François Boucher (Postdoctoral Fellow, Centre de recherche en éthique, Université de Montréal) and Jocelyn Maclure

It is not unusual to hear Canadians, from all the provinces, including some on the right in Quebec, complaining that fiscal federalism disproportionately benefits Quebec. Central in such concerns is the view that the equalization program allows Quebec to ship the costs of its social programs to the richest provinces, mostly Alberta, and keeps Quebec in a state of economic dependency.

The equalization payment program is enshrined in the Canadian constitution in section 36 of the 1982 Constitution Act, which states that: “Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation” (Subsection 36(2) of the Constitution Act, 1982).

This year, Quebec will receive $9.3 billion from the federal equalization program. The economist Pierre Fortin reports that such an amount “makes certain Quebecers publicly express their shame at seeing their province depend to this extent on federal welfare [BS fédéral].”

A similar view on Quebec’s equalization entitlements is also widespread outside of the province. For instance, a few years ago Danielle Smith, head of Alberta’s right-wing Wildrose Party, complained that equalization payments never benefit Alberta, that they are used to pay for social programs that Quebec could fund by exploiting its own natural resources and that it consequently confines Quebec to dependency.

More recently, in his report Supersized Fiscal Federalism, commissioned by the Fraser Institute, Mark Milke shows that net contributors to the equalization program (Alberta, British-Columbia and Saskatchewan) have “smaller government” and spend less on social programs whereas those on the receiving end of the equalization scheme (the so-called “have-not” provinces) tend to spend more on social programs. Milke then seems to assume that the equalization program allows fiscally irresponsible “have-not” provinces to send their bills to the wealthiest provinces. Net contributors to equalization subsidize the choices (seen as “expensive tastes” in the language of contemporary political philosophy) for more social programs of receiving provinces who do not have to cut spending, borrow or raise taxes. As he explains:

In a jurisdiction without transfers from outside of its own borders, a provincial government [attempting to balance its budget] would have a choice between just those three options: higher taxes, pared spending, or more debt. In a system with transfers from outside a particular jurisdiction, a government can choose a fourth option: to use tax dollars from non-residents that then allows a government to avoid answering local voters on their priorities for the first three options. Instead, priorities can be set without regard to the desirability or affordability of a particular program, service, the size of the public sector, and the size of government (p. 37).

Milke is unfortunately promoting a popular myth here. Obviously, it would be unfair if Quebec and other receiving provinces could maintain a strong welfare state while having lower taxation levels than other provinces because of the equalization payments they receive. However, this view is based on a poor understanding of the calculation of the provinces’ equalization entitlements. Resource allocation under the equalization program is based on a fiscal potential, that is, a province’s capacity to raise revenues using a standard taxation rate (the average taxation rate of the ten provinces). The egalitarian metric of Canada’s equalization plan (what it seeks to equalize) is provincial fiscal capacity. Such capacity corresponds to the revenue that a province would have if it were to apply the standard taxation rate.

This means that the fiscal capacity of a province is independent of its actual taxation rates and from its public spending level. In other words, a province’s equalization entitlements do not increase if it spends more, borrows less or lowers taxation rates and, conversely, those entitlements do not decrease as a province spends less, borrows and taxes more. Quebec and other recipient provinces are not on the receiving end of the equalization plan because of excessive spending and lower taxation rates but rather because they are less wealthy in the sense that their fiscal capacity is smaller: they have to apply higher taxation rates than the wealthiest provinces do in order to secure comparable revenue from their income sources.

There are a few more complications as well. We have perhaps exaggerated up to this point the lack of relation between a province’s equalization entitlements and its actual revenues. A province’s fiscal capacity is based on several sources of revenue. In addition to the revenues a province would raise from different taxation bases (individual and corporate income taxes, consumption taxes, property taxes) by applying a standard taxation rate, its fiscal capacity also reflects the actual revenues generated by the exploitation of natural resources. Thus it is not absolutely false to say, for instance, that Quebec uses Albertan tax-payer dollars to fund social programs that could be funded by exploiting natural resources more: Quebec’s equalization entitlements would decrease if it were to raise more revenue by exploiting its natural resources more (or more efficiently). Yet, we have to bear in mind that actual revenue from natural resources is only one source of income among several taken into account in the calculation of equalization entitlements.

Moreover, and this is often neglected, equalization payments are vertical transfers (from the federal government to provincial governments) rather than horizontal transfers from contributing provinces to receiving ones. Therefore, equalization payments are partly funded through taxes collected by the federal government but paid by Quebec’s residents and corporations.

Finally, one has to remember that on a per capita basis, Quebec does not rank among the biggest recipients of equalization payments. In 2013, it received $961 per inhabitant, thus ranking 5th among the 6 recipient provinces, behind Prince-Edward Island, New Brunswick, Nova Scotia and Manitoba (who received, respectively $2343, $2001, $1549 and $1418 per inhabitant). Only Ontario, among the receiving provinces, received less than Quebec ($234 per inhabitant). In addition, equalization payments are only one of the federal transfer payments. All the transfer payments and federal investments in the provinces and territories need to be factored in if we want to assess the fairness of the Canadian resource allocation scheme.

Above all, it is important to stress the egalitarian character of Canadian federalism. On the one hand, the Canadian government could secure the goal of ensuring that every Canadian citizen has equal access to comparable public services by centralizing the welfare state and making social spending the exclusive responsibility of the federal government. This would however require drastic constitutional changes unlikely to be accepted by the provinces. Moreover, the idea of a centralized welfare state does not sit well with the principle of federalism seen as a system of shared- and self-rule.

On the other hand, leaving provinces responsible for most of social spending and rejecting intergovernmental transfers threatens the principle of equality. Indeed, when provinces are in charge of public spending and social programs, it is more difficult for those with a smaller fiscal capacity to offer their citizens services which are comparable to those offered in the wealthier provinces, as they either have to increase their debt or raise taxes. Despite its flaws, the equalization program strikes a balance between equality and fiscal autonomy. For those who are both egalitarians and genuine federalists, this should be celebrated.

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We sketch out an egalitarian theory of federal distributive justice and discuss Canada’s equalization scheme in greater detail in: François Boucher and Jocelyn Maclure, “Federal Distributive Justice. Lessons from Canada,” in Jean-François Grégoire and Michael Jewkes, Redistribution and Recognition in Multinational Federations, Leuven University Press, (2014, forthcoming).