For the 2005-06 fiscal year, Alberta has a reported budget surplus of $8.7 billion, higher than the federal government’s budget surplus of $8 billion. Alberta’s $8.7 billion, however, is over and above unbudgeted spending of $2.5 billion, including the $1.3 billion in “prosperity cheques” forwarded earlier this year to every man, woman, and child resident in the province. Since 2000, the Alberta government has increased its program spending by roughly 10 percent each year. The cumulative result is impressive, but now, to keep people and attract others, the provincial government can spend like a drunken sailor, build an extraordinary asset base, and lower taxes even further.

The only thing limiting Alberta’s expansion is legislation capping the amount of non-renewable resource royalties that can be put into its program expenditures (the current maximum is $4.75 billion per year). Essentially, this self-imposed constraint demands that the provincial government invest non-renewable resource royalties above the $4.75-billion mark in other areas. And the form that these investments take poses an unprecedented challenge to Canada.

ever before has one region had no financial reason to remain part of the country, but Alberta will soon be at that point. Central and eastern Canadians might see the province as the new bully on the block whose time will come, but the truth is that hope resides in Alberta’s largesse. The über-province could decide to include the rest of Canada in its spending and investment plans. But if it decides to simply play up its own advantage by, for instance, dedicating itself to curing cancer, stowing money away in special research funds for knowledge-based industries, or investing offshore, there may be little the rest of us can do about it.

Prime Minister Harper has promised to deal effectively and fairly with the “fiscal imbalance” between Ottawa and the provinces, but he brings some baggage to this issue. Harper was one of the co-authors of the infamous 2001 “firewall letter,” a clear statement that Ottawa had little business in Alberta’s affairs. But with Ontario Premier Dalton McGuinty describing Alberta’s wealth as “the elephant in the room,” a showdown is brewing over how to deal with the province’s burgeoning riches.

Enshrined in the Constitution Act of 1982, the federal equalization program is designed to ensure that “have-not” provinces can offer comparable levels of services as “have” provinces. Then—Prime Minister Pierre Trudeau cast it as a vision of a sharing and compassionate nation, but official equalization came fast on the heels of the nep, in Alberta the bête noire of federal interference. The nep was enacted when world oil prices were peaking as a result of the 1979 energy crisis. A tax on energy exports had already been imposed but, fearing that rising oil prices would enrich Alberta and cripple Ontario’s manufacturing base, Ottawa crafted legislation in 1980 that shifted exploration out of Alberta’s control and into federally administered territories. Albertans were furious, and it seemed no amount of federal transfers could mitigate the damage done.

Flashing forward, in June 2006 a panel appointed by the federal Liberals released its report on equalization. “Equalization reflects a distinctly Can­adian commitment to fairness. It has been described as the glue that holds our federation together,” the report says. The chair of the panel, Al O’Brien, concluded that for equalization to be effective, natural-resource revenue must be included. Alarm bells went off in Alberta. With McGuinty gaining support for reforming the equalization program, wary Albertans want barriers erected and are looking for homegrown alternatives to a potential federal cash grab.

s it stands, Alberta and its resource revenues are not included when determining the average provincial capacity for providing services. (That figure is arrived at by averaging the revenue-raising capacities of Quebec, Ontario, Manitoba, Saskatchewan, and British Columbia.) This artificially deflates the national average, critics say, and short-changes have-not provinces of the funds needed to provide more competitive levels of service. Pushed on the matter, Premier Klein threatened to pull Alberta out of the program if natural-resource revenues were included in the fiscal-capacity calculations. (As the program is a federal initiative, Alberta cannot “pull out,” but the point was made.)

Ontario and Alberta have been the two most prominent contributors to the equalization program, but TD Bank economist Don Drummond believes that Ontario’s economy is too fragile to withstand higher equalization contributions. (Indeed, some observers envision a time when Ontario’s manufacturing base will be gutted by off-shore competition.) So if the combined forces of world demand for oil, nafta, and a diverse economy ensure Alberta’s continued growth and prosperity, they also ensure a growing dependency by the rest of Canada on Alberta.

The federal Liberals see equalization as a wedge issue for the fall and, especially if the left wing of the party prevails, they can be expected to argue that the formula should be changed to include all ten provinces and 50 percent of resource revenues (both of which the panel recommended).

Let there be little doubt that Alberta is willing to challenge the very notion of fiscal federalism. In February, when Klein proposed blending public and private health-care delivery, he knew that such a move contravened the Canada Health Act. He also knew that Ottawa’s censure and its threat to withhold $1.75 billion in health transfers meant little. Medicare supporters cheered when he backed off, but Klein simply changed tack, countering that Alberta would instead spend more money to attract even more doctors and nurses. In short, even when Alberta chooses to play by the national rules, its range of options allows it to produce levels of service that cannot be equalled anywhere else in Canada.