Monday, July 18, 2005

Equalization math

Several bloggers have already noted the new call for Alberta to separate made by Leon Craig, an emeritus professor of political science from the University of Alberta. (See especially the discussion of Muck Shoveller, a former student of Craig, here and, especially, here.) Prof. Craig has published an essay with the folksy title, 'Let's get while the gettin's good', which begins with this paragraph
To be sure, the $250 million of graft involved in the Adscam racket is but a small portion of Alberta’s annual donation to keeping Quebec tenuously tethered to the rest of Canada, barely a week’s contribution of the $12 billion Ottawa sucks out of Alberta every year in “equalization” payments (which the Liberal party then uses to buy votes east of Cornwall), a mere $60 of the almost $3,000 that every man, woman and child in Alberta pays per year for the privilege of remaining in a federation governed for the benefit of Ontario, Quebec and cronies of the Liberal Party of Canada.
The prose is, frankly, pretty sloppy, and its invective cliché, but let's leave that aside. Instead let's concentrate on the math behind his characterization of what equalization costs Alberta. Prof. Craig asserts two things here: (1) that equalization costs Alberta $12 billion per year, and (2) that this is 'sucked out' of Alberta in '"equalization" payments. (I'm not sure why he uses quotes here; perhaps someone can explain.) On the Buckets Truth Index, both statements sit somewhere between highly misleading and rank nonsense.

First, Craig mischaracterizes equalization payments. Alberta does not make any equalization payments--check its annual budget and public accounts if you don't believe me. Equalization is a program in which the Federal Government makes payments to some, but not all, of the provinces. At the moment there are eight provinces that qualify--all but Ontario and Alberta. (If you need to review the facts about this program, see here.) It cost $8.7 billion per year in 2003-4 (here), which is about 4.6% of the federal budget of $189 billion. Where do the Feds find this money? Out of the federal budget, which comes from federal taxation, which Canadians from all provinces pay.

Second, Craig is obviously wrong to imply that Alberta's share of equalization comes to $12 billion--which would be truly remarkable for a program that costs $8.7 billion. What is Alberta's share? Strictly speaking, of course, Alberta doesn't have a share, since it makes no payments. The money for the program comes from the federal taxes paid by individual and corporate Albertans. Now, we could roughly calculate what Albertans collectively pay towards equalization, since figures are available for share of federal taxation by province. The ones I have to hand are out of date (2000, I think) and are only federal income taxes, but they should give us a rough idea:
  • Nfld 1.05%
  • PEI 0.28%
  • NS 2.27%
  • NB 1.68%
  • Que 20.70%
  • ON 44.24%
  • MN 2.85%
  • SK 2.42%
  • AB 12.33%
  • BC 11.75%
  • Yuk 0.08%
  • NWT 0.14%
  • Nun 0.06%
  • foreign 0.15%
So, Prof. Craig raises the question of how much Alberta is paying towards equalization. Albertan's share will be equal to its share of total federal taxation, or 13% (rounding up). The total budget for the equalization program in 2003/4 was $8.7 billion. 13% of that is $1.1 billion. Not a trifle, but only a small fraction of Prof. Craig's $12 billion.

What went wrong with Craig's math? Did he slip a decimal point? I will try to return to this in a future post*, only pointing out here that it's a good thing that Prof. Craig taught Political Science in university rather than math in high-school.

    *For this post, see here


Kevin Brennan said...

I suspect that the number is based more broadly on the amount of federal tax revenue from Alberta minus the amount of federal spending in Alberta.

buckets said...

I suspect you're right--I'll try to post on this in the next day or two.

Mark Richard Francis said...

That would be my guess.

The theme is 'without Canada, this is how much extra money we'd have.'

I wonder what would happen if that calculation got applied to Toronto? Or just to rich people? Perhaps high income people should declare themselves sovereign and separate from Canada.

Or, perhaps we should redefine Canada's provinces to be land areas without propinquity, balanced such that there are no fiscal equalization differences between provinces. We'd all have a piece of Alberta, and of the Gaspe, and so on.

No more complaints.

Then we'd figure out that we're all the same kind of people, paying the same federal taxes, belonging to the same country.

Jason Cherniak said...

I think an interesting part about this post is it shows that people in provinces receiving equalization payments are actually putting money into it. What is really happening is not a transfer from Ontario and Alberta to the other provinces - it is a transfer from those who pay higher taxes to eight provincial governments.

buckets said...

Yes, that's a good point, Jason. Quebec, to choose the most notorious example, only gets out slightly more from the program than they contribute.

And BC, which is getting a payment now, still contributes more through taxes than flows back.

PR said...

"Then we'd figure out that we're all the same kind of people, paying the same federal taxes, belonging to the same country"

I'm assuming you're not an Albertan. Because my friend, you just don't get it.

Steve Lefty said...

good article..some good stats