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Fixing Equalization

Frank Atkins

In late October, the Wildrose Party released the Equalization Fairness Panel report, which listed six recommendations for the reform of equalization. I was honoured to be a member of this panel.

This is a topic that a lot of people just seem to accept as given, yet at the same time a lot of people only have a vague understanding of how it works. It should be understood that equalization is just one part of a larger system of transfers. Formally, this system of transfers is composed of the Canada Health Transfer, the Canada Social Transfer and the Equalization and Territorial Formula Financing.

As with any government program, this whole system of transfers is somewhat complicated. There is a belief amongst a non-trivial number of people that at the end of each year, someone writes a cheque to pay for transfers. This is simply not how it works. At the risk of over-simplification, here is a convenient and understandable manner in which to view this system of transfers. In each province, the federal government taxes money away from the province, as well as spending money in the province. If the federal government spends more money in a province that it taxes out of the province, that province is a net recipient of transfers.

For a long time, Alberta has been a net contributor to the transfer system, something that angers Albertans, especially in light of the tough economic times that we are going through now. However, the transfer system is something that Albertans should question in good times or bad times. This is because, in its current form, it is just bad economic policy. A good economic policy would be one that creates incentives for individuals to act in a manner that brings about good economic performance. The transfer system does just the opposite. I once said on a national news program that the system of transfers in Canada was like having your 35-year old son living in the basement without charging him rent and giving him an allowance. He would have no incentive to move out or get a job.

Unfortunately, this is what has evolved in Canada. We have created what many refer to as a “welfare trap”, especially in the provinces east of Ontario. For instance, Quebec and some of the Atlantic Provinces have banned fracking in the name of the environment, while receiving transfer payments. Because of the manner in which the transfer system works, these provinces have no incentive to develop their resource sectors, presumably fearing losing transfer payments.

At the press conference for the release of the Equalization Fairness Panel report, I was asked if I could say anything good about the transfer system. My response was that the original intention was good, but that it had become something other than what was intended by political meddling. In 2019, Canada will enter the next round of negotiations regarding equalization. In Alberta, we need to be prepared for this. You can be assured that Quebec will come to the table with a carefully articulated set of recommendations. Alberta needs to do the same. Now is the time to start thinking about reform of equalization.

Frank Atkins is a Calgary economist and a senior fellow at the Frontier Centre for Public Policy.