The Financial Case for an Independent Alberta

With the Alberta government now committing to holding a referendum on equalization during Alberta's next municipal election cycle (fall of 2021) I thought it would be appropriate to consider just how much Alberta contributes to the rest of Canada and how Alberta would likely fare as an independent country.

The Obvious Benefits

It is common knowledge that Alberta (and more specifically Albertans) contribute more to confederation than any other province in Canada. However, I don't believe that most people fully understand how this occurs (it's not really 'equalization') and how much it is (I'll make this really clear later). 

How Much?

The easiest and cleanest way to determine 'how much' is to look at 'net federal fiscal transfers' which is basically how much money is taken out of Alberta via taxes and how much comes back via federal transfers to the province or federal programs in the province. When viewed this way the numbers are staggering...effectively Albertans have been contributing ~$20 billion/year for the last decade and since 1961 it is estimated that Albertans have contributed over $600 billion! What I also want to make clear is that no one disputes these numbers. They are presented here in a National Post article and all the numbers are derived from Statistics Canada. There is literally no funny business going on and no exaggerations.

Now to drive home exactly how much this is I think it's important to view it on a per person basis (because most people can't fathom how much $20 billion is). So on a per person basis $20 billion/year equates to more than $4,500/per man, woman and child in the province every single year ($20,000,000,000 / 4,371,000 Albertans). For my family of 5 we are effectively contributing $22,500 to people in the rest of Canada every single year! If a separate Alberta were to tax us exactly like the federal government does today and simply rebated the excess in a Ralph Bucks style scenario everyone in the province would get $4,500. Except instead of it being a one-time thing it could happen every year!

How Can This Happen?

Equalization

The most well known mechanism is the much maligned 'equalization'. This is a very complicated formula but if you want to know all the details I suggest reading this. What you'll learn from that though is that Alberta doesn't really pay into equalization. The federal government is collecting all the tax revenue and then decides using a formula who should get a little extra when they start transferring money back to the provinces. Unfortunately for Alberta that means provinces like Quebec get a little extra all the time and Alberta basically never receives anything. You'll also quickly realize that based on the current formula Alberta is very unlikely to ever receive anything extra in the near or even medium term. I'm not going to unpack that fully but the reason would be the high incomes of Albertans on average combined with our propensity for low tax rates. Both of those things are highly punished in this formula.

Progressive Tax Rates

So if it's not from 'equalization' how do Albertans end up contributing $20 billion/year? The biggest reason is income tax. As everyone knows the tax rate you pay increases as your income gets higher - it's what's known as a progress income tax. Well, unfortunately for Albertans we have the highest median income in Canada so not only do we pay the highest tax in actual dollars we also have the highest effective tax rate! To illustrate the point, the median household in Alberta earned $93,835 in 2015 (most recent StatsCan data) but the median household in Canada only earned $70,366 (the Alberta data brings this number up unfortunately so the rest of Canada is actually lower but we'll ignore that for simplicity). Now if we plug that into a tax calculator you'll find that the Alberta household pays $13,823 in federal tax while the average Canadian only pays $9,012 (that's 53% more for those keeping track!). So even though these numbers are just illustrative you can quickly see where the $4,500 comes from ($13,823 - $9,012 = $4,811). Also, just for completeness this means the median Albertan is paying an effective tax rate of 14.7% to the federal government while the median Canadian is only at 12.8%.

Means Testing

How else do Albertans lose out? Well, every other program that uses 'means testing'. A good example is the Canada Child Benefit (CCB). If you look at the 'see the math behind CCB benefits' you'll find that the payments decrease as your Adjusted Family Net Income changes and again because the average family in Alberta has a higher income we end up receiving less from this program. The problem is that this is true for virtually every program offered by the federal government (OAS, CCB, GST rebates, etc.) and it slowly adds up which is how we eventually end up with the average household losing out on $13,500 compared to the rest of Canada (the average household in Alberta has 3 people).

Demographics

Another way Alberta misses out is by age. The median age in Alberta is 37.1 while the average for Canada is 40.8. This means there are fewer Albertans who are senior citizens and therefore less payments are made to Albertans using programs like CPP and OAS. This wouldn't be as big of a deal as you'd expect that money put into CPP will eventually become yours but CPP isn't like your defined contribution plan at work. Effectively CPP is funded by the ongoing contributions of Canadians and there are no guarantees on how much the payments will be when the current group of Albertans retire or how the premiums may change. One study found that should Alberta opt for it's own pension plan (like Quebec did) the rest of Canada would have to up their contribution rates from 9.9% to 10.6% which just goes to show again how much Albertans are supporting the rest of Canada.

That's Not All

You might think that the above is a complete list of how Albertans lose out financially by being part of Canada but there is even more...including lower federal employees per capita in the province, higher employment rates in Alberta and less use of EI over time but I'm not even going to go into these as at the end of the day we know the total value of all of this and it's ~$20 billion/year. That's the beautiful part of that 'net fiscal transfers' information as it captures all of this!

So What Would Happen if Alberta Left?

Most opponents of a separate Alberta won't even try to dispute the fact that Alberta carries a heavier economic load than any other part of the country (because all of the above is really well documented) but instead they tend to argue that a separate Alberta would simply not have the same economic opportunities if it wasn't part of confederation. The idea that a separate Alberta would be landlocked is also a common reason for opposing separation and is a favourite of Alberta's current premier, Jason Kenney. On the surface that logic makes sense. Alberta is a well known exporter of oil, natural gas and agriculture products and if there was no way to sell those products to other countries or ship them to other markets using Canada's ports (in particular in British Columbia) then it would be devastating for the newly formed country. However, there are a lot of landlocked countries in the world (particularly in Europe) and some of them are very successful.

Landlocked?

In Europe a number of countries are landlocked including: Austria (GDP/capita higher than neighbouring Germany), Czech Republic, Hungary, Lichtenstein, Luxembourg (3rd highest GDP/capita in the world!), Slovakia and Switzerland (6th highest GDP/capita in the world!). Given that many of these countries are very successful how do they do it?

First, some countries were able to negotiate access to seas with neighbouring countries. This would include Austria, Hungary and the Czech Republic who use the international waterway designation of the Danube to access the Black Sea. Secondly, other countries simply rely on their free trade agreements with neighbouring countries - this would include the rest of Europe's landlocked countries who have joined the European Union. Lastly, should none of that work for your country the UN Convention on the Law of the Seas actually guarantees landlocked countries access to and from the sea 'without taxation or traffic through transit states'. 

Now I'm certainly not a lawyer and have no idea what kind of teeth this UN convention has but it sure seems like all the other developed, landlocked countries in the world have found a way to be successful and there is at least some legal precedent for an independent Alberta to not be decimated by separation.

Quid Pro Quo

I strongly suspect that if Alberta separated the new country of Alberta would be added to the USMCA (the new NAFTA) almost immediately. As the recent negotiations showed, the US has all the leverage on this agreement and due to US investments in Alberta oil projects and the disruption it would cause to not have Alberta included I believe the US would push to have Alberta join immediately. However, I'm willing to explore what might happen if Canada refused to add Alberta to the USMCA and furthermore initiated a trade war with the new country.

Before expanding on this further it's important to understand what a trade war is. Basically, they occur when one country tries to incur economic penalties on another by taxing something the other country is selling in its territory. A perfect example in our case might be if Canada decided to apply a tarriff (like a tax) on Alberta oil and natural gas sold in Canada. In this example they might choose to apply a 20% tax on any Alberta oil and gas coming into the country. This is bad for Alberta because it would make oil and gas that comes from other parts of the world cheaper than ours and could reduce the demand for Alberta oil and gas in Canada. However, it is very unlikely that this would occur right away (the world basically produces exactly the right amount of oil right now so there's not a lot of places for it to come from) which means that it also causes harm to Canadian consumers while they pay 20% higher prices for oil and natural gas. That's why trade wars don't tend to last that long and developed countries prefer free trade agreements. You can try and harm another country or protect your local industry but it comes in the form of higher prices to your country's consumers (and voters).

Beyond the fact that tariffs tend to be like cutting off your nose to spite your face the other problem with a Canadian trade war on Alberta is that Alberta can also place tariffs on Canadian goods coming into Alberta. In fact, if you look at the StatsCan data on this you will find that Alberta exported $63.7 billion to the rest of Canada and imported $67.1 billion so there isn't really a mismatch here. It's odd to think that way because Canada would have over 30 million people and Alberta would only have 4 million but if the countries decided to match tariffs in a trade war they would be very evenly matched. For that reason I believe that it's very unlikely that Canada bitterly fights Alberta over a trade deal as it would only serve to harm both countries.

The Nuclear Options

Stranded Assets

Beyond the traditional methods countries use to fight economically there would be some unique advantages to a newly independent Alberta. These are what I'm going to call, stranded assets. Because Alberta has been a part of Canada for so long there are hundreds of billions of dollars worth of assets held by people in other parts of Canada but that are physically located in Alberta. The obvious example might be a rental condo in Calgary owned by someone who now lives in Toronto. My focus however would be on the much larger corporate versions of this. A good example from my own profession would be all of the assets held by Canada's 5 largest banks. Combined Albertans owe Canada's big 5 banks >$100 billion (through mortgages, business loans, lines of credit, etc.). What if the country of Alberta were to nationalize those debts and the associated bank branches? Maybe they roll that into new corporations or spread it out to the province's credit unions but a sovereign nation could ignore the property laws of their former country and nationalize whatever they like (ask Exxon Mobil about their Venezuelan business...). Along the same lines Canadian investment plans like OMERS (the Ontario Municipal Employee Retirement System) holds numerous investments in Alberta including Oxford Properties. Again owing no loyalty to Canada these assets could be seized by the Alberta government. There are of course countless other examples and it's very safe to say that investors and businesses outside Alberta would stand to lose hundreds of billions of dollars if a newly formed country decided to nationalize their investments. Of course it would never get to this as the political consequences to a Canadian government that allowed this would be catastrophic and the pressure from those businesses and investors that could lose their assets would be too great. However, it's important to note that Alberta would have this option.

The above of course begs the question of whether these stranded assets go both ways. Just like trade this is of course true. Again the easy example would be all the recreation properties that Albertans own in the Okanagan for example. However, in this case I believe Canada actually has more to lose than Alberta. The reason is simply that there are no major banks headquartered in Alberta and most investment funds are also from Eastern Canada so while I can't find quality data on this I do believe nationalizing assets would be a potent weapon for Alberta in economic battle with Canada.

The Rest

Other nuclear options revolve around market access. As discussed above around being landlocked it is conceivable that Canada would try and prevent Alberta products from reaching the Pacific Ocean. What is often forgotten in this discussion however is how many products go the other direction. A large amount of goods are shipped from Asia to British Columbia and then proceed by rail to Central Canada. All of these goods pass through Alberta. So just like the quid pro quo on tariffs Alberta would have significant ability to harm Canada by stopping rail shipments through the new country. In this scenario I suspect Alberta has more to lose than Canada if both parties refuse to move goods between their borders but unlike the common narrative Alberta is not defenseless.

Summing it Up

If you've stuck with me this far I believe that a sober and honest look at the facts show that the people of Alberta contribute a huge amount of money to support people living in the rest of Canada. This number is quite literally >$1,000/month for the average household in the province (which would make for a very nice car payment). However, reducing that number will be very difficult within the confines of Canada as the mechanisms that create this imbalance are numerous and enshrined within Canadian values. That said, I believe that most vocal advocates against an independent Alberta are being ingenuous about the facts and possibly their own motivations. Upon careful review of the economic data and legal precedents around the world I have to conclude that a separate Alberta would not be meaningfully impacted by changing status to an independent country. 

Oh and by the way an independent Alberta would likely sneak into the top 10 wealthiest countries when ranked by GDP/capita.