Economist proposes changes to equalization payments to ease provincial tensions

Economist Trevor Tombe said a shift to GDP-based equalization payments would shut down debate over the development of natural resources, which tends to pit Alberta and other oil and gas producing provinces against Quebec. Photo by laughingmangovideo/stock.adobe

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One of Alberta’s leading economists says that tying federal equalization payments directly to provincial GDP could help ease regional tensions and ensure equalization dollars are spent more efficiently.

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Trevor Tombe, an economist at the University of Calgary, says that the current equalization formula, which is based on how much revenue each province raises, creates resentment between richer and poorer provinces. That is, it encourages the poorer ones to avoid growing revenues so they can keep getting bigger cheques from Ottawa.

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Tombe said that tethering equalization payments to GDP would make it harder for provinces to game the system.

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“You don’t just sit around a cabinet table and decide that GDP will be higher or lower this year, whereas you can do that with a lot of other policies that are part of the (equalization) program,” Tombe told National Post.

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Tombe is the author of a new report from the Macdonald-Laurier Institute calling on Ottawa to “re-balance” equalization and federal-provincial transfers.

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The report calls for equalization to move to a “simpler macro-based formula” tied to provincial GDP per capita. The new formula could be tweaked to account for provincial age demographics, regional price differences and other relevant factors.

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Tombe said a shift to GDP-based equalization payments would shut down the polarizing interprovincial debate over the development of natural resources, which tends to pit Alberta and other oil and gas producing provinces against Quebec.

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“Moving to a macro-based formula means we can move away from all these discussions around how to treat resource revenues,” said Tombe.

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Quebec has often come under fire from Alberta and Saskatchewan, two provinces that rarely get equalization payments, for happily taking equalization cheques financed by resource revenues while being against pipelines and other oil and gas infrastructure.

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The equalization program was first introduced in 1957 with the goal of ensuring that all provinces could provide reasonably comparable public services. The principle of equalization became part of Canada’s Constitution in 1982.

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Albertans voted overwhelmingly in a 2021 provincial referendum to scrap equalization, with more than six in 10 voters saying that the equalization program should be removed from the Constitution.

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Tombe added that Quebec’s current practice of heavily subsidizing consumer electricity prices brings down its own assessed fiscal capacity, allowing it to claim artificially high equalization payments from Ottawa.

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The report also calls for a reversal of the growth escalator for total equalization payments introduced by the Harper government in 2009. The escalator requires aggregate payments to grow each year in line with recent national economic growth.