Confederation's Widening Gyre

This is a short post to check in on an issue I wrote about a year and a half ago.

In my review of the New Brunswick provincial budget in 2020, I discussed Equalization payments and linked to a manifesto against them that some Albertans had made:

... "These changes would acknowledge that programs like the Canada Health Transfer and the Canada Social Transfer already provide equitable stable funding for provincial social programs, would ensure all regions are treated equally, and would serve to remove disincentives for provinces to improve their fiscal situations."

This excerpt is from a manifesto that is unlikely to be implemented as-is (at least in my opinion). But the sentiment behind it is likely to be part of the national conversation in the years ahead. An adjustment to the Equalization formula may thus become a political necessity for the federal government; any adjustment is unlikely to benefit New Brunswick so being in a flexible fiscal position to deal with diminished revenue from this source would be prudent.

Well, now the province of Alberta has had a referendum on the matter of Equalization payments (where the "Yes" side was in support of changing the constitution to remove the commitment to inter-provincial fiscal equalization). Official results will be released next week, but the current indications point to it passing. As the linked article says, Alberta can't unilaterally change the Canadian constitution, but the Albertan premier expects that the referendum result will give his province more "leverage" in negotiations with the Federal government. So my prediction that anti-Equalization sentiment would become a part of the national conversation is looking pretty accurate.

This post gives a perspective from Alberta on the political calculations (i.e. that the squeaky wheel gets the grease), and also says that, "federal transfers of gobs of cash is increasingly the only tenuous thread holding the nation together".

What does this mean for New Brunswick? For the moment, there won't be any changes. In the medium term, having Equalization as a contentious topic that is straining Canadian federalism could put the finances of "have not" provinces under a lot more scrutiny. And even a small possibility of losing these payments is a sword of Damocles. NB received $2.3 billion this year from Equalization (over 20% of the budget). By comparison, we're spending $3.1 billion on health care; no other department had spending over $1.5 billion. So any cuts would be very painful if this source of revenue was curtailed (and not making cuts would put us on a fast track to default).

To investigate the impact of Equalization payments, I compared the relative size of the public sector between provinces:  

2021 Equalization payments per capita vs Public sector employees as a percentage of all workers

The Equalization data came from here and the data on employment by sector from here. Alberta, BC, and Ontario cluster around having 19.6% of their workforce in the public sector. The "Canada total" datapoint is just the average Equalization payments per capita for all provinces; the per capita average for the whole country is $570. Note that Saskatchewan and Newfoundland & Labrador look like they don't fit the trend, but they would both get Equalization payments under the base formula (instead a "resource revenue adjustment" is applied); furthermore, Newfoundland & Labrador recently received a quasi-bailout from the Federal government (with the transfer of part of the Muskrat Falls boondoggle from the former to the latter). In NB, 101,700 people are employed in the public sector (this isn't just provincial employees but includes other levels of government as well) out of a workforce of 355,600 (including self-employed), for a composition of 28.6%. This has increased by around 17,000 compared to 10 years ago (when the composition was 23.9%; I'm using records from August of each year to be consistent; and note that there was a dip (to 22.9% in 2016) in the intervening period), while the total size of the workforce has hardly budged—so the private sector has actually shrunk (or at least has been slower to recover from the pandemic). It's hard to look at the data and say that the public sector has been getting the short end of the stick here.

I wasn't expecting such a strong correlation between the two variables in the graph above, but after thinking about it some more, here's my tentative explanation: "have not" provinces are able to support a larger public sector via Equalization than they could just from taxes and other revenue from their own economies. This is related to the goal of the program of providing roughly equivalent levels of service regardless of province. In fact, looking at the percentage of public sector workers out of the total population instead of out of the total workforce has much less variability across the country (a range of 10.3% - 15.2%). Although there is still a discrepancy between ON/AB/BC (average of 10.4%) and QC/MB/NS/NB/PE (average of 13.1%).

So in New Brunswick, the above-average fraction of the workforce in the public sector is closely tied to the dependency ratio (fewer people of working age to support students and retirees) that I discussed here. On a positive note, there are some encouraging signs of population growth, but this will have to be sustained and translate into a growing economy in the private sector if the services needed to support an aging population are ever to become sustainable without these increasingly-controversial transfers from the Federal government.

Regional grievances have been a pretty regular feature of Canadian politics, so in one sense this referendum in Alberta is nothing new. On the other hand, it's one more centrifugal strain at a time when there are already a lot of domestic challenges to deal with, and the geopolitical milieu is also no longer something we can take for granted.

See here for more background on this referendum and here for a simulator of different equalization scenarios.

Another issue to keep an eye on is the current supply chain bottlenecking. It remains to be seen whether it will get better, worse, or just continue to slog along through the rest of the fall and into the winter. Like debates about interprovincial fiscal fairness, it could be an additional source of strain on our governments and institutions (along with a source of uncertainty for families and individuals, of course). I really hope we don't have strikes or railway blockades compounding the general supply chain malaise or we might truly see things fall apart.