Eroding Equalization

November 4, 2004

The issue of equalization has raised its barely comprehensible head once
more. But just because it is complicated doesn't mean it's not
important. So here is my attempt to shed light on the issue.

The Federal equalization transfers are intended to ensure that Canadians
receive a similar level of public services at similar levels of
taxation, regardless of where they live.

One of the key misconceptions, often repeated by commentators, is that
equalization is a transfer from "have provinces" (Ontario and Alberta)
to "have not provinces" (all other provinces). In fact equalization
funding comes from the federal government's general revenues and is
transferred to "have-not" provincial governments. In other words all
taxpayers in Canada pay into the equalization fund. Citizens earning
$100,000 in Nova Scotia and Alberta pay the same amount into
equalization .

The basic problem that equalization is designed to address is clearly
demonstrated by comparing Alberta and Nova Scotia. Through the accidents
of history and geography, the Alberta economy, with all its energy
resources, generates sufficient provincial government revenues that
Alberta (without even resorting to a sales tax) can cover the cost of
services such as education and health care. The economy of Nova Scotia,
on the other hand, cannot come close to providing the services to us
that Albertans take for granted. Thus Nova Scotia receives federal
equalization funds that in theory enable our government to provide
service levels similar to Alberta's.

Even though equalization funds do not come from the budgets of "have"
provinces, Ontario and Alberta do have an interest in limiting
equalization payments to other provinces. They want to ensure that
federal funds are available to support national programs that will go to
the citizens of "have" provinces. In this sense putting limits on
equalization is a thinly veiled grab by wealthy provinces for more
federal funds at the expense of provinces in greater need.

The politics and haggling over equalization are a product of Canadian
federalism. In less decentralized countries there would be very little
question of citizen entitlement to services regardless of where they
lived. In a similar vein we expect Nova Scotians to receive a similar
level of services whether they live in Yarmouth or Halifax, in rural or
urban Nova Scotia. Without the entitlements to similar services Nova
Scotians would move to areas with more services, from rural to urban
communities. This would further undermine less prosperous local

The majority of Canadians, including citizens of "have" provinces,
support the principals of equalization and it is enshrined within our
Constitution. It reflects one of the fundamental responsibilities of the
democratic state to redistribute wealth so as to limit the poverty and
inequality between citizens and regions.

The principle of providing similar levels of services and taxation was
undermined when in 1982, as a cost cutting measure, Alberta, with its
vast oil and gas revenues, was removed from mix of provinces that
produces the standard of provincial comparison. While this decreased
federal costs it also curtailed "have-not" provinces' ability to provide
adequate services. As a result Alberta has the capacity to provide a
higher level of service at lower levels of taxation. This is already
having an impact in Manitoba and Saskatchewan. Because these provinces
have insufficient revenue to provide services at similar rates of
taxation they are losing skilled workers to Alberta.

The recent agreement made no attempt to address this. Instead the
federal government is taking further steps that will undermine the
program. It is negotiating side deals with Newfoundland and Nova Scotia
to keep oil and gas revenues out of the equalization agreement. This
will lead to more calls to carve out sources of revenue and thereby
erode the fundamentals of the program. In fact, it threatens to make the
economic disparity between provinces worse, not better. Far better to
return to a standard that takes into account all revenues of all

The recent agreement to initiate a panel to review the equalization
program could provide an opportunity to get the equalization program
back on track but the signals so far do not bode well. If Ottawa's
record is any indication, the review of the program will result in
greater discrepancy between provinces in the levels of services
provided. We are also getting indications of what the powerful corporate
lobby will be pushing for.

According to a recent report from the corporate funded CD Howe Institute
the equalization program penalizes provinces that lower corporate taxes,
"reduce their debt (rather than spend money ) or develop their economies
by selling off natural resources or business enterprises [government
enterprises]." The solution according to the Institute is to revise the
equalization formula so that it would be more conducive to tax cuts,
debt repayment rather than spending on programs, and privatization.
Sound familiar?

Like most other government programs, equalization is being challenged by
the broader neoliberal agenda that seeks to curtail governments' ability
to promote the public good.

Unfortunately, given his record, I don't have faith in Paul Martin's
commitment to equalization and to resisting this challenge to active
government. I fear that without a return to the principles of
equalization, the program will be reduced from a fundamental entitlement
of Canadian federalism to a charity role that provides hand-outs at the
discretion of the federal government and wealthy provinces.

John Jacobs is director of the Nova Scotia office of the Canadian Centre
for Policy Alternatives (, an independent
public policy research institute.