Canada’s $25-billion equalization program needs major fixing. No one in Ottawa wants to talk about it
December 20 2023
Too good had to be saved. Re-printed without permission.
KONRAD YAKABUSKI
Ottawa’s unveiling of the amounts it intends to send to the provinces in federal transfer payments is an eagerly anticipated December ritual among policy wonks who follow the arcane intricacies of Canada’s $25.3-billion equalization program.
The 2024-25 figures that Finance Minister Chrystia Freeland just released have generated particular buzz because they show big swings in the amounts of cash some provinces are set to get next year.
Quebec’s share of the total equalization kitty will fall to about 53 per cent in 2024-25 from about 59 per cent in 2023-24. The province is set to get $13.3-billion next year, down more than $721-million, or 5.1 per cent, from the current fiscal year.
Manitoba’s equalization take will soar 24 per cent next year, to almost $4.4-billion. Nova Scotia will get $3.3-billion, or 17 per cent more, while New Brunswick will pocket $2.9-billion, an increase of about 10 per cent.
Prince Edward Island will get $610-million, or 8.7 per cent more, though it will receive the most of any province on a per capita basis, about $3,370. By comparison, Quebec will get less than $1,500 in equalization on a per capita basis.
Newfoundland and Labrador will receive equalization for the first time since 2008. Even so, its $218-million payment is modest compared with the more than $1-billion in equalization it received annually in the late 1990s, before royalties from a booming offshore oil industry made Newfoundland a “have” province.
Ontario will get $576-million in equalization – essentially a rounding error in the province’s $200-billion-plus budget. That is nevertheless up from $421-million in the current fiscal year. Alberta, Saskatchewan and British Columbia are the only provinces that do not receive equalization payments.
The equalization program has long been a source of friction within the federation. Quebec has historically received the lion’s share of payments, leading to charges that the system is mainly designed to prop up that province’s finances. Alberta has long called for reforms. But the Trudeau government has locked in the current equalization formula until 2029.
In theory, equalization aims to even out provincial revenues so that all provinces are able to provide “reasonably comparable” services at broadly similar levels of taxation. But critics argue that an overly complex equalization formula distorts outcomes and discourages “have-not” provinces from developing their own natural resources, since doing so could lead to a drop in federal transfers.
As recently as 2019-20, Quebec accounted for two-thirds of all equalization payments. The Quebec government says the decline in the province’s share of the equalization pot reflects the recent improvement in Quebec’s economy compared with the rest of Canada. If only it was as simple as that.
“There are problematic features in the equalization formula that can lead to large changes in the amounts provinces receive due to small changes in the underlying fiscal and economic reality of the country,” said University of Calgary economist Trevor Tombe, a reigning expert in the field of equalization. “So, it is not like Quebec is somehow outperforming the rest of the country.”
Indeed, equalization payments are broadly determined by a province’s “fiscal capacity,” which measures its ability to raise revenue based on average national tax rates. But Prof. Tombe noted that Quebec’s fiscal capacity actually declined relative to the national average in the past year. A host of other factors baked into the equalization formula explain why it will get less next year.
“We’ve seen phenomenal growth in per capita inflation-adjusted fiscal capacity in Alberta and Saskatchewan,” Prof. Tombe added. “Manitoba is not receiving more equalization this year because its fiscal capacity has shrunk. It’s just that the national fiscal capacity it is being compared to has grown.”
Equalization is paid out of federal tax revenues. Albertans, who contribute much more to federal coffers than Quebeckers on a per capita basis, disproportionally finance the equalization program. In 2020, Ottawa collected almost $11,000 in per capita tax revenue in oil-rich Alberta compared with less than $7,000 in Quebec.
Without Alberta’s oil wealth, Ottawa would have less tax revenue to redistribute to have-not provinces. That did not stop the Quebec government from last week announcing at the COP28 global climate conference that it will henceforth co-chair the Beyond Oil & Gas Alliance, a coalition of 21 national and sub-national governments pushing to phase out oil and gas production globally. In 2022, Quebec formally banned fossil-fuel production on its territory.
Such virtue-signalling by Coalition Avenir Québec Premier François Legault – who, in 2018, insisted Quebeckers did not want Alberta’s “dirty energy” – irks Western Canadians to no end.
But calls for equalization reform fall on deaf ears in Ottawa. The Liberals have made it clear they are not interested in fixing the formula, and the Conservatives don’t want to talk about it. That is no way to manage $25-billion in Canadian taxpayers’ money.
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