Back in 2023, the Trudeau Liberal government renewed the existing equalization payment formula among the provinces until 2029. This was done with zero consultation with the provinces – an underhanded move but not unusual for the underhanded Trudeau government. Last month at a meeting in Red Deer, Alberta, Prime Minister Mark Carney noted that, despite inquiries from a number of provinces, the federal government would not be opening up the current equalization agreement until its mandatory review takes place in 2029. Such a review was supposed to take place in 2023, but the Trudeau government chose not to do a much-needed review and just rubber-stamped the existing situation until 2029.
Alberta Premier Danielle Smith has been leading the charge to amend the program for the past two years. As Alberta pays the most into the program and receives nothing in return, it’s hardly surprising it would be at the forefront of promoting change. Some of the reforms Smith was seeking include removing the “fixed growth rate” rule that automatically increases the size of the program faster than necessary when the gap between the provinces’ economies shrinks. Smith estimates that Alberta has provided an excess of compensation to the so-called “have-not” provinces of $7 billion over the last five years. Smith also wanted large provincial economies such as Ontario and Quebec to be excluded from equalization as they have a large tax base on which to finance government programs.
The whole point behind the equalization program when it was first introduced in 1957 was to ensure Canadians in all parts of Canada had access to reasonably comparable public services. It was to help provinces with lower revenue-raising capabilities provide services at the same level as provinces with greater access to tax revenues. The program was later enshrined into the Constitution Act in 1982.
As is often the case, the program has become significantly distorted from when it was initially introduced. Any economist would not be surprised to find out that the main impacts of the equalization program has been to discourage economic development because of the fear of losing equalization benefits and favour some provinces more than others because of partisan political biases. Also, the system treats different forms of provincial wealth in different ways and rewards policy choices that do not favour economic development. Basically, the equalization system has become a welfare system for some provinces who have fallen into the classic welfare trap of not undertaking economic development projects because they will lose their equalization payments.
There is also a subjective element to the distribution of equalization monies since, as the program is financed by Ottawa from general revenues, the federal government is responsible for determining the “fiscal capacity” of every province’s theoretical ability to raise revenue. Fiscal capacity is determined on the basis of how much can be raised from business taxes, personal income taxes, HST/GST, property taxes and revenues from natural resources. Interestingly, natural resource revenues are treated differently than other revenues, with only a portion of them included. The calculations are complex and seemingly designed to confuse anyone trying to figure out what the ultimate calculations will be.
There are serious amounts of money involved. For fiscal year 2026-27, there will be about $27 billion for distribution. Quebec will receive just under $14 billion – over half of the total revenues to be distributed. Yet Quebec has refused to develop hydroelectric and fossil fuel revenue sources that could boost its economy in recent years and reduce its dependence on equalization payments. It’s pretty difficult to believe that this revenue distribution is not politically motivated as opposed to being determined by any non-partisan objective formula. As has been the case for decades, Alberta will receive nothing from the current equalization formula in fiscal 2026-27. It’s not surprising that Alberta is most opposed to the current equalization formula, as that province consistently has the most to lose.
Other “have-not” provinces that are perpetual recipients of equalization largesse are the Atlantic provinces. There have been many instances of government in the Atlantic provinces refusing to develop natural resource projects, presumably because they would lose equalization monies. The Atlantic Institute for Market Studies (AIMS) has recently noted how the perpetually stunted growth of the Atlantic provinces has in part been a result of the equalization program that discourages economic development.
The bottom line is that the initially well-intentioned equalization program, intended to ensure an equal level of public services would be offered to all Canadians, has become a means of preventing economic development lest the “have not” provinces lose their equalization welfare payments. This naturally diminishes the economic potential of the whole country and is a source of disunity among the provinces. Carney’s recent summary dismissal of a review of the unfair, unproductive equalization program once again shows the federal dismissal of Alberta’s concerns and the negative impact the program has on Canada’s economy. If Carney really wants to boost Canada’s economy, as he claims, he should consider a serious rework of Canada’s dysfunctional and unproductive equalization program.
She has published numerous articles in journals, magazines & other media on issues such as free trade, finance, entrepreneurship & women business owners. Ms. Swift is a past President of the Empire Club of Canada, a former Director of the CD Howe Institute, the Canadian Youth Business Foundation, SOS Children’s Villages, past President of the International Small Business Congress and current Director of the Fraser Institute. She was cited in 2003 & 2012 as one of the most powerful women in Canada by the Women’s Executive Network & is a recipient of the Queen’s Silver & Gold Jubilee medals.
