Author: Lennie Kaplan
Now that the dust has settled from the Alberta referendum, the Smith government should be discussing productive reforms to federal–provincial fiscal arrangements, pursued within Canadian federation, as a more realistic way to deal with legitimate Alberta grievances.
The Canadian federation is marked by a persistent fiscal imbalance: the federal government raises more revenue than it needs for its own direct responsibilities, while provinces carry the fastest-growing spending obligations, such as health care, depending on federal transfers to help finance them.
Alberta experiences this imbalance in a unique way. Albertans’ high incomes and corporate profits generate federal revenue well above federal spending undertaken in the province, so Alberta is a large net contributor to federal finances, while the Alberta government itself sometimes run deficits and accrues debt.
How can this growing fiscal imbalance be addressed?
In this commentary, I propose replacing Canada Health Transfer (CHT) and Canada Social Transfer (CST) cash payments with a nationally revenue-neutral package of federal PIT points and CIT tax points, transferred to the provinces.
This approach would raise Alberta’s revenue by $125 billion, improve the Alberta government fiscal balance by $200 billion, and cut Alberta’s cumulative net fiscal contribution (NCF) to Ottawa by $125 billion, or 17%, over the next 25 years, according to new research.
The tax-point transfer idea has been raised numerous times (you can check the sources here, here, here, here, here, here, and here) by astute observers of federal–provincial fiscal arrangements. I believe the time has finally come for Alberta to use its considerable fiscal clout in Canada to pursue this big-ticket item, as the centrepiece of a new fiscal MOU with Ottawa.
Under this approach, in 2028/29, Alberta would forgo $10 billion of estimated CHT and CST cash payments from Ottawa and instead receive an estimated $12.3 billion of federal tax-point revenue — a net gain of about $2.3 billion for Alberta.
Over 25 years, the cumulative net gain to Alberta is $38 billion under a low-growth scenario, $125 billion under a medium-growth scenario, and $200 billion under a high-growth scenario. Including lower debt servicing charges, the Alberta government’s cumulative fiscal balance would improve by about $70 billion under a low-growth scenario, $200 billion under a medium-growth scenario, and $350 billion under a high-growth scenario.
Under the medium-growth case, business as usual (BAU) produces persistent Alberta government deficits and net financial debt rising to 22% of GDP by 2052/53. But under the reforms presented here, the 25-year cumulative Alberta government fiscal balance turns positive, and net financial debt reaches only about 8% of GDP, compared to 22% of GDP under BAU. Alberta’s NFC to Ottawa falls cumulatively by $125 billion in the average-growth case.
This policy should be combined with a legislated fiscal anchor in Alberta that dedicates part of the fiscal gain to debt reduction and building up the Heritage Fund. That way, fiscal windfalls strengthen the balance sheet, rather than being added to the provincial government’s spending base.
To mitigate risks, provinces such as Alberta should also negotiate a cash floor, or a residual federal cash transfer top-up, paid only when the tax-point yield falls below the cash entitlement, to remove the downside risk of oil-price slumps.
The tax point approach better aligns revenues with responsibilities because of the following:
• The government that spends on health and social programs raises the revenue for them and answers to taxpayers for both;
• Provincial health costs grow with provincial population, aging and incomes; provincial income tax bases grow with the same drivers, unlike a national GDP escalator;
• Tax room cannot be unilaterally capped, clawed back, or made conditional by the federal government in the way cash can, as evidenced by unilateral federal cuts to the Canada Health and Social Transfer (CHST) back in 1995;
• Because tax points yield what each province’s base yields, less of Albertans’ federal tax is recycled to other provinces — directly lowering Alberta’s NFC;
• Brings greater stability to provincial revenues and allows for sustained funding for health care and social services delivered in the province. Currently, a significant portion (at least 25 percent) of Alberta’s revenue base, most notably non-renewable resource revenues (NRRs), is just too unpredictable to support higher levels of provincial health care spending. The fiscal reforms described above help diversify the province’s revenue base and secure long-term fiscal sustainability;
• The current system of federal cash transfers to the provinces is a confusing collection of various programs, with complex and often archaic rules, and tends to induce overlap, duplication, and intergovernmental conflict. An increased role for Alberta in self-financing its own health care programs would help streamline federal–provincial fiscal arrangements and reduce tensions between Ottawa and Alberta;
• The federal government is facing serious medium-term fiscal issues. Although the Carney government announced an expenditure review process aimed at saving $13 billion annually by 2028/29, it is unlikely to balance the Government of Canada’s consolidated budget. Federal cash transfers to the provinces, such as the CHT and CST, are currently not included in the expenditure review process, but circumstances could well require the federal government to expand the scope of spending subject to expenditure review, similar to what occurred with the more comprehensive program review exercise initiated under the Chrétien government back in the mid-1990s.
Of course, this approach does entail some risk for Alberta, as follows:
• CIT points move with oil-driven corporate profits; in a downturn, the yield falls while health costs do not. A PIT-weighted package and a cash floor would mitigate some of this;
• If national growth outpaces Alberta’s, the CHT escalator will have delivered more;
• Ottawa could later reduce other transfers, alter the equalization formula, or argue that Alberta’s points should be recalibrated. Durable agreements (legislated, with dispute resolution) are essential;
• The reform requires federal and multilateral agreements with the provinces.
But if the federal government and Alberta are serious about pursuing fiscal reform, perhaps these issues could be bridged. This is where a comprehensive, independent federal–provincial commissioned review of intergovernmental fiscal relations comes in as a means of kick-starting the process of fiscal reform.
As part of its contribution to this federal–provincial commission, the Alberta government should prepare and publicly release a detailed analysis of the benefits of transferring a portion of federal PIT and CIT to Alberta in return for federal tax points and the elimination of ‘strings-attached’ federal transfers in health, childcare and other social services.
In this respect, it has been troubling to me that, despite numerous requests over the past two years to Alberta Treasury Board and Finance and Executive Council, under Access to Information (AIT), for records relating to reform of federal–provincial fiscal arrangements, little of value has been publicly disclosed.
In conclusion, replacing CHT and CST cash with a package of federal PIT and CIT tax points would better align Alberta’s revenues with its spending responsibilities and reduce its NCF to Ottawa. Alberta gains $2.3 billion in the first year and, cumulatively over 25 years, $38 billion to $200 billion, depending on economic performance, with a medium-growth case estimate of $125 billion.
The reforms should be pursued with a cash floor for weak years and a legislated fiscal anchor provincially that converts the gains into a stronger Alberta balance sheet.
More of the revenues raised from taxpayers in Alberta could then be used to pay for programs under sole provincial government responsibility, most notably in health care. This would improve transparency and accountability to taxpayers, while encouraging program and service delivery innovation. The provincial revenue base would be stabilized. And some of the net gains could be used to reduce provincial personal and corporate income taxes to improve overall economic productivity.
This seems to be a much more productive means to deal with legitimate provincial grievances than an endless series of costly referenda.
Lennie Kaplan spent more than two decades in the public service of Alberta, focusing on government fiscal, economic, energy and environmental policy. He served as a senior manager in the Fiscal and Economic Policy Division of the Ministry of Treasury Board and Finance, where he assisted in developing meaningful options to reform federal–provincial fiscal arrangements. He later served as executive director to the MacKinnon Panel on Alberta’s Finances.