Tue 24 Oct 2006
Appeared in Sept 2006 issue of The Walrus Magazine
If the British North America Act were being
written today…natural resource ownership
would most likely remain with the federal
– “Policy Options,” October 2005.
It should have been a love fest.
Leading up to the March 30, 2006 Alberta Progressive Conservative Annual General Meeting polls declared Premier Ralph Klein the most popular man in the province, and for good reason. As an expert panel appointed by the former Liberal government, provincial governments, and even the Governor General, all recommended that Alberta share its bountiful riches with the rest of Canada, the tough-talking premier said, essentially, ‘over my dead body.’ It was classic Klein. For years, the premier had been Alberta’s chief defender and his record was impressive. He led the PC Party to four consecutive majority governments, enjoyed over 90 percent approval ratings each time he faced a leadership review, and could boast of a series of accomplishments envied by all other provinces. In 1993, Klein inherited a government bleeding $3.4 billion a year and with an accumulated debt of $23 billion. Thirteen years later, Alberta is Canada’s only debt-free province, the operating surplus for 2006 hovers around $10 billion, and the populist premier can justifiably lay claim to creating “the Alberta Advantage.”
In the last quarter of 2005, the population of seven provinces or territories shrank, while teeming thousands migrated to Alberta. They were drawn by the lowest unemployment rate in Canada and a combined municipal and provincial tax rate that is 47 percent lower than the national average. With no sales tax and plummeting provincial taxes, a typical two-income family earning $60,000 pays roughly $4,000 for health insurance premiums and provincial income, gas, and tobacco taxes. The result is take home pay that is 34 percent higher than the national average. In the event that this typical couple has children, they can be confident of receiving top quality education: grade ten students in Alberta routinely record the nation’s highest reading, math, and science scores.
Incredibly, Alberta’s advantages are destined to become even more dramatic. While other regions are struggling to meet the escalating health care costs of aging populations, a full 58 percent of Albertans are under forty – the highest percentage of young people in Canada. Albertans already generate Canada’s most robust per capita Gross Domestic Product, which is causing investors to pump more money per person into the province than into the rest of country. Relative to population, Calgary has twice as many corporate head offices as Toronto; and with an annual compounded growth rate of almost 20 percent, combined with business growth that is three times the national average, the Edmonton-Calgary corridor has become the most productive region in North America. While central Canadian snobs might cling to the view that this is all well and good, but Alberta is still home to a bunch of uncultured rednecks beholden to the boom and bust energy economy, the truth is just the opposite. Increasingly, the province’s burgeoning growth is fueled by a highly sophisticated workforce. Over 60 percent of Albertans have university or college educations, Internet use is the highest in Canada, and service industries – everything from restaurants to communications – now account for 60 percent of the provincial economy. All told, it is safe to say that everything – save perhaps the weather – is better in Alberta.
Against this backdrop, on the eve of his well-deserved retirement from politics, Premier Klein humbly requested only one real thing: that he control the timing of his own departure. Nearly half of the delegates to the Conservative AGM rejected his proposal. What happened?
Klein may have been “shocked…and a little hurt” by this slap in the face, but signs that he might be so humiliated had been appearing across the province for some time. Ten days before the vote, former treasurer and leadership front-runner Jim Dinning spoke to the Meadowlark PC Association and warned that “as much as geology and geography have provided us a rich gift, it is just that, a gift. It is meaningless unless we do something with it.” Dinning was referring, of course, to Alberta’s unprecedented natural resource wealth, specifically the oil sands developments, and he insisted that prosperous times were no occasion for complacency. Alberta had to dream big, Dinning said, and show a talent “not only for taking the resources out of the ground, but going the next step.”
Days later, former Conservative premier Peter Lougheed entered the fray with a column in the Globe and Mail that offered advice on “what Alberta should do with the huge surplus of money flowing to its treasury from oil and gas royalties.” If Dinning reserved his comments mostly for provincial imperatives, Lougheed went after bigger game. With Klein and others ardently defending Alberta’s right to keep those royalties at home – and conjuring up the last time Ottawa made a power and money grab for Alberta’s natural resources, the infamous National Energy Program (NEP) of the early 1980s, to bolster their case – Lougheed suggested a more magnanimous approach. Alberta, he said, should remain in charge of its riches to be sure but, in the name of national unity and the province assuming a lead role in the federation, it should also share its wealth.
Lougheed might credit Klein with making shrewd investments, being a good steward of social policy, and to date at least, dealing adequately with the province’s surplus revenues. (After all, Alberta spends significantly more than other provinces on education, culture, and industrial development; its research grants far outstrip those allotted elsewhere; and Alberta is scheduled to spend four times more on cancer research than the rest of Canada combined.) But, with Dinning, he believes that Alberta is in the midst of transformational change, and he was less than sanguine about Klein’s strategies for the future.
Then, on the day of the Tory meeting, David McColl, the President of the Young Albertans’ PC Association, brashly asserted that Klein had “absolutely no vision” for Alberta. The premier’s sin, apparently, was rooted not in his past record or in his sometimes erratic behaviour, but in lacking the urgency and wherewithal to transform “Alberta’s Advantage” into something more meaningful than a rich and fortunate province. According to Tory insider Ken Hughes, the rebuke Klein experienced on March 30 had far less to do with the naked ambition of leadership hopefuls believing that their chances would be improved by forcing an early convention, than in a profound sense that if Alberta stood pat its future was in peril.
While Canadians are aware of Alberta’s resource wealth, few appreciate the complications that large and regular annual surpluses create. Alberta is blessed with two-thirds of the country’s reserves of conventional oil, over 80 percent of its natural gas, and the bulk of Canada’s coal supply. Historically, this resource richness has been a mixed blessing. As prices fluctuated, Alberta experienced untenable booms and busts. Today, however, with crude oil prices set high and likely to remain so, the industry’s very success is generating repercussions that are difficult for the rest of economy to absorb. Rapid growth in the energy sector has led to rising labour costs across the economy, soaring home and office-rental prices, and other inflationary pressures. These fiscal realities are making it difficult for small- and medium-sized businesses (outside of the resource sector) to compete. With employees constantly seeking better pay and better conditions, staffs and work crews are anything but stable. Welders snapped up by high-paying oil companies are not available for work elsewhere, and a good number of companies simply cannot meet their orders or production quotas. As a result, a surprising number of companies are losing business to outside competitors or shutting down. Other problems are beginning to surface – e.g. “virtual residents” filing tax returns using Alberta addresses – but the big issue remains the labour shortages that are driving up prices, creating economic dislocations, and which might eventually result in hyper-inflation.
A growing economy is a demanding one, and therefore simply saving for the future is not an option. Alberta must do something with its surplus cash, and, according to The Canada West foundation, that “something” will generate “the most important debate that Albertans will face for a generation. It is also one that will ripple across the West and across the country.”
Beneath the headlines and a wave of high-profile energy sector promotions – including displays of the gigantic oil-sands trucks for US senators and investors — Alberta has, in fact, done a remarkable job over the last twenty years of insulating itself from a dependency on natural resources. The energy sector’s contribution to Alberta’s GDP actually dropped from 40 percent in 1985 to 19 percent in 2003, and, despite growing pains, its triple AAA credit rating (the only province in Canada to be accorded such respect from investors) is based on a healthy and diversified economy. The question, says Roger Gibbins, President and CEO of the Canada West Foundation, is “whether Alberta’s current fiscal position is sustainable…My suspicion is that it is,” he told me last spring, and talk of healthy diversification aside, the reason for his optimism rests on a virtually guaranteed demand for Alberta crude from the US and the emerging markets of China and India.
The US is “addicted to oil” – as President Bush put it – bad news for climate change, perhaps, but great news for Alberta – and Gibbins believes that the province is “relatively immune to any downturn in the US economy, or border security issues that pose risks to [Ontario’s] manufacturing base.” Indeed, with the supply chain from the Middle East, Venezuela, and Russia uncertain, Alberta’s reserves, says Jeff Rubin, Chief Economist at CIBC World Markets, “will be the most important source of new oil in the world by 2010.”
It is no coincidence that the beginning of Alberta’s rise to economic prominence coincided with the implementation of the North American Free Trade Agreement and, more specifically, stipulations which assure the US a steady supply of Alberta oil. Alberta’s pipelines point decidedly north-south, and almost two-thirds of its oil and gas exports flow south of the border – compared to 14 percent of its oil and 24 percent of its gas shipped to sister provinces – making Canada the largest supplier of energy to the US. Canadians who enjoy no such privileged access to Alberta’s energy resources may bristle at this sweetheart arrangement, but given current Prime Minister’s Stephen Harper’s views about provincial rights and positive relations with the US, it is unlikely to change.
The tar sands cover 140 square kilometers, a vast area larger than Florida, and contain roughly 1.6 trillion barrels of tar-laden bitumen, from which 175 billion barrels of oil is currently considered recoverable. Buried in the muck and muskeg of Northern Alberta, for decades relatively low energy prices depressed the research and development necessary to make the tough-to-reach reserves economically viable. At somewhere between $28 and $30 per barrel, the tide began to shift and extraction looked considerably more promising. The chief difficulty was the enormous capital costs required. To address this, in a move that now seems EITHER clairvoyant OR FOOLHEARTY, (KEN: A DEBATE IS STARTING OVER THIS “ROYALTY HOLIDAY”. POLLS SHOW A PLURALITY OF ALBERTAS BELIEVING THEY ARE RECEIVING “LESS THAN THEY DESERVE” FROM THE OIL SANDS AND SOME ARE CALLING FOR A RE-OPENING OF NEGOTIATIONS) the Alberta government stepped in with a very generous royalty arrangement. Rates were set at a mere one percent of production, and would increase only when the participating companies were able to recoup their development costs.
That moment is fast arriving, and with the current price of $50+ a barrel and production scheduled to double to half-a-million barrels a day by 2012, the result will be a financial bonanza for the province. Whereas, in 2005, Alberta generated $14.4 billion in non-renewable resource revenue and the government received $1 billion in oil sands royalties, in ten years total revenues will likely be off the chart and the oil sands royalty cheques are projected to top $5 billion annually.
For the current fiscal year, Alberta is forecasting a surplus of $7.4 ($8.7 – ON MONDAY THE GOVERNMENT REVISED ITS FORECASTS AND DISCOVERED IT HAD OVER $1B MORE IN SUPRPLUS THAT IT THOUGHT, THREE MONTHS PREVIOUSLY!) billion, roughly the same amount as the federal government’s budgetary surplus. In Alberta’s case, however, the $8.7 billion does not include unbudgeted outflows of $2.8 billion, including the $1.3 billion in “prosperity cheques” forwarded to every man, woman, and child earlier this year. Since 2000, the Alberta government has increased its program spending by roughly 10 percent each year. The cumulative result is impressive, but now, to keep people and attract others, it can spend like a drunken sailor, build an extraordinary asset base, and lower taxes. And it will.
The only thing limiting Alberta’s expansion is its own legislation capping the amount of non-renewable resource royalties that can be put into general revenues at $4.75 billion per year. Essentially, this self-imposed restraint demands that the provincial government invest non-renewable resource royalties in excess of $4.75 billion in areas beyond the here and now. The form that these investments take poses an unprecedented challenge to Canada.
Never before has one region had no financial reason to remain part of the country, but Alberta will soon be at that point. Liberal Canadians might like to describe the province as the new bully on the block whose time will come, but the truth is that hope resides in Alberta’s largesse. The über-province could decide to include the rest of Canada in its spending and investment plans or it could not. And if, for instance, it decides to invest offshore, or to stow money away in a special research fund for knowledge-based industries, or to single-handedly dedicate itself to curing cancer, there may be little the rest of us can do about it.
Prime Minister Stephen Harper promised to deal effectively and fairly with the “fiscal imbalance” between the provinces and Ottawa, but, unlike his other priorities on this issue he’s got baggage. Harper was one of the co-authors of the infamous “firewall letter,” a clear statement that Ottawa had little business in Alberta’s affairs. At the same time, the prime minister must deal with Ontario Premier Dalton McGuinty, who consistently calls Alberta’s surging wealth “the elephant in the room,” a point of view echoed in early June by the Liberal appointed panel studying equalization.
Enshrined in the Constitution Act of 1982, the federal equalization program is designed to ensure that “have-not” provinces can offer comparable levels of service as “have” provinces. “Equalization reflects a distinctly Canadian commitment to fairness. It has been described as the glue that holds our federation together,” states the panel’s report, adding that the “exclusion of resource revenue is not viable…for the program to be effective in achieving its objectives.”
Despite being snubbed by Harper on the matter, McGuinty is gaining support for his view that Ontario is paying too much into the program while Alberta gets a free ride. As it stands, neither Alberta nor its resource revenues are used to determine the average provincial capacity for providing services. (The median on which equalization is based is arrived at by averaging the revenue-raising capacity of Quebec, Ontario, Manitoba, Saskatchewan, and British Columbia.) This not only artificially deflates what the real national average is, it also allows Alberta to offer services and create capacity that is far superior to the rest of the country. The federal sanction against such actions is to withhold transfer payments, but with Alberta running huge surpluses this sanction is rendered meaningless. When pushed, Premier Ralph Klein OFFERED A HOLLOW THREAT (KEN: BECAUSE EQUALIZATION IS A FEDERAL PROGRAM AND THE FORMULAE IS MERELY MATH, ALBERTA CANNOT ACTUALLY “PULL OUT”) to pull Alberta out of the program altogether if natural resource revenues were included in the fiscal capacity calculations.
Meanwhile, the federal Liberals are seeing this as a wedge issue for the fall, and they can be expected to push for the formula being changed to include all ten provinces and 50 percent of resource revenues, (both recommendations of the panel). The equalization program has always been directed at supporting the poorer provinces, but, if Prime Minister Harper takes solving the fiscal imbalance issue seriously, he is faced with a new phenomenon: Alberta’s wealth could turn the entire discussion on its head, as the nation begins to grapple with “What should be done with the richest province?”
Let there be little doubt that Alberta is willing to challenge the very notion of fiscal federalism. In 2005, when Ralph Klein proposed blending public and private health care delivery he knew full well that such a move contravened the Canada Health Act. He also knew that Ottawa’s censure and its threat to withhold $1.9 billion in health transfers meant little. Medicare supporters cheered when he backed off, but, Klein’s “third way” merely changed tack when he countered that, instead, Alberta would simply spend more money to attract even more doctors and nurses. In short, even when Alberta chooses to play by the national rules its range of options allow it to produce levels of service that cannot be equaled anywhere else in Canada.
While the debate rages on between Ottawa and the provinces, inside Alberta a pitched battle is taking shape between those who wish to retreat from the nation and husband their wealth for Alberta’s use and the “pan-Albertans” who seek to supplant Ontario as “the heartland of the Canada” and move the province into a leadership role in national affairs. “The real issue,” says Peter Lougheed, “is whether Alberta is going to look inward or outward.”
Broadly speaking, the internal debate revolves around three radically different approaches: lower or eliminate taxes, be they personal, business or property; increase program spending on social services and infrastructure; or save and invest a significant portion of the surplus and/or resource revenue for future use.
The first option, embraced by a somewhat unholy alliance between big business and the poor, would make Alberta the lowest tax jurisdiction in North America. It is simple and, as such, intrinsically appealing, and some of its advocates fully realize that a further lowering of taxes in the lowest tax region in the country will create a competitive advantage for Alberta that could destroy the rest of the country. As Roger Gibbins has warned, “Alberta’s capacity to alter the competitive balance of the country is far greater than Canada’s ability to absorb it.”
According to province-wide polls, increasing program spending is the preferred option for most Albertans. But critics of this alternative claim that high spending commitments will lead to deficits if and when energy royalties slow down. They further argue that such generosity will lead to social services and infrastructure improvements that are so superior to those offered elsewhere that the population influx into the province will be impossible for Alberta to withstand. As other regions empty out, this approach is potentially ruinous for Canada as well.
A minority group (including prominent oil men like Jim Gray) wants to ensure that Alberta remains strong in perpetuity, and believes that it should do so within the context of a strong Canada. Alberta must save, but it must also invest in both the province and the country. While this strategy has yet to be fully fleshed out, the likes of Peter Lougheed, Preston Manning, Roger Gibbins, and Jim Dinning seem to agree on the broad brush strokes. A fixed portion of resource revenues would be deposited in the Heritage Fund and other Trusts, with the monies ear-marked for particular purposes. Capital would accumulate in these accounts and the interest would be used to make investments inside and outside of the province, either independently or by leveraging assets with bank debt or with joint venture partners. This save-and-invest camp clearly supports setting up special trusts like Norway’s Petroleum Fund which, since 1994-1995, has collected $223.8 billion US in resource revenues, and has current assets of just under $200 billion US (which will likely grow to over $300 billion over the next four years).
Harkening back to his own experience with the Heritage Fund, Lougheed recalls investments made in grain terminals in Prince Rupert, British Columbia and medical research facilities in Alberta, and believes something similar could be achieved through a Pacific Gateway Initiative or even “locating a segment of the Medical Research Foundation in, say, Montreal or Toronto.”
Fearing that rising oil prices at the time would have the twin effect of enriching Alberta while crippling Ontario’s manufacturing base, in 1980 the Trudeau government intervened by applying a tax on energy exports and effectively moving exploration out of Alberta’s control and into federally administered crown lands. The move precipitated a conflict between Ottawa and Alberta that structures relations to this very day. Nonetheless, Peter Lougheed has outlined what many see as three fundamental differences between the situation when he was Alberta’s premier and the NEP was enacted, and current realities. First, the volume of energy flowing out of the province is staggering, whereas in 1980 it was modest. Moreover, the accumulated assets of the Heritage Fund, Alberta’s rainy day treasure chest, was a mere $7 billion, and world oil prices were stuck around $25 a barrel. Today, the barrel price is $50+ and one proposal is to deposit as much as 50 percent of the annual resource revenues into the Heritage Fund, which could be re-tooled for particular purposes such as health and higher education, thereby further insulating Alberta from areas of federal responsibility. Second, the relative financial health of the two most regular contributors to the equalization program, Ontario and Alberta, now tilts heavily in favour of Alberta. Respected TD Bank economist, Donald Drummond, believes that Ontario’s economy is “too fragile” to withstand any further enrichment of equalization. Indeed, casting forward, some observers envision a time when there will be few manufacturing jobs in Ontario not performed better and at a lower cost in some other part of the world. Finally, like many others, Lougheed believes that the combined forces of world demand for oil, NAFTA, and a diverse economy, ensures that Alberta will continue to grow and prosper.
Other ideas are on the table. The Fraser Institute, a right wing think tank, believes Alberta should eliminate all municipal property taxes. Whereas it once supported a similar approach — replacing personal income tax with a flat tax on consumption — the Canada West Foundation now advocates an obligatory investment of 50 percent of all revenue from non-renewable resources. Queen’s University expert on fiscal federalism Tom Courchene and TODD Hirsch have both proposed the formation of an Energy Trust to develop a full range of energy initiatives. What is especially intriguing – if not dizzying – about these suggestions is that they are all possible now, and that some such grand scheme will be implemented as Alberta’s fiscal capacity grows.
Indeed, with personal and corporate taxes currently accounting for only $8.5 billion of Alberta’s total $34 ($36 – REVISED FIGURES –SEE ABOVE) billion in revenue, Alberta could become a tax-free jurisdiction. Perhaps a simpler and more feasible solution to address the “problem” of surging surpluses would be to eliminate all corporate taxes, an approach under active consideration. Oil executives might be happy enough with the status quo, but as royalty pay-outs increase, they will be demanding new holidays; and such a strategy has the added benefit of helping small- and medium-sized businesses, that is, the part of Alberta’s corporate world experiencing tougher times. Summing up the situation, Roger Gibbins envisions a time when Alberta COULD become (KEN: HE DOESN’T WELCOME THIS PROSPECT AND WARNS THAT MORE TAX CUTS WOULD BE DISASTEROUS FOR CANADA AND ALBERTA) “the Grand Caymans of Canada,” essentially the country’s bank, making interest-bearing loans as it sees fit, and securing its own longevity, prosperity, and control in the process.
Jim Dinning’s vision is to replace the segregated energy industry with “a fully integrated energy system, where maximum value is extracted at each link along the value chain.” While campaigning to become the next premier, he asks his audiences to “think of the investment opportunities in the network of pipelines, transmission wires, and infrastructure linked together to pump out not only our raw natural resources but to go one step further: to manufacture finished products, plastics, fibres, resins, rubbers, and specialized fuels, and ship them around the world.” Preston Manning sees a “tremendous symbiosis with Quebec and its Hydro resources” and would like the two provinces to “create an energy alliance that could use its leverage to invest in a secure energy supply” for all North America.
Manning, the author of Think Big, talks about such steps “as part of growing up” and Alberta’s “new leadership responsibility for the rest of the country.” Echoing the same sentiment, Dinning insists, “We’ve got Alberta to the point where we can choose to do or become pretty much whatever we want,” and that it is now time for “Alberta to take the lead in Canada.” Even the normally staid and conservative Canada West Foundation states, in Seizing Today and Tomorrow: An Investment Strategy for Alberta’s Future, “As Albertans explore the transformative power of natural resource endowment, hopefully they will also seize the opportunity for national leadership.”
Inspirational language is one thing, but it will take something akin to a miracle for the Lougheed-Manning-Dinning crowd to prevail in the tug-of-war over the province’s bankroll. Polling clearly reveals that the save-and-invest strategy is preferred only by certain elites. The vast majority of the population feels that Alberta’s wealth should be used to solve Alberta’s problems, today. And there is virtual unanimity that spending on health care and secondary education would be a “good” or “excellent” use of the surplus. The option that receives far and away the least support — even less than temporarily lowering corporate taxes — is “sharing it with the rest of Canada.”
So, while “pan-Albertans” are preaching big, bold, even magnanimous ideas, “little Albertans” are manning the ramparts. With a population distrustful of the long arm of the federal government, and with a history of highs and lows, the sense on the ground is get-rich-quick, and get the goods and services while they are available. To be sure, trade delegations from Alberta visit other provinces, and at the political level there is shuttle diplomacy between Edmonton and Ottawa, but at the grassroots a new provincialism is emerging in Alberta. The tension with the rest of Canada is as old as mortgage foreclosures attributed, fairly or unfairly, to the National Energy Program and other attempts at federal control.
In a 2004 essay titled “Federal-Provincial Tensions: The Evolution of a Province,” Preston Manning attempted to explain the historical root of Alberta’s sense of alienation. Albertans, he argued, came out of the Depression and WW II years believing that Confederation was a “one-way street” and that “Alberta better take care of itself – especially when times are good – because in real crisis, the national government cannot be counted on to do so.”
This early alienation manifested itself in the lament that “Toronto has everything” — that Alberta was a powerless backwater, taken for granted and invisible in national affairs. The tide began to change in the 1970s as the population and accumulated wealth grew. Then Premier Lougheed tapped into Prairie pride and a can-do attitude, and, slowly but surely, the prevailing view became that initiative, new ideas, and success were more abundant in the West than in Canada’s traditional centre of power. Alberta now had a voice, but its right to control its own destiny was trampled by the National Energy Program and, in short, top-down federalism. With central Canada paying, according to Albertans, undue attention to itself, the Quebec crisis, or the US, the province was ripe for the Reform Party’s battle cry, “the West Wants in.”
Today, Jim Dinning says, Westerners are demanding a “process that more fairly respects the region’s weight and role in the federation…it comes down to one word: respect.” In the view of the Pan-Albertans, the province’s wealth can produce transformative change, principally for Alberta but also for the nation as a whole. But if they are offering Canada a carrot, they are also barely concealing a stick. As Preston Manning warns, “If someone makes a raid on Alberta, you won’t be able to stop separatism… People like myself couldn’t argue against a firewall mentality.”
Shear math dictates that Alberta’s wealth will pose a tremendous challenge to Canada’s future. Whether Albertans choose to lower or eliminate taxes, spend their way to Nirvana or amass huge holdings a la Norway, their actions will force a tectonic shift in the economic balance of power in Canada. In fact, the most benign of these scenarios suggests that Alberta will become Canada’s bank. The issue therefore is not whether “the West wants In” but whether “the West will let Canada in.”