What will renegotiating equalization mean for P.E.I.?

The debate is coming, and Islanders need to be prepared for the outcomes

There has been considerable public debate recently regarding the need to renegotiate equalization in Canada.

Equalization has been in place since 1957 and has evolved over time. It’s not particularly well understood by the average Canadian. The formula to calculate equalization is complicated; in essence, equalization is meant to average out the fiscal capacity of poorer provinces to provide services of roughly the same standard to their residents. This fiscal capacity relates to a province’s ability to generate revenue through various forms of taxation and is evaluated based on a province’s ability to tax at a level equal to the national average for taxes. Sales taxes, corporate taxes, and personal income taxes are the main sources used to generate revenue for provinces.

In Atlantic Canada, fiscal capacity is limited, given that the tax burden is already the highest in the country. The most recent fiscal year saw $19 billion in equalization payments (more than $400 million for P.E.I.) divided among six have-not provinces, which included the three Maritime provinces. Newfoundland and Labrador was not one of the six have-nots. In recent years, it’s been deemed to be a “have” province despite its economic woes.

Equalization payments come in addition to other transfers from the federal government that all provinces receive for education, health, and welfare (the Canada Social Transfer and the Canada Health Transfer), largely on a per capital basis.

To be clear, individual Canadians

and corporations, not provinces, contribute to equalization payments through federal income tax and GST at the same rates across the country. Equalization payments increase annually, for the most part.

Albertans have long complained that they pay a higher share of equalization than they should, funding about 17 per cent of overall equalization payments while having only about 11 per cent of the population in Canada, according to the Fraser Institute. This is largely the consequence of having significantly higher incomes in Alberta. Quebec is the biggest beneficiary of equalization payments, receiving more than half of such payments.

With the economic power in the country now increasingly shifting to the western provinces, it’s likely the terms of any renegotiated agreement will include conditions related to the development of natural resources, particularly energy

– still a source of wealth in this country.

The recent federal election (and Alberta provincial election) underscores the deepening political divide in the country. With Alberta and Saskatchewan being largely Conservative and the rebirth of the Bloc Quebecois in Quebec, regional tensions are once again on the rise. Don’t expect any attempt at the renegotiation of equalization during the new government’s term, which may only last 18-24 months, but the pressure to renegotiate will only increase with time.

In the meantime, the Maritime provinces should focus on becoming less dependent upon equalization because it’s likely any new deal will be less advantageous. It’s interesting to note the lack of political appetite in this region to debate how the region can become less dependent on these equalization transfers. I believe the majority of Islanders would prefer to be less dependent on the generosity of other Canadians and become more self-reliant.

In the meantime, equalization payments have increased over time in Prince Edward Island (by 27 per cent since 2010-2011) and represented nearly 20 per cent of provincial revenues in the last fiscal year. A growing population (and tax base) provides the best opportunity for the province to become less reliant on equalization going forward. At the same time, Islanders need to better understand the concerns of western provinces and be prepared for some difficult negotiations of the next equalization agreement.

Don Mills is the former owner of Corporate Research Associates and a recognized expert in data trends in Atlantic Canada. After selling his business recently, he remains passionate about data - and learning the guitar. He can be contacted at dmillshfx@gmail.com or on Twitter at @donmillshfx.