Alberta Premier Danielle Smith has a point – well, perhaps half a point – about the problems with Canada’s increasingly unfit-for-purpose equalization system.
Ms. Smith, in a 20-minute speech this week, underscored the need for a revamp of equalization payments, which are meant to give poorer provinces the ability to provide, as the constitution stipulates, “reasonably comparable levels of public services at reasonably comparable levels of taxation.”
The Premier acknowledged that smaller provinces should receive such payments, going on to assert that Alberta was providing them subsidies. “But there is no excuse for such large and powerful economies like Ontario, Quebec, B.C. or Alberta to be subsidizing one another,” she continued. “That was never the intent of equalization, and it needs to end.”
Ms. Smith also laid out a demand for Ottawa to pay Alberta the “same per capita transfers and equalization as is received by the other three largest provinces.”
There is a lot to unravel there, starting with the Premier’s wrong reading of history. The equalization program was explicitly designed to provide funding to poorer (not smaller) provinces. Indeed, in the early going, almost all provinces – yes, including Alberta – received payments.
And of course, the province of Alberta pays exactly nothing into equalization. Every dollar spent comes from Ottawa.
It is true that Canadians living in Alberta provide a big share of federal tax revenues – because as a group they have much higher incomes than the national average. But Ms. Smith’s government does not send a cent of equalization to any province, large or small. And it is simply nonsensical to demand that Alberta, with the highest fiscal capacity among the provinces, receive equalization payments.
The basis of Ms. Smith’s critique is ill-founded, but that does not mean that the equalization program is fine as is. To the contrary, it is in dire need of an overhaul, in part because the Trudeau Liberals punted any decisions on reform.
The most obvious problem is the formula for determining total equalization payments. In 2009, that formula was tweaked so that equalization rose by the three-year moving average of nominal GDP. That was meant to place a ceiling on the costs in an era of surging oil prices. Instead, it became a floor, driving up the costs of the program beyond that needed to lift have-not provinces up to the national average.
Eliminating that floor would have carved $1.1-billion from the $25.3-billion cost of the program in the current fiscal year, and would end the ludicrous practice of sending equalization payments ($576-million this year) to Ontario, which is not a have-not province.
Broader reform is needed, as well, though it is less straightforward than the scrapping of the 2009 formula.
One major issue is the treatment of Quebec’s political decision to provide cut-rate electricity to residential and industrial customers in the province. According to Hydro-Québec, residential customers in Edmonton paid nearly three times the per-kilowatt-hour rate in 2023 of those in Montreal. Torontonians paid nearly twice as much. The equalization formula includes actual revenue, but not the potential windfall from Quebeckers paying a market price for electricity.
In a recent paper, former federal deputy minister Louis Lévesque estimated that Quebec would forgo $70-million in equalization payments for every $100-million in increased profits from Hydro-Québec. University of Calgary economics professor Trevor Tombe cautions that estimating forgone revenue would be difficult.
By contrast, equalization rules do impute provincial sales tax revenue to Alberta, even though the province has made the political decision not to have its own levy. There is a clear inequity, although how to address it is less clear.
Similarly, there is a fundamental problem in giving cash to have-not provinces, while ignoring the reality that services often cost less in poorer jurisdictions. As with Quebec’s hydro revenue, the issue is obvious, the solution less so.
An overhaul could be treacherous, but it is necessary and more politically feasible than a piecemeal approach. Any savings, of course, should be returned to those providing the funds for equalization – taxpayers – either in the form of reduced taxes or a smaller deficit, and a lower tax bill in future.
And as a conservative-minded premier, Ms. Smith ought to be able to applaud the notion of taking funds from the government and putting them back into taxpayers’ pockets.