POSC 3650-056
Canadian Political Economy
George Chakhunashvili
Research Paper
To what extent equalization program in Canada creates economical dependency of provinces on federal government?
Dimensions of topic and research question
Equalization is a payment made to a state, province or individual from the federal government. The latter’s goal is to offset monetary balances between different parts of the country or between individuals. In simpler words, equalization is a method used by the government for all the provinces or states in its country to reach a monetary equilibrium. This paper examines whether equalization created economic dependency on federal transfers in Canada through an examination accurately the process of equalization. Firstly, in the research paper will focus on the current situation of Alberta and analyzed to depict if this process of equalization is in reality more harmful than beneficial for the province. The second part of paper will analyzes how and in which ways some provinces benefit more than the others hence leading to economic trap for development. Thirdly, this paper will identify and discuss the role of Quebec in equalization. It is also important to mention that an in-depth analysis is done of the role of Quebec in the program to demonstrate how the process of equalization is failing to carry its main function. In the same connective line, the research paper will focus on the creation of dissatisfaction that arises among other provinces caused by this inequality as its closing argument. The conclusion of the research paper will focus on presenting the answer on the research question based on factual evidence and illustrating why precisely this topic matters. Ultimately, an unbiased appraisal is done to objectively reach a correct conclusion.
The federal government's Equalization Program was designed to reduce the fiscal disparity between provinces which have the ability to sustain economically and those who cannot. Its main objective is to allow less prosperous provinces to provide public services comparable to those of their wealthier counterparts, a province will receive equalization payments if its ability to raise money, which is technically referred to as its fiscal capacity, falls below the national standard . The term national standard is different from the national average. Standard has been set by averaging the fiscal capacity of the five middle-income provinces — Quebec, Ontario, Manitoba, Saskatchewan, and British Columbia . The process of equalization was enacted in 1957, it was originally designed to bring all the provinces per capita tax revenues in line with the two richest provinces, later 1982 the system was changed to bring every province up to the national average since that time, the current five-province method came into being and Equalization Program was enshrined in the Canadian Constitution. .
The equalization program works by taking federal tax revenue, collected from across the country and distributing it to the governments of provinces with weaker economies. The objective of such process is to help governments of economically weaker provinces to provide public services reasonably comparable to other provinces at comparable levels of taxation. There are still some issues that the Equalization Program is facing and this can be shown through the analysis of current economic position of Alberta. The province is not benefiting from equalization and it can be gloomy that it has no economical dependency on equalization. The issue with Alberta receiving equalization payments during or after the recession of 2014 is that, the Alberta still had the largest per-capita economy in Canada. Alberta has enough money to sustain and develop by itself without help of equalization; the capital of this province makes it free from the economic dependency on the equalization process. According to Calgary political scientist Trevor Tombe -“At bottom in 2016, Alberta's GDP was nearly $73,000 per person — higher than any other province and much higher than the national average of $56, 000," By having a GDP higher than the national average, it shows that Alberta is not lacking any financial resource, which would drag them down and create dependency on equalization. In fact for Alberta to suite an equalization requirement it would mean taking money from taxpayers all across Canada and transferring it to the richest province in the country, clearly, it won’t minimize the economic pain experienced during the recession however this is precisely the opposite of the program’s purpose.
It is hard to stay that Alberta disadvantaged by equalization, because provinces which have access to such resources such as oil and gas will benefit more than a national average. Until to the point that gas and oil exist in the market, Alberta will have constant inflow of income which will benefit their economy and support its development. Ultimately, the equalization will not be necessary as the state does not need help in sustaining itself. According to Jared Wesley professor at University of Alberta, he suggests that “As long as oil and gas is flowing at all in this country, Alberta will still make more than the national average, and as a result will never receive equalization” .On the other side, it also means that the population of Alberta will pay more tax hence more money will go toward the equalization process. Alberta is not under the equalization process and the money which was received from the population of state will not be used for benefiting the state which pays the most. These tend to create dissatisfaction in the general public of the state which inclines to believe that equalization is unfair. According to Alberta’s Opposition leader Jason Kenney, he suggests that the equalization process is unfair and it is “a slap in the face to Alberta” , he also points out that” “It means we will continue to be forced, even when times are bad in Alberta, forced to subsidize public services in other parts of the country where politicians have been trying to block out pipelines and impair our energy industry.” The dissatisfaction which Alberta is having is reasonable towards the process of equalization because the state does not want to pay more for possessions which will not benefit the state. However, it is important to mention that Alberta is not suited for the requirements for the process of equalization. Due to this, Alberta does not need support as they have stable inflow income which makes them richer than other states which need the support of the federal government. It is crucial to understand that richer states will pay more money because they have the ability to produce more money. Recently, their contributions have been 55 per cent above the national average and about 35 per cent greater than the per capita amount from Ontario . The greater amounts largely reflect the high personal incomes and corporate profits associated with Alberta’s energy boom, the implicit contribution of the average Albertan to Equalization was about $650 per capita in 2010-2011 , Alberta does not receive equalization so that total amount is a net contribution. Difference in the taxation level across provinces was the cause of dissatisfaction in the general public which is the same factors that played a role for creating the opinion of unfair process of equalization towards Alberta. Equalization process does not create dependency of Alberta on the federal system. Alberta is considered as the strongest economy from all the states and it cannot be considered for equalization process. In the case of Alberta being a valid candidate to obtain equalization, this will create the dilemma in which equalization will lose its meaning and power. The development of the state should be equal as this is the main point of equalization. The process of equalization may be viewed as unfair by some state such as Alberta but it is important to note that provinces which pay more usually as it is more developed than other .On the other hand, some provinces which tend to be on same level of development are more apt to benefit more from equalization than others. Differences between equalization distributions across provinces create an economic trap for development for provinces which could base their development purely on federal support.
All provinces can be divided into three groups: the rich province: Alberta, the intermediate provinces: British Columbia, Saskatchewan, Ontario and Newfoundland and Labrador and the poor provinces: Manitoba, Québec, New Brunswick, Nova Scotia and Prince Edward Island. By dividing those provinces in categories, it is easier to identify what provinces should obtain more financial aid. However, the problem arises that despite the visible issues which some provinces face, they tend to not get enough money for solving their domestic issues. This leads to some provinces changing their behaviour regarding collection revenues. Unfortunately the Canadian equalization program opens the door to strategic behaviours because the receiving provinces have the possibility of influencing their fiscal capacity and hence the amounts that they get under this program . According to Michel Smart Professor of Economics at University of Toronto: he analysed provincial fiscal policies in effect from 1972 to 2002, and showed that the average tax rates were higher in the provinces receiving equalization payments than in the other provinces; also that the receiving provinces raised these rates at the moment of receiving equalization payments . In doing so, they caused a flight of economic activity to other provinces, but they were compensated for this loss by larger equalization grants . In case of Newfoundland and Labrador, when it was receiving equalization payments, adopted an uncompromising policy for many years toward the development of the nickel deposit at Voisey’s Bay in Labrador . The province required the transformation of the ore on the island, while the company preferred to ship the unprocessed ore to its existing plants in Sudbury, Ontario. In taking this stance, the province deprived itself of mine royalties. The shortfall was partially compensated, however, by equalization payments that reflected the reduced fiscal capacity. By creating such compensation plans, provinces have lost mine royalties but it also indicated that it created a dependency on equalization . If provinces would keep mine rights then there would be no compensation available, thus leading to the lack of ability to transform these resources. It was crucial to find another way to benefit from it. By putting themselves in the hand of benefiting purely from the compensation of equalization, the state has created a trap for itself where they became depended on this money. Newfoundland and Labrador and Nova Scotia still require equalization protection in order to continue their financial turnarounds. These provinces have endured an extended period of economic decline, which have contributed to a cycle of government deficits and ballooning debt . These underlines that these provinces are depended on equalization support more than anyone as they are facing an economic decline and they are unable to solve the problem by themselves. They have trapped themselves in a loop of dependency on the federal system. On the other side, other oil-rich provinces, such as Alberta; the Atlantic offshore oil industry is still in its infancy and their economic development is not tide towards federal support. By comparing one province to another, it is clear that lower economically developed provinces tend to connect itself towards federal support as one of their main ways of economic development. In 2018-19, the Government of Newfoundland and Labrador will receive $750 million through major transfers compared to Government of Saskatchewan which will receive $1.7 billion through major transfers; Compared to other provinces Newfoundland has received one of the lowest amounts of money from federal support . It seems that even when a province is depended on money it is not receiving enough to create a stable development inflow. This suggests that equalization is not only creating an illusionary support but also it control future development of countries which heavily base their development on process of equalization. On the other side, taxes in Atlantic Canada are really high, it creates dissatisfaction in people as they tend to pay a lot of money but they do not receive a lot back from federal support. Heavy regulation and a refusal to let failing industries go and adapt to new conditions and dynamic new ways of making a living aided and abetted by the feds rigging employment insurance to pour money into precisely those firms unable to offer steady work at good pay without endless subsidies. Equalization is creating more problems rather support for Atlantic Canada as a process of support of Federal system is not fairly dividing support distribution. Alberta took equalization money for the first eight years. But consistent small-government, low-tax policies produced rapid growth and it hasn’t pocketed a dime since 1964 . Thus the state which has primary economical support for natural resources or other resources tend to benefit without having a major equalization support. This leads to the point that the equalization support has its own price as it tend to put the tariffs on federal support and creates economical dependency. Newfoundland and Labrador have not received equalization money for last couple of years because of revenues from offshore oil. State has issues with high unemployment and because of a lack of foundation; their economy which is already weak is struggling even more. This leads to the question of whether equalization has its importance. If provinces are still having economical downfall then, what is the reason for having such program after all. It is clear that process of equalization is a great idea but the execution was done poorly as equality of provincial development has not been achieved. In 2007 clash between Stephen Harper former prime minister of Canada and to Atlantic Provinces, Newfoundland and Labrador and Nova Scotia were another example of how equalization is creating a dependency of weak provinces on the federal system. Newfoundland Premier Danny Williams and Nova Scotia's new premier, Rodney MacDonald, both Conservatives, have accused Harper in the strongest terms of bullying their provinces over equalization and breaking the tenets of the Atlantic accords.
To solve the issue Prime minister offered two basic choices to the provinces, choices that really only affect those, N.S. and N.L. that are also bound by their respective offshore agreements. By introducing the choice for provinces it underlines that equalization is not working as it should as it’s creating dissatisfaction among provinces. These two provinces have the option of staying with the old equalization formula, the one that's been cobbled together over the years, and thereby shielding virtually the full amount of their offshore revenues from any kind of claw back, at least until the accords end in 2012. By agreeing to stick with the old version of equalization, problems of provinces would be postponed rather than solved complete. Choice to stick with old version of program was focused more on short term solution rather a long-term. But it would also mean that provinces are still depended on equalization process and in the future it won’t be able to avoid dependency. On other side Provinces can opt for the enriched equalization plan that Ottawa is now offering, but the calculation for this plan includes 50 per cent of a receiving province's wealth from natural resources, including those offshore. This would mean that all the natural resources which these province’s own and wealth which it brings would be include in equalization plan. This essential would mean that natural resources would not bring as much profit anymore as now they would be include in equalization process. Thus more money would be taken from weaker economically developed states. Two premiers of Atlantic Canada see this as violation of their respective accords. Essentially provinces were forced to choice an option which would benefit them the most. However it never include the fact that no matter which choice they would make in long run their economy would still be depended on federal support. Essential choice was more like an option of their future fate, but each option was coming with its own prices. Some provinces in Atlantic Canada tend to benefit more from equalization process rather than others. But this difference between benefit of province is creating more disturbance between provinces rather a development and at the end of the day they still depend on federal support. Amount of equalization could be different but they all share common economical dependency on federal support. Economical trap has essentially created the dependency which would support the development of economy of state.
However in the case of Quebec and equalization can be considered specifically unequal to other provinces, this lead towards dissatisfaction among other provinces, accusation and demand of changes. The equalization entitlements of the provinces for 2009-2010 announced by the federal government on November 3, 2008, took into account other changes applied by the federal government that were announced to the provinces only on November 14, 2008 . One of these changes concerns a modification in how dividends paid by Hydro One to the Ontario government are treated under the equalization program. The federal government decided to include this source of revenue in the corporate income tax base rather than in the natural resource tax base, as had been the case in 2007-2008 and in 2008-2009, By doing it state has insured and receive of more founds from equalization, In 2009-2010, the effect of this federal decision was to reduce Ontario’s relative fiscal capacity and thereby increase its equalization entitlements. The argument given by the federal government states that government corporation transmits and distributes electricity, but does not produce it. Such an orientation does not seem to contradict the logic of the equalization program. However, all the dividends paid by Hydro-Québec to the Québec government continue to be taken into account by the federal government in the natural resource tax base, even though a considerable portion of those dividends are generated by the transmission and distribution of electricity, just as in the case of Hydro One . The result is an unfair treatment which leads towards dissatisfaction of other states and unfairness of system. Hydro One and Hydro-Québec are both government corporations which have only one shareholder: the Ontario government in the case of Hydro One, and the Québec government in the case of Hydro-Québec. Hydro One’s activities differ in no way from the activities carried on by two of Hydro-Québec’s four divisions, that is, Hydro-Québec Trans Énergie, which operates the largest power transmission grid in North America, and Hydro-Québec Distribution, which distributes electricity to its customers, In a similar manner, the activities of Hydro-Québec Production, Hydro-Québec’s largest division, differ in no way from those of Ontario Power Generation (production), another Ontario government corporation which, like Hydro One, has only one shareholder, the Ontario government. In this way, there is no justification for the federal government, under the equalization program, to treat Hydro-Québec dividends generated by the transmission and distribution of electricity differently from how Hydro One dividends are treated. This unfair attitude leads towards unfair equalization which seems to favour specific states more than others. Point of equalization is lost if there is dominance of favour of federal system over one state compared to others. Furthermore, in 2014, the staggering low price of resources led the economies of Saskatchewan, Alberta and Newfoundland and Labrador went in a downfall, Government revenues plunged, and thousands of people lost their jobs . Despite this downfall challenge, the three provinces were still considered as provinces under the equalization formula, and therefore ineligible for equalization payments. Over the same period, Quebec received $100 billion, including $11.7 billion this year alone . It is unrealisable that a big number of funds were obtained by the province which was not facing any economical downfall. If money would be given towards provinces which truly need it as they face downfall, equalization might work and it would seem fair and just. Premier Philippe Couillard suggests about his province that “it has never been so well off as it is now” . It clearly demonstrates that this is not how equalization should function and that there is high inequality.
Despite clear demonstration of unequal support of Quebec by federal government, even Quebec can be considered as depended on federal support. For 50 years Quebec has been the most consistent recipient of equalization. In this fiscal year alone La Belle Province will receive $11.7 billion out of a total equalization pay-out of $18.9 billion . Without equalization from the rest of Canada, Quebec would instantly lose up to one tenth of its provincial budget. But according to the numbers of equalization, the only way Quebec could break this spiral would be to immediately launch into the most rapid of economic growth in modern Canadian history in which the federal support would be excluded . According to University of Calgary economist Trevor Tombe one of Canada’s leading experts on the equalization program he suggest that in order to state to break the cycle of dependency on federal support province Quebec would need to swell its economy by roughly one third. This suggests that even after unfair support of Quebec by federal government, state is still suffering from cyclic dependency on support. In order to prevent dependency, state needs to introduce economic developing program which will help them to develop and avoid help from federal state. By isolating their economy from outside support Quebec will need to build strong economic development flow in order to maintain development and at the same time avoid massive depends on federal support.
Conclusion
The issues of equalization that Canada faces hold a lot of significance. Equalization in itself is a remarkable process as per the very core of such method is to sustain a failing economy and to be able to achieve financial dependency hence all sub-economies of the country attain an equal level. However, as shown in the above mentioned points, the route that the Canadian government decided to take to execute this process has created numerous problems; dissatisfaction for the provinces. In order for equalization to work efficiently, the federal government needs to take into regard the priorities and major concerns of the said low-economically developing states. A thorough research before the implementation of equalization is recommended. This will help to accurately identify the states that are in dire need for grants and that financial help from the government is the best remedy for those provinces. Once identifying those states, the government can regulate those policies in the equalization process in a way for the provinces to gain more independency. Finally, it is important to keep in mind that equalization should not be a process that remains stagnant over a long period of time. Its policies need to change and adjust with the dynamic changes in the economy of those provinces.
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