There was a predictable skirmish over the federal equalization program last week after Finance Canada announced the details of transfer payments to the provinces for 2019-20. The fact that Quebec received a $1.4 billion increase in equalization may have been enough in normal times to attract some negative comment from politicians whose provinces do not receive equalization. But these are not normal times and even though Parliament renewed equalization to 2024 earlier this year, the program is not likely to disappear as an issue.

Alberta is facing an election in the coming months amid angst over low oil prices and pipelines. On top of that, Quebec’s new Premier waved a red flag at Albertans at this month’s first ministers’ meeting when he dismissed the possibility of the mythical Energy East pipeline crossing Quebec because there was no social acceptability for “dirty energy” from the oil sands.

Legault’s comments were condemned across the board, but Jason Kenney, the man who would be Premier of Alberta, was quick to bring equalization into it. “PM Trudeau gave Quebec a veto over any future Energy East Pipeline,” he tweeted. “Premier Legault exercised that veto, saying oil is ‘not socially acceptable in Quebec.’ Now QC gets $1.4 billion more in equalization for a total of $13 billion, thanks in part to Alberta’s oil industry.”

The first part of Kenney’s tweet – about Trudeau handing a veto to Legault – verges on Trumpian in its mendacity. Energy East’s promoter abandoned the project well before Legault became premier of Quebec, and has shown no interest in reviving it. As for Quebec’s increase in equalization, only a tiny fraction of which can be attributed to “Alberta oil,” Kenney should start to admit that the formula delivering the increase is the handiwork of the federal Conservative government he was part of.

The Harper Conservatives, Kenney among them, brought in a new equalization formula with the 2007 budget. The more generous formula – up 20 per cent between 2006 and 2008 – also contained provisions on treatment of property taxation that delivered an even larger increase to Quebec. Quebec’s equalization payment went up 50 per cent from $4.8 billion to $7.2 billion over the two years.

Alberta benefitted

I have posted on this topic a few times, most recently here, pointing out that not only was Jason Kenney part of the government that crafted the equalization formula that he now suggests favors Quebec, but also that changes to the overall federal transfer system brought in by the Harper government and continued under the Liberals have in fact benefitted Alberta more than any other province.

That’s because the new equalization formula was only part of a package of changes to the transfer system that included equal per-capita cash transfers for health and social programs. Although equalization gets more attention, it represents just over 25 per cent of the $75 billion in major federal transfers to the provinces, while health and social transfers will total $55 billion in 2019.

It was acknowledged at the time that the move to per-capita funding for health and social transfers would benefit the wealthier provinces, but the enriched equalization was supposed to compensate the less wealthy ones for those losses. Unfortunately that has not happened, for several reasons. To recap:

In 2008 the government Kenny was part of deemed that the sudden rise in oil prices and royalties made it too expensive to fully equalize provinces’ fiscal capacity, and so put a ceiling on equalization, limiting increases to GDP growth;

In 2011 the Conservatives announced that the six per cent a year increases in health transfers would end in 2017, to be replaced by increases tied to the rise in the GDP;

In 2013, the Conservatives decided that an extra $800 million in health cash to bring Alberta to the same per-capita cash amount as the other provinces would come from the overall health transfer allotment, reducing increases to the other nine provinces from the usual 6 per cent range to anywhere from 0 (Newfoundland) to 4.3 per cent (Saskatchewan);

Making matters worse, future increases to CHT would be calculated on the diminished 2014-5 base.

As a result, with the exception of Quebec, equalization-receiving provinces (ERPs) like Nova Scotia received lower than average increases in total federal transfers – that’s equalization, CHT and CST – over the last 12 years.

Per-capita change major transfers 2007-2020 ($000,000)

2007-8 2019-0 % change Average 1434 2097 46.2 NL[i] 2882 1465 -49.2 PEI 3110 4160 33.8 NS 2611 3484 33.4 NB 2958 4078 37.9 QC 1902 3013 58.4 ON 948 1465 54.7 MB 2510 3111 23.9 SK 1316 1465 11.3 AB 797 1465 83.8 BC 1021 1465 43.5

As the table compiled from Finance Canada data reveals, Quebec had the second highest increase in overall federal transfers since 2007. The increase was well below Alberta’s and just ahead of Ontario. But Quebec was an outlier among the long-term ERPs, all of whom saw their per capita transfers increase more slowly than British Columbia, Alberta and Ontario.

“Floor”questioned

There are three likely reasons that Quebec’s overall transfers have grown faster than other equalization-receiving provinces. One is economic growth – Quebec’s has been slow, with the province falling behind Nova Scotia into ninth place among the provinces in median personal income. Another is that after ten years, Ontario does not qualify for anything from the equalization pot in 2019-20, freeing up nearly $1 billion, most of which is going to Quebec.

The third factor is a tricky one, the ceiling. It was originally introduced in 2008 to put a lid on equalization, but over the years it has also been treated as a floor, guaranteeing annual increases in equalization cash in line with growth in the economy. With the drop in oil prices reducing the amount needed to equalize resource revenues, some critics are suggesting removing the guaranteed growth factor, likely reducing spending on equalization.

An analysis by University of Calgary economist Trevor Tombe found that for 2018-19, only $17.20 billion of the $18.96 billion pot was needed to equalize up to the current standard, with the surplus created by the growth factor distributed as adjustment payments. Payments from the surplus went mainly to Ontario and Quebec this fiscal year, but Nova Scotia received $66 million, New Brunswick $53 million and PEI $10 million.

With equalization renewed through to 2024 it may appear that the foes like Jason Kenney have missed the boat, and are just blowing off political steam in reaction to Quebec’s refusal to play nice on pipelines. However there is some ambiguity about whether the floor is mandatory or can be removed at the government’s discretion, providing an opening for equalization’s legions of critics to claim the program is too generous and should be cut.

The best defense against such an attack is to recite recent history, a history in which a succession of changes to the whole package of federal transfers – for health, social programs and equalization – have generally favored the larger, wealthier provinces at the expense of the poorer ones.

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[1] Both Newfoundland and Labrador and Saskatchewan received some equalization in 2007-8 but because of increased fiscal capacity due to resource development their 2019-20 transfers consist only of CHT and CST