Federal Transfers to the Provinces
(How equalization actually works)
One of the least understood features of our Confederation is the term ” Equalization Payments”. In the abstract it is not difficult to explain. Essentially the federal government has a pool of cash that it distributes amongst the provinces, based on each province’s economic capacity, reflected in their ability to charge taxes. These payments intend to enable less prosperous provincial governments to give their residents with public services that are, with reason, comparable to those in other provinces, at reasonably comparable levels of taxation. Sounds good so far?
In 2004, Federal Transfers to Provinces totalled $10,774,000,000.
The formula used to calculate these payments was to take the mean fiscal capacity average between the “median” 5 provinces – Quebec, Ontario, Manitoba, Saskatchewan and British Columbia. With this average then calculate what it will take to bring all provinces up to that level. For example, in 2004, transfers to provinces, based on the formula were as follows (in millions of dollars):
- PEI – 277
- NB – 1,326
- NL – 762
- NS – 1,313
- MB – 1,607
- QC – 4,155
- SK – 652
- BC – 682
There was flexibility in the formula to take into account the revolving prosperity of some provinces. For example, during the period from 1993 to 1999, BC received no payment. They were considered a “Have” province. In 2000 they received $125 million and by 2004 they received $682 million. Saskatchewan, which was traditionally an “Have-not” province, had a blip in its economy in 2003 when payment fell to $0. But they ballooned in 2004 to $652 million.
Ontario and Alberta have been the only consistent “Have” provinces.
In 2005/06 the Transfer formula is being changed to make budgeting easier for the provinces. There are still 8 out of 10 “Have-not” provinces. The major change will be that a floor chunk of change will be established the program. In 2005/06 the floor will be $10.9 billion. Thereafter it grows by 3.5% per year.
The Transfer payments are not tagged with any guidance for their use. The provinces can put them into general revenue and spend them on anything.
The Province of Alberta, with their immense natural resource wealth, creates a distortion in the average capacity. The chart above (from Canada Dept of Finance) shows the level of distortion.