surrounding the program, but what’s this all mean?

Alberta, finding itself as an oil export-dependent, landlocked country, with a GDP somewhere between Colombia and the Philippines, doesn’t provide much, if any, leverage…

Well, it means that when Jason Kenney is suggesting that Alberta won’t pay into the Equalization program anymore, he is in effect insinuating one of two things: Albertans will begin to evade federal taxes en masse, or Alberta will secede from Confederation altogether.

[This is because, as I explained, Equalization payments are made from the revenue pool generated by federal taxes, dispersed by the Federal Government. Just like all other federal programs.]

On the one hand, mass tax evasion might lead to some uncomfortable meetings with the Canada Revenue Agency which would best be avoided – if Alberta goes down this road, they should probably find a lawyer.

On the other hand, secession from the Confederation would be an unfathomably grave act of economic self-harm, and is a contradiction on its own terms; there is zero chance Alberta would get its much wanted pipeline after leaving Confederation, and it would now have to reign in its deficits without protection from the federal infrastructure.

Furthermore, Alberta finding itself as an oil export-dependent, landlocked country, with a GDP somewhere between Colombia and the Philippines that provides little leverage when negotiating trade deals with Canada or the rest of the world. It would be Brexit, but with a bunch of D list celebrities, and nobody wants that.

Being annoyed is not a policy

Regardless of the specifics, it’s clear that any attempt to pull Alberta out of its federal requirements would be a complete own-goal for the interests of Alberta ranging from severe to catastrophic.

So, whilst Kenney talks tough on Quebec and the Equalization Program, practically speaking there is not much behind his claims beyond stoking up the centre-right base.

Overall, it seems that Albertans have some right to be annoyed: they feel like they’re being jerked around by politicians in Ottawa over pipelines while they court Quebec voters, and some of this rings true. There are also some valid issues Albertans have with the Equalization Program, such as it potentially excusing bad economic policy in the recipient provinces.

However, these two issues are analytically separate, and they need to be treated as such if Albertans want to make progress on them. Remember, Conservative Albertans: facts don’t care about your feelings.