Provinces are converging. Why is equalization still growing?

Flying under the radar in the long-overdue federal budget was a record $20.9 billion in equalization payments this year, rising to $25.1 billion over the next four years — a full 20 per cent. The budget also confirmed that “Fiscal Stabilization” payments, which are being made somewhat more generous, will nevertheless remain severely capped. In an economically awful year like 2020, such payments can and should go even to Ontario, Alberta and B.C., the usual net contributors to equalization.

Given the scale of federal taxes that Ottawa redirects to Quebec, Manitoba and the Maritimes every year, these twin developments — hiking equalization while still constraining fiscal stabilization — are especially unfair to the “have provinces.”

As explained by economists Ben Eisen and Milagros Palacios in their December 2020 paper for the Fraser Institute, the provinces have become much more fiscally equal since 2015, so equalization payments are now barely, it at all necessary. The “fiscal capacity gap” between median “have” and “have-not” provinces fell from $5,000 per capita in 2015 to just $1,600 in 2020. Even if we don’t all agree on the magnitude of the federal deficit crisis, it should be clear these growing payments are too high and that Canada cannot afford an unnecessarily bloated equalization program.

The good news is that the problem is not as intractable as it may seem. Yes, equalization is a political minefield that pits region against region, but with recipients of this windfall representing only 30 per cent of Canada’s population, and the provincial governments of the other 70 per cent facing myriad and growing problems, why should we tolerate this unfair and unaffordable status quo?

Though the budget’s forecast of growing equalization got no media coverage, equalization is simmering as a national issue once again. Frustration in Alberta is so high the province is holding a referendum in October to challenge equalization’s place in the constitution, with the goal of triggering negotiations with Ottawa.

But equalization’s unfairness is not just an Alberta problem. This year, British Columbians will have roughly the same $3 billion of their federal taxes go towards it as Albertans do, and Ontarians, who provide roughly 41 per cent of federal revenues, are on the hook for over $8.5 billion in this record-smashing budget. As with the smaller net contributors, Saskatchewan and Newfoundland & Labrador, no tax dollars raised for equalization will come back to support their own provincial services.

To make those big numbers personal, Ontarians’ share of equalization funding works out to $2,400 per family of four this year. B.C.’S number also rounds to $2,400, while Alberta families are sending about $2,700 more in federal taxes for equalization payments alone. This $20.9 billion will be sent with no strings attached to more or less the same five provinces as always (Quebec, Manitoba, Nova Scotia, New Brunswick, and Prince Edward Island). This is a remarkable level of redistribution given that all provincial governments are currently struggling.

In 2009 the equalization budget was tied to GDP to prevent costs from rising out of control. But now the link to GDP is the cause of continuing growth at a time when fiscal convergence should be leading to reduced payments. Given the big decline in the fiscal gap between provinces after 2015, payments to five recipient provinces alone should not have risen from $16.7 to $20.9 billion. And we certainly should not let them soar another 20 per cent over the next four years.

Equalization discontent has never been unique to any province or party. It was not an Alberta conservative who said, “We’re happy to support the country. But you know what? We’re running a deficit and we need to put more money into our healthcare system.” That was Premier Dalton Mcguinty, who argued in 2005 that equalization payments were making some provinces better off than Ontario and using Ontarians’ tax dollars to do it.

Premier Mcguinty’s 2005 complaints are even more on the mark in 2021. With provinces now relatively equal, we should not be distorting provincial fortunes with inflated equalization payments for a select few. Folks in Ontario and B.C. should join with Albertans (as Saskatchewan has done) and demand immediate reform to equalization to keep more of that $2,400 per family funding their own services or staying in their own pockets.