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Feb 22, 2018

Risk-sharing, not equalization, is failing Alberta

February 22, 2018

In the weeks leading up to Family Day, Canada’s governments did what many families often do: argue about money. This year’s quibble focused on the Equalization program – and largely missed the mark.

Before things get out of hand and everyone starts saying things they can’t take back, let’s get matters in perspective.

The main principle of the Equalization program is straightforward. Provinces deliver most of Canada’s important social programs. But fiscally speaking, not all provinces are created equal. Through Equalization, the federal government distributes funds to provinces with below average revenue-raising capacity so all Canadians can enjoy “reasonably equal” services regardless of the province they live in.

Putting the principle of equalization into practice, however, has never been simple, resulting in numerous compromises that fully satisfy no one. One such compromise is the ‘fixed envelope’ approach, which for the last decade has tied the growth of the program to that of GDP. When the fixed envelope served as a ceiling on total payments, it saved the federal government a considerable amount of money – $26.5 billion between 2009-10 and 2017-18. But this provision has been criticized as unprincipled, because it does not reflect the fiscal disparities between provinces the program is supposed to equalize.

The flip side of the fixed envelope approach, however, is that in certain circumstances the ceiling becomes a floor. That is what happened this year. With resource prices flagging and provinces less dependent on resources, such as Ontario, experiencing above average economic growth, fiscal disparities between provinces have narrowed.

As a result, this year the fixed envelope formula spat out $1.8 billion more than the program otherwise would have required. This money was split among receiving provinces, including Ontario, in accordance with current Equalization legislation, in the form of an “adjustment payment.”

While this caught some commentators by surprise, the legislative possibility for this outcome has been on the books since 2009. Canada’s governments were acutely aware of it, and planned accordingly. And that is precisely why the federal government, which could have chosen not to make this adjustment payment, should be commended for going ahead with it.

Planning an operation as complex as a provincial government – which in Ontario’s case funds over 150 hospitals, nearly 5,000 elementary and secondary schools, and so on – requires as much revenue certainty as it can get. Provinces have to base their multi-year budgeting assumptions on the legislation governing the Equalization program as it currently stands.

That’s why changes to the Equalization program are generally attached to scheduled program renewals that occur every five years. It is difficult to justify making changes outside of the set review processes, except under the most extraordinary circumstances. Quite simply, changing the rules mid-game puts provincial services at unnecessary risk.

Happily, the program is currently up for renewal. This represents an opportunity to introduce and transition to meaningful changes, which should, among other things, include a return to a more principled determination of the program’s funding envelope.

The fairness of this adjustment payment has also been questioned in light of Alberta’s recent downturn. Indeed, Albertans send a lot of money out to other Canadians on a net basis – $24 billion in 2015. It is perfectly reasonable for Albertans to expect the federation to help them in their time of need, just as Albertans help other Canadians when they need it.

But that’s just not what Equalization is for. Equalization is not about sharing risk (such as the risk of an oil price shock); it is about equalizing provinces’ ability to raise revenues. And Alberta’s ability to raise revenue is still the highest in the country.

The real problem is that Canada is terrible at sharing risk. Long-term redistribution to help fund social programs was important enough for us to have built it into our Constitution. But when it came to short-term economic stabilization, the architects of our current arrangements have effectively said ‘sorry, you’re on your own.’ That, not Equalization, is what’s failing Alberta.

What’s needed now are improvements to the Fiscal Stabilization program and reduced provincial cost-matching requirements for infrastructure funding in provinces facing short-term economic shocks. These would be immediately implementable changes that would benefit Alberta now, and all provinces going forward.

Thankfully, federations, like families, are capable of more than just arguing about money. They can also step up to help each member out. So after Family Day, let’s stop quibbling about Equalization and instead talk about how we can better help each other through rough times.

Release Date

February 22, 2018


Erich Hartmann

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