SPEECH: Canada’s Equalization Program Is Unfair and Ineffective

Published on February 02, 2017

When it was started in 1957, Canada’s equalization program had a noble intention: To ensure that Canadians from coast to coast have a similar level of service from their provincial government, whether they live in poorer or richer provinces. It was seen as a way to unite the country.

Unfortunately, that is not how it turned out. The program has had numerous unintended consequences. It is unfair and inefficient in multiple ways. And it is disuniting Canadians instead of uniting them.

During the past ten months, I have travelled across the country and spoken to people in all provinces. Many told me that because of this program, they feel that the federal government is not on their side. They feel that it creates tension between certain provinces. And that it discourages growth and necessary economic reforms.

Let me give you a few examples. With its strong economy and strong energy sector, Alberta has been for years a net contributor to the equalization program. Its citizens pay federal taxes to fund it, but the province never receives any of it.

However, Alberta’s economy has been severely contracting for two years in part because of the collapse in oil prices. Yet, the province will still not get a penny from equalization this year and next year.

The equalization formula uses two-year-old data and calculates an average of fiscal capacity over three years. Albertans are suffering but are still forced to help other provinces with economies in better shape fund their social programs. This is unfair.

Here is another example of unfairness and inefficiency. The equalization formula uses five criteria to determine a province’s fiscal capacity, including energy revenues. However, it doesn’t treat all forms of energy revenues the same way.

In the case of hydroelectricity, it does not use the market value of hydro power produced in Quebec and Manitoba, but rather the subsidized rate at which it is sold in local markets. Because of this, the two provinces appear poorer than they actually are and get more equalization money than they should.

These provinces are therefore encouraged to continue their policy of subsidizing their local customers instead of getting the full value for their energy, for example by exporting it. This whole situation is a mess from the point of view of good public policy. It’s unfair and inefficient.

There is a myth that equalization at least has the benefit of helping have-not provinces economically. But the opposite is true. It has created a poverty trap that prevents them from developing to their full potential.

I would argue that the biggest victims of the equalization program are in fact the citizens of provinces that have been on the receiving end for decades: Manitoba, Quebec, Nova Scotia, New Brunswick and PEI.

Quebec is the province that received the largest amount of money, $10 billion out of a total of $18 billion this year. But that’s because it has a much larger population. The other four actually get more money per capita and are even more dependent on federal support.

This economic reality is well documented. Think tanks in Canada, such as the Montreal Economic Institute, the Fraser Institute, the Frontier Centre and the Atlantic Institute for Market Studies have analysed it in detail in various studies.

These studies have shown that equalization money encourages the growth of the public sector in the recipient provinces, which bids away resources and workers from the private sector and weakens it.

Equalization money encourages recipient provinces to keep taxes high and to intervene more in their economies. They don’t have as much incentive to make their economies more competitive because more private sector growth will lead to less equalization money.

The system is similar to badly designed welfare programs that used to discourage recipients from working, because they would then lose all their benefits and would be worse off than if they stayed on welfare. That’s what we call a poverty trap. These programs were reformed in the 1990s in the US and Canada and since then, the number of people on welfare has been drastically reduced.

It’s time to put an end to this unfair and inefficient equalization program.

It’s time to stop rewarding provincial governments for not adopting better economic policies.

It’s time to give hope and support to Conservatives fighting for free-market reforms and less government intervention in these provinces. Sending more money simply helps those who argue that there is no problem and who favour the status quo.

As leader of the Conservative Party of Canada and prime minister, I will propose first of all to freeze the envelope devoted to the equalization program.

Second, I will set up a parliamentary committee with the goal of reviewing that envelope, examining the current formula and proposing a new one. That new formula should avoid the welfare trap and perverse effects identified by economists. It should encourage provincial governments to take responsibility for their bad decisions, adopt the right pro-growth economic policies, and reduce their dependency on federal money, instead of the opposite.

Kevin O’Leary said earlier this week that he will “force” provinces to adopt some policies that he favours, such as developing natural gas in Nova Scotia. And that he will be “very punitive” if they don’t comply.

This is a totally arrogant and reckless approach, one that will bring back constitutional quarrels between Ottawa and the provinces. It’s similar to the Liberal approach of imposing specific conditions to provinces on how to spend the money for health transfers, even though Ottawa has no jurisdiction in health care. But even worse.

My approach is not to impose Ottawa’s will on the provinces, but rather to reform the equalization program so that it provides the right incentives for economic development. My approach will respect the provinces and our Constitution. My approach will respect taxpayers from across the country who fund this program and demand results.

When I launched my leadership campaign last May, I made it clear that I would base all my policies on four key principles: Freedom, fairness, responsibility, and respect.

I have already announced a plan to lower taxes on individuals and corporations, to reduce the burden of regulation and to remove barriers to trade within Canada. With these policies, the so-called “have-not” provinces will have all the tools to unleash their economies.

This will not only benefit citizens in these provinces. It will make all Canadians more prosperous. And instead of breeding resentment between givers and receivers, it will make our country more united.

Thank you.