Equalization is a federal transfer payment program designed to reduce the differences in revenue-generating capacity among Canada’s 10 provinces. The program helps ensure that all Canadians have access to broadly comparable levels of public services.
The Equalization program is fully funded from the federal government’s general revenues. The provinces do not contribute financially to the program, and transfers do not affect a province’s ability to raise tax revenues.
To determine which provinces are entitled to Equalization payments and their amounts, the per capita fiscal capacity of each province is compared with the average fiscal capacity of all the provinces. If a province’s fiscal capacity is below average, it is entitled to Equalization payments to make up the difference. However, if a province’s fiscal capacity is above average, it will not receive any payments.
The mechanism used to calculate the total amount of Equalization payments has been modified many times since the program was created in 1957. The two most recent series of major reforms occurred in 2007 and 2009. In 2007, the treatment of government revenues from natural resources was changed, and a fiscal capacity cap was introduced. In 2009, the growth in the total amount of Equalization payments was limited based on the growth in Canada’s nominal gross domestic product.
The Equalization program has come under criticism for various reasons. For instance, some observers argue that the program may encourage recipient provinces to make decisions that maximize their Equalization payments rather than their long-term economic growth and that decision making regarding the Equalization program is often politicized.
Read the full text of the HillStudy: Canada’s Equalization Formula
By Édison Roy-César, Library of Parliament
Revised by Michaël Lambert-Racine and Édison Roy-César, Library of Parliament
Categories: Economics and finance, Executive summary, Government, Parliament and politics