Introduction
Most federal systems have developed stand-alone equalization programs to reduce fiscal inequalities among constituent units. In Canada, the federal equalization program is widely debated; redistributing large sums of money to less well-off provinces is always potentially controversial. In 2016–17, to fulfill its constitutional obligation, the federal government allocated more than $17.8 billion to six provinces that have a fiscal capacity below the equalization standard.1 The program’s importance to the recipient provinces and its redistributive nature make it a contentious political issue. Unprecedented territorial conflict over the equalization system during the Martin and early Harper years led to some key policy revisions. Although the political debate over equalization has calmed down considerably since then, the policy remains controversial. Provincial grievances as well as reform proposals, including changing the extent to which resource revenues are included in the formula, are regular issues in debates about the future of fiscal federalism in Canada.
In spite of the importance of equalization for citizens and governments alike, public knowledge about this federal program is sorely lacking. For instance, it is common to read that equalization is a direct transfer of fiscal resources from “have” to “have-not” provinces, a misleading representation of how the program works (Lecours and Béland 2010). Despite the outstanding work of economists such as Robin Boadway, Tom Courchene, and Anwar Shah, equalization remains a poorly understood program outside small expert circles. Moreover, the nature and workings of equalization are often distorted in both the media and political discourse. Furthermore, as changes have been made to the program, with more changes pending, current, accessible, and accurate information about equalization remains scant. The resulting lack of public understanding is related to the inner complexity of the program as well as the inflammatory rhetoric that surrounds it, a situation stemming at least in part from the size of the transfers and ongoing political struggles over power and influence.
The objective of this concise book is to increase public understanding of equalization by providing a comparative and interdisciplinary perspective on the history, politics, and economics of equalization policy in Canada. The focus is on the federal equalization program created in 1957 and its relationship to public policy and provincial politics. Also included is a discussion of other components of Canadian fiscal federalism, especially the other largest federal transfers to the provinces: the Canada Health Transfer and the Canada Social Transfer. To explain to Canadians what equalization is and how it works, the book provides: a short history of the equalization program in comparative perspective; an analysis of the politics of equalization as witnessed over the last decade; a discussion of key economic debates about the role of the program and its effects; and, finally, an exploration of the relationship between equalization and fiscal federalism at large, particularly the Canada Health Transfer and the Canada Social Transfer.
This book offers an interdisciplinary perspective on equalization that draws from the best scholarship available in the fields of economics, economic history, political science, public policy, and comparative sociology. Most of the literature on equalization policy is dominated by the discipline of economics, and, although our book draws extensively on this rich material (two of the co-authors are economists by training), it also uses other approaches and disciplines to explore the political and policy aspects of equalization while placing it in a comparative, historical, and policy context.
The chapters
This book is divided into four chapters. The first chapter explores the emergence of equalization policy in Canada from an historical and comparative perspective. More particularly, it explains why Canada came to adopt a federal equalization program in 1957 in the context of the decline of the tax-rental agreements between Ottawa and the provinces, first signed during World War II. This chapter also discusses how the Canadian experience with equalization policy differs from that of other federal countries. One of the central goals of this comparative and historical chapter is to locate equalization within the broader context of the political and fiscal management of the federation. For instance, this chapter discusses the status of Québec within the Canadian federal system and the potential relationship between equalization and national unity issues. The last part of the chapter formulates a direct comparison between Australia and Canada. The objective of this discussion is to explain why Canada rejected two key aspects of the “Australian model” created in the early to mid-1930s: first, the creation of an arm’s-length expert commission in charge of determining equalization payments and, second, the consideration of expenditure needs alongside fiscal capacity in the calculation of such payments. Overall, this chapter uses historical and comparative analysis to illuminate key policy choices that have shaped Canada’s distinct equalization system.
The second chapter focuses on the politics of equalization during the Martin (2003–06) and Harper (2006–15) years. Paying close attention to the politics of equalization is especially important because most of the scholarship on equalization is undertaken by economists, who seldom analyze the politics of equalization in a systematic manner (on this issue, see Lecours and Béland 2010). As argued in this second chapter, at the most general level, the politicization of equalization in Canada is in large part the product of the program’s governance structure, which is grounded in federal executive discretion. More specifically, four factors are particularly important in explaining why the federal equalization program became so politically contentious in the mid-2000s. First, increasing oil prices exacerbated political tensions over horizontal fiscal redistribution. Second, in a context of growing partisan competition in the aftermath of the unification of the right through the advent of the Conservative Party of Canada in 2003, executive discretion over the federal equalization program made it possible for federal politicians to attempt to use equalization for political gain. Third, strong existing provincial identities coupled with the willingness of premiers such as Danny Williams (Newfoundland and Labrador) to mobilize these identities against federal minority governments intensified intergovernmental tensions. Finally, public and media perceptions of the program added fuel to the fiery debates about equalization. After discussing these four factors in detail, the chapter concludes with a discussion of a possible reform of equalization governance aimed at potentially reducing future political conflict over the program.
The third chapter focuses on the economics of equalization. The starting point of this chapter is that the economic case for equalization payments arises from the recognition that the advantages of a decentralized form of government may be offset by regional differences that create perverse incentives. Ideally, the internal mobility of people and resources responds to economic incentives to produce the best national outcomes. However, constituent provinces may have very different endowments and thus very different potentials to provide public services to their populations. They might also have very different needs when it comes to taxing these populations. Provinces with an abundance of revenues, for example, may attract population (and labour) based on their ability to provide public goods and services; this migration is referred to as fiscally induced migration. This type of migration is undesirable in that it is not in the direction of higher productivity. One way to “correct for” or reduce fiscally induced migration is through the equalization of the revenue capacity of the provinces, which is the intent of Canada’s equalization program. However, the economic literature suggests that, under some conditions, equalization payments may also create “welfare traps” in recipient provinces, removing the incentive for economic migration and making both the “trapped” population and the country worse off in the long run. After outlining the economic basis for equalization payments, this chapter explores the extent to which Canada’s program has been successful in its economic objectives. Major challenges that remain are also discussed, such as the effectiveness of equalization payments in addressing inefficient migration, which revenue bases should be included in the assessment of provincial revenue capacity, the use of a moving average to calculate equalization entitlements, and the potential negative effects of equalization transfers.
The fourth chapter offers a broader perspective on fiscal federalism by looking at the relationship between the equalization program and the larger system of federal transfers to the provinces, in particular the Canada Health Transfer (CHT) and the Canada Social Transfer (CST), the two largest specific-purpose transfers. Although equalization is not the largest transfer (this claim to fame belongs to the CHT), it is the best known of the three transfers because of its longer history and its constitutional status. Equalizing transfers, however, are not limited to the Canadian Fiscal Equalization Program. Until recently, there were equalization components in the allocation formulas for the CHT and CST. However, the adoption of the equal per capita allocation (for CST starting in 2007 and for CHT starting in 2014) removed the equalizing dimension in these programs. As a result, lower-income provinces now have to rely more heavily on equalization payments to supplement own-source revenues to finance rapidly growing social expenditures, especially health care. Given the contested nature and history of equalization in Canada, there is room for the federal government to better coordinate the design of the three federal transfers to achieve their respective policy objectives. In this chapter, we first briefly review the purpose, history, and politics of the CHT and CST. We then link this review with the prior analysis of the equalization program to assess the performance of the three transfers as a group in achieving their objectives. We then discuss the advantage and disadvantage of using CHT to achieve the purpose of equalization, particularly in regards to addressing the different expenditure needs of the provinces, compared to the alternative of modifying the equalization program, which should be focused on differing revenue capacities.
The brief conclusion summarizes the main points made in the book before discussing potential reform scenarios regarding the future of equalization policy in Canada. Our conclusion shows that Canada cannot dismantle equalization altogether for economic, political, and constitutional reasons and stresses issues that Canadians should focus on when discussing the future of a crucial yet misunderstood and contentious federal program.
References
Béland, Daniel, and André Lecours. 2010. “Does Nationalism Trigger Welfare State Disintegration? Social Policy and Territorial Mobilization in Belgium and Canada.” Environment and Planning C: Government and Policy 28 (3): 420–34.
Lecours, André, and Daniel Béland. 2010. “Federalism and Fiscal Policy: The Politics of Equalization in Canada.” Publius: The Journal of Federalism 40 (4): 569–96. http://dx.doi.org/10.1093/publius/pjp030.
Footnote
1 Among the three major federal transfers to the provinces (equalization, Canada Health Transfer, and Canada Social Transfer), equalization is the second largest behind the Canada Health Transfer ($36 billion in 2016–17). Return to text.