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

Press Release, Equalization, Eric Merkley

The Frontier Centre for Public Policy today released policy series paper Fiscal Imbalance in Canada: A Look at the Opportunity Costs of Equalization. The author, Eric Merkley, is a research associate with the Frontier Centre for Public Policy.

The report highlights the systematic and unending burden transfer programs have placed on taxpayers in Ontario, Alberta and British Columbia. Ontario has faced a cumulative burden of $250-billion since 1963. Alberta and British Columbia have also lost $70-billion and $40-billion of revenue. “Most of this gap has been due to the equalization program,” notes Merkley. “What is notable about both the absolute and per capita data is that the gap between the provinces has been widening over time. For transfers geared toward equalization, there has been remarkably little equalizing going on.”

The report argues that it is easy to lose sight of the magnitude of the wealth transfer out of Ontario, Alberta and British Columbia caused by equalization. For example, Alberta could have expanded the size of the Heritage Fund by 100 per cent, or afforded a 28 per cent increase in the annual education budget with the transferred revenue. Alternatively, if the transfer was returned to Albertans on a per capita basis, a family of four could afford full tuition for a three-year undergraduate program. There are also immeasurable downstream economic benefits if wealth was instead kept in net-provider provinces. Instead “equalization robs taxpayers of these benefits, as it transfers money out of province.”

The status quo involves massive cumulative costs to net-provider governments. As such, it needs to be economically justified. The paper notes that the pioneer of equalization theory, James Buchanan, backed away from his support of equalization in practice due to perverse economic incentives that arise. These incentives have ensured that “Equalization in its present form has been used to bloat the governments of recipient provinces, and it acts as a substantial drag on their economies, further harming their fiscal capacity.” Merkley concludes that, “Given the massive costs of this program to taxpayers in Alberta, Ontario and British Columbia, we need to ask ourselves if it is worth it.”

View the entire study here: