Ottawa's buffer against provincial economic shocks needs reform: economist

A new paper suggests a federal program meant to buffer provinces against economic shocks is not up to the task — especially in the COVID-19 era.

University of Calgary economist Trevor Tombe is urging Ottawa to review and reform the federal stabilization program in short order so it can help provincial economies weather the effects of the pandemic.

"There's some really big unanswered questions here that we have rightly put off because of the short-term crisis decisions," he said.

"But in the coming months, we will need to start turning our attention to this."

Tombe estimates provinces could be on track for a collective $35-billion revenue decline this fiscal year — equivalent to $1,000 per person.

But he notes that figure is offset by between $12 billion and $23 billion, thanks to taxable federal emergency supports, such as the Canada Emergency Response Benefit for individuals and the Canada Emergency Wage Subsidy for employers.

But Tombe said there's still a big gap that can't be adequately addressed by fiscal stabilization, which has not been meaningfully reformed since its inception in 1967 or reviewed at all since 1995.

Under the program, provinces can apply for federal help if their non-resource revenues drop by more than five per cent year-over-year. Resource revenues, such as oil and gas royalties, are only factored in if they fall by more than 50 per cent one year to the next.

In the scenario Tombe sketched out — which he admits is subject to much uncertainty — Alberta, Saskatchewan, Ontario, Quebec, and Newfoundland and Labrador would all qualify for support.

Accounting for inflation

However, a $60-per-person cap on payments that hasn't been updated since 1986 means the help wouldn't go very far.

Adjusting for inflation alone, Tombe suggested the cap should be $120 per capita.

He notes the program has only been accessed 18 times in its entire history.

Quebec would qualify for $1.8 billion this year if all losses beyond the five per cent threshold were covered by Ottawa. But the current cap means it would only receive about $500 million.

Alberta, which had its economy pummelled by a steep drop in oil prices well before the pandemic, currently qualifies for about $250 million in stabilization "in the face of what might well be a revenue reduction of well over $10 billion," Tombe said.

As part of its quest for a "fair deal" from Ottawa, the Alberta government has asked that the per-capita cap be lifted retroactive to 2015, when the oil downturn took hold, resulting in a $2.4-billion rebate.

A spokeswoman for Finance Minister Bill Morneau said the federal government "agrees further analysis is warranted, with a view to considering any appropriate adjustments."

"Our government's first priority is and has been to deal with the effects of the COVID-19 pandemic on the health of Canadians and our economy," Maeva Proteau wrote in an emailed statement.

"It is however our intent to soon return to this issue and continue the collaboration with provinces and territories."

Tombe said if it were up to him, stabilization would be expanded as well as integrated with equalization, a better-known federal transfer program that is meant to smooth out more chronic fiscal discrepancies between have- and have-not provinces.

Tombe's paper was published by the Canada West Foundation think tank. He and other independent academics and policy experts have started the new Intergovernmental Fiscal Relations Commission, which aims to improve the fiscal relationship between Ottawa, the provinces and cities.

He said the COVID-19 crisis presents an opening to take a deep dive.

"The pandemic is revealing a hole in our current arrangements and, therefore, an opportunity to think about how to reform them so that we're better prepared for these kinds of extreme situations in the future."