Originally published in the Globe and Mail.
Ontario will shed its status as a poor cousin of Confederation in the coming years, not because its economic fortunes are rebounding, but because resource-rich Alberta is falling on hard times.
The federal government is expected to announce how much each province will receive in the fiscal year 2016-17 from transfer payment programs, which include equalization, before Finance Minister Bill Morneau meets with his provincial and territorial colleagues in Ottawa on Sunday evening.
The equalization program redistributes national income to help poorer provinces provide services comparable to those of their richer counterparts. But equalization experts say the formula for calculating the payments is slow to respond to changes, including volatile commodity prices, which will leave Alberta carrying a disproportionate burden when the numbers are announced this weekend.
Ontario began receiving equalization for the first time in 2009, a dramatic reversal of fortune for the country’s one-time economic powerhouse. It is now set to reclaim its status as a “have” province because the disparity between its economy and that of Alberta is shrinking.
“What we’re talking about here is the bad way of coming out of equalization,” economist Don Drummond said.
The “good way” to come out of the program, he said, is for a province’s economy to rebound so that growth in its revenues offsets a loss of equalization payments.
Because the equalization funding is based on a three-year national average of gross domestic product, next year’s calculation will still include times when oil prices were high and Alberta was booming. This means Ontario will not get “kicked out” of the program for another two or three years, Mr. Drummond said.
Alberta pulled up the overall standard of living in Canada when the country’s wealth was shifting west to the resource-rich provinces. Now that Alberta’s economy is faltering, the reverse is happening. Ontario will no longer be eligible to receive equalization once its standard of living is aligned with a lower national average.
Any province that falls below the national average is eligible for equalization. In fiscal 2015-16, Ottawa distributed $17.3-billion in equalization payments to six provinces. Ontario’s share was $2.4-billion.
Ontario Finance Minister Charles Sousa would not speculate on when the province will rejoin the “have” ranks, which included British Columbia, Alberta, Saskatchewan and Newfoundland as of fiscal 2015-16.
“The issues are complicated,” Mr. Sousa said in an interview. “But we recognize that certain provinces that have the commodity risk volatility right now impact all of Canada.”
Alberta’s current troubles stem from a collapse in oil and natural-gas prices, which together have reduced provincial energy royalties to a fraction of what they were last year and have led to mass layoffs. Oil prices have plummeted from more than $115 (U.S.) a barrel in June, 2014, to just under $36. The sudden decline in Alberta’s economy highlights structural flaws with the equalization program, the experts say.
“With layoffs by the tens of thousands and the real estate market in trouble, they are still going to be paying major amounts for equalization over the next two or three years,” said David MacKinnon, a fellow at the Atlantic Institute for Market Studies and a former senior bureaucrat in Ontario and Nova Scotia.
Alberta Finance Minister Joe Ceci said he gets phone calls and letters from residents asking why the province still contributes to equalization when it is experiencing negative economic growth. However, he said he has no plans to lobby Ottawa for changes because there would be little sympathy.
“We’re very mindful of the way we’ve been driving the economy of this country for the last several years,” Mr. Ceci said in an interview.
Noah Zon, who leads the intergovernmental research team at the Mowat Centre, a public policy think tank, said Ontario should not be lumped in with other “have not” provinces because even though the province receives equalization, it still sends more money to Ottawa in the form of tax revenues than it receives in federal support.
“That entire narrative could be a bit overblown,” Mr. Zon said.
With a report from Bill Curry