Fiscal Imbalance in Canada: A Look at the Opportunity Costs of Equalization

Canada, Equalization, Eric Merkley, Publications, Uncategorized

Executive Summary

Ontario, Alberta, and British Columbia taxpayers have faced a long-standing fiscal gap between the federal transfers they receive and the transfers they deserve based on their share of federal revenue. The gap between the winners and losers of equalization has widened considerably since 1963.

The fiscal burden of equalization faced by Ontario, Alberta and British Columbia has real opportunity costs for their governments. For example, without the fiscal burden of equalization since 2005, the government of Alberta could have been in a position to increase its health budget by 13 per cent annually or double the Heritage Fund. British Columbia could eliminate its ongoing budget deficit, or it could have increased capital expenditure by 41 per cent per year.

Alternatively, if residents were to have received the money, a family of four in Alberta could have afforded the average tuition for a three-year undergraduate program, or they could have paid 90 per cent of the minimum down payment on an average house.

Economists and public policy analysts have identified problems with the equalization program. Findings suggest that the program acts as a drag on growth, bloats the public sector in recipient provinces and harms Canada’s productivity. Instead of equalizing fiscal capacities between jurisdictions as intended by the pioneer of equalization theory, public choice economist James Buchanan, it further harms their capacity to raise revenue. We must ask whether the program as it stands is worth the cost to Alberta, Ontario and British Columbia.

Introduction

Fiscal transfers, including equalization, have a long and contentious history in Canada. Supporters argue that they are necessary, at least in part, to even out the inequities in the Canadian Confederation created by disparities in natural resources and human capital. Critics see it as a subsidy for poor fiscal policy. No one can dispute that, whatever the merits of equalization and other fiscal transfers, they have come at the expense of the three leading economies in Canada: Alberta, Ontario and British Columbia. This paper will look at the fiscal burden the taxpayers of these provinces have had to carry historically because of federal government transfers to the provinces and at the equalization program more specifically. It will also provide illustrations of the opportunity costs these provinces have faced because of equalization. Any debate over the merits or failures of the status quo needs to address the systematic and unending costs that these provinces face in the absence of meaningful reform.

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