Executive Summary

Assessing Equalization

Equalization reflects a distinctly Canadian commitment to fairness. It has been described as the glue that holds our federation together.

Starting with the basics

Canada’s Equalization program has been in place since the mid 1950s. While many changes have been made throughout the program’s history, the basic approach involves assessing the fiscal capacity of provinces to deliver public services. Those provinces that have less ability to pay for reasonably comparable levels of public services receive Equalization payments, while others with a higher fiscal capacity do not.

Canada’s approach to Equalization may be unique, but it’s important to understand that most countries with a combination of federal and regional governments provide some form of redistribution of funding to ensure that common objectives are met.

Getting the facts right

The federal government pays for Equalization through general taxes paid by all Canadian taxpayers.

While some have talked about money being transferred from one province to another, in fact, all the money for Equalization comes from Canadian
taxpayers across the country and is shared among the less wealthy provinces. Equalization is paid by the federal government to provincial governments and does not include any sharing of provincial revenues among provincial governments.

There are no strings attached to Equalization funding.

The federal government doesn’t tell provinces how to spend Equalization funding – there are no conditions placed on how funds should be used or what, if any, standards should be achieved. Provinces make decisions on behalf of their residents and they are accountable to their electors for the services they provide.

Equalization is designed to be a permanent program.

Most people the Panel heard from want to see the Equalization program improved, not abandoned.

Unlike most other federal government programs, Equalization is enshrined in Canada’s Constitution. How the program is designed and how much money it involves can be and is changed on a periodic basis. But without a change in Canada’s Constitution, the program will remain an essential component of Canada’s federation. As long as the program is designed to bring the fiscal capacity of less wealthy provinces up to a certain standard, unless all provinces have the same fiscal capacity, some will receive Equalization payments and some won’t.

Equalization doesn’t level the playing field among all provinces.

Equalization brings less wealthy provinces up to a common standard, but it doesn’t bring wealthier provinces like Alberta and Ontario down to the standard.

Resource revenues in one province are not shared with other provinces.

Provinces keep all the money they raise from resources and all their other tax bases. No provincial government funds go to support Equalization. Although some provinces talk about having their resource revenues “clawed-back,” the only impact from Equalization is that provinces get less Equalization funding if their own revenues increase. That’s the way Equalization is supposed to work.

Equalization is designed to address fiscal disparities among provinces.

Provincial premiers have raised concerns about a fiscal imbalance between provincial and federal governments. The issue relates to whether or not the responsibilities of provinces and the federal government are matched with their respective abilities to pay. While Equalization does provide financial support from the federal government to receiving provinces, it is not designed or intended to address the broader issue of fiscal imbalance between the provinces and the federal government.

Identifying the key issues

As a result of its consultations and discussions, the Panel learned that:

• Most want to see the Equalization program improved, not abandoned.

While fundamental questions have been raised about the purpose and effectiveness of Equalization, most believe that Equalization meets an important national purpose and it is an essential component of Canada’s intergovernmental fiscal arrangements. Furthermore, information reviewed by the Panel and included in this report suggests that Equalization has been effective in reducing the financial gap between wealthy and less wealthy provinces. For provinces that receive Equalization payments, it’s an important source of funds that helps them to achieve the objective of providing reasonably comparable public services at reasonably comparable levels of taxation.

• Equalization should be put back on track through a principle-based, formula-driven approach.

If there was one consistent message the Panel heard, it was a call to return to a principle-based formula-driven approach.If there was one consistent message the Panel heard, it was a call to return to a principle-based formula-driven approach.

The Panel consistently heard concerns about what many saw as an increasingly ad hoc approach to Equalization. Before 2004, Equalization was based on a formula that determined both the overall amount of money to be provided for Equalization and the allocation to individual provinces. The formula was complex and was not without its share of problems. However, the New Framework introduced by the federal government in 2004 has been consistently criticized by provinces and academics. On top of that, many questioned the impact of separate Offshore Accords with Newfoundland and Labrador and Nova Scotia on the Equalization program. The result is a call to put Equalization back on track and return to a new, less complex, formula.

• The treatment of resource revenues is the most complex and controversial aspect of Equalization.

Different provinces, experts, and analysts have different ideas as to how the Equalization program can and should be improved. By far, the most contentious issue involves how resource revenues should be treated in the formula. The Panel heard strongly held and diametrically opposing views ranging from excluding resource revenues entirely to including them completely. Given the importance of resources to the economies of some provinces and the impact of high prices for oil and gas in particular, this issue has direct bearing not only on the Equalization program but on the potential for resource revenues to increase disparities among provinces.

Table of Contents	Next