June 18th, 2021

Viewpoint: Breaking down the inequality of equalization

By Medicine Hat News Opinion on June 3, 2021.

My recent article on Alberta in Confederation has been criticized that my bias lacks an understanding of this controversial federal program – equalization. Alberta’s contribution was a misleading statement because it did not explain that federal revenues are from payments by Albertans and not from the government.

Thus, this essay will delve into this program with references to four Alberta academics/economists – Robert Mansell, Mukesh Khanal, Trevor Tombe and Mark Milke. They have analyzed this program extensively. Undoubtedly their work will also be criticized. So be it, but to me, it is very acceptable.

The 1982 Constitution committed “… the government of Canada to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”

These federal payments to the provinces and territories are sourced from general revenues. For example, the 2020-2021 federal budget includes $20.6 billion for equalization. Mansell, Khanal, Tombe (University of Calgary) calculated the federal revenues from different sources and federal spending in the provinces. A reference to provinces also includes the three territories.

Their study covered the period from 1961 to 2018. They quoted figures in 2018 dollars. The federal fiscal balance for each province is the total federal revenues collected less the total federal expenditures. A positive balance means a province is a net contributor and a negative balance indicates a net transfer into a province.

The fiscal balance was calculated from a list of sources. The percentages are of the total and from the term 2009-2018: personal income taxes (31%), equalization/stabilization (24%), corporate income taxes (9%), CPP net contributions (8%), non-defense purchases (6%), OAS benefits (6%), EI payments less receipts (6%), GST/Excise taxes (5%), defense purchases (3%) and other factors (3%).

The first figure in brackets is the total fiscal balance in billion dollars and the second is the average annual per-capita balance.

Three provinces were net fiscal contributors: Ontario (768/1,267), Alberta (631/3,720), British Columbia (138/603).

All other provinces were net beneficiaries: Quebec (-497/-1,200), Nova Scotia (-320/-6,192), New Brunswick (-212/-5,047), Manitoba (-184/-2,787), Nfld. & Labrador (-177/-5,567), Saskatchewan (-103/-1,777), PEI (-52/-6,795) and Territories (-121/-23,000).

The 2020-2021 budget has five provinces to receive equalization (in billion dollars): Quebec (13.3), Manitoba (2.5), Nova Scotia (2.1), New Brunswick (2.2) and P.E.I. (454M). The Territories are budgeted for $ 4.2 billion. Nfld. & Labrador and Saskatchewan join the other three provinces as net contributors.

The recent changes in provincial economies are not reflected in the equalization program. The payments continue to increase for it is related to economic growth – for example, 5% from 2019-2020 to 2020-2021 even though the contributing provinces with resource-based economies have experienced a substantial decrease in revenues.

Nfld. & Labrador is close to bankruptcy, it failed to sell its recent government bond; but it does not qualify for equalization. The federal fiscal stabilization program is intended to assist in a sudden decrease in revenues, but its deductible and cap limit the required assistance.

Mark Milke has compared spending by the provinces on 19 different government services. The “receiving provinces” exceed the “giving provinces” in 13 of the 19 categories. For example, the average tuition for full-time Canadian undergraduate students in 2020-2021 is $ 6,100. One of the lowest tuitions is $3,155 in Quebec, whereas the fees are $6,372 in Alberta and $7,938 in Ontario. His findings indicate that equalization provides additional funds for receiving provinces to have lower-cost services than the giving provinces.

The Fraser Institute has calculated that all the provinces are more fiscally equal today, it questions if equalization is even necessary. The fiscal gap between the contributing and receiving provinces fell from $5,000 per capita in 2015 to $1,600 in 2020. This program today is also important politically, and politics generally prevails.

Larry Samcoe is a Medicine Hatter. His column, Viewpoint, will run on the first Thursday of each month. Feedback can be sent to letters@medicinehatnews.com

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