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VANCOUVER — A new report from the Fraser Institute says a design feature in Canada’s equalization program has led to $10.5 billion in additional payments to provinces since 2018-19.
The study, Equalization Is Broken: How the Continuous Growth Requirement Inhibits Reform, examines how the program distributes federal transfers to so-called “have-not” provinces and finds costs have continued to rise despite a narrowing gap in provincial fiscal capacity.
Equalization is intended to ensure provinces with lower revenue-raising ability can provide reasonably comparable public services. In theory, payments should decline when the difference between provinces shrinks.
But the report says a rule introduced in 2009 requires total equalization payments to grow each year in line with Canada’s overall economic growth, regardless of whether disparities between provinces are increasing or decreasing.
Ben Eisen, a senior fellow at the Fraser Institute and co-author of the study, says the rule was originally designed to control costs at a time when fiscal gaps between provinces were widening.
However, the report says that since about 2015, provincial fiscal capacity has begun to converge, meaning the differences the program is meant to address have been narrowing. Under those conditions, the growth rule has effectively prevented payments from declining.
Instead, the study says, the rule now acts as a floor rather than a ceiling, requiring upward adjustments even when underlying economic conditions would otherwise justify lower payments.
According to the report, this design has resulted in $10.5 billion in additional equalization payments between 2018-19 and 2026-27 that would not have been made if the growth requirement were not in place.
It also finds that in three separate years during that period, more than 10 per cent of the program’s total costs were attributable to the effect of the growth rule.
Eisen says the requirement for continuous growth limits the effectiveness of potential reforms aimed at making equalization more responsive to changing economic and fiscal conditions across provinces.
He says policymakers seeking to reform the program will first need to address the growth requirement before broader changes can be effective.
The Fraser Institute describes itself as an independent, non-partisan public policy think tank.
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