Equalization 101

Assessing Equalization

In the past year, serious questions have been raised about the purpose of Equalization, whether that purpose is being achieved, and how the impact of Equalization can or should be measured. In view of that, it’s important to address several key questions.

What purpose is Equalization intended to serve?

Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation. - Section 36(2) The Constitution Act, 1982

As noted earlier, the Equalization program is enshrined in Section 36(2) of Canada’s Constitution. The section specifically identifies the purpose of ensuring reasonably comparable levels of public services at reasonably comparable levels of taxation.

The section in the Constitution specifically related to Equalization is preceded by Section 36(1) which outlines commitments on behalf of both the federal and provincial governments.

While both sections outline commitments to fairness in opportunities and public services across the country, it’s not clear whether, or to what extent, the sections are linked. Some have suggested that the two sections both apply to Equalization and complement one another. Others have said the effectiveness of Equalization should be

Without altering the legislative authority of Parliament or of the provincial legislatures, or the rights of any of them with respect to the exercise of their legislative authority, Parliament and the legislatures, together with the government of Canada and the provincial governments, are committed to a. promoting equal opportunities for the well-being of Canadians; b. furthering economic development to reduce disparity in opportunities; and c. providing essential public services of reasonable quality to all Canadians. - Section 36(1) The Constitution Act, 1982

The Panel’s view is that the purpose of Equalization is a broad national purpose outlined simply and clearly in Section 36(2). It is not intended as an economic development tool nor is it designed to ensure that common standards in quality or outcomes in public services are achieved. Instead, its focus is on making sure all provinces have the fiscal capacity to deliver reasonably comparable education, health care, social services, roads, and transportation services to their residents at reasonably comparable levels of taxation – period.

Furthermore, Equalization is uniquely designed to reflect the Canadian reality where provinces have considerable autonomy and responsibility for the vast majority of public services including education, health, and social services. It is not designed to interfere in that autonomy or to influence

Equalization is uniquely designed to reflect the Canadian reality where provinces have considerable autonomy and responsibility for the vast majority of public services.

Who pays for Equalization?

Equalization is paid for by the federal government with taxes raised from Canadian taxpayers across the country.

As noted earlier, Equalization is paid for by the federal government with taxes raised from Canadian taxpayers across the country. Because Ontario has the largest population in the country and higher-than-average incomes, Ontario taxpayers generate about 43 percent of federal revenues. Correspondingly, as Figure 3 shows, they “pay” for about 43 percent of the costs of the Equalization program compared with just under 21 percent coming from Québec taxpayers. As Figure 4 shows, on a per capita basis, Alberta taxpayers contribute the highest amount to total federal revenues, followed by taxpayers in Ontario and
British Columbia.

Figure 3 – Percentage of Federal Revenues Collected in each Province (2003)

Source: Statistics Canada: Provincial Economic Accounts

Figure 4 – Per Capita Revenues Collected in each Province by the Federal Government (2003)

Source: Statistics Canada: Provincial Economic Accounts

How big a program is Equalization for the federal government?

Information in the following tables suggests that Equalization is a relatively small program in comparison with all other spending by the federal government.

Total federal government spending on the Equalization program has grown from just under $4 billion in the early 1980s to about $11 billion in 2005–06 (see Figure 5). The October 2004 New Framework established a new base for Equalization at almost its highest level since the program was introduced. Unlike the past, where Equalization fluctuated up and down in response to changing circumstances, the New Framework also established an automatic rate of annual growth in overall spending on Equalization.

Figure 5 – Total Equalization Entitlements (1982–83 to 2006–07)

Source: Finance Canada

As a proportion of total federal government spending, Equalization has ranged from a low of 4.7 percent in 1985–86 to a high of 7.1 percent in 1999–2000. For the current fiscal year (2006–07), Equalization makes up 5.5 percent of the federal government’s total spending (see Figure 6). As Figure 7 shows, Equalization has declined to less than 1 percent of Gross Domestic Product (GDP) by 2005–06. In terms of overall transfers from the federal government to provinces, Equalization currently makes up just over a quarter (26 percent) of all transfers.

Figure 6 – Equalization Entitlements as a Percentage of Federal Expenditures (1982–83 to 2006–07)

Source: Finance Canada, Public Accounts and Federal Budget documents

Figure 7 – Equalization as a Percentage of Gross Domestic Product (GDP) (1982–83 to 2005–06)

Source: Finance Canada, Statistics Canada: National Accounts

Does Equalization help reduce fiscal disparities among provinces?

Since the 1980s, there have been significant fiscal disparities among the most and the least well-off provinces. As Figure 8 shows, Equalization has helped to narrow the gap. Without Equalization payments, the fiscal capacity of the least well-off province was between 58 and 68 percent of the national average. With Equalization payments, the fiscal capacity of that province was raised to between 91 and almost 100 percent of the national average.

Figure 8 – Contribution of Equalization to Reducing Inter-Provincial Disparities (1982–83 to 2004–05)

Source: Finance Canada

How important are Equalization payments to the provinces that receive them?

Equalization allocations to individual provinces have changed over time. Ontario has never qualified for Equalization and Alberta has not received Equalization payments since the early 1960s. Saskatchewan and British Columbia have seen substantial year-to-year variations in Equalization payments. Most other receiving provinces have consistently relied on Equalization for significant amounts of money.

Table 1 – Equalization Entitlements (1993–94 to 2006–07)

* As announced by the federal Minister of Finance in November 2005

Note: Totals may not add due to rounding.
Source: Finance Canada

Equalization payments clearly are an important source of revenue for receiving provinces. The impact varies across the receiving provinces. In 2004–05, for example, Equalization made up just over five percent of provincial and local revenues in Québec, while the proportion was over 21 percent in Prince Edward Island (see Figure 9). On a per resident basis, in 2006–07 Equalization payments are expected to range from $107 per person in British Columbia to $700 per person in Québec and over $2,000 per person in Prince Edward Island (see Figure 10).

Figure 9 – Equalization as a Percentage of Provincial and Local Government Revenues (2004–05)

Source: Finance Canada, Statistics Canada: Financial Management System

Figure 10 – Equalization Entitlements Per Capita (2006–07)

Source: Finance Canada

Does Equalization help provinces provide reasonably comparable services?

“The Equalization Program contributes ... 22.1% of revenues in New Brunswick, in 2005–06. To put into context what this means to New Brunswick, equalization funding represents nearly 75% of total spending in the Department of Health and Wellness; it exceeds the province’s $1.2 billion budget for education and postsecondary education; and it exceeds the amount of revenues that the province derives from personal and corporate income taxes and capital taxes combined.” - Hon. Jeannot Volpé Minister of Finance, New Brunswick 7

Because of the nature of Canada’s federation and the substantial amount of provincial autonomy, there are few consistent and comparable measures of public services across the country. Furthermore, it’s important to remember that Equalization is only intended to bring receiving provinces’ fiscal capacity up to a certain standard. Beyond that, provinces can decide to tax more or incur debt to pay for services to their residents. As noted earlier, provinces can choose the nature and level of public services they will provide along with how those services are funded.

We know, however, that provincial program spending (the amount of money provinces spend on delivering public services) ranges from a high of $10,503 per person in Alberta to a low of $8,310 per person in New Brunswick (for 2004–05), a range of slightly more than $2,000 per person. This is a much smaller range than the differences in fiscal capacities among the provinces. Without Equalization payments, the gap in fiscal capacity between the lowest province (Prince Edward Island) and highest (Alberta) was over $6,000 per person.

Figure 11 – Provincial and Local Government Program Expenditures Per Capita by Sources of Finance (2004–05)

Source: Finance Canada, Statistics Canada: Financial Management System

This suggests that Equalization is closing a large part of the gap among provinces and going a long way to achieving its goal of “reasonable” comparability.

As Figure 11 shows, in all provinces the majority of the costs of public services are paid for by their own sources of revenues other than Equalization payments. However, in several of the receiving provinces, the absence of Equalization payments would make it difficult for them to deliver reasonably comparable public services to their residents.

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