Central Canada is the new centre of gravity for equalization

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Appeared in the Financial Post on January 20, 2016

Historically, the purpose of Canada’s equalization program was to largely provide financial assistance to the country’s poorer provinces where incomes lagged behind the national average. In the recent past, Quebec, with its underperforming economy, was the only large province to receive substantial equalization payments, where they have helped fund the province’s uniquely expansive social welfare programs.

Starting in 2009/10, however, the nature of Canada’s equalization program fundamentally changed from the prevailing arrangements of recent years with Ontario’s descent into “have-not” status—a development that made Canada’s largest province eligible for equalization payments. Ontario’s shift to have-not status meant that six out of 10 provinces representing more than 70 per cent of the Canadian population was entitled to equalization payments.

Over the past decade, the emergence of Ontario as a have-not province, along with continued economic weakness in Quebec, has led to a larger share of all equalization dollars going to governments of large provinces in Central Canada instead of the smaller jurisdictions of Manitoba and the Maritimes.

In 2005/06, Ontario and Quebec together received a minority of all equalization payments. Approximately 44 per cent of equalization payments flowed to Quebec (Ontario was not yet a have-not) with 56 per cent flowing to the rest of Canada. By 2015/16, things changed dramatically. Ontario and Quebec now receive approximately 70 per cent of all equalization payments, with the smaller have-not provinces taking in approximately 30 per cent.

These developments raise a number of important questions about the future of the equalization program. Just a few of these are:

  • Is the current design of equalization fair? Specifically, is it fair that Ontario receives billions of dollars in equalization payments each year while British Columbia, a province with a similar (but slightly lower) median income does not receive equalization?
  • Are there implications for national unity resulting from the rise of Central Canada as centre of gravity for Canada’s equalization program? Will competition between jurisdictions for scarce resources breed regional tensions and resentments as provinces that have long relied on equalization see their share of the “pie” diminished as more money flows to the somewhat wealthier provinces of Ontario and Quebec?
  • Is the equalization program sustainable if 70 per cent of the population lives in “have-not” equalization receiving provinces? If equalization is flowing to nearly everybody, instead of just jurisdictions facing specific, deep and unusual hardship, has the program lost its fundamental purpose and should it therefore be overhauled?
  • Is Ontario becoming too dependent on equalization payments? Largely due to equalization payments, Ontario now depends on transfers from the federal government for 16.4 per cent of its revenue compared to just 12.0 per cent in 2005/06. A recent news report suggested economic weakness in Alberta could have the effect of altering the equalization formula, and wiping out Ontario’s payments even if economic growth in Ontario remains anemic. Could Ontario’s plan to balance its budget during the final years of this decade survive this type of development, given the substantial risks to its fiscal plan that already exist?

Answering these questions is, of course, beyond the scope of this piece. However, the great shift in the balance of equalization payments away from the traditional smaller recipients and towards Central Canada is a noteworthy development, the complete ramifications of which are still not well understood.

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