No stigma attached to receiving equalization

Hey there, time traveller!
This article was published 16/01/2024 (1015 days ago), so information in it may no longer be current.

An annual December ritual in the Canadian federal system is the announcement of the forecast financial transfer amounts from Ottawa to provincial governments. Today I attempt to explain in plain language one component of that transfer system, namely the arcane and controversial national equalization program.

My hope is to create greater understanding of how the program contributes directly to the finances of the Manitoba government and indirectly to the quality of life in our province.

The purpose of equalization is to enable a provincial government to provide “reasonably comparable” public services without requiring provincial taxes to be well above the average national rates on a “representative” group of taxes.

Equalization can be contentious, but it represents a concrete expression of the Canadian ideal (never fully realized) of equality of opportunity for people in all parts of the country. There should be no stigma attached to receiving equalization.

The principle of equalization has been part of the Canadian constitution since 1982. It is legally controlled by the Government of Canada. Provincial governments contribute nothing directly to equalization spending — the money comes from national taxes imposed on provincial societies. In short, equalization is determined by and paid for by Ottawa.

There are regular calls from various provincial governments to revise the equalization program, usually in their favour. The legislation governing the program requires periodic reviews to take account of changing circumstances. By law, a renewal of the program must take place before March 2029. Prime Minister Justin Trudeau has stated nothing will happen before then.

The amount of equalization paid to recipient provinces is determined by a grotesquely complicated formula that measures the relative “fiscal capacity”of individual provinces to raise revenue based on the notional application of average national tax rates in their jurisdiction. The measure of fiscal capacity covers five broad revenue categories: personal income taxes, business taxes, consumption taxes, property taxes and natural resource revenues.

The formula results in the identification of so-called “have” and “have-not” provinces. In December, the federal finance minister announced $25.3 billion in equalization payments for 2024. Only three provinces — Alberta, British Columbia and Saskatchewan — are not eligible to receive payments. At various times other provinces, like Ontario and Newfoundland and Labrador, were in the “have” category.

Historically, Quebec has received the largest equalization payments, leading to charges that the program is meant to prop up the finances of that province. The real reason is that Quebec is a large, less affluent province. On a per capita basis, Prince Edward Island receives the highest equalization payments, more than double the per capita amounts sent to Quebec.

The dynamics of the current equalization formula mean that total payouts by the national government, the list of recipient provinces and the amounts they receive can change significantly in response to relatively small changes to the economic and fiscal realities within the country.

Manitoba has been a “have-not” province for decades. For the 2023-24 fiscal year, it received $3.5 billion in equalization, a $577-million or 24 per cent increase over the previous year. For 2024-25, there will be another $844-million increase, which would bring Manitoba’s equalization entitlement in that year to $4.3 billion.

That money comes with no strings attached. This “windfall” does not reflect actual economic decline in Manitoba. Rather, it results from stronger economic growth elsewhere, especially resource revenue increases in Alberta.

When advance news of the sizable increases occurred, the then-opposition NDP urged the former PC government to funnel all the new equalization dollars into health care. The now-confirmed increases will definitely help the Kinew government to fulfil its expensive campaign promises, especially in health care, and to balance the provincial budget during its first term.

However, the equalization numbers must be kept in perspective. For 2023-24, Manitoba’s total spending budget was forecast to be approximately $22 billion, with health care accounting for approximately $8 billion, and there is a $1.6-billion deficit on the provincial books. In short, higher equalization payments will help, but tough budgetary choices will still have to be made.

There are many criticisms of equalization, not all of them well founded.

One criticism particularly relevant to Manitoba is that the formula does not include in the calculations of equalization the subsidized hydro rates for domestic customers by Crown corporations, like Manitoba Hydro. The provincial government rightly resists this argument, insisting it has the right to use a public enterprise to deliver cheaper electricity, which unlike fossil fuels, is a “clean” renewable resource. Cheap hydro power gives us a competitive advantage.

A more fundamental complaint is that the program reduces overall national productivity by creating perverse incentives for recipient provinces to avoid potentially unpopular economic and financial policy steps necessary to increase provincial prosperity. This argument is somewhat comparable to ideological opposition to social assistance for low-income individuals, which involves redistribution from wealthier citizens.

Former PC premier Brian Pallister subscribed to this view, believing that lower taxes and deregulation were the path to ending Manitoba’s “have-not” status, which he seemed to regard as a badge of inferiority. I disagree. Federal transfer payments are a sign of shared national citizenship.

Let’s invest them in economic and social programs that create opportunities for all Manitobans.

» Paul G. Thomas is professor emeritus of political studies at the University of Manitoba. This column previously appeared in the Winnipeg Free Press.