The Premiers Have Missed the Point on Equalization

Worth A Look, Equalization, Frontier Centre

The best outcome the federally appointed panel on equalization could have hoped for would have been unanimous support from all provinces. The second best outcome would have been unanimous denunciation from all provinces.

As it turned out, the panel nearly achieved this second best outcome.

Almost every province has found something to dislike, and they nearly all have found something to dislike intensely. And there were almost as many reasons for disliking the report as there were dissenting voices. All in all, a pretty impressive outcome.

Luckily for those who wrote the report — and for those who see equalization as a critical part of the glue that makes Canada what it is and should be — nearly all of the premiers’ comments to date have missed the most important contribution of the panel. And in so missing the point, they have provided the room for the leadership needed to fix equalization.

For nearly its entire history, equalization has been a program that has been driven by a mathematical formula. While there has been a fair degree of tinkering around the edges, payments from the program have been generated from a set of data fed into those mathematical formulas and the data that came out the other end determined what provinces received.

And while there has been no end of politics around the equalization program, this fact — a data in, data out formula for determining payments — has been effective in preventing these politics from creating an entirely politically driven program.

That being said, it was the data in, data out feature of equalization that broke down in the last number of years. The previous federal government abandoned the formula-driven approach and instead started to make ad hoc agreements with some provinces, but not others. This created tensions between provinces with the entirely laudable argument (especially Saskatchewan) that everyone should be treated equally under the program — something a data in, data out program did.

The previous government also politicized the total dollars spent by equalization. This created tensions between certain provinces (especially Ontario) and Ottawa about the size of the program, which, in turn, became determined by political whim rather than by the data in, data out approach.

The higher purpose of equalization is to give provinces the ability (access to revenues) to run comparable programs in areas of provincial jurisdiction with minimal interference by the federal government. Equalization is, in this sense, manifestly in the interests of the wealthier provinces that do not receive equalization — it affords them more autonomy to design social programs to better meet the needs of their own population.

But equalization can only survive if payments are driven by a data in, data out approach.

By providing a road map to return the program to this approach that, at the same time, does not result in massive shifts in the amount any province receives, the expert panel has done the country a significant service. And by recommending an approach that reduces the number of formulas from 33 to five, the panel also has opened the way for a significant simplification of the mathematical approach — a big win in its own right. Finally, by proposing a middle ground on resource revenues and by designing a clever cap to prevent the program from becoming unaffordable, the panel has both given impetus to critics and provided a compromise on two intractable issues.

The provinces in their disparate and negative voices didn’t just miss the point; they are, in an important way, beside the point.

Equalization is not, as some premiers pretend, a provincial program that takes money from rich provinces and gives it to poor. It is a federal program that takes money from all Canadians and distributes it to less well off provinces. (Just for clarity’s sake, a Newfoundlander making $100,000 pays the same amount for equalization that an Albertan making $100,000 pays.)

It will take national leadership to fix equalization. And that leadership has been made easier by disparate provincial bickering that has largely missed the point. Returning to a data in, data out program is the only way in which to preserve equalization for the long term — and that is in every province’s interest.

Ken Boessenkool is general manager of Hill and Knowlton Alberta and has written numerous research papers on equalization for the Atlantic Institute for Market Studies and the C.D. Howe Institute.