In 2016 Alberta was coping with an economic downturn caused in large part by persistently low oil prices made worse by Federal policies and their inability to approve pipeline construction.  These struggles led to the provincial government’s own-source revenues dropping $8 billion, or 18%, in 2015-16, and another 1.1 billion decrease in 2016-17.

Meanwhile in 2016, the federal government took $16 billion of Albertans tax dollars and spent it in other provinces. That was the equivalent of 5% of Alberta’s entire GDP transferred elsewhere through federal programs and spending decisions.

A federal program aimed at providing a fiscal cushion to provinces that face a sudden drop in revenues began in 1957 (alongside Equalization).  In 1967 it expanded into something like the Fiscal Stabilization Program we have today: that model had provinces receiving compensation for revenues that dropped beyond 5% year-over-year.

Alberta’s $8.022 revenue loss in 2015-16 earned it $248 million from the Revenue Stabilization Fund – 3.1% rate of compensation.  $248 million is also only 1.6% of Alberta taxpayers’ net transfer to Canada in 2016.

Had the original 1967 formula been in place they would have received $5.8 billion back in 15-16, and $7 billion when combined with 2016-17.  That is still less than the revenue drop, and much less than the net transfer Albertans made, but it seems much more fair given the steep and unexpected drop in revenues and the $324 billion net contribution Albertans have made to Canada since 2000.

Background:

In a recent paper by economist Bev Dahlby, he helpfully describes the stabilization fund as a fiscal-insurance program, where Alberta’s premium payments are the enormous net transfers its taxpayers make to the rest of the country (the $324b since 2000 we have repeatedly highlighted). He argues that the relatively small payments Alberta earned in 2016 and 2017 – despite its revenues dropping 20% – show that it is clearly worth considering reforms.

Given Alberta was only compensated for 3.1% of its losses, this would seem to be a case of academic understatement. 

After a few adjustments to the formula through the 70s-90s, including dropping the ‘5% deductible’, then adding it back in 1995, the instances where a province has qualified have been rare and the payments have been quite modest. Most notable among these changes was in 1987 when a cap was set at $60 per capita; Economist Trevor Tombe in his helpful recent publication notes that there was little debate or explanation as to why it was frozen at the per capita level of the most recent payment (BC in 1982), but that it has by far the biggest impact in limiting Alberta’s payment to such a small proportion of its losses.

Tombe estimates that the $60 cap alone lowered their payments by $2.25 billion in just 2016 and 2017 combined.  Other changes to the formula since 1967 – noted in the chart below – meant the loss of additional billions. Returning to the original formula of covering everything beyond 5% would have meant $5.8 billion for 2016 instead of $248 million.

Using historical examples of the Fiscal Stabilization formula, there are a number of possible adjustments to the program to make a fairer and flexible formula; Tombe calculates some scenarios in the table below.  They range from a cap adjusted only for inflation ($999 million payment) to the 1972-77 formula, which would generate a $9.3 billion payment – nearly twenty times the $499 million capped amount Alberta has received.