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Thread: Alberta's Equalization Payments

  1. #1

    Default Alberta's Equalization Payments

    I thought this subject deserved its own thread and Lamphier's article provides an interesting start to it.


    As it says:


    Even more remarkable, few Canadians seem to be aware of this, except in the vaguest sense. Conspicuously, I’ve never seen these numbers reported in the national media or disclosed by federal and provincial politicians.

    And after calling not one but four leading public policy think tanks, I couldn’t find a single expert who has researched this data, or who was willing to discuss it at any length....

    Don't just read this excerpt, the link is below.


    Lamphier: How much money has flowed out of Alberta to Ottawa? A lot
    FEBRUARY 21, 2016 6:30 AM
    Gary Lamphier of the Edmonton Journal has the story.
    Calgary Herald



    http://calgaryherald.com/storyline/l...o-ottawa-a-lot



    Excerpt:


    "If you’re still wondering why oil-rich Alberta doesn’t have a massive sovereign wealth fund like Norway, consider this.

    ...

    I realize this runs counter to the preferred narrative in Canada, where politicians and media types insist Alberta either “put all its eggs in one basket” by failing to diversify its economy (hello Christy Clark), or that Albertans “spent like drunken sailors” during boom times. ..."




    "...Between 2000 and 2014, on a net basis, Alberta’s individual and corporate taxpayers shipped an estimated $200 billion-plus to the federal government. That’s what left the province, less what the feds reinvested here.

    To put that lofty figure in perspective, it’s nearly 12 times the value of the $17.4 billion Alberta Heritage Savings Trust Fund. No other province — including Ontario, with three times Alberta’s population — even comes close to matching this province’s contribution to the federation.

    During Alberta’s boom years, back in 2007 and 2008, the province’s taxpayers shipped more than $20 billion annually, on a net basis, to Ottawa. And when oil prices returned to triple-digit levels after the 2008-2009 recession, the cash gusher from this province returned. In 2011, for instance, it reached nearly $19 billion.

    Even more remarkable, few Canadians seem to be aware of this, except in the vaguest sense. Conspicuously, I’ve never seen these numbers reported in the national media or disclosed by federal and provincial politicians.

    And after calling not one but four leading public policy think tanks, I couldn’t find a single expert who has researched this data, or who was willing to discuss it at any length. Some seemed downright defensive about it, as if it was “un-Canadian” to explicitly acknowledge one province’s outsized contribution to the federation.

    The only reason I’m now aware of the massive amount of money that has flowed out of Alberta in recent years is due to the efforts of one man. Fred McDougall, 78, is a former deputy minister of forestry who served under former Alberta Premier Don Getty in the 1980s.

    ... "


    "...Other provinces have basically been trying to extort ..."



    Last edited by KC; 26-02-2016 at 08:21 AM.

  2. #2
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    It is similar to how the colonies worked in previous centuries, we are basically a colony of eastern Canada.

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    Too my understanding equalization payments go towards social programs and other programs all Canadians enjoy. However, at the same time Ontario is now over $300B in debt and about to go into debt again. Quebec, the richest province in Canada is getting the bulk of Alberta's equalization windfall.

    Another thing, it looks like Ontario will provide free post secondary education to households making less then $50,000. This is madness. And you know who is going to pay the bill for this right?......
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    Quote Originally Posted by envaneo View Post
    Too my understanding equalization payments go towards social programs and other programs all Canadians enjoy. However, at the same time Ontario is now over $300B in debt and about to go into debt again. Quebec, the richest province in Canada is getting the bulk of Alberta's equalization windfall.

    Another thing, it looks like Ontario will provide free post secondary education to households making less then $50,000. This is madness. And you know who is going to pay the bill for this right?......
    It will be interesting to see what happens to Alberta's contribution.

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    ^ We do get some of that money back though through infrastructure spending and many of those programs we enjoy here as well. If it takes 2 years to become a have not Province, then Alberta is in its second year. So, are we going to have shell out Billions more as a have not Province? When are our University kids going to get free education? Does this mean Ontario's credit rating will be reduced again down to a "A" from a double "A A"?
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    The figures in this report are net not gross. After whatever monies come back, the difference.

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    Soooo... what's going to happen here? Everyone in the country knows Alberta is hurting, going to get a lot worse once the fiscal year is done... do our equalization payments decrease? I'm thinking they must, but how much?

    Not sure how it all works so some plain English would be mucho appreciated.

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    ^ One can only go to the well for so long.
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    Hopefully the Feds will realize how important the oil industry is to all of Canada and legislate the building of pipelines. Working with the new President to transport oil by pipeline to the gulf refineries and ports would be a plus. Oil will be back and when it is it would be nice to have markets for it, for the good of all of Canada.

  10. #10

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    Quote Originally Posted by Drumbones View Post
    Hopefully the Feds will realize how important the oil industry is to all of Canada and legislate the building of pipelines. Working with the new President to transport oil by pipeline to the gulf refineries and ports would be a plus. Oil will be back and when it is it would be nice to have markets for it, for the good of all of Canada.
    I wonder if we may seen enough production get mothballed to eliminate the surplus over the existing pipeline capacity.


    "Everything in that passage is simply incorrect"
    see below...
    EQUALIZATION QUESTIONS AND MISCONCEPTIONS

    1. Alberta pays for equalization

    One of the common misconceptions is that equalization is entirely paid for by the so-called “have provinces”, notably Alberta. The keyword search activity on this blog regularly shows people searching for things such as “how much does each province pay for equalization”, “how much does province X contribute to equalization”, “province Y receives equalization money from province Z”, etc. It isn’t uncommon to see comments on blogs or online media stories calling for Alberta to “pull out” the equalization program, or about how other provinces are spending the money they get from Alberta via transfer payments from that province. For example, on the Alberta Wild Rose Party website, we find the following:

    Federal equalization and other wealth transfer programs were ostensibly intended to balance the quality of social programs across the country. Instead, what has happened is that the provinces benefiting most from these programs are now able to offer significantly more generous services to their citizens than the two or three provinces who are the actual net contributors (primarily Alberta and Ontario). It is no small irony that the biggest single beneficiary of such transfers, Quebec, provides cheap university tuition and inexpensive provincial day care, while Albertans pay high prices for, and have severe shortages of both in their own province. These annual wealth transfers also create the perverse incentive for ‘have-not’ provinces to retain fiscally irresponsible taxation and spending levels thereby remaining on the transfer dole in perpetuity.

    Everything in that passage is simply incorrect and it is worrying that the party does not understand how equalization actually works. ...


    http://thoughtundermined.com/2012/04...isconceptions/

    Can't forget aspects of the process like this..

    Oil-price plunge could cost Ontario billions in equalization

    "One change we'd like to make, to modernize it, is to include hydro in the calculation," he said. "We'd also argue those provinces with the great advantage of hydro that other's don't have should probably have to have that included in their calculation of economic capacity."

    Provinces that have hydroelectric power are able to export it, but profits made on those exports aren't part of the equalization formula, according to Wall.


    http://www.cbc.ca/news/business/oil-...tion-1.3204437
    CANADA’S EQUALIZATION FORMULA: PEERING INSIDE THE BLACK BOX ... AND BEYOND†
    Jim Feehan, 2014


    Another flaw in the current equalization arrangement is the inclusion of Crown-owned hydro corporations’ remittances of earnings to their provincial owners in the natural resources category of equalization calculations. Many of these corporations are not simply energy producers, but are also vertically integrated, with transmission and retail sales operations, and some have no resources at all, but rely instead on fuel purchased in the marketplace. Moreover, taxes paid by private energy corporations are not considered part of the natural resource category but are included in the business income tax category. This means the formula is essentially inconsistent, discriminating based on the ownership profile. Hydro remittances should be removed from the natural resource revenue category in the formula that calculates equalization. They should go in the business income tax category, just as do the earnings of other commercial Crown corporations and taxes paid by private businesses. Going beyond the formula, it is time to re-consider the practice of exempting commercial Crown corporations from corporate income taxation.

    ...
    A more fundamental and long-recognized problem is the incentive for provinces receiving equalization payments to underprice the water-rental rates they charge for hydro production. Lowering water-rental rates has the effect of reducing provincial hydro revenues, which can entitle those provinces to larger equalization payments, while benefitting residents with cheaper hydro rates. Looked at empirically, ...



    http://policyschool.ucalgary.ca/site...ualization.pdf

    Last edited by KC; 26-02-2016 at 02:07 PM.

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    ^ Good point. Its the surplus that's hurting the market. Right now pipelines would only add to the surplus. Slow and steady wins the race.
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  12. #12

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    Quote Originally Posted by KC View Post
    It will be interesting to see what happens to Alberta's contribution.
    All provinces contribute the same to equalization. However, that isn't enough to pay for equalization. So it is "topped up" by Federal tax revenues (which come from all provinces). What this means in practice is that any province that receives low or no equalization, is subsidizing provinces that receive high equalization, as they get less of their Federal tax back. Health transfer payment inequities exacerbate it even more. In other words, the hundred billion or so of equalization paid to Quebec over the years, has been paid for by all Canadians, but some of those Canadians, like in Alberta, never received equalization like that, so they are subsidizing Quebecors. Its a price we pay to be part of Canada, we help our poor provincial neighbors / don't horde our wealth.
    Last edited by moahunter; 26-02-2016 at 02:03 PM.

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    Quote Originally Posted by envaneo View Post
    ^ Good point. Its the surplus that's hurting the market. Right now pipelines would only add to the surplus. Slow and steady wins the race.
    No, they would be a huge boon for Alberta. New pipelines would mean we get far closer to market value for our oil instead of a 40% discount. Right now we're only getting $16-18/bbl for our oil because of pipeline capacity.

  14. #14

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    Quote Originally Posted by moahunter View Post
    Quote Originally Posted by KC View Post
    It will be interesting to see what happens to Alberta's contribution.
    All provinces contribute the same to equalization. However, that isn't enough to pay for equalization. So it is "topped up" by Federal tax revenues (which come from all provinces). What this means in practice is that any province that receives low or no equalization, is subsidizing provinces that receive high equalization, as they get less of their Federal tax back. Health transfer payment inequities exacerbate it even more. In other words, the hundred billion or so of equalization paid to Quebec over the years, has been paid for by all Canadians, but some of those Canadians, like in Alberta, never received equalization like that, so they are subsidizing Quebecors. Its a price we pay to be part of Canada, we help our poor provincial neighbors / don't horde our wealth.
    They contribute at the same tax 'rates'.

    Seems that state ownership and type of production may play a role in determining the balancing formula.

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    Yeah, I read recently that Quebec's hydro is not considered within the formula so they keep the prices artificially low to game the equalization system. Probably read it in Lampier's article a week ago. Dirty, socialist pool being played.

  16. #16

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    Quote Originally Posted by Kitlope View Post
    Yeah, I read recently that Quebec's hydro is not considered within the formula so they keep the prices artificially low to game the equalization system. Probably read it in Lampier's article a week ago. Dirty, socialist pool being played.
    The links in my post #10 above provide some clarity.

    It would be cool to have an online calculator to play with numbers and everything to see what changes could game the taxes paid via the system. ie. Privatization vs. nationalization, changes to exports, etc.

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    Quote Originally Posted by Kitlope View Post
    Soooo... what's going to happen here? Everyone in the country knows Alberta is hurting, going to get a lot worse once the fiscal year is done... do our equalization payments decrease? I'm thinking they must, but how much?

    Not sure how it all works so some plain English would be mucho appreciated.
    There are no "equalization payments" from provinces. The equalization program is run from the federal government's general revenue.

    "For every complex problem there is an answer that is clear, simple, and wrong"

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    Personally I don't see a lot of difference between the equalization program and how any other jurisdiction spreads it's money around. Provinces build hospitals and roads in rural areas that don't generate the revenue of other areas. Cities do the same. The big difference the equalization program has a fixed formula and process that makes the process a lot less politicized.

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    Who cares how the current equalization program works. The bottom line is this - we give, they take. That's it. Right now Alberta has no money. We have a public sector that does not care about provincial debt and cries for more money. Look at the recent release from the ATA. They want raises. Raises at a time like this? And the NDP have no backbone to fight them as it's their voting base. Scary times.

    Anyway, I fear that Alberta will always be a 'have' province regardless of its economic situation. I stand with Brian Jean, a revamp is required. I find it funny how Trudeau is willing to revamp the NEB (direct affect on Alberta), and the electoral process, yet remains quiet on equalization, while Alberta continues to dole out cash during a recession.

  20. #20

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    Quote Originally Posted by Kitlope View Post
    Soooo... what's going to happen here? Everyone in the country knows Alberta is hurting, going to get a lot worse once the fiscal year is done... do our equalization payments decrease? I'm thinking they must, but how much?

    Not sure how it all works so some plain English would be mucho appreciated.
    I do my best, but this is my understanding of the formula, so use as much as salt as you need, reading this.

    1- A benchmark of the fiscal ability of 10 provinces is created. This is how: Sources of revenue in 5 categories (income tax, business, property tax etc) and the size of that revenue base within 10 provinces delivers a per capita taxable revenue number. This number is multiplied by the "10 province average" tax rate for that source. The benchmark is the sum of these revenue sources.

    2- For natural resources revenue instead of this formula 50% of the actual revenue across 10 provinces is used.

    3-Same calculation is repeated for each province. Size of a taxable revenue in that province per capita multiplied by 10-province average tax rate of that source plus half of actual natural resources revenue.

    4- If the number in step 3, is less than numbers of step 1 and 2, that province is below Canada (i.e. 10 province) fiscal capacity average and qualifies for Equalization payment.

    5- The federal government, from its general revenue allocates the payment to the have-not province.

    6- To limit the growth rate of federal payment to any given province, a cap is applied, so the actual pay is the lower of the number in step 4 or the cap. Also to limit the total pay, the equalization payment rate is limited to average GDP growth of Canada.

    7- Finally to make the formula stable and predictable, the benchmark calculated in steps 1 and 2 is a weighted average of past 3 years, with 50% weight for last year and 25% weight each year before that.

    So the spirit of the program has been to consider longer term fiscal capacity of provinces not year to year fiscal imbalances. In that sense it will take a while for Alberta to fall below the 10 province 3-year rolling average!

    Apologies if that's not as plain as you expected.

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    No, that's an excellent summary. Thank You.

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    ...
    If equalization is thought of as a sort of insurance program, it appears to be a form of insurance Alberta can never collect on, no matter how lousy local economic conditions get. We seem to be permanently, structurally ineligible.
    ...
    http://nationalpost.com/opinion/colb...5-07ea5988d357

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