The Debate over Canada's Equalization Program

By Wendy Tso, University of Alberta LL.B. student

Introduction

Guaranteed in the Constitution Act of 1982, Canada’s equalization program “is the Government of Canada’s most important program for reducing fiscal disparities among provinces.”[i] Essentially, the federal government collects tax dollars from each of the provinces and redistributes the pool of money in unconditional payments to those provinces in “need.” Experts explain that the payments are “transfer[s] of cash, four times a year, from the Government of Canada to those provinces which, according to a formula set out in federal legislation, have revenue-generating capacity that is below the national average.”[ii]

The original formula for calculating eligibility is based on a province’s fiscal capacity: “a measure of its ability to raise revenues from each of 33 revenue sources” using an average tax rate applied to areas such as personal income tax, corporate income tax, oil and gas revenues, sales taxes, and property tax.[iii] Each province’s fiscal capacity is then “compared to a national standard, determined by averaging the tax yield from five ‘middle-income’ provinces: Ontario, Quebec, Manitoba, Saskatchewan, and British Columbia.”[iv] Any province below this “national standard” receives payments. The amount is determined by “taking the difference between that province’s per capita revenue and the national average, and then multiplying that figure by the province’s population.”[v]

Since the program’s inception, the so-called “have-not” provinces of Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland & Labrador have and continue to receive federal payments under the program.[vi] The eligibility of British Columbia and Saskatchewan wavers from year to year; Ontario has never qualified; Alberta qualified for compensation from 1957 to 1964 but has not been eligible since that time, and Canada’s territories are given financial assistance through a separate program.[vii]

While the calculations generally apply to every province in the same way, there are some exceptions. These were instituted in the late 20th century in response to provincial concerns over revenue from natural resources. As such, the generic solution is applicable to Newfoundland & Labrador, Nova Scotia, Quebec, and Saskatchewan, and the two Atlantic Accords protect Newfoundland & Labrador, and Nova Scotia.[viii]

Continued Controversy

In the last few decades, a heated debate has erupted over how and if the equalization program should be reformed. While the “have” provinces of Alberta and Ontario consistently criticize the program for its unfairness and inequity, the “have-not” provinces continue to demand increases to the equalization transfers, and protection from drastic decreases in their payments, even in light of new revenue (usually from fledgling oil and gas/natural resources projects).[ix] Regardless, any tinkering of the program could mean millions gained in one province, while disentitling another, and worse yet, bankrupting the federal treasury. The disagreements over the current equalization program are many, including:

The National Standard

This figure is currently made of up 5 provinces deemed to be in the “middle-income” bracket. Alberta (too wealthy) and the Atlantic provinces (largely in debt) are exempted. Many have argued that the national standard should be the two wealthiest provinces, or alternatively, that a ten province standard should be used. In either situation, the inclusion of the wealthy provinces would translate into a higher national standard and Ottawa increasing payments to the eligible provinces.[x] For example, it was estimated in 2005 that “putting Alberta, Canada's richest province, back into the equation would have entitled have-not provinces to a significant increase in cash and cost Ottawa an estimated $3 billion to $4 billion more a year.”[xi]

Determining Fiscal Capacity

The current method of determining a province’s need is based on its ability to generate revenue from 33 sources. A hotly debated topic in Canada and an unresolved matter is whether non-renewable resources should be included as a source of revenue.[xii] Obviously, for provinces such as Saskatchewan, Nova Scotia and Newfoundland & Labrador, who have such resources, there is strong support for exempting non renewable resources from the calculation, since this would allow them to keep 100 percent of their revenues, yet lowering their fiscal capacity, translating into higher equalization payments.[xiii] For Alberta, excluding the revenues would mean less intrusion by Ottawa into their provincial resources and paying less into the equalization program.[xiv]

The main justification for excluding non-renewable resource revenue is that such resources are temporary, volatile and not sustainable.[xv] As well, the exclusion of resource revenues would allow the inclusion of Alberta and the Atlantic provinces back into the national standard. Scholars agree that a ten province average is more true to the spirit of the Constitution and the original intentions behind the equalization program.[xvi] There are those however, who advocate the inclusion of revenue resources, stating that “it makes no sense to exclude resource revenues since they account for the major source of fiscal disparity among the provinces.”[xvii]

Enabling Dependency

Some economists maintain that Canada’s equalization system has directly contributed to the Atlantic region’s “longstanding economic sluggishness.”[xviii] In the provinces of Alberta and Ontario, the program is often denounced for “forcing taxpayers to help finance lower taxes and higher health and education spending in other provinces, where they don't get to enjoy the benefits.”[xix] In its current form, there is no incentive for a province to strengthen its economy, since generating more revenue would equal losing out on free, unconditional cash from the federal government. Likewise, if a province has discovered potential sources of revenue, there is no motivation to develop, explore, or promote such resources, since more revenue translates into lower equalization payments.[xx] Ottawa has tried to circumvent this tendency with special programs such as the Atlantic Accords, protecting Nova Scotia, and Newfoundland & Labrador for a limited time period from decreases in their payments until their offshore resources are fully developed and significantly contributing to their economies.

Further Reading:

Equalization and Fiscal Federalism: Ottawa’s Response

Equalization under then-Prime Minister Paul Martin

Over the years, Canada’s various federal governments have devoted considerable attention to the equalization program and its shortcomings. As mentioned above, the generic solution, and the Atlantic Accords were established in response to provincial grievances, protecting specified provinces from drastic decreases in payments for a limited period. Despite these efforts however, the provinces remain more divided than ever. At the 2004 First Ministers Conference, then Prime Minister Paul Martin met with the Premiers as part of his election promise to negotiate changes to the Canadian equalization program.[xxi] With the atmosphere only slightly less antagonistic than the earlier Conference on Health Care, the delicate formalities were brusquely disrupted when Newfoundland & Labrador Premier, Danny Williams, “stormed home in a huff.”[xxii] Williams accused Martin of reneging on his election promise to allow Newfoundland & Labrador to retain 100 percent of their oil and gas revenues – without decreasing their equalization payments in any way. Across the country, objections were raised over Williams’ “double dipping” and his demands to have the best of both worlds.[xxiii] On the defense, Martin maintained his offer was more than what he had promised: a generous “eight-year deal that would give the province 100 per cent of offshore oil revenues, but would include a cap to keep Newfoundland & Labrador from surpassing the per capita tax revenue of Ontario.”[xxiv] Williams responded by ordering all Canadian flags to be hauled down from his province’s buildings, furiously retorting: “Paul Martin has turned his back on the people of Newfoundland & Labrador when they need him most...Our pride can’t be bought… They're slapping us in the face. I'm not willing to fly that flag anymore in the province.''[xxv]

Not fazed by this setback and hopeful that matters could be sorted out, Martin continued negotiations with the remaining Premiers, ultimately reaching an agreement for a new framework for the program. The main features include:

Original/current formula for calculating fiscal capacity and entitlement to the payments suspended. Interim formula used to allocate payments.
Payments are made from a fixed pool of money; in 2005-2006, an additional $2 billion enlarged the money pool to $10.9 billion available to eligible provinces.
The pool is guaranteed to increase 3.5 percent each year thereafter.
Creation of an independent expert panel to review the program; an extensive report submitted in 2006.
Following consideration of the report, further negotiations to take place for a new allocation formula.

Sources: MapleLeafWeb, 2004 First Minister’s Conference, Library of Parliament, Equalization, and Government of Canada, Department of Finance, Equalization Program.

In early 2005, flags flew once again in Newfoundland & Labrador when Danny Williams accepted a lucrative offer from Ottawa: the province would be entitled to keep 100 percent of their resource revenue for eight years – guaranteeing a minimum of $2.6 billion for the provincial coffers. Another Atlantic province, Nova Scotia, forged a similar eight year agreement with Martin, albeit only gaining $830 million dollars in revenue.[xxvi] Not to be left out, Canada’s Northwest Territories demanded the same preferential treatment, followed shortly by demands from Saskatchewan, Quebec, and even Ontario.[xxvii] To date, these disputes continue to be an unresolved matter between the provinces and Ottawa.

Further Reading

Michael Holden. “Equalization: Implications of Recent Changes.” Library of Parliament.
CBC News, In Depth. Equalization Program in Canada.
“Provinces reach deal on equalization funding.” CTV News Online (October 2004)
“Premiers fail to find consensus on equalization.” CTV News Online (June 2006)

Equalization under Prime Minister Stephen Harper

In June 2006, Prime Minister Stephen Harper incited a flurry of controversy with his wobbly stance on the future of the equalization program.[xxviii] The issue in dispute was once again the treatment of non-renewable resources in the calculation of equalization payments. Initially, Harper’s election promise was to exclude all resource revenues and adopt a 10 province standard;[xxix] after five months in parliament as a minority government however, Harper refused to confirm any action before fully considering the recent report (Achieving National Purpose: Putting Equalization Back on Track) submitted by an expert panel in 2006 (commissioned by Harper’s predecessor, Paul Martin in 2004.)[xxx]

The 2006 report was considered a balanced compromise and recommended the following:

Increase funding to the equalization program by $900 million annually.
Use 50 per cent of provincial resource revenues in the formula to determine each province's real fiscal capacity; this would include non-renewable resource revenue.
Amend the national standard to include all ten provinces.
Nullify the side deals with Nova Scotia, Newfoundland & Labrador
A cap should be implemented to ensure that no province ends up with fiscal capacity higher than that of the lowest non-receiving province.
The system requires greater transparency and simplicity.
A similar report was dedicated to funding the Territories: “Improving Territorial Formula Financing and Strengthening Canada’s Territories.”

Source: Canada NewsWire: Achieving a National Purpose - Expert Panel on Equalization and Territorial Formula Financing Releases Recommendations and Government of Canada, Department of Finance, EPETFF Expert Panel Report

Although “panel members were unanimous in their recommendations,” Canada’s Premiers have already begun digging their trenches.[xxxi] The onslaught of criticism was led by Newfoundland & Labrador’s Danny Williams, denouncing the proposal as “a bad dream” and warning of “dire consequences” if Harper follows the recommendations.[xxxii] Similarly affected by the proposal, Nova Scotia joined the chorus of objections; British Columbia voiced concerns in fear of losing eligibility. Alberta and Saskatchewan, closely allied by their geography and resources, condemned the report and vowed “to fight tooth and nail,” demanding that Harper fulfill his promise to exclude all revenue resources.[xxxiii] Alberta’s Ralph Klein even threatened to withdraw his province from the equalization program, stating: "This is political showdown…This is also a constitutional issue. Alberta has control and authorization and authority over its resources."[xxxiv] Even Harper’s own caucus members are weighing in, such as a letter from Brian Fitzpatrick, Chair of the Caucus of Conservative Saskatchewan Members of Parliament, ominously warning of “political damage if he does not stick to the initial promise to exclude non-renewable resources such as oil and gas from the equalization formula.”[xxxv] Ontario’s Premier, Dalton McGuinty, questioned the logic behind equalization payments and the need to continuously enrich the program, especially since his province contributes a significant portion of the money to compensate other regions.[xxxvi] On the flip side, provinces such as Manitoba, Quebec, Prince Edward Island, and New Brunswick, accused the other provinces of being “anti-Canadian” and “going back on previous commitments to support increases in equalization payments.”[xxxvii]

It remains to be seen if Stephen Harper will follow the report recommendations, and if so, how the consequences of such actions will affect his campaign for a majority government in the next term.

[i] Equalization Program. Government of Canada, Department of Finance.
[ii] “What is Equalization?” Guide to Equalization payments: sharing within the federation. Council for Research and Information on Canada.
[iii] Supra note i.
[iv] MapleLeafWeb. How Equalization Payments are Calculated.
[v] Ibid.
[vi] Ibid. See also, MapleLeafWeb. Impact of Equalization on Individual Provinces.
[vii]. “Equalization Payments.” CBC News, In Depth (May 2005) <http://www.cbc.ca/news/background/cdngovernment/equalization.html>.
[viii] Ibid. See also, supra note vi.
[ix] Supra note vii.
[x] Ibid.
[xi] Ibid.
[xii] Ibid.
[xiii] Ibid. See also, MapleLeafWeb. Equalization Issues, Atlantic Accords.
<http://www.mapleleafweb.com/features/economy/equalization/solutions.html>.
[xiv] See, Government of Canada. “Proceedings of the Standing Senate Committee on National Finance.”(24 October 2001).
[xv] Ibid.
[xvi] Ibid.
[xvii] Bryden, John, “Enrich Equalization: Report.” cNews (5 June 2006) <http://cnews.canoe.ca/CNEWS/Canada/2006/06/05/1615382-cp.html>.
[xviii] “Equalization Payments.” Wikipedia, The Free Encyclopedia. <http://en.wikipedia.org/wiki/Equalization_payments>.
[xix] Leslie, Keith. “Using equalization to fix so-called fiscal gap unfair to Ontario: McGuinty.” Canadian Press (10 May 2006) .
[xx] Supra note xviii.
[xxi] See, MapleLeafWeb. 2004 First Ministers’ Conference on Equalization.
[xxii] Wells, Paul. “The Danny Millions Deal.” Macleans.ca, The Back Page (10 February 2005). [xxiii] MapleLeafWeb. Equalization Program in Canada.
[xxiv] “Nfld. Premier says PM broke promise.” CBC News (24 October 2004).
[xxv] Ibid. See also, CBC News. “Maple Leaf flags removed in offshore feud.”
[xxvi] Supra note xxii.
[xxvii] Ibid.
[xxviii] University of Alberta, Government Relations. (June 2006) “Harper muddies equalization debate.”
[xxix]. “Provinces spat over Harper's mystery promise.” CBC News (January 2006).
[xxx] Supra note xxviii.
[xxxi] “Achieving a National Purpose – Expert Panel on Equalization and Territorial Formula Financing Releases Recommendations.” Canada NewsWire (June 2006).
[xxxii] Supra note xvii.
[xxxiii] Ibid.
[xxxiv] “Klein threatens to abandon equalization.” CBC News (May 2006)
[xxxv] “Saskatchewan Tory MPs warn Harper on equalization.” Globe and Mail, Insider Edition (15 August 2006)
[xxxvi] “Equalization unfair to Ontario: McGuinty.” Toronto Star (May 2006).
[xxxvii] “Premiers fail to find consensus on equalization.” CTV News (June 2006) <http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20060607/premiers_eq_060607?s_name=&no_ads=>.

Centre for Constitutional Studies

The Debate over Canada's Equalization Program