Portico Press

The federal equalisation program is a system in which the redistribution of federal tax revenue is allocated, through a number of transfer funds, to provinces that fall below a standard of fiscal capacity. The political effect of the transfer system is that regional cleavages are potentially accentuated.  The equation that is used to determine the transfer of federal tax dollars has gone through a number of amendments, often prompted from provincial leaders wishing to exert their political influence for an increase in dollars received.  Fiscal capacity utilises the potential tax revenue of provinces, based on the federal tax rate, to determine the necessity of equalisation payments.  The equalisation program underwent numerous iterations that changed its determination of fiscal capacity.  The most notable change occurred when the “federal government started to take into account 50 percent of provincial natural resource revenues” when assessing fiscal capacity (Beland et al., 2017).  A move that has fomented dissent from resource rich provinces.

The amendment of oil royalties into the fiscal capacity of provinces alienated oil rich provinces because of the perceived federal intervention on provincial responsibilities; natural resources.  A perception of federal over step was only furthered as provincial governments were pressured to not expand their production and extraction of natural resources due to environmental concerns.  While the Kinder Morgan pipeline failed to materialise, the prospective resource capacities continue to be factored into the equalisation payments distributed.  The historical process of determining fiscal capacity had left discrepancies between provinces; were Saskatchewan faced a reduction in equalisation payments “more than the increase in its oil and gas revenues”, atlantic provinces were exempted “as a result of deals [the Atlantic Accords]” (Beland, 2017).  These differences in treatment extend beyond oil royalties and into the debate of general energy resources.  Quebec’s state owned Hydro-Quebec is an example of the complexity in determining a provinces fiscal capacity.  Hydroelectricity revenues are partly factored into fiscal capacity, as such this “provides incentives for the Quebec government to keep its [electricity] prices and royalties low” (Beland et al., 2017).  Quebec receiving equalisation payments is the most prominent controversy in the debate over the welfare program because of its ability to “artificially lower[s] its formal fiscal capacity” (Beland et al., 2017).  

The result is a cleavage between the ‘have’ and ‘have-not’ provinces.  In the past five years this cleavage has reared its head in the form of ‘Wexit’, a western exit party that has a platform of independence from federal intervention in provincial matters and a core focus on protecting western provinces natural resource revenues.  Despite the fringe nature of this party, the ideology that prompted it to exist is important to understand under a broader context in Canadian politics.  The Canadian federal system encompasses very different industries within its provincial boundaries, industries that reach beyond provincial boundaries.  Given this fact, external stimuli must be considered in the complex organisation of the Canadian economy.  When the price of crude oil dropped globally, it sent economic shock waves through oil producing provinces in Canada.  The globalisation of the economy has exacerbated divisions as it has “expose[d] communities to market upheavals” (Rice & Prince, 2013).  These upheavals have resulted in an increase in pluralization in Canadian politics and a renewed debate on the equalisation equation.  As it stands the equalisation program is under fire because of its fiscal federalism that centralises power in the federal government and the perception of favouring some provinces over others.  

Addressing the political controversy of equalisation requires comparing the program to its original iteration.  The goal of equalisation is to enable provinces equal opportunity to provide comparable social services.  In the process of obtaining the goal concessions were made that targeted resource rich provinces, such as B.C, Alberta, and Saskatchewan.  This occurred, in part, because of the oversight on the recommendations made by the Rowell-Sirois Report on fiscal capacity indicators; to “also evaluate their particular expenditure needs” (Beland et al., 2017).  Alberta is a key indicator of this oversight, as oil prices plummet the reciprocal need for provincial expenditure increases.  The equalisation payments lag behind the need of provinces that make up the majority of contributions to the program.  

The modern Canadian welfare state is underpinned by the equalisation program that redistributes Canada’s wealth.  Within the program are numerous markers of its history of concessions, centralisation of power, and increasing complexity in determining fiscal capacity.  The result is that politicised elements of equalisation sows division in Canadian provinces and pluralizes the debate on fiscal federalism. 

Citations

Rice, J. J., & Prince, M. J. (2013). Changing politics of Canadian social policy. University of Toronto Press. 

Béland, D., Lecours, A., Marchildon, G. P., Mou, H., & Olfert, M. R. (2017). Fiscal federalism and equalization policy in Canada: Political and Economic Dimensions. University of Toronto Press. 

Rowell, Newton & Sirois, Joseph. (1940) Royal Commission on Dominion–Provincial Relations.