Fiscal Stabilization Program

In 2016 Alberta was coping with an economic downturn caused in large part by persistently low oil prices made worse by Federal policies and their inability to approve pipeline construction.  These struggles led to the provincial government’s own-source revenues dropping $8 billion, or 18%, in 2015-16, and another 1.1 billion decrease in 2016-17.

Meanwhile in 2016, the federal government took $16 billion of Albertans tax dollars and spent it in other provinces. That was the equivalent of 5% of Alberta’s entire GDP transferred elsewhere through federal programs and spending decisions.

A federal program aimed at providing a fiscal cushion to provinces that face a sudden drop in revenues began in 1957 (alongside Equalization).  In 1967 it expanded into something like the Fiscal Stabilization Program we have today: that model had provinces receiving compensation for revenues that dropped beyond 5% year-over-year.

Alberta’s $8.022 revenue loss in 2015-16 earned it $248 million from the Revenue Stabilization Fund – 3.1% rate of compensation.  $248 million is also only 1.6% of Alberta taxpayers’ net transfer to Canada in 2016.

Had the original 1967 formula been in place they would have received $5.8 billion back in 15-16, and $7 billion when combined with 2016-17.  That is still less than the revenue drop, and much less than the net transfer Albertans made, but it seems much more fair given the steep and unexpected drop in revenues and the $324 billion net contribution Albertans have made to Canada since 2000.

Background:

In a recent paper by economist Bev Dahlby, he helpfully describes the stabilization fund as a fiscal-insurance program, where Alberta’s premium payments are the enormous net transfers its taxpayers make to the rest of the country (the $324b since 2000 we have repeatedly highlighted). He argues that the relatively small payments Alberta earned in 2016 and 2017 – despite its revenues dropping 20% – show that it is clearly worth considering reforms.

Given Alberta was only compensated for 3.1% of its losses, this would seem to be a case of academic understatement. 

After a few adjustments to the formula through the 70s-90s, including dropping the ‘5% deductible’, then adding it back in 1995, the instances where a province has qualified have been rare and the payments have been quite modest. Most notable among these changes was in 1987 when a cap was set at $60 per capita; Economist Trevor Tombe in his helpful recent publication notes that there was little debate or explanation as to why it was frozen at the per capita level of the most recent payment (BC in 1982), but that it has by far the biggest impact in limiting Alberta’s payment to such a small proportion of its losses.

Tombe estimates that the $60 cap alone lowered their payments by $2.25 billion in just 2016 and 2017 combined.  Other changes to the formula since 1967 – noted in the chart below – meant the loss of additional billions. Returning to the original formula of covering everything beyond 5% would have meant $5.8 billion for 2016 instead of $248 million.

Using historical examples of the Fiscal Stabilization formula, there are a number of possible adjustments to the program to make a fairer and flexible formula; Tombe calculates some scenarios in the table below.  They range from a cap adjusted only for inflation ($999 million payment) to the 1972-77 formula, which would generate a $9.3 billion payment – nearly twenty times the $499 million capped amount Alberta has received.

Illustration of Alberta’s stabilization payments in fiscal years 2015-16 and 2016-17under alternative scenarios

Stabilization Formula
2015-16 ($ millions)
2016-17 ($ millions)
Total ($ millions)
Actual stabilization payments
248
251
499
Payments under alternative stabilization formulas
$120 per capita cap
496.6
502.8
999.4
$170 per capita cap
703.6
712.3
1,415.9
No cap on payments
1,589.3
1,159.8
2,749.1
Deductible: 5% for all revenues
5,836.8
1,159.8
6,996.6
Deductible: 0% for all revenues
7,184.1
2,194.5
9,378.7
Deductible: 0% for nonresource revenues and 50% for resource revenues
2,464.7
2,194.5
4,659.2

(source: Trevor Tombe, “An (Overdue) Review of Canada’s Fiscal Stabilization Program,” Institute for Research on Public Policy; Feb. 2020)

Bev Dahlby also proposes some concrete reforms to the program, and under the three scenarios he develops, Alberta’s government would have received stabilization payments in range of $5-7 billion (rather than $499 million for 2016 and 2017) and another roughly $1 billion back in 2010.

The Government of Alberta has chosen a modest but reasonable path, requesting only to have the cap lifted, but retroactive to the oil price collapse in 2015.  In December 2019 all Canada’s Premiers declared their support for Alberta in this request. 

Given that the claims are relatively rare, and that even the uncapped amount pales in comparison to the revenue drops provinces face to trigger the payment, there is reason to take the federal Minister of Finance at his word when he says he will seriously consider this unanimous request.

Perhaps more importantly, when you consider that the provinces most susceptible to sudden revenue drops are the resource-based provinces, allowing these “have” provinces to get sizeable assistance in those rare years of fiscal calamity seems likely to contribute to the strengthening of the federation given how much their taxpayers contribute to other provinces through longstanding programs like Equalization.

Given the $324 billion net transfer from Albertans to other provinces since 2000 – and the $16 billion transfer in 2016 alone – we would argue that Albertans have more than paid for a robust fiscal stabilization program.

Fairness Alberta believes the federal government should not make the modest retroactive payment to Alberta all premiers have called for; instead, given Albertan’s tremendous contributions they should make a payment of $6.996 billion in accordance with the original formula and commit to thoughtful reforms to the program for the future.

See our News Release on this topic here: https://www.fairnessalberta.ca/news/