- Major Federal Transfers -

Equalization Program

What is Equalization?

• Equalization is the Government of Canada’s transfer program for addressing fiscal disparities among provinces.  Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation.
• The purpose of the program was entrenched in the Canadian Constitution in 1982:

  “Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”  (Subsection 36(2) of the Constitution Act, 1982)

• Equalization payments are unconditional – receiving provinces are free to spend the funds according to their own priorities.

Six provinces to receive $14.2 billion in Equalization payments in 2009-10

• The Government of Canada is acting to ensure Equalization continues to grow in line with the economy. 

How Equalization Works

• Equalization entitlements are determined by measuring provinces’ ability to raise revenues – known as “fiscal capacity”.
• A province’s Equalization entitlement is equal to the difference between its fiscal capacity and the average fiscal capacity of all provinces – known as the “10 province standard”. 
• Provinces whose fiscal capacity is above the standard do not receive Equalization payments.
• Other elements of the program include:
  • Under the Equalization program, provinces get the greater of the amount they would receive by fully excluding natural resource revenues, or by excluding 50% of natural resource revenues. 
  • Nova Scotia and Newfoundland and Labrador maintain the benefits of the Atlantic Accords.  The two provinces are able to continue to operate under the previous Equalization system to receive the full benefits that they are entitled to under the offshore agreements.  These provinces can choose to permanently opt into the program at any point prior to the expiry of the offshore accords.  If either of these provinces chooses to opt into the program, it will benefit from a guarantee that it will do at least as well, on a cumulative basis, as it would have under the formula agreed to at the time the Accord was signed.     
  • In recognition of the significant impact of the property tax change on British Columbia, the program provides additional protection to British Columbia by retaining the existing adjustment factor for its residential property tax in the calculation of its Equalization payments for a three-year transitional period.  Payments to other provinces will not be affected. 

Recent Changes to Equalization

Equalization will be put on a new growth track

• The Equalization program has to adapt to developments that nobody could have foreseen. In particular, the enormous volatility of resource prices is putting unsustainable pressure on the program.
• Furthermore, Equalization has grown by 56 per cent since 2003-04. This rate of growth is clearly unsustainable.
• The Government of Canada is putting Equalization on a new sustainable growth path ensuring that it grows in line with the economy. The growth path will be based on a three-year moving average of gross domestic product (GDP) growth.
• The moving average will help to ensure stability and predictability while still being responsive to economic growth and ensure that provinces are protected against reductions in overall Equalization.

Ensuring that Equalization remains fair

• Up to now, the fiscal capacity of the lowest non-receiving province has been used as the measure to ensure fairness and provide equity and stability.
• But if the number of receiving provinces expands to cover roughly two-thirds of the Canadian economy, a new measure is required to both ensure fairness and that provinces continue to receive a meaningful and stable net fiscal benefit from resources.
• This would be set at the average post-Equalization fiscal capacity of those provinces receiving Equalization. The result is that receiving provinces will get a net fiscal benefit from their resources equivalent to half the per capita resource revenues of the receiving provinces.

Transition Payments

• In keeping with the fiscal balance approach, the Government is providing transition payments for 2009-10, to ensure that a province that receives Equalization in that year will receive no less than its payments for 2008-09.

- Major Federal Transfers -