Equalization has always been about keeping Quebec content

Alberta has historically paid in much more than it gets back, Ted Morton writes.

Federal equalization is up for review this year, and the University of Toronto Press has published a timely new book on the subject: Fiscal Federalism and Equalization Policy in Canada.

While the authors defend equalization transfer payments to poorer, have-not provinces, they confirm that politics and partisan self-interest have driven the development of equalization from the start.

The equalization program began in 1957 as “an attempt to break the recent fiscal and institutional isolation of Quebec.”

As separatist unrest grew in Quebec in the 1960s, the Liberal government expanded the number of revenue sources to include 50 per cent of non-renewable resource royalties, and added oil and gas producing provinces such as Alberta and Saskatchewan to the formula. These changes increased the size of the equalization pool paid to the have-not provinces, with Quebec receiving the largest share.

During the 1970s, soaring oil prices transformed Alberta into the richest province in Canada on a per-capita basis. The Trudeau Liberals seized this to expand the quantity of equalization transfers by introducing a new, arbitrary distinction in the equalization formula between “basic revenues” and “additional revenues” (from oil and gas).

But there is no mention of Trudeau’s National Energy Program, arguably the single greatest interprovincial revenue transfer program in the history of Canada. These increases in equalization coincided with the separatist Parti Quebecois winning the 1976 election in Quebec.

In the early 2000s, equalization cheques began to shrink, especially for Quebec. Quebec’s preferred solution: grow the pie, so we will get a larger slice.

This was achieved by amending the equalization formula to include all 10 provinces, including Alberta and its surging oil and gas revenues.How are we to understand this ad hoc evolution of 50 years of equalization policy? The authors are clear on this:

“(E)xecutive discretion has remained the defining principle for governing equalization in Canada. As a result, equalization is never far away from partisan politics. Federal parties can therefore make competing promises about the program before or after they form the government.

“These promises are typically informed by political ... considerations, and they elicit similar thinking on the part of provincial politicians who see something to gain by engaging their federal counterparts on equalization.”

The authors get full credit for laying all the cards on the table in the final and concluding chapter:

“Equalization has most likely helped federalists in Quebec make the case against independence. … The economic arguments in favour of Quebec remaining ... have often featured reference, sometimes explicit and other times implicit, to the equalization program as important to the financing of the province’s social programs.”

In 2018-19, equalization payments will rise to a new high of $19 billion. Sixty-two per cent will go to Quebec, while Alberta taxpayers will contribute about $3 billion. This is only a portion of approximately $20 billion of net federal transfers out of Alberta this year.

Two other federal programs — the Canada Health Transfer and Canada Social Transfer — have a transfer effect. The same is true for federal programs such as employment insurance, Old Age Security and the Canada Pension Plan.

Each year, Albertans collectively pay in much more in that we receive back. Understanding the transfer effects of these other federal programs explains how it is that between 2007 and 2015, Alberta’s net contribution to the federal government was $221 billion, or an average of over $24 billion a year.

None of this should really surprise us. For my generation, Quebec has been explicit or implicit in almost every federal election and policy dispute since we reached voting age. From the NEP in the seventies, to patriation, the charter, Meech and Charlottetown in the eighties; from supply management (dairy, eggs and chickens) to Bombardier; and now blocking pipelines and imposing carbon taxes, there is always a fourth dimension to our federal politics. This book adds another chapter to that list.