Equalization payments

From Academic Kids

Equalization payments are cash transfer payments by the federal government of Canada to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity" — their ability to deliver government services.

Ontario and Alberta are the only provinces that do not receive equalization payments. Some economists have suggested that Saskatchewan and British Columbia will join the ranks of the "have" provinces (i.e., those provinces that do not receive equalization payments) in 2005.

Equalization payments do not involve wealthy provinces making payments to poor provinces; rather, the funds for equalization payments come from the federal treasury. Thus a wealthy citizen in New Brunswick, a "have not" province, pays more into equalization than a poorer citizen in Ontario, a "have" province. Because of Ontario's greater population and wealth, however, the citizens of Ontario as a whole do pay more federal taxes and thus their total contribution to equalization is greater than that of New Brunswick.

Unlike conditional transfer payments such as the Canada Health and Social Transfer, the money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee equal levels of health care, education, and welfare in all the provinces.

Today the total amount of the program is around 10 billion Canadian dollars per year.

The payments have the added benefit of promoting national unity. Quebec, the most populous of the "have not" provinces, is by far the largest single recipient of the payments.

History

The basics of equalization payments have been around since Canadian Confederation when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed.

A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist James Buchanan and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada.

The original program had the goal of giving each province the same per capita revenue as wealthy Ontario. Five years later this goal was reduced to ensuring each province had revenue that equaled the national per capita average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy, this gave Canada by far the world's most generous system of equalization payments.

The 1982 Constitution Act creating a new constitution included the rights of the poorer provinces to equalization payments and it is extremely unlikely that this provision will be amended.

In 2004, the federal government and the provinces agreed to a new formula for equalization payments that increased the funding given to "have not" provinces. Some "have not" provinces accepted the deal reluctantly however, complaining of insufficient money and a new per capita formula to be introduced in 2005-06 that will award cash based on population size.

Criticisms

Equalization payments have mostly been criticized by leaders of the wealthy provinces. Premiers of oil rich Alberta and Ontario with its large manufacturing base have both criticized the drain on their citizens' finances. Some economists also believe that they have contributed to the Martimes' longstanding economic backwardness.

Supporters argue they are necessary to ensure that all Canadians can expect an equal level of service from their government. Legislation like the Canada Health Act requires equal levels of care, something the poorer provinces would not be able to provide without the assistance of equalization.

But equalization payments still leave the provinces far from equal. Alberta has far lower taxes and a generally higher level of social services due to its oil wealth, while schools in provinces such as Newfoundland and Labrador underperform compared to the national average.

The equalization payments also create a very large scale welfare trap. For instance as Nova Scotia began to develop its lucrative off-shore gas reserves it found that for every dollar in new money brought in it would lose a dollar of equalization payments, discouraging provincial growth. This situation may change if the so-called "Offshore Deal"[1] (http://novascotia.cbc.ca/regional/servlet/View?filename=ns-sign-offshore20050214) negotiated between Ottawa and the Maritime provinces passes through the House of Commons. The deal faces opposition from the Bloc Québécois.

External links


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