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Equalization payments

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Equalization payments are cash transfer payments by the federal government of Canada to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity" — their ability to deliver government services. Currently Ontario and Alberta are the only provinces that do not receive equalization payments. Some economists have suggested that Saskatchewan and British Columbia will join the ranks of the "have" provinces (i.e., those provinces that do not receive equalization payments) in the near future.

Equalization payments do not involve wealthy provinces making payments to poor provinces; rather, the funds for equalization payments come from the federal treasury. Thus a wealthy citizen in New Brunswick, a "have not" province, pays more into equalization than a poorer citizen in Ontario, a "have" province. Because of Ontario's greater population and wealth, however, the citizens of Ontario as a whole do pay more federal taxes and thus their total contribution to equalization is greater than that of New Brunswick.

Unlike conditional transfer payments such as the Canada Health and Social Transfer, the money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee equal levels of health care, education, and welfare in all the provinces.

Today the total amount of the program is around 10 billion Canadian dollars per year.

The payments have the added benefit of promoting national unity. Quebec, the most populous of the "have not" provinces, is by far the largest single recipient of the payments. When BC and Saskatchewan are removed, approximately 70% of the 10 million Canadians residing in "have not" provinces are in Quebec.

Contents

Sources of fiscal capacity

The fiscal capacity of the provinces is determined by measuring their revenue from 33 different sources. Those sources are:

History

The basics of equalization payments have been around since Canadian Confederation 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 wealthy Ontario. Five years later this goal was reduced to ensuring each province had revenue that equaled the national per capita 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 Canada Act 1982, which created a new constitution, included the rights of the poorer provinces to equalization payments in the Constitution Act, 1982, and it is unlikely that this provision will be amended.

In 1994, the federal government implemented the "generic solution" under which Ottawa takes back 70 cents in equalization for every dollar in energy royalties. The deal applies only to Newfoundland and Labrador, Nova Scotia, Quebec and Saskatchewan.

Besides the generic solution, Ottawa has other deals with Nova Scotia, and Newfoundland and Labrador, known informally as the Atlantic Accords to protect them from the loss of equalization payments while their petroleum industries developed:

The Canada-Newfoundland Atlantic Accord, signed in 1985. The Canada-Nova Scotia Offshore Petroleum Resources Accord, signed in 1986.

Both agreements state that the province may tax the offshore resources as if they were on land and the provinces owned them outright. Because the resources are offshore, they legally belong to the federal government. By contrast, Alberta owns its oil reserves outright because they are on land and under provincial jurisdiction.

The Nova Scotia deal offers 10 years of protection from reduction in equalization payments. The deal initially began in 1993-94, but the protection start date was later changed to 2000-01, giving Nova Scotia protection until the 2010-11 fiscal year.

Under the accord, Ottawa reduced equalization payments only 10 cents for every dollar in offshore revenues in the first year. In the second year, the equalization payments were reduced 20 cents for every dollar, and so on. The deal will continue until the protection matches what is available under the generic solution.

The Atlantic Accord with Newfoundland is more complicated. It protects the province for 12 years starting in 1999-2000. The deal guarantees that the province's equalization payments for a given year will be at least 85 per cent of the previous year's payments, and as much as 95 per cent, depending on how the province's treasury compares to other provinces.

Since then, though, the provinces have been pressing for a new deal to retain 100 per cent of their offshore oil revenues, without any reductions in equalization payments.

In October 2004, Ottawa, and Newfoundland and Labrador appeared close to a deal. Ottawa offered an eight-year deal that would allow the province to keep 100 per cent of its revenues, but subject to a cap such that its per capita tax revenue would not exceed Ontario's.

Premier Danny Williams called that a broken promise from Ottawa and walked out of equalization talks. In December 2004, he ordered all Canadian flags to be taken down from provincial government buildings in protest.

Canadian flags flew once again over St. John's Confederation Building in January 2005. Later that month, Ottawa and the provinces did reach a deal that would allow them to keep their energy revenues for eight years, a minimum of $830 million for Nova Scotia and $2.6 billion for Newfoundland and Labrador.

The provinces will continue to receive equalization payments until they have reached the average standard. If they haven't reached that standard by 2012, the deal can be extended for another eight years.

During the second eight-year period, if the provinces no longer qualify for equalization, they will receive transitional payments for two years.

In 2004, the federal government and the provinces agreed to a new formula for equalization payments that increased the funding given to "have not" provinces. Some "have not" provinces accepted the deal reluctantly however, complaining of insufficient money and a new per capita formula to be introduced in 2005-06 that will award cash based on population size.

Criticisms

Equalization payments have mostly been criticized by leaders of the wealthy provinces. Premiers of oil rich Alberta and Ontario with its large manufacturing base have both criticized the drain on local finances. Some economists also believe that they have contributed to the Maritimes' longstanding economic sluggishness.

Normally, under the equalization scheme, for every dollar increase in a province's treasury, its equalization payments go down a dollar. However, if a province loses a dollar for every dollar it makes from the sale of its energy reserves, there's no incentive to develop them at all.

External links

 

From Wikipedia, the Free Encyclopedia. Original article here. Support Wikipedia by contributing or donating.
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