Oil-price plunge could cost Ontario billions in equalization

Western Canada's oil price nightmare could have a significant financial impact on provinces with little or no oil wealth, a University of Alberta economics professor says.

That's because the massive drop in oil revenue for Alberta and other oil-producing provinces could shift the central Canadian province to "have" from "have-not" status.

Such a shift in the country's largest province would create a ripple effect for the remaining have-not provinces, which would become eligible for a greater share of the equalization program, observers say.

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"Ontario may find itself a have province," said Melville McMillan, an economics professor at the University of Alberta who has published research on the Canadian equalization program. "That could occur, we're moving in that direction.

"Ontario may shift [to have status] because of what's happening in Alberta, Saskatchewan and Newfoundland," McMillan said. "The price of oil goes down, their natural resource revenues go down, corporate taxes go down and personal income taxes go down as well."  

Shift for Ontario

The equalization program is designed to ensure provinces can deliver reasonably comparable services at reasonably comparable levels of taxation. It's historically been controversial because every Canadian pays into the program, yet funds are only given to certain provinces.

Equalization looks at the revenue each province can generate based on personal income tax, corporate tax, sales tax, property tax and 50 per cent of resource revenues.

In the last 50 years, Alberta is the only province to not receive any money from the program. Even with its economy in a recession this year, it will not benefit from the program.

Ontario is near the divide separating wealthy provinces and those less-prosperous.

The Ontario government expects its residents to contribute about $6.7 billion to equalization this year, with the province receiving about $2.4 billion in return in 2015-16. Next year, if its status changes, it might not receive a penny in return.  

North American oil prices were above $100 US a barrel in the summer of 2014. This week, prices are below $40 US.

"It [lower natural resource revenues] would certainly increase the odds of Ontario ending up above the average," said Noah Zon, who is a part of the Mowat Centre at the School of Public Policy at the University of Toronto. "Any province that is close to the average, and just below it right now, could end up just above it and may not receive equalization payments any more."

Win for remaining have-nots

If Ontario shifts to become a have province, the remaining have-not provinces would benefit. Ontario's $2.4-billion share this year from the program would be returned to the $17-billion fund that is dispersed among the have-not provinces.

"The existing amount that is allocated for equalization would be distributed across a smaller number of provinces. They could actually get more," McMillan said. "This is one thing about equalization that some of us have criticized."

McMillan's conclusions are based predominantly on the change in oil prices. However, there are many other factors at play, including each province's economic performance.

If Ontario becomes a have province, it could spur even more frustration with the program. 

Ontario was already unhappy with equalization and other federal transfers to the provinces. In its spring budget, Queen's Park wrote the "fiscal imbalance in the federation could have profound effects on the federation's future. It could limit provinces and territories from making the necessary investments that strengthen their economies and maintain the public services that Canadians expect and deserve." 

Calls for change

Ontario is not the only province pushing for a revamp to equalization.

Saskatchewan Premier Brad Wall renewed his calls for change during an interview last weekend on CBC Radio's The House.

"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.

He also wants to get rid of the lag time built into the program. Equalization is calculated on three-year rolling averages to avoid sudden spikes. 

"Albertans will fund their share, probably $2 billion of the $17 billion program, even though they're getting hammered by $40 oil and there's massive lay-offs," Wall said.

Wall also suggests the current formula could be tweaked with half of the money in the fund going toward supporting infrastructure across the country.

Alberta's premier would like to see a review of all federal transfers to the provinces, including for health care and infrastructure.

"I think there's a lot of different formulas we can look at, but you need to be aware that when you touch one part of it, you invariably end up impacting another part of it," said Rachel Notley.

The parliamentary budget officer's office declined to comment because the federal election campaign is underway. The federal Finance Department also did not provide comment.