ECON 318 Lecture Notes - Lecture 43: Constitution Act, 1982, Canada Health Transfer, Canadian Federalism
12 Nov 2016
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ECON 318: Canadian Economic Policy & Institutions 2016-2017
Notes for Lecture -- 043
CANADA’S EQUALIZATION TRANSFERS
Thomas J. Courchene, “Energy Prices, Equalization and Canadian Federalism: Comparing Canada’s Energy
Price Shocks”, Institute for Research in Public Policy, 2006.
Federal Department of Finance, “Federal Support to Provinces and Territories”,
http://www.fin.gc.ca/access/fedprov-eng.asp#Major, http://www.fin.gc.ca/fedprov/mtp-eng.asp
Federal Department of Finance, “Equalization Program”, http://www.fin.gc.ca/fedprov/eqp-eng.asp
http://www.fin.gc.ca/fedprov/mtp-eng.asp
Equalization Program – What is Equalization?
Equalization is the federal government’s transfer program for addressing fiscal disparities among
provinces. Equalization payments enable less prosperous provincial governments to provide their
residents with public services that are reasonably comparable to those in other provinces, at reasonably
comparable levels of taxation.
The purpose of the program was entrenched in the Canadian Constitution in 1982:
"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." (Subsection 36(2)
of the Constitution Act, 1982)
The interesting thing about this clause is that it is very specific about the instrument of redistribution
yet the redistribution is geared to regions rather than individuals. Yet, it is a source of pride for many
Canadians. During an amendment debate in 1994, members of Parliament stated that:
“The equalization program marks our compassion as a nation. Because of equalization, no citizen
of Canada is a second-class citizen, regardless of where he lives. The citizens of Cape Race,
Newfoundland, of....etc Vancouver, B.C., are all entitled to roughly the same level of services in
government. That is the essence of Canada. This is why the country remains united”.
Equalization payments are unconditional. Therefore, the receiving provinces have complete autonomy
over the Equalization funds to spend them according to their own priorities – unlike for example
health and education related transfers.
o Of course, this freedom of choice does not necessarily lead to the best use of the funds.
Equalization payments are indexed to an automatic escalator of 3.5% annually and continue to grow in
line with the economy.
Six provinces will receive $17.9 billion in Equalization payments in 2016-17.
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How Equalization Works
Equalization entitlements are determined by measuring provinces’ ability to raise revenues – known as
"fiscal capacity".
A province's per capita Equalization entitlement is equal to the amount by which its fiscal (tax-
generating) capacity is below the average fiscal (tax-generating) capacity of the provinces that
make up the "standard"
o If the province in question falls short of that standard it qualifies for equalization payments, if
it is not below the standard it does not qualify.
o Provinces that qualify are referred to as “have not”, while the others are the “have” provinces
The choice of provinces and tax revenues that enter into the standard that determines Equalization
payments is crucial for the determination of the federal funds.
Oil and natural gas are an important component of the tax-generating capacity of some provinces - in
particular for Alberta and Saskatchewan, and more recently offshore Nova Scotia and Newfoundland
and Labrador. These provinces benefit from energy booms because
o corporations in the provinces pay more in corporate income tax to the provincial gov’t
o extraction royalties are paid to the provincial government, and
o the personal income tax base increases when more individuals are employed in high-pay jobs
in this sector.
Inclusion of a province with a large resource sector with a worldwide demand for its product has this
impact on the Equalization payments:
If the tax generating capacity from resources (such as the case of Alberta) is part of the
national average or standard, then the amount by which the “have not” provinces fall short
of the standard increases and therefore the federal government must come up with more
money for those provinces
This implies that energy prices have major impacts on Canada’s economy, and on the fiscal
transfers from Ottawa to the provinces.
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The definition of the standard has gone through several transformations in terms of which provinces
and tax revenues would be included, since the inception of Equalization in the 1950s.
Equalization payments do not, technically, involve wealthy provinces (“haves”) making direct
payments to poor provinces (“have nots”), although in practice this is what happens indirectly, via the
federal treasury.
o The distinction of who is a “have” and who a “have-not” province depends on resource
revenues as well as the state of the economy (see Ontario’s case, for example)
o A wealthy citizen in a "have not" province pays more into equalization than a poorer citizen in
a "have" province. However, because the “have” province has a greater population and
wealth, its citizens as a whole are net contributors to Equalization, while the citizens of
“have not” province are net receivers of Equalization payments
Equalization receipts do not have any strings attached as to where and how efficiently are used
o Resentment at times builds up against recipient “have-not” provinces (especially Quebec that
receives the lion’s share of Equalization funds), when those funds are used for politically
expedient purposes, enlargement of bureaucratic structures, and the offering of an expanded
array of government services to their residents for free or at a very low price, while these same
services are not available or they are available at a high price to the residents of the “have”
provinces (who pay the bill).
The Current Face of Equalization
Budget 2007 introduced a new program legislated through 2013-14 to provide long-term predictability
for provinces. The current program is based on the recommendations made by the Expert Panel on
Equalization and Territorial Formula Financing (O’Brien Report).
o Equalization payments are determined using a 10-province standard.
o Provincial fiscal capacity and standard is measured using five tax bases – personal and
business income taxes, consumption tax, property tax and 50% of natural resource
revenues, and excludes user fee revenues
Equalization is adjusted to ensure fairness among provinces while ensuring that receiving
provinces can get a net fiscal benefit from their resources.
o Provinces get the greater of the amount they would receive by fully excluding natural resource
revenues, or by excluding 50% of natural resource revenues.
Equalization is also adjusted to ensure that the total program payout grows in line with the
economy. The growth path is based on a three-year moving average of gross domestic product (GDP)
growth. This helps to ensure stability and predictability while still being responsive to economic
growth and ensuring that provinces are protected against reductions in overall Equalization.
o Equalization payments are based on a three-year weighted moving average of provincial
fiscal capacity lagged two years. Payments will thus be determined in advance of the
receiving year.
o For example, actual payments for a receiving province for 2015-16 were equal to the sum of
50% of its entitlements as calculated for the 2013-14 fiscal year, 25% of the same in 2012-13,
and 25% of the same in 2011-12
The program includes a fiscal capacity cap to ensure that Equalization payments do not raise a
receiving province’s total per capita fiscal capacity above that of any non-receiving province.
Document Summary
Econ 318: canadian economic policy & institutions 2016-2017. Thomas j. courchene, energy prices, equalization and canadian federalism: comparing canada"s energy. Price shocks , institute for research in public policy, 2006. Federal department of finance, federal support to provinces and territories , http://www. fin. gc. ca/access/fedprov-eng. asp#major, http://www. fin. gc. ca/fedprov/mtp-eng. asp. Federal department of finance, equalization program , http://www. fin. gc. ca/fedprov/eqp-eng. asp http://www. fin. gc. ca/fedprov/mtp-eng. asp. Equalization is the federal government"s transfer program for addressing fiscal disparities among provinces. Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation. The purpose of the program was entrenched in the canadian constitution in 1982: The interesting thing about this clause is that it is very specific about the instrument of redistribution yet the redistribution is geared to regions rather than individuals. Yet, it is a source of pride for many. During an amendment debate in 1994, members of parliament stated that:
