What are we going to do about Saudi Alberta?

December 1, 2000

Imagine a family with ten children. Some of the kids may be a little smarter or prettier due to the luck of the draw. But suppose one child of the ten is the beneficiary of a whopping inheritance that affords this fortunate son the ability to drive around in a fancy car, avoid a part-time job, and just be generally smug. It is not hard to imagine how this situation could be highly disruptive to the family unit.

A very similar problem plagues a rather complex family, the Canadian confederation. And the enfant terrible? Not Quebec, as many might guess, but a province that might better be called Saudi Alberta.

While many have proclaimed the secret of Alberta's success to be tax cuts and debt reduction, a closer look reveals that the black ink on the provincial books has everything to do with black gold beneath the surface.

Over the 1990s, resource royalties from the oil and gas sector have netted the Alberta treasury about $3 billion per year. In 1999/00, rising oil and gas prices on world markets led to a $4.7 billion bonanza. This amounted to 27% of total provincial government expenditures of $17.3 billion. Put another way, if you removed resource royalties from the Budget, last year's $2.8 billion surplus would turn into a $2.6 billion deficit.

This year, oil prices have stayed above $30 a barrel, and look to remain high in the short-term. The price of natural gas has almost doubled since Budget time. The resulting windfall for Alberta's treasury in 2000/01 is estimated at $8.5 billion--or just under half of total provincial expenditures. Alberta advantage indeed.

Albertans now contemplate the day when their wildest dreams will be funded by petro-dollars. The province is already the only one without a provincial sales tax. Talk of late is about slashing corporate income tax rates by half, and even eliminating personal income taxes altogether. While these ideas are still a pipe dream, this year's bounty has made such massive tax cuts a serious topic of conversation.

What is of concern is that Alberta is engaging in what economists call "beggar-thy-neighbour" policies with regard to taxes. As they drive tax rates down, other provinces feel compelled to follow, so that businesses are not lured away to the oil patch. The OECD recently raised a red flag about such bidding wars, warning against "harmful tax competition" (in the context of national tax policies). This behavior fails to produce new investment, but rather, merely pits jurisdictions against one another, to the benefit of mobile corporations.

From the perspective of Canadian federalism, this is a big problem. If other provinces feel compelled to follow Alberta to stay "competitive", they risk seriously underfunding public services. Most provinces are not as blessed as Alberta with oil and gas; BC and Saskatchewan have some, a boost to their provincial coffers, but BC is the land of trees, and Saskatchewan of farms. Other provinces, apart from Ontario (with its massive manufacturing base), just cannot compete in this race to the bottom.

All of this means that Alberta is exporting more than just oil, but its political agenda as well. This is clearly the case with Alberta's new flat income tax of 10.5%. Alberta is pushing other provinces to deliver big tax cuts for the wealthy, even if it means gutting public services. The result will be rising tuition for post-secondary students, rising user-fees for health care, and the continuing privatization of public services generally.

At one time, sentiments of national unity bound Canadians together. The federal government made moves to share the wealth across this diverse country through equalization payments and regional development programs. Here the Alberta agenda lurks again, in the form of Alberta's homegrown Alliance Party, which wants to eliminate regional development programs and radically decentralize the country. Such a move will only reinforce all of the above trends.

So what are we going to do about Saudi Alberta? It is tempting to call for a new National Energy Program to share the booty, even if it risks escalating Western alienation. But this would likely run afoul of NAFTA. Another alternative might be to revitalize the structure of equalization payments to better ensure that provinces are not pitted against each other.

On the other hand, Alberta will get $1.4 billion this year in transfer payments from Ottawa. If Alberta refuses to take a cooperative approach to maintaining national standards, perhaps the federal government should simply cut off Alberta's allowance.