Quebec's Premier Philippe Couillard listens to a question during a news conference at his office in Quebec City, April 13, 2015.MATHIEU BELANGER/The Globe and Mail
TransCanada Corp.'s 4,600-kilometre Energy East pipeline would carry Alberta crude oil to refineries in Quebec and New Brunswick that are dependent on Middle East imports. Last November, the Quebec government declared that, for the pipeline to cross the province, it must generate economic benefits. Then on June 23, Quebec Premier Philippe Couillard told reporters that he didn't see much economic value for his province in being a "transit place" for the pipeline.
New Brunswick Premier Brian Gallant was quick to respond: "The province of Quebec is … estimated to receive … about 4,000 jobs … an increase of about $3-billion in the GDP and, on top of that, about $700-million in extra tax revenue." Given the size of those economic benefits and that they are roughly twice those that would accrue to Premier Gallant's own province, Mr. Couillard's statement is indeed baffling. Perhaps it's simply a matter of the anti-oil bias he illustrated later in the interview: "I prefer a world without fossil fuel, only electric, you know."
Alberta is of course, Canada's biggest fossil fuel producer, and most dependent on the success of the Energy East project. But what Mr. Couillard fails to recognize is that a decline in Alberta's economic fortunes also poses an indirect threat to his province's own financial sustainability. Why? The answer lies in the structure of the federal Equalization Program.
A province's equalization entitlement is based on the amount by which its "fiscal capacity" is above or below the average of all 10 provinces (known as the "10 Province Standard"). Those falling below that average are commonly referred to as "have-not" provinces. Quebec has received an equalization grant every year since the program was established in 1957. And since Ontario became a have-not province in 2009, B.C., Alberta, Saskatchewan and Newfoundland/Labrador have been the only net contributors to federal equalization funding.
Alberta has long been the province with the highest fiscal capacity and, indirectly through Ottawa, the largest supporter of equalization. But now, Alberta is in serious economic trouble. A Conference Board of Canada report released in January concluded that 2015 will see the province experience the largest drop in gross domestic product, together with a reduction of some $12-billion in business investment. Events in the six months since the report was released make that outlook decidedly optimistic.
TransCanada has been forced to defer the planned startup date for Energy East to early 2020.
The world oil price outlook has become even more unclear. And the surprise victory of Rachel Notley's NDP, elected on a platform of higher income and carbon taxes together with a "review" of royalty rates, has fostered further waves of layoffs and deeper investment cuts.
The Conference Board report estimates that oil producers in Alberta, Saskatchewan, and Newfoundland and Labrador will see a combined $10-billion reduction to their revenues this year. It will almost certainly be worse than that. So what if the fiscal capacity of these three "have" provinces were to drop? Simple arithmetic would result in a reduction in the 10 Province Standard, thereby drastically reducing equalization payments to the have-not provinces. What if this happens to "fossil fuel"-shunning Quebec?
That province's deficit for the fiscal year ended March 31 was $2.35-billion after receiving a $9.29-billion federal equalization grant. Without that grant, Quebec's deficit would have ballooned to $11.64-billion. Given that Quebec's debt-to-GDP ratio is already the highest of any Canadian province and 2.5 times that of the most indebted American state, the Couillard government would have no choice but to implement drastic spending cuts. The "Quiet Revolution" that brought in the so-called "Quebec Model" welfare state so revered by the provinces' political, union and intellectual elite would turn into a raucous and wrenching upheaval.
The impact of reduced equalization grants would also be wrenching for the other Maritime provinces. The difference is that Mr. Gallant understands the vital importance of the oil and gas industry to Canada's economic and social fabric, and is wisely doing what he can to help sustain it.
Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.