Finance Ministers in Ottawa: Equalization on Agenda?

Finance Ministers in Ottawa: Equalization on Agenda?

UPDATED June 26, 2018 11:52amET


Finance Minister Bill Morneau hosts his provincial and territorial counterparts in Ottawa today, with the discussion scheduled to focus on trade and competitiveness — and with visits by Bank of Canada governor Stephen Poloz and ambassador to the U.S. David MacNaughton.

Ministers are expected to talk to reporters at approx. 3:45pm ET / 12:45pm PT – WATCH LIVE ON CPAC

Will equalization also play a role in Tuesday’s talks?

Alberta Finance Minister Joe Ceci told reporters he plans to raise equalization, in the hope of a “better deal” for his province. And Saskatchewan had wanted Ottawa to consider a new model that accounts for population as well as economic power.

But the meeting comes less than one week after passage of federal budget legislation that renews the current formula for another five years to 2024.

In responding to initial media coverage about the renewal, government officials denied it was intentionally concealed in a large omnibus bill, or that provinces had not been notified:

Several ministers spoke to reporters this morning as they arrived at the meeting:

Equalization and the Federation

The equalization program is spelled out right in the Constitution: Ottawa must “ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”

Provinces must be below “the average fiscal capacity” of all 10 provinces to qualify for equalization.

How Ottawa determines the transfer has changed many times since the program begin in 1957. Income tax, consumption tax, property tax, and natural resource revenues are all used to determine who gets what, if anything. What those governments then do with the money is up to them.

But Saskatchewan, which receives no federal equalization, is unhappy with the current system and its sole focus on the “fiscal capacity” of provincial governments.

Here’s how Premier Scott Moe reacted to last week’s stories about the renewal:

 

The Saskatchewan Plan

Saskatchewan is instead calling for a “50-50” approach that accounts for population as well as economic indicators:

The overall amount of equalization and relative fiscal capacity of each province would continue to be calculated in the same manner it is now, using the same revenue sources.  Half of the total equalization pool would be distributed on this basis. The other half would be distributed on a per capita basis, based on the population of each province relative to the other provinces.  This would ensure that all provinces receive some amount of funding from the equalization program, while continuing to ensure the “have not” provinces receive significantly more relative to their size, based on their relative fiscal capacity.

Moe’s system would reduce Quebec’s 2018-19 equalization payment from $11.7 billion to $8.1 billion. Manitoba and the Maritime provinces would also receive less.

Saskatchewan, though, would now receive $301 million. Alberta, $1.1 billion. Newfoundland and Labrador? $140 million. And Ontario would see an additional $3.2 billion.

Economists have argued that economic turbulence and fiscal policy decisions (including how natural resource revenue is used) play no part in the equalization process:

Ottawa administers a separate fund, the Fiscal Stabilization Program, to top up provincial treasuries during major economic downturns — but not to replace revenue lost from tax cuts or other fiscal policy decisions. Alberta ($251 million) and Newfoundland and Labrador $32 million) received payments in 2016 following a fall in global oil prices.

 

The Current Payout

Still, the budget bill received royal assent last week — complete with the renewed formula. Here is the equalization transfer for 2018-19 (and the per-person amount), based on Finance Canada projections and Statistics Canada population estimates:

Prince Edward Island $419M ($2736.49)
New Brunswick $1.9BN ($2461.86)
Nova Scotia $1.9BN ($2016.90)
Manitoba $2.0BN ($1510.22)
Quebec $11.7BN ($1387.52)
Ontario $963M ($66.70)

 

As for Territorial Formula Financing:

Nunavut $1.6BN ($41059.91)
Northwest Territories $1.3BN ($28075.82)
Yukon $950M ($24399.01)

 

Ottawa’s equalization transfers are projected to rise three to four per cent annually over the next four years ($ billion), based on Canada’s overall GDP growth:

18-19 19-20 20-21 21-22 22-23
Equalization 19.0 19.8 20.5 21.3 22.1
Territorial Formula Financing 3.8 3.9 4.0 4.1 4.2
Canada Health Transfer 38.6 40.2 41.7 43.3 44.9
Canada Social Transfer 14.2 14.6 15.0 15.5 15.9

Source: Finance Canada/2018 Budget

-Andrew Thomson