Some hard truths for Western politicians on Quebec, equalization and oil

It's been open season on the Quebec government since it was revealed the province will be getting a $1.4-billion boost in its equalization payment next year.

Western politicians in particular have cried foul. Saskatchewan Premier Scott Moe called Quebec's allotment "problematic" in an interview with The Globe and Mail. Alberta's finance minister, Joe Ceci, said it was proof the equalization program "doesn't work."

The equalization numbers, which were released Sunday, compounded existing ire in the West over comments Quebec Premier François Legault made last week.

First, he extinguished the flicker of hope that a defunct cross-Canada pipeline project, Energy East, could be revived. Then, he boasted Quebec's hydroelectricity was "clean energy" compared Alberta's "dirty oil."

Alberta Premier Rachel Notley, who is heading into an election amid tumbling oil prices, did not appreciate Legault's choice of adjective.

"He needs to get off his high horse," Notley said Tuesday. 

"He needs to understand not only is our product not dirty, but it actually funds the schools, the hospitals, the roads and potentially some of the hydroelectricity infrastructure in Quebec."

On Wednesday, Quebec's intergovernmental affairs minister was dispatched to sue for peace.

"We're not at war with Alberta," Sonia LeBel told reporters in Quebec City. "It was not our intention to offend them."

But it will likely take more than a mea culpa for Quebec to escape the firing line. For that to happen, Western politicians will have to accept some hard truths about how the equalization program works.

Feds to province, not province to province

The first is that the equalization program does not funnel money from one province to another.

Notley is hardly the only politician to suggest otherwise. Her chief rival, United Conservative Leader Jason Kenney, tweeted earlier this week, "It is not acceptable for a province to block our resources while benefiting massively from the wealth they generate."

The equalization envelope is drawn from federal, not provincial tax revenues. It is money Ottawa has collected from across the country — including Quebec taxpayers.

And provinces receive money under the program when their fiscal capacity, a measure of their potential revenue base, drops below the national average.

In other words, it is money handed out by the federal government to ensure provinces with smaller economies are able to offer the same level of services as those with access to more tax revenues.

It is up to the provinces, though, to decide how much they want to tax that revenue base. 

"Quebec is often accused of stealing the money of Albertan taxpayers. But that's not how the program works," Daniel Béland​, a fiscal policy expert at the University of Saskatchewan, told Radio-Canada this week.

Quebec's higher tax rate, by and large, funds its more general social programs — an option politicians in Alberta and Saskatchewan have refused to entertain. 

"Those are political choices that have nothing to do with equalization," Béland said.

What's all the fuss about Energy East?  

Second, if there are reasons to revive the Energy East project — which would transport crude oil from Alberta to export terminals in New Brunswick — its impact on equalization shouldn't be one of them.

The pipeline, if it ever gets built, would indeed increase Quebec's fiscal capacity, creating jobs and property value.

But according to Trevor Tombe, an economist at the University of Calgary, it wouldn't dramatically change what Quebec receives.

"For perspective, the overall fiscal capacity of Quebec in this latest year is nearly $64 billion. So a single project, here or there, won't mean big swings in that number," said Tombe.

Moreover, there are currently three viable pipeline projects already on the table for Alberta: Keystone, Trans Mountain and Enbridge's Line 3.

Together, they would alleviate the pipeline constraints that are behind the current crisis in oil prices, Tombe added.

Unlikely to change soon

Finally, Western Canada should probably get used to Quebec receiving equalization payments, unless the system is radically overhauled.

There are two general paths by which Quebec could become a "have" province, according to Tombe's calculations.

Its economy could grow by one-third, or generate $20 billion more in non-renewable resource revenues. Resource revenue in Quebec currently stands at $3.4 billion.

"That's a completely implausible change in a province's situation," said Tombe. "Quebec is quite far from a situation where it wouldn't receive equalization at all."

This is a point Legault may also want to take to heart. He made sweeping promises before his election to wean Quebec off equalization.

But a long-term forecast conducted this year by the Parliamentary Budget Office shows Quebec is actually slated to increase its dependence on equalization, as measured as a share of its GDP.

That's a reflection, Tombe said, of an aging population that earns less in retirement, which in terms of the equalization formula translates into reduced fiscal capacity.

None of this means Quebec's economy is in trouble (GDP growth of 2.5 per cent this year) or that it has a poor credit rating (AA- compared to Alberta's A+).

It does mean, though, that Quebec is set to remain a handy foil for Western politicians looking to make political gains.