Maritime provinces vulnerable to any future changes to equalization program

Alberta Premier Jason Kenney recently confirmed that his government will proceed with an “equalization referendum,” which will ask Albertans to vote on whether they would like to see the requirement for equalization payments to be removed from Canada’s Constitution.

It’s unclear how the referendum will turn out or what, if any, policy changes will actually happen in its wake. However, when equalization payments or intergovernmental transfers find their way onto the issue agenda, policymakers in the Maritimes should take notice. That’s because the Maritime provinces more heavily rely on both equalization (and federal transfers more generally) than any other significantly populated region in the country.

Let’s look at the numbers. In 2019/20, equalization comprised 21 per cent of provincial government revenue in Prince Edward Island, 18.8 per cent in New Brunswick and 16.9 per cent in Nova Scotia. The other two equalization recipient provinces receive less money relative to their overall revenues (12.7 per cent for Manitoba, 9.3 per cent for Quebec).

Thanks in large part to these significant equalization payments, the Maritime provinces generally more heavily rely on federal transfers than all the other provinces. The chart above shows that federal transfers comprised between 31.8 per cent and 37.2 per cent of provincial revenue in the Maritimes in 2018/19. By comparison, federal transfers represent just 15.8 per cent to 17.3 per cent of all revenue in Ontario and the three westernmost provinces.

We recently identified the Maritimes' heavy reliance on federal finances as one of several reasons why the region’s public finances are in a precarious position. If federal policy changes, and transfers from equalization or any other program fall, the Maritime provinces are more vulnerable than other regions because they rely so heavily on federal dollars to fund their programs.

This is not just a matter of hypothetical concern. Heavy reliance on equalization has created challenges for the region in recent history. In the early 2010s, Ontario became eligible for equalization payments, which took a bite out of the equalization money available for the Maritimes. For example, Nova Scotia’s equalization payments (as a share of that province’s total revenue) fell by 4.7 percentage points over just two years as more money flowed to Ontario and Quebec.

Back then, the federal government partially bailed out the Maritime region through an ad hoc and arbitrary “total transfer protection” program, which prevented any province from suffering a drop in their total envelope of nominal federal transfers. Still, even with this help, the Maritimes saw a decline in real per-person transfers.

More importantly, however, this development underscored the fact that the region was especially vulnerable to changes in transfer payments that occur due to factors completely outside the region’s control (again, in this instance, economic developments in Ontario made it a have-not province). And while the federal government of the day made an ad hoc adjustment to cushion the blow, there’s no guarantee of similar assistance in the future.

The Maritimes rely heavily on federal transfers. As such, any changes to equalization or transfer payments may have an outsized impact on the health of public finances in the region.