Alberta Government Paper Calls for Change or End to Federal Equalization Program

Prime Minister Justin Trudeau meets with Alberta Premier Danielle Smith as Canada's premiers meet in Ottawa on Feb. 7, 2023. The Canadian Press/Sean Kilpatrick

EDMONTON—Alberta Premier Danielle Smith says her government has heard “loud and clear from Albertans that the federal equalization program is unfair and must be changed or abolished.”

In a April 21 news release accompanying a position paper title Responding to Canada’s Growth Challenge – Options to Reform Equalization, Smith suggests that the current program “creates barriers to regional economic growth and gives excessive transfers to recipient provinces.”

The equalization program is a federal government transfer payment program that sends money from wealthier provinces to provinces with less capacity to raise revenue. This is to “ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation,” states the Constitution Act, 1982.

The program is federally funded from general revenues, largely raised through federal taxes, with no contributions from provincial governments.

The present system uses a formula to determine each province’s fiscal capacity, which represents the tax revenues a province could raise if it were to tax at the national average tax rate.

A province’s fiscal capacity is determined across five revenue categories: personal income taxes, business taxes, consumption taxes, property taxes, and natural resource revenues.

In the news release, Smith said the position paper is a starting point for a national conversation. It proposes reforms that the Alberta government maintains would encourage provinces “to adopt pro-growth policies to reduce their dependence on federal transfer payments.”

Alberta is advocating for a simpler approach to calculating equalization payments. It suggests using gross domestic product (GDP) and population—rather than “a GDP floor, the fiscal capacity cap, multiple resource revenue inclusion rates and others”—to calculate if a province falls above or below the national average.

Alberta’s proposed approach would use an agreed-upon definition of revenue to calculate the revenue-to-GDP ratio that represents the national average tax rate.

“Each province’s fiscal capacity per capita would be calculated by applying the national average tax rate to its GDP per capita and comparing it to the national standard,” says the news release.

The paper also recommends gradually lowering the standard from 100 percent of the national average to 95 percent.

Provinces with GDP per capita that’s more than 5 percent below the national average would still receive equalization. Provinces with GDP per capita within the 5 percent range would be considered to have enough fiscal capacity to provide reasonably comparable public services without federal government transfer payments.

‘Over Equalized’

Alberta held a referendum in October 2021 in which 61.7 percent of those who voted said “yes” to removing the equalization section from the Constitution.

The province listed what it sees as some of the issues with the current equalization program, including that it is too complex, lacks transparency, and can reduce incentives for provinces to grow their own wealth.

Alberta suggests that some provinces are “over equalized.”

“In 2023-24, the Equalization Program will disperse almost $24 billion, however, only $21.6 billion is needed to bring the fiscal capacity of receiving provinces to the national average,” said the news release.

The paper also said improvements to the equalization program must be accompanied by policies that drive economic growth.

Saskatchewan Premier Scott Moe speaks to the media after the Saskatchewan nudget is presented in Regina, on March 22, 2023. The Canadian Press/Heywood Yu

History

In 2018, the federal government under the Liberals extended the current equalization formula until 2024 by burying this plan in a budget implementation bill, without provincial consultation.

At the time, Saskatchewan Premier Scott Moe proposed changing the equalization formula to pay out on a per-capita basis. Alberta was at that time governed by the NDPs.

According to a statement from Saskatchewan Finance Minister Donna Harpauer, her province raised the issue again at a meeting with federal, provincial, and territorial finance ministers in early 2023.

“A number of provinces wished to be further consulted, and it is disappointing that the federal government would move forward with these changes without further consultation,” the statement said.

As part of an omnibus budget motion tabled in the House the week of April 19, the Trudeau Liberal government, 200 pages into the document of 400-plus pages, signalled an intention to extend the use of the current equalization formula for another five years, until 2029.

Quebec has historically received the highest equalization payments, with $14 billion paid to that province for the 2023–24 fiscal year. The other provinces that received money in 2023–24 include Manitoba ($3.5 billion), Nova Scotia ($2.8 billion), New Brunswick ($2.6 billion), Prince Edward Island ($561 million), and Ontario ($421 million).

Since its inception in 1957, the equalization program has provided benefits at some point in time to every province in Canada.

At a November 2022 message to Albertans, Smith said the equalization program sent billions of tax dollars “into a black hole of federal bureaucracy and vote-buying arrangements” in other parts of the country.

“These continual federal attacks on our economy and provincial rights cannot be allowed to continue,” she said at the time.

The Canadian Press contributed to this report.