Coyne: Only thing equalization has spread evenly in Canada is discontent

Whatever the complaints of provinces that don't receive equalization, it pales beside the rage of those that do, should anyone propose to take any away

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The timing was admittedly not the best. Shortly after the premier of Quebec, Francois Legault, declared his opposition to reviving the mothballed Energy East pipeline, which would have transported western Canadian oil through Quebec to refineries in New Brunswick — there was no “social acceptability” for such “dirty energy” in Quebec, Legault sniffed — the federal Finance Department released the figures for next year’s equalization payments. They showed Quebec’s share rising $1.4 billion to $13.1 billion — two-thirds of the $19.8-billion cost of the program.

The response was about what you would expect. Quebec was only too happy to take Albertans’ money, Alberta politicians fumed; it should be no less happy to take the oil that produced it. Alberta Premier Rachel Notley claimed Alberta oil “funds the schools, the hospitals, the roads and potentially even some of the hydroelectricity infrastructure in Quebec.”

But of course Quebec’s hypocrisy is not the real issue here. What truly eats at Albertans and their leaders are the terms of equalization itself. Alberta is running large deficits, the argument runs; Quebec is in surplus. And yet Quebec is eligible for equalization payments, while Alberta is not. “Albertans are generous,” Alberta opposition leader Jason Kenney tweeted. “But we shouldn’t be taken for suckers.”

Politicians on all sides in Alberta are demanding a review of the equalization program; Kenney is even calling for a referendum to back Alberta’s demands. And the discontent is not limited to Alberta: Saskatchewan and Ontario are equally adamant that the program must change. By a coincidence, all three are non-recipient provinces.

Fine: there’s lots wrong with the program, which has strayed far from its original intent after repeated reworkings over the years. Though forever justified in the language of lofty principle, “reforms” to equalization are typically driven by politics and the need to placate whichever part of the country is angriest at the moment, the “principle” being selected on the basis of its ability to generate the desired outcome.

So instead of a simple program to top up revenues in “have-not” provinces, that they might be able to provide services to their citizens that are “reasonably comparable” to those in other provinces, we have a complex, jury-rigged mess. Total payments under the program do not vary with the degree of disparity between the provinces’ “fiscal capacities,” for example, but must increase every year in line with the economy — no faster but also no slower.

No one can agree on which revenue sources to include in the definition of fiscal capacity — in particular, whether to include 50 per cent of resource revenues, as now, or zero, as Kenney and others demand. No matter: provinces can choose between 50 per cent and zero, depending on which pays them more. And if this should result in a “have-not” province having a greater fiscal capacity than the “haves”? Then part of the payment is clawed back.

Equalization have not or have? Quebec Premier FranÃ§ois Legault and Alberta Premier Rachel Notley at the First Ministers conference on Dec. 7, 2018 in Montreal. Martin Ouellet-Diotte/AFP/Getty Images; Ryan Remiorz/The Canadian Press

That doesn’t begin to describe the complexity of the program. As a result it is broadly misunderstood, notably in the persistent myth that some provinces “pay in” to the program while it “pays out” to others. Not so: it is a federal program, financed entirely by federal taxes. When Alberta leaders complain that the program is funded by Albertans, they mean that Albertans pay a disproportionate amount in federal tax. Yes, they do: because Albertans are, on average, richer than the average Canadian — yes, even today.

The same explains why Alberta does not receive equalization payments: because its own “fiscal capacity,” thanks to Alberta’s oil wealth, is also much higher than the national average. And fiscal capacity is what it’s all about. Equalization has nothing to do with whether a province is in deficit or surplus, since that is a result of all sorts of political decisions unrelated to how rich its economy is. Alberta has a deficit, for example, largely because it spends more on its citizens than other provinces do.

Those leading the charge for a “review” of equalization therefore have an obligation to spell out what they mean. They cannot possibly mean it should be rejigged in such a way as to make Alberta eligible to receive equalization payments: that would make the program even more nonsensical than it is now.

So the agenda must be, not to make the program more generous to provinces that are not currently eligible for it, but to make it less generous to those who are. There’s a good argument for doing just that, actually. At the least, one might expect total payments to shrink as the disparities between provincial economies narrowed. A well-known economic theory, called “convergence,” predicts those disparities should narrow, over time: incomes in poorer provinces, other things being equal, should tend to catch up to their richer brethren.

That in fact they haven’t, after six decades of equalization, may not be coincidental. There’s evidence to support the thesis that equalization discourages provinces from realizing the full potential of their economies. Would Quebec be so hostile to tapping into the abundant reserves of oil and gas under its soil if it had less access to federal transfers? Would Manitoba have sold its hydro-electricity at such a discount? Would the Atlantic provinces have remained such economic backwaters?

Good luck with that, however. Whatever the complaints of provinces that do not receive equalization, it is nothing beside the rage of those that do, should anyone propose to take even a penny of it away; the aim of federal politicians is generally to keep them in rough balance. Equalized resentment may be equalization’s most lasting legacy.

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