Problems of the equalization system in Canada - Dissertation Économique

Canada’s fiscal instrument of equalization payments might imply fairness, however, the system is flawed in which it represents a financial drain on the economies of non-eligible provinces. These disparities exist largely because of the unequal ownership of natural resources which allows some provinces to raise revenue more easily (Beland & Lecours, 2016). However, the current equalization system is in need of deep reform. Specifically this paper will argue that equalization payments given from the federal government encourages dependency among the provinces and impedes economic efficiency by discouraging growth. Moreover, the system does not reward provinces such as British Columbia and Alberta for their economic success but instead requires them to contribute to the payments for other provinces.

Equalization has been a fixture of Canada’s federalism since 1957. The current system as been enshrined in the 1982 Constitution, Canada’s equalization moniker is meant to ensure that all provinces have the ability to execute their constitutional responsibilities and allow a Canadian living in a smaller province with a weaker economy to have access to a comparable quality of services to a Canadian living in a more wealthy province. The attempt to reduce the inequality of the horizontal fiscal imbalance reflects Canada’s commitment to helping its country.

Economist Trevor Tombe affirms that the Equalization formula calculates a province’s “potential” to earn rather than the “actual” revenue raised (CBC, 2018), clarifying that Alberta (contrary to popular belief) is not getting the short end of the stick. Alberta chooses to have a deficit, and have low taxes to encourage high spending, their deficit and recession is a result of their government’s actions to not develop natural resources(Tombe, 2018). In addition, the current formula is arguably more objective because it is largely based on a province’s fiscal capacity which leaves room for few ambiguities (Beland & Lecours, 2016). Reforming the system to a more needs-based option would create much more subjectivity and thus obscurities.

Despite the aforementioned arguments, the current equalization system creates the wrong incentives for economic development and encourages dependency on the federal government. While the vertical fiscal imbalance gives the Federal government opportunities to support provinces with a weaker economy, it inadvertently encourages dependency as well (Atkins, 2016). Provinces have less incentive to develop their resources or increase their economy because it will lead to fewer payments. This dependency effect can be seen in Nova Scotia’s ban on hydraulic fracking in the fall of 2014. While

there were many reasons for this decision such as the environmental implications, developing this industry would’ve undoubtedly created jobs and raised revenue in the traditionally “have not” province (Ferede, 2017). Instead, the province continues to rely on equalization payments to sustain their services. Many economists such as J. Mintz argues that the current equalization system as unfair to provinces with a stronger economy as they are left unrewarded for their economic success.

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