Wednesday, December 23, 2015

Ontario to lose equalization payments as Alberta’s economic fortunes fall

Ontario will shed its status as a poor cousin of Confederation in the coming years, not because its economic fortunes are rebounding, but because resource-rich Alberta is falling on hard times.

The federal government is expected to announce how much each province will receive in the fiscal year 2016-17 from transfer payment programs, which include equalization, before Finance Minister Bill Morneau meets with his provincial and territorial colleagues in Ottawa on Sunday evening.

The equalization program redistributes national income to help poorer provinces provide services comparable to those of their richer counterparts. But equalization experts say the formula for calculating the payments is slow to respond to changes, including volatile commodity prices, which will leave Alberta carrying a disproportionate burden when the numbers are announced this weekend.

Ontario began receiving equalization for the first time in 2009, a dramatic reversal of fortune for the country’s one-time economic powerhouse. It is now set to reclaim its status as a “have” province because the disparity between its economy and that of Alberta is shrinking.

“What we’re talking about here is the bad way of coming out of equalization,” economist Don Drummond said.

The “good way” to come out of the program, he said, is for a province’s economy to rebound so that growth in its revenues offsets a loss of equalization payments.

Because the equalization funding is based on a three-year national average of gross domestic product, next year’s calculation will still include times when oil prices were high and Alberta was booming. This means Ontario will not get “kicked out” of the program for another two or three years, Mr. Drummond said.

Alberta pulled up the overall standard of living in Canada when the country’s wealth was shifting west to the resource-rich provinces. Now that Alberta’s economy is faltering, the reverse is happening. Ontario will no longer be eligible to receive equalization once its standard of living is aligned with a lower national average.

Any province that falls below the national average is eligible for equalization. In fiscal 2015-16, Ottawa distributed $17.3-billion in equalization payments to six provinces. Ontario’s share was $2.4-billion. (Source: Globe & Mail)

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