Equalization Isn’t Equal

Commentary, Equalization, Frontier Centre, Media Appearances

Mention the subject of federal transfer payments, and most people's eyes will glaze over. Mention that taxpayers in Alberta, British Columbia and Ontario are net contributors to federal transfer payments – even though the cost of living is highest in those provinces, and lowest in the provinces that receive the bulk of federal transfer payments – and you might get people's attention.

Recent briefing notes prepared for federal Finance Minister Jim Flaherty, and leaked to the media, suggest Ottawa may be mulling changes to one federal transfer program, equalization.

At present, equalization payments are calculated through a complicated formula that measures a province's ability to raise revenues. That is known as its fiscal capacity. When a province falls below the national average of all provinces, it receives equalization. This year, as in other years, Quebec receives the largest share of the $15.4 billion given to the provinces, at $7.4 billion. Per capita, the Atlantic provinces receive even more than Quebec, but do not loom as large in public debates over equalization given their relatively small populations.

The cost of equalization to taxpayers has risen to $15.4 billion this year from $10.9 billion in 2006, when the Conservatives took office. Overall transfer payments to the provinces, including equalization, have risen to $60.8 billion from $42.5 billion six years ago.

There are several problems with equalization. One is that in the context of all taxation and spending transfers, even Ontario, although it receives equalization payments ($3.2 billion this year), is a net contributor to federal coffers. The Ontario government figures its taxpayers are responsible for 39 per cent of all federal revenues, but that Ottawa sends and spends just 34 per cent of federal monies in that province.

Here in Alberta, the Finance department calculates that Albertans pay $39.6 billion into federal coffers and the province as a whole receives back $20.6 billion in the form of federal spending and transfers to persons. So Albertans receive little over half our money back.

It makes sense that higher-income, richer provinces will be net contributors to Confederation. If unemployment is higher in Newfoundland than in Ontario and Alberta, it stands to reason that our two provinces will pay more into federal coffers and withdraw less.

That much is fair. What is not fair is how equalization is calculated. At present, hydro-producing provinces such as Manitoba, Quebec and British Columbia have an incentive to keep their prices below market rates for their hydro. Politicians do that to win votes. But they also do it because if government-owned hydroelectricity was priced according to the market rate (and so higher priced), Quebec and Manitoba, which receive equalization payments, would receive more at-home revenues. That would decrease the amount of equalization payments such provinces would receive.

As the Frontier Centre for Public Policy noted about Quebec, between 2005 and 2010, Quebec received $42.4 billion in equalization payments. "Lost revenues resulting from excessively low electricity pricing during that period was $28.6 billion," wrote Frontier Centre president Peter Holle, who compared it to if Saskatchewan charged just $50 per barrel for oil in-province and then pleaded poverty to the rest of the country.

Equalization needs an overhaul – something a spokesman for the federal Finance department denies is under consideration.