Equalization payments are intended to give all provinces the financial means to provide roughly equivalent services to their residents. This principle is embedded in our Constitution. But it doesn’t always work out that way. In fact, some provinces receive more than they need. Some receive too little.
Manitoba has proportionally more school-age children than any other province. Those extra students put pressure on the Manitoba government to spend more on education. Nova Scotia has proportionally more seniors than any other province. Those extra seniors mean higher demands on the Nova Scotia government to provide health care. Alberta’s wage rates exceed those of any other province. Those higher labour costs make it more expensive for the Alberta government to supply public services.
Equalization turns a blind eye to Manitoba’s extra students, Nova Scotia’s extra seniors and Alberta’s higher wages.
Equalization does admit that provinces differ, but only in terms of the revenue they are able to raise. It ignores differences in the expenditures they must make. The federal government helps out tax-poor provinces, but leaves those that must spend more to fend for themselves. Changing Equalization to incorporate differences in expenditure need would make the system fairer. Surprisingly, it might also cost the federal government less.
If recognizing differences in expenditure need makes equalization both fairer and less costly, why has Canada not followed other countries such as Australia along that path? The arguments typically put forward for ignoring expenditure need are not convincing.
Too complex? Expenditure need can be included in the equalization program fairly easily.
Too intrusive and distorting of provincial agendas? Incorporating expenditure need into equalization need not mean telling provincial governments how to spend their money or giving them a financial incentive to alter their spending.
Too subjective and open to manipulation? It is possible to measure differences in expenditure need objectively. For example, it’s a fact, not a judgment call, that seniors use the health-care system more, and that some provinces have older populations than others.
An equalization program that incorporates need will result in different outcomes. Currently, provinces receive equalization payments because they are able to raise less revenue. Some of these provinces also have comparatively low expenditure need. Quebec is a notable example. A fair equalization system, which reflected both the expenditure and revenue sides of the coin, would pay Quebec less.
Some provinces with above average expenditure need, such as Alberta, also have an extraordinary ability to raise revenue. Even a fair equalization system would not generate payments for Alberta.
Ontario is in a third category. It has both high expenditure need and below average revenue raising capacity. A fair equalization system that captured differences in expenditure need would increase Ontario’s payment.
The reduction in payments to some provinces would more than offset the increase in payments to others. Overall the fairer system would cost less than the current equalization program.
The legislation underpinning equalization payments must be renewed by 2014. As the federal and provincial governments consider changes, they should seriously consider expenditure need. Equalization has been operating in Canada for 55 years. It’s time we finally live up to our constitutional obligation.