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Conservative Equalization Policy
15/05/2005

At Bound by Gravity, Andrew has taken a "It's the Policy, Stupid" position on discussing the Conservatives. He really thinks that's what Harper ought to be talking about, now that the party has an official policy declaration (link PDF).

On Friday, he wrote about the party's policy on equalization and joins me in noting that Paul Martin is making the current system dysfunctional. If the Conservatives want to address that, then I would have some interest.

Here is their entire statement on Equalization (link PDF):

22. Equalization

Equalization is an essential component of Canada's nation building efforts. The Conservative Party supports changes to the equalization program to ensure provinces and territories have the opportunity to develop their economies and sustain important core social services. We will remove non-renewable natural resource revenue from the equalization formula to encourage the development of economic growth in the non-renewable resource sectors across Canada. The Conservative Party will ensure that no province is adversely affected from changes to the equalization formula.

Beyond reassuring us that Conservatives, do, indeed, support equalization, most of the policy seems to be a focused on the controversy about natural resources that recently came to a head with Danny Williams demanding a special deal to sustain Newfoundland's equalization levels despite oil revenue growth.

The Conservatives' policy raised questions for me because by excluding non-renewable natural resource revenue from the formula, I began to wonder if they meant to affect not only provinces like Newfoundland, but also Alberta. More than any other place in Canada, Alberta is famous for its oil revenue. So, I did some more research.

How equalization actually is meant to work is described on a federal government web page.

Equalization is the Government of Canada's most important program for reducing fiscal disparities among provinces. Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation.

How the money gets divided is not that complicated. Here's my summary:

  1. The purpose of equalization is to help provincial governments pay for programs by bringing the provinces with less tax base up to a particular standard.
  2. The provincial tax bases are not judged by how much tax they actually bring it, but rather, how much tax per capita they would bring in assuming the province had average tax rates. This is the province's fiscal capacity.
  3. The standard, to which the poorer provinces will be raised, is the average fiscal capacity of five provinces: Quebec, Ontario, Manitoba, Saskatchewan and British Columbia.
  4. The federal government makes a payment to the provinces below the standard in order to bring their capacity up. So, if your province's fiscal capacity is $1000 per person below the standard, then Ottawa sends your provincial government a cheque for $1000 per person.

For 2005/06, more than $10-billion is being redistributed, with about 44% of it going to Quebec, 35% of it going to the maritimes, 15% going to the prairies, and 5% going to BC. The money comes from general federal revenues, collected nationwide, but with higher per-capita contributions in Alberta and Ontario.

In principle I support equalization. Where I have been unhappy is in the growing proliferation of side deals and one-off adjustments. Those sorts of deals have made me more sympathetic to McGuinty's fiscal imbalance complaints, not because the complaints are completely logical, but rather because Martin's special deals are delegitimizing the system. It is becoming more about political payola than it is about "enabl[ing] less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation."

Back to the Conservative policy... In my view, taking steps to factor out natural resources is an unnecessary idea that is not connected to the program's purpose. However, what really worried me about the Conservatives' policy would seem to not be true. Since the equalization standard is set by the average of Quebec, Ontario, Manitoba, Saskatchewan and British Columbia, I don't think that dropping non-renewable natural resource revenue from the formula will have a dramatic effect beyond what Paul Martin has already granted.

I would caution, however, that the last sentence in the Conservative policy is simply untrue. Equalization is the shifting of money from one pocket to another. It is a zero-sum game, so the Conservative Party cannot ensure that no province will be adversely affected from changes to the equalization formula. It remains to be seen what changes the CPC has in mind.


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