‘Cut It’: Taxpayer Advocate, Experts Weigh In on Equalization Changes

Alberta Premier Jason Kenney speaks to the media during a press conference after a meeting of the Council of the Federation, which comprises all 13 provincial and territorial leaders, in Mississauga, Ont., on Dec. 2, 2019. (The Canadian Press/Nathan Denette)

A day after a taxpayer advocacy group called for provincial equalization to be phased out, Conservative leadership candidate Jean Charest pledged reforms to the program to satisfy Alberta.

As politicians converged in Calgary for the annual Stampede festival, which kicked off on July 7, Canadian Taxpayers Federation federal director Franco Terrazzano said Ottawa should wind down its long-standing program that gives tax dollars to underperforming provinces.

“Sometimes the only right thing to do with a bad idea is put it out to pasture. Instead of tinkering around the edges, Conservative Party leader hopefuls should commit to phasing out equalization,” Terrazzano wrote in a July 6 opinion article published online in the Western Standard. The next day, Charest told the Western Standard he would make an accord with Alberta within a month of becoming prime minister.

Geoffrey Hale, professor emeritus of political science at the University of Lethbridge, says this idea of striking a deal with one province echoes provincial deals made by past prime ministers, such as Brian Mulroney’s Atlantic Accord in 1985, and revised versions of such deals by Paul Martin and Stephen Harper in the mid-2000s.

“The idea of a one-off deal with Alberta to address its concerns over equalization—and prospectively, other unresolved disputes over resource development inherited from the Trudeau government—reflects a long tradition of ‘let’s make a deal’ federalism going back to Confederation,” Hale said in an interview.

“Any such deal would probably result in pressures from other provinces on both sides of the balance sheet, including Quebec, for their own custom-tailored deals. What all this would look like once the smoke has cleared is anyone’s guess.”

Temporary vs Permanent

Section 36(2) of the 1982 Constitution Act says, “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.”

Ian Madsen, senior policy analyst for the Frontier Centre for Public Policy, says the United States, UK, and EU have taken measures to help their regions at times, but they were always temporary. By contrast, equalization in Canada causes “a lot of disincentives” by being “jack-hammered” into the Constitution, he says.

“It gives the supposedly underperforming or poor regions no incentive to become more efficient, or to attract business, or to enhance skills of underemployed or unemployed people, or improve infrastructure. It just gives them cash without any conditions or restrictions to supposedly bring the level of social services up to that of the median place in Canada,” Madsen told The Epoch Times.

“Manitoba has a bloated civil service that hasn’t been pared back or made more efficient or productive. A lot of the money is spent in places like that. And over time, for instance, Quebec has now become a much better economic performer and one could argue that it doesn’t need any more [equalization]. The same with Nova Scotia.”

Alberta’s Fair Deal Panel reported in June 2020 that the province contributed nearly $240 billion to the rest of Canada from 2007 through 2018, an amount that dwarfed second-place Ontario ($97.9 billion) and third-place B.C. ($54.6 billion).

‘Time to Look at Options’

Last October, 61.7 percent of Albertans voted yes in a referendum to removing Section 36(2) from the Constitution, even though Alberta does not have the unilateral power to do so.

In the lead-up to the referendum, University of Calgary economics professor Trevor Tombe argued in an commentary that rejecting equalization spurned a crucial principle of Confederation. He cited former Alberta premiers Ernest Manning and Peter Lougheed as accepting the fairness of the idea. Even so, Tombe told The Epoch Times the program “should certainly be reformed” in a renewed framework of federal transfers to the provinces.

“Given mounting demographic pressures on provinces and given some weird quirks in the formula that built up over the years, it’s time to take a thoughtful and serious look at the options,” he said.

“What the feds need to do is not just tinker and tweak at the margins, but really do a serious, large-scale engagement, potentially something on the order of a Royal Commission.”

This engagement would echo the panel assembled by former prime minister Paul Martin in 2004, whose recommendations instigated changes introduced by the Stephen Harper government that followed. Tombe said that although the revised framework was simpler and was made harder for the provinces to manipulate, it was flawed by setting too high of a minimal annual increase.

“The gap between high-income and low-income regions is just a lot smaller [than expected], and so there’s all these leftover dollars that are still distributed even though the formula didn’t call for them. That’s one thing that the government of Alberta has identified as what they would like to see removed,” he said.

“A formula that is based only on a province’s GDP is the way to go, not measuring resource revenues or hydro revenues or measuring tax bases or anything. It would minimize the amount of gaming that a province could engage in.”

Although the ostensible constitutional purpose of equalization is to have comparable levels of public services among provinces, Tombe says no one has found clear metrics to measure that. Excessive or not, the spring federal budget pegged $21.9 billion to go to five recipient provinces in 2022–23. Calculations by Fairness Alberta projected the amounts would increase by 23 percent over the next four years unless the formula changed at its next possible juncture in 2024.

‘Federal Trap’

Madsen and Terrazzano believe amounts should be gradually reduced instead. In an interview, Terrazzano called the equalization program a “slush fund for the premiers” of dependent provinces.

“Canada shouldn’t have a federal trap that keeps some provinces hooked on the tax dollars forever. It’s clearly not fair for taxpayers in the provinces that have to pay into equalization through their taxes but don’t get any money back,” he said.

“It also doesn’t work for the taxpayers who live in provinces that receive equalization, because it allows their politicians, like those in Eastern Canada, to get away with bad economic policies because they rely on the tax dollars coming from other provincial taxpayers.”

Equalization was introduced in 1957 and it’s time to “cut it,” Terrazzano says.

“After six-and-a-half decades of equalization payments, now is as good of a time as ever to push these provincial governments to become more self-reliant,” he said. “There’s nothing in the Constitution that says equalization has to be more than $20 billion every single year.”