Putting Equalization back on track

Improving governance and transparency

Since its inception, Equalization has been the responsibility of the federal government. Changes to the design and implementation of the program have been made through a series of intergovernmental consultations and processes, primarily between finance officials, held behind closed doors and rarely involving public scrutiny.

The majority of provinces reject the idea of replacing the intergovernmental process with an independent, arms-length agency.

That’s not to suggest that the process hasn’t worked reasonably well. In fact, the majority of provinces reject the idea of replacing the intergovernmental process with an independent, arms-length agency. The fact that the process has worked reasonably well to date and is viewed as a model in other parts of the world is largely a testament to the dedication and hard work of finance officials in the federal government and in provincial governments across the country.

That being said, there is room for improvement, particularly with respect to the transparency of the process.

The Panel recommends that the following steps should be taken to achieve that objective.

The majority of those consulted supported strengthening and improving the current process rather than establishing an independent body.

The Panel was asked to assess whether the federal government should establish a permanent, independent body to provide ongoing advice on Equalization and conduct periodic reviews of provincial disparities. The majority of those consulted supported strengthening and improving the current process rather than establishing an independent body.

Those who support an independent body point to concerns with the lack of transparency of the process and the overall lack of understanding about the Equalization program. The fact that decisions are negotiated and made behind closed doors undermines the credibility of the program. They point to examples such as Australia where an arms-length, independent commission is responsible for all aspects of the equalization program. Furthermore, they suggest that an independent body would be better able to provide public education about Equalization, engage in research and independent assessments, and add credibility to the program.

The Panel firmly believes that a more rigorous, expanded, and transparent process is the best fit for Canada’s federation.

On the other hand, most provinces indicated that an arms-length body is not needed if improvements can be made to the current process and if the Equalization program is returned to a principle-based, formula-driven approach. Their concerns centre more on reducing ad hoc decisions, improving transparency in decision-making, and ensuring that the federal government is more responsive to their specific concerns. They also contend that accountability for the program must continue to reside with the federal government rather than being transferred to a body that is not directly accountable to Canadians.

The Panel also heard that, while independent agencies offer a professional and credible view, they also are prone to incentives for increasing complexity and expanding their mandate as permanent employees with a single focus on Equalization. Agencies would see countless opportunities for seeking more information, testing more ideas, and proposing more layers of solutions. The typical oversight role of citizens and the media is also diminished, as people are less willing to question experts than politicians.

The federal government should report annually to Parliament on key measures related to Equalization.

The Panel firmly believes that a more rigorous, expanded, and transparent process is the best fit for Canada’s federation.

To improve the process, the Panel recommends that:

• The federal government should report annually to Parliament on key measures related to Equalization in combination with the Canada Health Transfer, the Canada Social Transfer, and any other general purpose transfers provided to some or all of the provinces. Annual reports on Equalization should also refer to major changes made in the program, issues raised by the provinces and territories, and how those issues
  were addressed.
• Five-year reviews of the Equalization program should be retained. Well in advance of each five-year renewal, the federal government should issue a public discussion paper outlining key issues and options for changes to Equalization. The discussion paper would serve as the basis for a Parliamentary review process in which provinces, academics, and interested parties would be able to express their views before the next renewal.

• Steps should be taken to implement a more constructive process for ongoing discussions among provincial and federal government representatives.

  Any material changes to the Equalization program, particularly funding changes (e.g., any scaling back of the overall amount allocated by the federal government to the Equalization program), made within the five-year renewal period should be the subject of a public discussion paper. Periodic public reviews should also be launched to focus attention on particular issues, objectives, or aspects of Equalization.
• Finance Canada should make an up-to-date and user-friendly simulation model of the Equalization program available on its website, along with the associated databases. This would take some of the mystique out of the program, improve understanding, and improve predictability for provinces.
• Ongoing academic research related to Equalization should be encouraged through a number of existing mechanisms and research agencies, along with combined support from federal and provincial governments. Research reports should be reviewed through the intergovernmental process.

The Panel also recommends that steps be taken to implement a more constructive process for ongoing discussions among provincial and federal government representatives. Clearly, the federal government is responsible for the Equalization program. However, Equalization has a substantial impact on provinces, particularly those that receive Equalization. The Panel heard concerns that the current process does not provide the kind of forum that’s needed for a forthright and constructive discussion of various ideas and options. The result is frustration and a lack of trust between federal and provincial governments. In the Panel’s view, these concerns can be addressed through more open and constructive discussions, including
discussions by Finance Ministers at their regular meetings.

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