Equalization payments in Canada
Encyclopedia
In Canada
, the federal government
makes equalization payments to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity" — their ability to generate tax revenues. A province that does not receive equalization payments is often referred to as "have province", while those that do are called a "have not province". In 2010-2011, six provinces will receive $14.4 billion in equalization payments from the federal government.
Until the 2009-2010 fiscal year, Ontario
was the only province to have never received equalization payments; in 2009-2010 Ontario received $347 million, while Newfoundland and Labrador
, which has received payments since the program's creation, is now a so-called "have" province, and is now a net contributor and does not receive them.
Canada's territories are not included in the equalization program - the federal government addresses territorial fiscal needs through the Territorial Formula Financing
(TFF) program.
Equalization payments do not, technically, involve wealthy provinces making payments to poor provinces, although in practice this is what happens, via the federal treasury. As an example, a wealthy citizen in New Brunswick, a so-called "have not" province, pays more into equalization than a poorer citizen in Alberta, a so-called "have" province. However, because of Alberta's greater population and wealth, the citizens of Alberta as a whole are net contributors to Equalization, while the citizens of New Brunswick are net receivers of Equalization payments.
Equalization payments are one example of what are often collectively referred to in Canada
as "transfer payments", a term used in other jurisdictions to refer to cash payments to individuals (see Canadian Transfer Payments
). The money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee "reasonably comparable levels" of health care
, education
, and welfare in all the provinces. The definition of "reasonably comparable levels", however, has been the subject of considerable debate.
In 2009-2010, the total amount of the program was roughly 14.2 billion Canadian dollar
s.
Recent negotiations surrounding the renewal of the program have created considerable tension among provinces. Due to the zero-sum nature of the formula, increases in entitlements for some provinces necessarily lead to decreases for others.
Gross domestic product per capita by province - 2009
($ per capita)
Source: Statistics Canada
Per capita benefit is derived from provincial population data in other Wiki articles and the total payments cited below.
Quebec and Ontario will receive the most from equalization payments in the 2011-2012 year.
However, per capita, PEI benefits the most.
In the 2011-2012 year, the following provinces will receive equalization payments:
The following provinces will not qualify for equalization payments in 2011-2012:
Source: Dept. of Finance Canada, accessed 3 June 2011
Note: According to the Department of Finance, "provinces get the greater of the amount they would receive by fully excluding natural resource revenues, or by excluding 50% of natural resource revenues."
when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed.
A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist
James M. Buchanan
and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada.
The original program had the goal of giving each province the same per capita revenue as the two wealthiest provinces, Ontario and British Columbia, in three tax bases: personal income taxes, corporate income taxes and succession duties (inheritance taxes). Five years later, 50 per cent of natural resource revenues were included as the fourth tax base. At the same time, however, the standard of the two wealthiest provinces was lowered to the national average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy; this gave Canada by far the world's most generous system of equalization payments.
The rise in energy prices and the resulting increase in provincial natural resource royalties in the late 1970s created several problems for the equalization formula. The need for amendments to the formula became clear when the traditional "have" province of Ontario qualified for equalization payments in 1978. This result went against the spirit of the system and would have led to substantial costs for the federal government; it was agreed that Ontario should be excluded from receiving payments. In 1982, the equalization standard was shifted from the national average to the average of the five "representative" provinces: British Columbia, Saskatchewan, Manitoba, Ontario, and Quebec.
The Canada Act 1982
, which amended the constitution
, included the rights of the poorer provinces to equalization payments. Subsection 36(2) of the Constitution Act, 1982
states that "Parliament and the government of Canada are committed 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." It is unlikely that this provision will be amended.
In 2004, the federal government and the provinces agreed to suspend the traditional formula that determined payment amounts and move to fixed funding levels, which were scheduled to grow at a fixed rate - regardless of the economic performance of the provinces. In 2007, based on the recommendations of a federal expert panel, the program was returned to formula-driven calculations and enhanced by moving to a standard based on the national average. A fiscal capacity cap was added to ensure that Equalization-receiving provinces couldn't be raised to a fiscal capacity above that of a non-receiving province (this could potentially arise due to the partial or non-inclusion of resource revenues).
In 2009, the fiscal capacity cap was modified and a ceiling and floor on aggregate payments were added.
Normally, under the equalization scheme, equalization payments go down for every dollar increase in a province's ability to raise taxes. So, for example, if a province's economy booms and the provincial government's potential income tax revenues increase, equalization payments decrease. Economist Michael Smart has argued that this gives have-not provinces an incentive to raise taxes, because any harm higher taxes do to the economy is off-set by higher equalization payments.
A have-not province also loses Equalization for every additional dollar it makes from royalties off the sale of its natural resources, thereby creating a disincentive for developing those resources. To protect Newfoundland and Labrador's equalization payments, premier Danny Williams negotiated the Atlantic Accord which provides that province with a special arrangement until 2012. Nova Scotia reached a similar arrangement with the federal government.
A March 2007 paper published by the Fraser Institute
questioned the constitutionality of the equalization payment system.
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, the federal government
Federal government
The federal government is the common government of a federation. The structure of federal governments varies from institution to institution. Based on a broad definition of a basic federal political system, there are two or more levels of government that exist within an established territory and...
makes equalization payments to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity" — their ability to generate tax revenues. A province that does not receive equalization payments is often referred to as "have province", while those that do are called a "have not province". In 2010-2011, six provinces will receive $14.4 billion in equalization payments from the federal government.
Until the 2009-2010 fiscal year, Ontario
Ontario
Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa....
was the only province to have never received equalization payments; in 2009-2010 Ontario received $347 million, while Newfoundland and Labrador
Newfoundland and Labrador
Newfoundland and Labrador is the easternmost province of Canada. Situated in the country's Atlantic region, it incorporates the island of Newfoundland and mainland Labrador with a combined area of . As of April 2011, the province's estimated population is 508,400...
, which has received payments since the program's creation, is now a so-called "have" province, and is now a net contributor and does not receive them.
Canada's territories are not included in the equalization program - the federal government addresses territorial fiscal needs through the Territorial Formula Financing
Territorial Formula Financing
Territorial Formula Financing is an annual unconditional transfer payment from Canada's federal government to the three territorial governments of Yukon, the Northwest Territories, and Nunavut to support the provision of public services....
(TFF) program.
Calculating payments
Equalization payments are based on a formula that calculates the difference between the per capita revenue yield that a particular province would obtain using average tax rates and the national average per capita revenue yield at average tax rates. The current formula considers five major revenue sources (see below). The objective of the program is to ensure that all provinces have access to per capita revenues equal to the potential average of all ten provinces. The formula is based solely on revenues and does not consider the cost of providing services or the expenditure need of the provinces.Equalization payments do not, technically, involve wealthy provinces making payments to poor provinces, although in practice this is what happens, via the federal treasury. As an example, a wealthy citizen in New Brunswick, a so-called "have not" province, pays more into equalization than a poorer citizen in Alberta, a so-called "have" province. However, because of Alberta's greater population and wealth, the citizens of Alberta as a whole are net contributors to Equalization, while the citizens of New Brunswick are net receivers of Equalization payments.
Equalization payments are one example of what are often collectively referred to in Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
as "transfer payments", a term used in other jurisdictions to refer to cash payments to individuals (see Canadian Transfer Payments
Canadian Transfer Payments
Transfer payments are a collection of fiscal equalization processes used in Canada. Chief among these are the Canada Social Transfer, the Canada Health Transfer and equalization payments...
). The money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee "reasonably comparable levels" of health care
Health care
Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...
, education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
, and welfare in all the provinces. The definition of "reasonably comparable levels", however, has been the subject of considerable debate.
In 2009-2010, the total amount of the program was roughly 14.2 billion Canadian dollar
Canadian dollar
The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...
s.
Recent negotiations surrounding the renewal of the program have created considerable tension among provinces. Due to the zero-sum nature of the formula, increases in entitlements for some provinces necessarily lead to decreases for others.
Regional fiscal disparities in Canada
There are significant differences in the provinces in terms of size, geography, population, and economic activity. While there has been considerable convergence in provincial gross domestic product per person and personal incomes among the regions over the last fifty years, the gap between the most and the least well-off provinces continues to be a primary economic concern.Gross domestic product per capita by province - 2009
($ per capita)
| NL Newfoundland and Labrador Newfoundland and Labrador is the easternmost province of Canada. Situated in the country's Atlantic region, it incorporates the island of Newfoundland and mainland Labrador with a combined area of . As of April 2011, the province's estimated population is 508,400... |
PE Prince Edward Island Prince Edward Island is a Canadian province consisting of an island of the same name, as well as other islands. The maritime province is the smallest in the nation in both land area and population... |
NS Nova Scotia Nova Scotia is one of Canada's three Maritime provinces and is the most populous province in Atlantic Canada. The name of the province is Latin for "New Scotland," but "Nova Scotia" is the recognized, English-language name of the province. The provincial capital is Halifax. Nova Scotia is the... |
NB New Brunswick New Brunswick is one of Canada's three Maritime provinces and is the only province in the federation that is constitutionally bilingual . The provincial capital is Fredericton and Saint John is the most populous city. Greater Moncton is the largest Census Metropolitan Area... |
QC Quebec Quebec or is a province in east-central Canada. It is the only Canadian province with a predominantly French-speaking population and the only one whose sole official language is French at the provincial level.... |
ON Ontario Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa.... |
MB Manitoba Manitoba is a Canadian prairie province with an area of . The province has over 110,000 lakes and has a largely continental climate because of its flat topography. Agriculture, mostly concentrated in the fertile southern and western parts of the province, is vital to the province's economy; other... |
SK Saskatchewan Saskatchewan is a prairie province in Canada, which has an area of . Saskatchewan is bordered on the west by Alberta, on the north by the Northwest Territories, on the east by Manitoba, and on the south by the U.S. states of Montana and North Dakota.... |
AB Alberta Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces... |
BC British Columbia British Columbia is the westernmost of Canada's provinces and is known for its natural beauty, as reflected in its Latin motto, Splendor sine occasu . Its name was chosen by Queen Victoria in 1858... |
Average | |
| GDP per capita | $61,670 | $31,278 | $34,210 | $33,664 | $37,278 | $43,847 | $38,001 | $45,718 | $49,563 | $41,689 | $39,057 |
| Ratio to mean | 157.8 | 80.0 | 87.5 | 86.1 | 95.4 | 112.2 | 97.2 | 117.0 | 126.8 | 106.7 | 100.0 |
| Per capita benefit | - | $2,324 | $1,235 | $1,973 | $978 | $166 | $1,351 | - | - | - |
Source: Statistics Canada
Per capita benefit is derived from provincial population data in other Wiki articles and the total payments cited below.
Quebec and Ontario will receive the most from equalization payments in the 2011-2012 year.
However, per capita, PEI benefits the most.
In the 2011-2012 year, the following provinces will receive equalization payments:
- Quebec ($7.815 billion)
- Ontario ($2.200 billion)
- Manitoba ($1.666 billion)
- New Brunswick ($1.483 billion)
- Nova Scotia ($1.167 billion)
- Prince Edward Island ($329 million)
The following provinces will not qualify for equalization payments in 2011-2012:
- Alberta
- Saskatchewan
- Newfoundland and Labrador
- British Columbia
Source: Dept. of Finance Canada, accessed 3 June 2011
Sources of fiscal capacity
The fiscal capacity of the provinces is determined by measuring their revenue from five general sources. Those revenue categories are:- Personal income taxes
- Business income taxes
- Consumption taxes
- Up to 50 percent of natural resource revenue (see below)
- Property taxes and miscellaneous
Note: According to the Department of Finance, "provinces get the greater of the amount they would receive by fully excluding natural resource revenues, or by excluding 50% of natural resource revenues."
History
The basics of equalization payments have been around since Canadian confederationCanadian Confederation
Canadian Confederation was the process by which the federal Dominion of Canada was formed on July 1, 1867. On that day, three British colonies were formed into four Canadian provinces...
when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed.
A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
James M. Buchanan
James M. Buchanan
James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...
and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada.
The original program had the goal of giving each province the same per capita revenue as the two wealthiest provinces, Ontario and British Columbia, in three tax bases: personal income taxes, corporate income taxes and succession duties (inheritance taxes). Five years later, 50 per cent of natural resource revenues were included as the fourth tax base. At the same time, however, the standard of the two wealthiest provinces was lowered to the national average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy; this gave Canada by far the world's most generous system of equalization payments.
The rise in energy prices and the resulting increase in provincial natural resource royalties in the late 1970s created several problems for the equalization formula. The need for amendments to the formula became clear when the traditional "have" province of Ontario qualified for equalization payments in 1978. This result went against the spirit of the system and would have led to substantial costs for the federal government; it was agreed that Ontario should be excluded from receiving payments. In 1982, the equalization standard was shifted from the national average to the average of the five "representative" provinces: British Columbia, Saskatchewan, Manitoba, Ontario, and Quebec.
The Canada Act 1982
Canada Act 1982
The Canada Act 1982 is an Act of the Parliament of the United Kingdom that was passed at the request of the Canadian federal government to "patriate" Canada's constitution, ending the necessity for the country to request certain types of amendment to the Constitution of Canada to be made by the...
, which amended the constitution
Constitution of Canada
The Constitution of Canada is the supreme law in Canada; the country's constitution is an amalgamation of codified acts and uncodified traditions and conventions. It outlines Canada's system of government, as well as the civil rights of all Canadian citizens and those in Canada...
, included the rights of the poorer provinces to equalization payments. Subsection 36(2) of the Constitution Act, 1982
Constitution Act, 1982
The Constitution Act, 1982 is a part of the Constitution of Canada. The Act was introduced as part of Canada's process of "patriating" the constitution, introducing several amendments to the British North America Act, 1867, and changing the latter's name in Canada to the Constitution Act, 1867...
states that "Parliament and the government of Canada are committed 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." It is unlikely that this provision will be amended.
In 2004, the federal government and the provinces agreed to suspend the traditional formula that determined payment amounts and move to fixed funding levels, which were scheduled to grow at a fixed rate - regardless of the economic performance of the provinces. In 2007, based on the recommendations of a federal expert panel, the program was returned to formula-driven calculations and enhanced by moving to a standard based on the national average. A fiscal capacity cap was added to ensure that Equalization-receiving provinces couldn't be raised to a fiscal capacity above that of a non-receiving province (this could potentially arise due to the partial or non-inclusion of resource revenues).
In 2009, the fiscal capacity cap was modified and a ceiling and floor on aggregate payments were added.
Criticisms
Equalization payments have mostly been criticized by leaders and residents of the wealthy provinces. The premiers of oil-rich Saskatchewan and Alberta, as well as Ontario, with its large manufacturing and service sectors, have criticized a perceived drain on their finances. However, money is collected for equalization payments by federal taxation and is collected regardless of whether or not the province is a 'have' or 'have not' province. The difference is whether the provincial government receives money from the federal treasury. Residents of Alberta and Ontario pay the same federal tax rate as residents of other provinces. Critics of equalization argue that, since those provincial governments receive fewer total dollars per capita from the federal government than 'have not' provinces, they are required to collect more taxes from their residents compared to their neighbours than otherwise would be required if the equalization program did not exist.Normally, under the equalization scheme, equalization payments go down for every dollar increase in a province's ability to raise taxes. So, for example, if a province's economy booms and the provincial government's potential income tax revenues increase, equalization payments decrease. Economist Michael Smart has argued that this gives have-not provinces an incentive to raise taxes, because any harm higher taxes do to the economy is off-set by higher equalization payments.
A have-not province also loses Equalization for every additional dollar it makes from royalties off the sale of its natural resources, thereby creating a disincentive for developing those resources. To protect Newfoundland and Labrador's equalization payments, premier Danny Williams negotiated the Atlantic Accord which provides that province with a special arrangement until 2012. Nova Scotia reached a similar arrangement with the federal government.
A March 2007 paper published by the Fraser Institute
Fraser Institute
The Fraser Institute is a Canadian think tank. It has been described as politically conservative and right-wing libertarian and espouses free market principles...
questioned the constitutionality of the equalization payment system.