The Equalization Quagmire: Where Do We Go From Here?
Equalization has been a key component of Canadian finance in one form or another since Confederation. Formalized into a formula-based program in 1957, equalization was designed to be a provincial government welfare program meant to equalize the per capita fiscal capacity of all Canadian provinces. The Equalization system has had a major impact on public services in Canada. Measures of inter-provincial disparities typically show that while differences in private sector economic measures have persisted, there are small disparities in public sector programs. However, a series of practical adjustments to the Equalization system in Canada has moved it so far away from its original goal that it no longer addresses the equalization of provincial tax capacity in an effective way.
Growth in the importance of resource revenues in provincial tax bases, combined with the federal government’s lack of access to those revenues and the non-contributory structure of the system, has led to changes in the Equalization system that have moved it away from its purpose as enshrined in the Constitution Act, 1982. Under the Representative National Average Standard (RNAS), the goal of comparable levels of public services and tax rates was compromised to some degree because the system equalized recipient provinces up to a national average but did not move rich provinces down to the same standard. The Representative Five Province Standard (RFPS) also only partially addresses the main economic rationale for Equalization, the elimination of differences in net fiscal benefits between provinces.
In the near future, the federal and provincial governments will be attempting to reach an agreement on how to change the Equalization formula to address the problems that have arisen. Saskatchewan, which has seen its increasing resource revenues completely offset by reduction in its Equalization entitlements, has much to gain from addressing the deficiencies of the current system. A major reform may prove difficult because of the constitutional impediments to implementing a true equalization system. It is more likely that the future changes to the system will be of a piecemeal variety. A wiser path would be to allow the Equalization program to address the goals set out for it and to reform the system in a way that would improve its effectiveness in achieving these important goals.
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