Annex 9: Evidence-based Indicators of Fiscal Disparities

The scope of indicators to evaluate federal support for Equalization

The Panel’s mandate calls for advice on “evidence-based aggregate measures of fiscal disparities … to provide information to governments and citizens and assist in future re-evaluations of the overall level of federal support for Equalization.”

In order for the Panel to determine what information would be most relevant for this task, it had to consider the scope of the indicators that would be appropriate given the purpose of Equalization.

Indicators could be relatively narrow in scope to allow Canadians to judge whether the Equalization program provides adequate fiscal support to enable provinces—“to provide reasonably comparable levels of public services at reasonably comparable levels of taxation,” in accordance with the commitment in section 36(2) of the Constitution. Narrow indicators would assess whether Equalization is reducing fiscal disparities among provincial governments so that they can provide comparable services at comparable levels of taxation if they choose to adopt similar policies.

Broader indicators would allow Canadians to evaluate whether or not Equalization is resulting in comparable government services at reasonably comparable levels of taxation. These indicators could answer questions about whether provinces are providing similar services in health, education, social and other expenditure areas.

Even broader indicators would allow evaluations to be made on the comparability of outcomes or results achieved by provincial programs and services, which are partly financed by Equalization. These types of indicators could show whether Equalization is producing similar outcomes in areas such as health status, educational achievement and incomes across provinces.

These three very different perspectives are illustrated in Figure 1.

In the Panel’s view, while the broader indicators are interesting, they extend well beyond the objective of Equalization. They assume that there is a direct link between Equalization and the comparability of services and outcomes when, in fact, Equalization is only one of many contributors to the results. Indeed, the provision of government services and socio-economic outcomes result from a complex mix of federal and provincial programs and choices, social and economic trends that reach far beyond the scope of Equalization, and less tangible factors such as individual initiative and effort.

Figure 1 – The Scope of Indicators for Evaluating Federal Support for Equalization

Linking broader indicators back to Equalization would also be incompatible with the spirit of Canadian federalism. Equalization is an unconditional grant, meant to enable (not enforce) reasonable comparability of public services in a decentralized federation, where provincial governments are accountable to their residents for the choices they make with respect to public services and taxation. A province alone decides whether it wishes to provide more than comparable, less than comparable or reasonably comparable public services. Equalization should give a province the means to do the latter, without imposing it.

The Panel, therefore, believes that the most relevant indicators are those that show whether Equalization payments reduce fiscal disparities among provincial governments so that they can provide reasonably comparable services at reasonably comparable levels of taxation, if they choose. Such measures are consistent with the Panel’s view of the purpose of the Equalization program and with the respective accountabilities of the federal and provincial governments under the Constitution.

Assessing financial adequacy of Equalization to reduce fiscal disparities

The Panel believes that pre- and post-Equalization fiscal disparities are the most important indicators for assessing the adequacy of the Equalization program. These measures can be derived directly from the Equalization formula, and if the Panel’s formula is accepted, should be a very accurate measure of fiscal capacity.

Figure 2 illustrates the use of pre- and post Equalization fiscal capacity measures, and provides an indication of the extent to which Equalization has reduced fiscal disparities since 1982–83.

Figure 2 – Contribution of Equalization to Reducing Inter-Provincial Disparities (1982–83 to 2004–05)

Canada has experienced significant (and highly variable) pre-Equalization fiscal disparities between its least well-off and most well-off jurisdictions. Equalization has generally succeeded in significantly narrowing this gap.¹ Since 1982, Equalization has raised the fiscal capacity of the least well-off province from 58 to 68 percent of the national average to between 91 and 99.7 percent of the national average.

The Panel’s recommendation for a rules-based approach using a 10-province standard would automatically reduce fiscal disparities even further than the five-province standard, which has been in place since 1982–83.

While the Panel believes that pre- and post-Equalization indicators are the single most useful indicator for determining the adequacy of Equalization, they are not the whole story. Canadians clearly have an interest in knowing how much each province receives in Equalization, and how important the program is in relation to the size of the province. To allow Canadians to better judge the adequacy and significance of the program, Equalization entitlements should be presented as a share of provincial revenues, program expenditures, and other measures that put Equalization entitlements into context.

Canadians also need to know whether a given level of support is affordable for the federal government. Equalization as a share of Gross Domestic Product, federal program spending and federal revenues can provide important information in this regard.

Finally, signs that some provincial governments are showing marked deviations from the norm in per capita spending, revenues, tax effort, deficits and debt burdens may be a symptom of inadequacies in Equalization. For instance, a province spending much less than the national per capita average, displaying higher tax levels, or incurring much higher debt burdens might indicate that Equalization is under-compensating that jurisdiction.

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