Equalization Payments in Canada

July 31, 2017 § Leave a comment

Over the weekend on Twitter, I was caught up in a discussion with an Albertan who didn’t believe that the province, along with British Columbia, is forecast to lead Canada in economic growth.

She argued that the province is still hurting, that big American gas companies had pulled out, and that people were leaving Alberta.  Indeed, in June, Alberta’s unemployment rate was 7.4%, but even then, that was an improvement of 0.4% from May.  But, economic growth does not mean that one can necessarily see the signs of a booming economy.  Alberta’s economy, however, shows signs of recovery, and this 2.9% economic growth, as well as a decline in unemployment rates, shows that.

She also expressed a pretty common bitterness from Albertans about Equalization payments in Canada.  These payments might be the most mis-understood aspect of Canadian federalism.  The common belief in Alberta, which is usually a ‘have’ province (meaning it doesn’t receive equalization payments), is that its money, from oil and gas and everything else, is taken from it and given to the ‘have-not’ provinces (those who receive equalization payments).  This is made all the more galling to Albertans because Quebec is the greatest recipient of equalization payments.

This argument, though, is based on a fundamental mis-understanding of how equalization payments work in Canada.  Equalization payments date back to Canadian Confederation in 1867, as most taxation powers accrued to the federal government.  The formal system of equalization payments dates from 1957, largely to help the Atlantic provinces.  At that time, the two wealthiest provinces, Ontario and British Columbia, were the only two ‘have’ provinces.  And this formal system was enshrined in the Constitution in 1982. Section 36, subsection (2) of the Constitution Act reads:

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.

The general idea behind equalization payments is, of course, that there are economic disparities across the nation.  There is any number of reasons for these disparities, which are calculated on a provincial level.  These can include the geographic size of a province, population, the physical geography, or economic activity.

Quebec is a traditional ‘have not’, which seems incongruous with the size and economy of the province.  Montreal, after a generation-long economic decline from the late 1960s to the mid 1990s, has more or less recovered.  If Quebec were a nation of its own (as separatists desire), it would be the 44th largest economy in the world, just behind Norway. It contributes 19.65% of Canada’s GDP.  But Quebec’s economy is marked by massive inequalities.  This is true in terms of Montreal versus much of the rest of the province.  But it is also true within Montreal itself.  Montreal is home to both the richest neighbourhood in the nation, as well as two of the poorest.  Westmount has a median family income of $220,578.  But Downtown Montreal ($32,841) and Parc Ex ($34,211) are the fourth and fifth poorest, respectively, in Canada.

The formula by which equalization payments are made is based on averages across the country.  Here, we’re talking about taxation rates and revenue-generation, based on the national averages of Canada.  Provinces that fall below these averages are ‘have not’ provinces.  Those who fall above it are ‘have’ provinces.  The three wealthiest provinces are usually Ontario, British Columbia, and Alberta.  But all three of these provinces have fallen into ‘have not’ status at various points. In 2017-18, in order of amounts received, the have-nots are: Quebec, Manitoba, Nova Scotia, New Brunswick, Ontario, and Prince Edward Island.  Quebec, it should be noted, will receive more than the other ‘have-nots’ combined.  The ‘have’ provinces this year are Alberta, British Columbia, Newfoundland & Labrador, and Saskatchewan.

The equalization payments, though, are not a case of taking money from Alberta to pay for Quebec’s social programs.  The funds are not based on how much one province pays for its health care system, or for a universal child care system, or cheap tuition at the province’s universities (Quebec has both universal child care and cheap tuition for in-province students).  Rather, the funds come out of the same general revenue stream that Ottawa has to fund ALL of its programmes and services.  And, each and every Canadian contributes to this revenue stream.  Thus, the fine people of Westmount contribute more to equalization payments (and general revenue) than the middle-class residents of suburban Calgary, or a person in a lower income bracket in Saskatchewan.  And, because there are more Quebecers than there are Albertans, Quebec actually contributes more to the equalization payment scheme.

It is not just angry Albertans who believe they are getting hosed by the federal government.  Many Quebecers will rail against their province’s funding priorities and point to the province’s status as a ‘have not’ as to why it should not have these programmes.  Both positions are factually wrong, and based on a fundamental misunderstanding of Canada’s equalization payments.

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