Federal Finance Minister Chrystia Freeland gave the Progressive Conservative government of Ontario an unexpected gift in mid-December by announcing that Canada’s wealthiest province (in terms of gross domestic product) would receive equalization payments next year for the first time in five years.
However, it is not because Ontario has become poorer lately that the province will be entitled to $421 million in equalization during the 2023-2024 budget year, which begins in April. This is partly because Quebec has become a little richer and, according to the current equalization formula, its fiscal capacity would have exceeded that of Ontario without these additional amounts, however modest they may be.
Equalization is anything but simple.
Proof that Quebec is getting richer little by little, the province will see its equalization payments increase by a meager 2.6% in 2023-2024, to reach just over $14 billion, while Ottawa will distribute a total of nearly $24 billion in equalization to six provinces, which represents an increase of 9.3% compared to 2022-2023. This jump is also the result of the galloping inflation observed since 2021, the amounts allocated to equalization being linked to the growth of nominal GDP over the last three years. Manitoba will receive almost 20% more in equalization, for a total of $3.5 billion, as its relative wealth has shrunk from the national level over the past year.
In short, in 2022-2023, Quebec received 62.3% of the sums that Ottawa devotes to equalization: this proportion will drop to 58.6% in 2023-2024.
If all the provinces are calling for an increase in federal health transfers, this beautiful interprovincial unanimity evaporates as soon as we talk about equalization. Some western Canadian politicians are bluntly asking that Ottawa abolish this program, which has been enshrined in the Constitution since 1982 and which aims to ensure that less well-off provinces can offer public services “at a level of quality and substantially comparable taxation”. to the national average. Former Alberta Premier Jason Kenney also held a referendum on the subject in 2021: nearly 62% of voters who voted said they wanted the principle of equalization no longer to be enshrined in the Canadian Constitution. But Mr. Kenney’s claims went unheeded; Justin Trudeau’s federal Liberals have turned a deaf ear.
The equalization formula, on the other hand, must be renewed every five years, and the next appointment must take place in 2024.
No major changes have been made to the program since 2008, when Stephen Harper’s Conservative government capped amounts allocated to the program due to the growing wealth gap between Alberta and all other provinces. The price of oil had then reached a peak of US$147 a barrel, and Alberta was swimming in record royalties from its fossil industry. Without this cap, the amounts devoted to equalization (which are entirely financed from federal revenues) were destined to explode. But this single reform did not satisfy critics of equalization, for whom this program creates “perverse incentives” by penalizing provinces that exploit their natural resources. Because any increase in the revenue derived from it results in a decrease in equalization payments. With regard to Quebec more specifically, these same detractors accuse the province of keeping the price of energy from its vast hydroelectric reserves artificially low in order to pocket the difference in equalization.
Although Alberta is enjoying renewed prosperity and budget surpluses these days — thanks to the rise in the price of oil since the Russian invasion of Ukraine, in particular — the grumbling towards Ottawa is not fading. On the contrary, Mr. Kenney’s successor at the helm of the province, the ultra-conservative populist Danielle Smith, favors an even more belligerent discourse. Year after year, Albertans pay more taxes to Ottawa than their province receives in federal spending. “Through equalization and other transfers, [le gouvernement du Canada] siphons billions of dollars from your tax dollars into the black hole of federal bureaucracy and vote-buying schemes in other parts of the country,” the premier said in a televised speech in November. last.
Admittedly, she is far from assured of keeping her post after the Alberta elections which are to be held this spring. But if it survives the next election, the next renewal of the equalization formula may be more difficult than the last.