Feds’ equalization program flaws led to $10.5B in overpayments: Report
‘Have not’ provinces such as Ontario, Quebec and the Maritimes rewarded at the expense of ‘have’ provinces such as Alberta, B.C. and Saskatchewan: Fraser Institute
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The federal equalization program is broken, resulting in $10.5 billion in overpayments to “have not” provinces such as Ontario, Quebec and the Maritimes, at the expense of “have” provinces such as Alberta, B.C. and Saskatchewan, according to a new study by the Fraser Institute.
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The fiscally conservative think tank says the overpayments have occurred since 2018 because of a design flaw introduced in 2009 known as the fixed growth rate rule linking annual payments to the growth rate of the economy, which was intended to cap annual equalization increases.
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The program, one of the largest components of federal transfer payments to the provinces, is supposed to ensure all provinces are able to provide comparable public services at comparable levels of taxation across the country.
Ben Eisen, co-author of the study: “Equalization Is Broken: How the Continuous Growth Requirement Inhibits Reform,” said “equalization should shrink when the ability of provinces to raise revenues — particularly between so-called ‘have’ and ‘have-not’ provinces — moves closer together.”
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The problem is that the current formula does not account for the fact that the fiscal capacities of the provinces have been moving closer together over time, while the fixed growth rate rule now mandates upward adjustments to equalization payments instead of decreasing them.
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While Alberta, Saskatchewan and B.C. receive no equalization payments and they account for just 0.2% of provincial revenues in Ontario and 1.7% in Newfoundland and Labrador, they are major contributors to Quebec where they account for 8.4% of provincial revenues, 19.3% in Manitoba, 20.5% in Nova Scotia, 20.7% in P.E.I. and 23.6% in New Brunswick.
“When a program designed to equalize fiscal capacity (in the provinces) can no longer adjust to relative changes in that capacity, its core mechanism is no longer functioning, as intended,” Eisen said.
“In order to make real equalization reforms possible, policymakers will first have to fix the growth requirement flaw.”
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