Federal Equalization Program Flaws Led to $10.5 Billion in Overpayments: Report
Canada's federal equalization program is fundamentally broken, resulting in $10.5 billion in overpayments to "have not" provinces such as Ontario, Quebec, and the Maritimes, at the expense of "have" provinces like Alberta, British Columbia, and Saskatchewan, according to a new study by the Fraser Institute. The fiscally conservative think tank's findings highlight a critical design flaw that has distorted the program's intended purpose since 2018.
The Root Cause: Fixed Growth Rate Rule
The overpayments stem from a fixed growth rate rule introduced in 2009, which links annual equalization payments to the growth rate of the economy. Initially intended to cap annual increases, this rule has instead created a systemic imbalance. Ben Eisen, co-author of the study titled "Equalization Is Broken: How the Continuous Growth Requirement Inhibits Reform," explains that the program fails to adjust as provincial fiscal capacities converge.
"Equalization should shrink when the ability of provinces to raise revenues—particularly between so-called 'have' and 'have-not' provinces—moves closer together," Eisen stated. The current formula, however, does not account for this convergence, mandating upward adjustments instead of decreases, contrary to its core mechanism.
Impact on Provincial Revenues
The disparity in equalization contributions is stark across provinces:
- Alberta, Saskatchewan, and B.C. receive no equalization payments.
- In Ontario, equalization accounts for just 0.2% of provincial revenues.
- In Newfoundland and Labrador, it represents 1.7% of revenues.
- However, in Quebec, equalization makes up 8.4% of provincial revenues.
- The dependency is even higher in the Maritimes: 19.3% in Manitoba, 20.5% in Nova Scotia, 20.7% in P.E.I., and 23.6% in New Brunswick.
This uneven distribution underscores how "have" provinces are subsidizing others disproportionately, despite the program's goal of ensuring all provinces can provide comparable public services at similar taxation levels.
Calls for Reform and Policy Implications
Eisen emphasizes that the program's inability to adapt to changing fiscal realities renders it dysfunctional. "When a program designed to equalize fiscal capacity can no longer adjust to relative changes in that capacity, its core mechanism is no longer functioning as intended," he said. The study argues that policymakers must first address the growth requirement flaw to enable meaningful reforms.
The equalization program is one of the largest components of federal transfer payments, aimed at balancing provincial disparities. Yet, with $10.5 billion in overpayments identified since 2018, the need for urgent corrective action is clear to restore fairness and efficiency in Canada's interprovincial fiscal framework.
