Maritime Provinces Should Brace For Lower Equalization Payments
An expert in the financial prosperity of Canada’s provinces is warning the Maritimes that future equalization payments from the federal government may be much smaller than normal.
According to Ben Eisen of the Fraser Institute, the economic gap between the “have” and “have not” provinces is quickly shrinking, which means there may be new “have not” provinces on the horizon. If more provinces qualify for equalization transfer payment, that means there is less money to go around.
“If more provinces have a lower fiscal capacity below the 10-province standard… that means that there are additional provinces that have to divide up (the equalization money),” explains Eisen. “There’s a fixed amount of equalization for everybody. The more provinces become eligible, the less there is for those that were already there.”
“If Alberta continues to struggle as much as it has, and eventually becomes a have-not province, that’s a big province,” he said.
Equalization payments come from a very complex formula the federal government uses to ensure the poorer provinces can provide quality services to its residents, rather than fall behind the richer provinces. In theory, this ensures there is a standard across the country, for things like education and healthcare, regardless of which province people live in.
Nova Scotia and New Brunswick both rely heavily on equalization payments to provide government programs to their residents. In 2019-20 Nova Scotia received $2.015-billion from the federal government in equalization payments alone. That number only increases to $2.146- billion in 2020-2021 and will increase yet again in 2021-2022 to $2.315-billion. New Brunswick receives nearly the same amount and will receive $2.210-billion this fiscal year.
Usually, it is a good thing if economic gaps between citizens begin to close and more people are financially equal. But Eisen says the gap is closing, not because the have-not provinces are gaining ground, but because the resource-rich have provinces are struggling.
“If the lower-income provinces were going gangbusters economically and closing the gap between the richer and poorer provinces, that would be a good news story,” says Eisen. “That’s not what we’re seeing. What we’re seeing is a big drop in fiscal capacity particularly in the oil-rich provinces of the country and commodity-rich places like Alberta.”
Even before the pandemic, commodities prices, like that of oil, were performing far lower than previous years, leaving provinces like Newfoundland and Labrador and Alberta to face budget crunches. The Cov-19 pandemic only made matters worse.
“It’s definitely a trend that’s been going on for a long time, not just when the pandemic first started. How much of it is driven by the pandemic is a very interesting question because the ultimate single driver is probably natural resource revenue,” said Eisen.
There is already a historical example of what happens when a large, have, province suddenly becomes a have not. Nearly a decade ago, Ontario began receiving equalization payments, which ended in 2018-19.
In the 2012-13 fiscal year, Ontario received $3.261-billion in equalization. That same year, Nova Scotia received just $1.268 billion. New Brunswick, meanwhile, received $1.495 billion during that fiscal year.
Over the years, equalization has become a hotly debated political issue. The have provinces have been critical of the program, while the have-not provinces have defended it. The political debate has caused much confusion about how the program actually works. Contrary to popular belief, the have provinces do not directly provide money to the poorer provinces, although it is often framed this way.
“Equalization is a federal government program. So, the federal government collects taxes all across the country… and distributes it to the have-not provinces,” explains Eisen. “So, it’s certainly not a question about Alberta writing a cheque to New Brunswick; that’s not how it works at all.”
Still, Eisen says some of the criticism towards the program is fair. The richer provinces still pay taxes into a program they get no benefit from.
The program has also been criticized for not taking a province’s entire fiscal situation into account to qualify. There’s no better example than Newfoundland and Labrador, which hasn’t qualified for equalization payments in more than a decade. Yet people in this province have one of the lowest per capita incomes in the entire country, and a combination of poor spending choices and tanking oil prices has Newfoundland in a serious debt crisis.
Eisen is unable to predict how big or how small future equalization transfers will be to the Maritime provinces. But whatever the impact of Covid-19, it won’t affect the formula for payments for another two years or more.
If there is one lesson to learn from all this, says Eisen, it’s that provinces should not rely 100 per cent on volatile commodities, like oil, to pay for a government’s budget. It is okay for an economy to reap the rewards of natural resources, but a good chunk of money should go into a heritage fund for future generations, rather than spending everything right now.
“It’s important to remember that the oil and gas industry in Alberta has provided prosperity, good jobs, high incomes, for millions of people over the course of a very long time.”
“I’m not willing to say that that the provinces’ economies have been too reliant on oil and gas revenue…but relying on oil and gas revenue to pay for government programs is misguided.”