Suppose Alberta had this huge surplus - wait, it does!

JEFFREY SIMPSON
Globe and Mail
June 27, 2008

Later this summer, the Alberta government will announce the first-quarter estimate for its 2008-2009 budget surplus.

On budget day, the government based its analysis on $78-a-barrel oil. It predicted a $1.6-billion surplus, even after huge spending increases.

With oil trading between $130 and $140 a barrel, it now looks as if the Alberta budget surplus for this fiscal year will be between $11-billion and $12-billion. Forecasters are already suggesting that the 2009-2010 budget surplus could hit $20-billion.

In Ottawa, the Harper government bought Quebec's argument that a "fiscal imbalance" existed between the federal government and the provinces. The argument ran that Ottawa had too much money, and provinces too little. So Ottawa had to hand over billions of dollars, which the Harper government did.

That was a so-called vertical imbalance between two levels of government. Canada now faces the most severe horizontal imbalance since the 1970s. One province, Alberta, has a surplus 10 times greater than Ottawa's and larger than all the provincial surpluses combined. In fact, Alberta's surplus will be greater than the federal and other provincial surpluses combined.

If oil prices remain high, or go higher, the huge gap between Alberta's revenues (and, to a lesser extent, Saskatchewan's) will widen every year.

Until now, almost no one in the country dared mention this gap. People outside of Alberta were scared of conjuring up memories of the Trudeau era's national energy program. People thought oil would settle back to a lower price. The Alberta government was soaking up the surpluses with a spending spree on infrastructure and health care. The gaps were big, but not that big.

What, if anything, will the national government do faced with this horizontal imbalance? Chances are, nothing, given the Harper government's political base in Alberta and its belief in "open federalism," which invariably translates into letting provinces pretty much do what they want and allowing the chips to fall where they will.

Very high oil prices, however, bring a series of jarring adjustments that do affect Ottawa's ability to run the economy.

The equalization formula, for example, is going to be so out of whack that the Toronto-Dominion Bank anticipates Ontario will be receiving payments from Ottawa within two years.

The Bank of Canada has refused to lower interest rates because it's worried about inflation produced by higher energy (and food) costs.

Manufacturers won't like this approach, since they're being terribly squeezed, but the soaring costs of energy make the bank fear inflation.

The high dollar stems, in part, from the incredible infusion of money into the country from high oil prices that produce gains for producers and losses for consumers. Good luck telling a manufacturer that a dollar at parity with the greenback is a good thing when a productivity gap exists between the United States and Canada.

The Alberta boom sucks up labour from less fortunate parts of Canada. Labour markets, in this sense, are working. Some of the money earned in that province works its way to other parts of Canada, but the gap in the ability of citizens to receive public services among provinces widens.

A national government twice tried to grapple with such huge regional spreads caused by high oil prices. Everyone remembers the NEP, but it's often forgotten that Joe Clark's government tried in 1979 to negotiate a deal with then-premier Peter Lougheed to recycle some of Alberta's petro-revenues across the country. The negotiations were extremely difficult. They remained unfinished when the Clark government fell, with consequences for Alberta.

There will be fierce resistance in Alberta to even discussing the huge challenges associated with this burgeoning gap. We give through equalization, many Albertans will say. End of story. People such as Mr. Lougheed worry about the problem; the current government in Edmonton does not.

A few Albertans talk privately about how the province can spread at least some of its money across the country. Alberta, for example, could take $2-billion of that surplus and launch a crash program with industry and universities across Canada to solve the technical problems of sequestering carbon emissions.

The Harperites apparently won't say boo about the gap, even though the gap makes their life harder as a national government. Since no one can get near Mr. Harper to ask him a question, his views on the situation are unknown.

jsimpson@globeandmail.com