EPETFF - Key Issues for the Review of Equalization and Territorial Formula Financing

Expert Panel on Equalization and Territorial Financial Financing

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Key Issues for the Review of Equalization and Territorial Formula Financing

4. From Broad Purpose to Program Objectives

The broad purpose of equalizing grants - reasonable comparability in provincial-territorial public services at reasonably comparable levels of taxation - needs to be translated into more concrete program objectives when designing programs such as Equalization and TFF. The objectives set out below have been part of most federal-provincial-territorial discussions of these programs.

Program Objectives for Equalization and TFF

Adequacy
Assure provincial-territorial governments sufficient revenues to provide reasonably comparable public services at reasonably comparable levels of taxation to their residents.

Fairness
Fairness, which has many dimensions, can usefully be interpreted in its broadest meaning as "reasonable comparability of treatment" of all jurisdictions—perfect fairness is not achievable.

In a program sense, fairness often refers to how accurately and comprehensively one measures the disparities in revenue capacity or fiscal need among provincial and territorial governments. This is central to the success of the program. A related issue is the time period over which relative disparities are to be measured and compensated for.

Stability
Refers to how much payments to receiving governments fluctuate from year to year, as they respond to economic circumstances and fiscal disparities. Instability in payments may make fiscal planning difficult for receiving governments.

Predictability
Refers to the frequency and size of changes made to transfers for a given year, after they have already been paid out. Under Equalization, for instance, payments for a given year can be recalculated several years later, when more up-to-date information becomes available, leading to very large recoveries from provinces.. Predictability is a key concern of some receiving governments.

Responsiveness
Refers to the timeliness with which payments respond to changes in governments' relative revenue-raising capacity. Stability and predictability of payments necessarily require accepting less timely responsiveness

Sound Incentives
Refers to whether federal transfers distort the spending and tax decisions of provincial territorial governments, discourage broad economic development and cause undue dependency. This objective is called by some "neutrality".

Transparency/Accountability/Governance
Is the operation of these programs sufficiently clear that Canadians can hold their governments to account on how well they are meeting the above objectives? Do Canadians have the necessary information to do so?

Figure 3: Some Key Trade-offs to be considered by the Panel

Some Key Trade-offs to be considered by the Panel

There are many policy trade-offs among these program objectives, which are also often used as criteria for assessing Equalization and TFF. Transfers that are too large (i.e. that over-compensate less wealthy provinces or territories for disparities) may be unfair to Canadians in jurisdictions not eligible for Equalization and TFF. Moreover, they may be objectionable to Canadian taxpayers who will see other national spending priorities crowded out. Transfers that are too small, on the other hand, may fall short of enabling the provision of reasonably comparable public services to Canadians, wherever they reside. And views about adequacy will differ in receiving and non-receiving provinces.

The exclusion of some revenue sources (e.g. natural resources) from Equalization or TFF calculations would arguably result in understating the real revenue capacity of resource-rich provinces, thus potentially over-compensating them relative to resource-poor ones. At the same time, excluding some revenues from Equalization or TFF may be helpful in preventing potential perverse incentive effects (e.g. excessive "claw-backs" of natural resource revenues).

The search for stability and predictability of payments may entail sacrificing short-term accuracy in measuring revenue capacity. Finally, the quest for ever-more precision in measurement may result in increasing complexity and reduced transparency for Canadians.

To sum up, no equalizing grant can fully achieve all these program objectives. Practical trade-offs among them must necessarily be made and views on the appropriate trade-offs will differ.

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Last Updated: 2012-02-04		Important Notices