Fixing equalization will not be easy, but there are other options, say experts

As the premiers of Alberta and Saskatchewan continue to demand a better deal within the federation, all eyes are beginning to focus on the controversial government equalization program.

It was crafted to help poorer provinces deliver the same level of government services as richer ones, butAlberta Premier Jason Kenney and Saskatchewan Premier Scott Moe want to see it changed.

Last week Kenney announced the members of his Fair Deal Panel that will hold a series of town halls in an effort to push Ottawa for a better equalization deal, among other things.

Kenny has even promised to hold a referendum on the program as a way to pressure the federal government to improve the deal for Alberta.

Chief among his complaints is that Quebec receives $12 billion a year in equalization payments and is posting a provincial surplus, while an Alberta hard hit by the downturn in global oil prices is running deficits and gets no money under equalization.

But what the deal would look like if it were changed, and what it would mean for Alberta, say experts, might not be what Alberta and Saskatchewan would like to hear.

"For Alberta there is really a simple answer: nothing could be changed that would result in Alberta receiving payments," said Trevor Tombe, associate professor of economics at the University of Calgary.

The reason Tombe can be so confident in this proclamation lies inhow the equalization formula that delivers federal dollars to provinces works. Tombe explains that the formula basically looks to even out "fiscal capacity" a province's ability to generate revenue.

So a province like Alberta that does not have a provincial sales tax is considered to have much more room to increase its tax revenue than a province like Quebec, which has a relatively high provincial sales tax.

The same can be said for provincial income tax levels. The equalization formula takes into consideration how much income a province has to tax. According to Statistics Canada, Alberta's median household taxable income in 2015 was $93,835, the highest in the country, compared to Quebec's median of $59,822, one of the lowest.

The federal government could ... do a lot to help Alberta and Saskatchewan but not through equalizationDaniel Bland, McGillUniversity

With Alberta having a very low provincial income tax, compared to other provinces, the equalization program considers Alberta as having a high fiscal capacity, or an ability to increase taxes, and therefore is deemed not in need of assistance from the federal government. At least not before it raisestax levels to be more in line with the rest of the country.

"Even if you remove natural resources from the equation Alberta will not receive equalization payments, they are just way above the average. There is just no way that they would receive equalization." said Daniel Bland, a political science professor atMcGill University in Montreal.

The Fiscal Stabilization Program

So putting aside, for the moment, the option of adjusting the equalization program to better help otherwise wealthy provinces hit by hard times, what else can be done?

"Maybe we need something on the fiscal stabilization side, which has always been a small program, not to be used often," said Kevin Page, president and CEO of the Institute of Fiscal Studies and Democracy at the University of Ottawa.

Bolstering that program could help provinces weather "the longer-term cyclical downturns in the economy to provide support for these provinces that have helped the federation."

The Fiscal Stabilization Program is a relatively small program,that provides financial assistance to provinces facing a year-over-year decline in non-resource revenues that are greater than five per cent. The maximum a province can receive under the program is $60 per person, or in Alberta's case about $260 million.

Boosting other transfers

Page said that with global oil prices likely to stay depressed for the significant future a program like this could be increased to help not only the West, but other provinces as well.

"Maybe we need to change that program and enrich that program so that when economies like Alberta or Saskatchewan or Newfoundlandgo through these periods, that we find ways to give them assistance," he said.

Bland said the formulas for other federal programs could also be adjusted to help provinces in a downturn by providing higher health and social transfers and investments.

"The federal government could help Alberta in certain ways, investments in infrastructure, helping them in terms of diversifying the economy. They can do a lot to help Alberta and Saskatchewan but not through equalization," he said.

That is not to say that Bland is completely against tweaking the equalization program but rather that he believes updating it should be left to experts and not politicians.

Fixing equalization

"We could try to isolate equalization from partisan politics and create a federal panel or permanent commission that will actually review the formula to have top economists and policy experts, non-partisan people who will sit at the table, review the equalization formula and make recommendations to government," he said.

Blandsaid such apanel could be made a permanent fixture that would make recommendations every couple of years to better reflect changing economic circumstances.

Tombe said he, too, isn't ready to give up on the program yet and that a commission could consider changing the equalization formula to scrap the limit on the transfer so that the formula itself decides how much money needs to be given to each province.

"We could move to a system where there's an objective formula-based determination of how large the program is and needs to be," he said.