Canada's equalization program requires reform to meet constitutional requirements

March 30, 2004

OTTAWA-The 2004 Federal Budget fails to address the flaws in Canada's equalization program, which needs to be reformed if it is to meet its constitutionally required objectives, according to a study released today by the Canadian Centre for Policy Alternatives. "Equalization: Financing Canadians' Commitment to Sharing and Social Solidarity," explains that the best way for the Martin government to build a firm foundation for the future is through the equalization program, which is set to be renewed April 1, 2004.

The authors Errol Black and Jim Silver explain that the "Canadian constitution stipulates that equalization payments be sufficient to ensure 'provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation' (Constitution Act 1982)."

"The fundamental flaw with the current program" explains Silver "is that the calculations are based on the five-province standard. This excludes the wealthiest province-Alberta-which, because of oil and gas revenues, is able to offer richer public services at lower levels of taxation. For fear of losing skilled workers and businesses recipient provinces are pressured to decrease taxes and this in turn impairs their ability to offer needed public services. Including Alberta in the standard would increase the ability of other provinces to provide comparable level of services at comparable levels of taxation."

"The best solution," according to Black, "is to move to a ten-provinces standard that includes Alberta, and makes 100 percent of natural resource revenue subject to the equalization formula. In 2002 this would have resulted in total increased transfers to recipient provinces of $4.5 billion. Manitoba's entitlement would, for example, have increased by $333 million and Nova Scotia would have received an additional $269 million."

It is worth noting, according to Silver, "that including Alberta in the calculations would not adversely effect Alberta. Contrary to what some Canadians think equalization does not involve transferring money from well-off provinces to less well-off provinces. Equalization is a federal program funded by taxpayers in all provinces."

The report recommends: the establishment of a Federal-Provincial Fiscal Secretariat; the permanent elimination of the ceiling on equalization payments and a return to the ten-province standard for use in the equalization formula. "The effectiveness of the program is a matter of national importance" conclude the authors.

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