The Peace Tower on Parliament Hill.Sean Kilpatrick/The Canadian Press
There are, it is sometimes said, only six people in Canada who understand the equalization formula, and five of them are dead. This is not entirely a joke. Equalization – the system of federal transfers to provinces whose “fiscal capacity” is judged to be below the national average – has become so overloaded with political fixes over the years, in response to the demands of one part of the country or another, that it’s doubtful anyone comprehends it fully.
Nevertheless, there is currently a flurry of interest in reforming equalization – not coincidentally, with the Alberta referendum looming in the fall. Equalization has become a particular bugbear in Alberta politics, based largely on the mistaken belief that Alberta “pays into” equalization more than it should.
It doesn’t, of course. Equalization is a federal program, not an arrangement between provinces. It is paid for out of federal taxes, and Albertans pay exactly the same rate of federal tax, at any given level of income, as taxpayers in other provinces (leaving aside the “Quebec abatement,” an even more abstruse subject, if that were possible, than equalization). The reason Albertans “pay more” for equalization, on average, than other Canadians, is the same reason they pay more for any other federal program: Because Albertans are richer, on average, than other Canadians. It’s the same reason Alberta has not, in more than six decades, qualified for equalization payments.
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Still, it’s an issue in the province, and while it’s never a good idea to make changes at the point of a gun, if equalization reforms that make sense in themselves also happen to soothe provincial tempers at an opportune moment, so much the better. Equalization may not be unfair to Alberta, per se, but that doesn’t mean there’s nothing wrong with it.
The idea is sound, in principle. If people who are thinking of taking a job in another province hesitate to do so, for fear that they will not be able to obtain social services of comparable quality to what they have now, that can hurt labour mobility, and ultimately the economy. Conversely, workers might flee a province that was struggling to provide basic social services, accelerating its decline and straining the finances of its neighbours.
So it’s a good idea, in a federation, to put some sort of fiscal floor below its member states. That’s one of the reasons to have a federal government.
But the details matter. And equalization’s design, pulled this way and that by interprovincial grievances and resentments and the calculations of federal politicians, has become not just incomprehensible, but counterproductive. It can deter provinces from doing all they can to expand their economies, first, in much the same way as a “welfare wall,” where the loss of benefits from taking work is enough, or sometimes more than enough, to offset any gain in income.
Second, it can lead provinces to underprice publicly owned resources, to avoid increasing their “fiscal capacity” – the amount of revenue they can generate from a given amount of GDP. This has been a particular problem in Quebec and Manitoba, which have chronically priced their hydroelectricity far below the levels suggested, not only by fiscal prudence, but economic rationality: In effect, subsidizing electricity hogs at the expense of every other industry.
Third, it’s not even an equalization program. If it were truly about equalization, the amount paid out to “have-not” provinces each year would be reduced as they closed the gap with their richer cousins. But thanks to changes agreed to by the Harper government, equalization was put on an automatic escalator: The amount paid out must increase each year, in line with the economy (technically, a three-year average of nominal GDP) regardless of the level of interprovincial inequality.
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How to fix it? The ills suggest their own remedies. Reduce the rate at which equalization is clawed back as provincial revenues grow. Base equalization payments, as the Alberta economist Trevor Tombe has recently recommended, on per capita GDP, rather than arcane calculations of revenue-raising capacity. And ditch the escalator clause. Whatever else we disagree on, we can surely agree that equalization should equalize.
If it’s that simple, why hasn’t anyone done it? Why, indeed, isn’t anyone likely to do so this time? I mentioned how the referendum in Alberta offers a rare window for reform. But there’s another political event looming this fall: An election in Quebec, the largest provincial recipient of equalization payments, with the possibility of a separatist government coming to power – and a referendum on secession to follow. That sound you hear is a window of opportunity slamming shut.
Albertans may detest equalization the most of any province’s citizens, but Quebeckers are perhaps the most attached to it. In politics, the status quo usually rules.