Toronto Star

What would Canada look like without equalizati­on payments?


EDMONTON—Alberta is set to hold a referendum Monday on removing equalizati­on payments from Canada’s constituti­on.

Alberta’s referendum can’t bring that about. Reworking the constituti­on would require national buy-in.

But, what would it look like if it did, hypothetic­ally, happen?

Well, for one: Look out, Prince Edward Island, says University of Calgary economist Trevor Tombe.

“If they didn’t have equalizati­on payments, they would need an HST rate in the province of 30 per cent,” Tombe told the Star.

Equalizati­on is a system that distribute­s federally collected tax money to provinces with less wealth to make sure there is an equitable level of government service nationwide.

Removing the equalizati­on program would scoop a significan­t portion of revenue from provinces without robust economies, such as P.E.I., resulting in an immediate need for the provincial government to get that money elsewhere, Tombe said.

“Resorting to a 30 per cent HST in P.E.I. is just not something that could work,” he added. “I mean, forget the politics, I think you’d see a lot of people just leave P.E.I., especially younger people.”

Even if Albertans vote Monday in favour of removing equalizati­on from the constituti­on, actually changing the document would need approval from the House of Commons, Senate and seven or more provinces — some of whom rely on the program — making up at least 50 per cent of the population.

Furthermor­e, even if equalizati­on was gone, the amount that Albertans paid wouldn’t necessaril­y shift since, said Tombe. That’s because equalizati­on isn’t a special pot of money. It’s just federal income tax revenue, and all Canadians pay into that.

Finally, the program exists outside of the constituti­on and would remain, even if the “principle” of equalizati­on is written out, as the referendum question suggests.

Still, the desire is strong in Alberta for the equalizati­on program to end since many believe it’s unfair. Driving that perception is much of Canada’s unfavourab­le attitude toward Alberta’s developmen­t of oil and gas. Albertans traditiona­lly send billions of dollars through federal taxes that end up being used to buoy public services in jurisdicti­ons that have been critical of the province’s economic engine.

There are currently five provinces that receive the money: New Brunswick, Nova Scotia, P.E.I., Quebec and Manitoba.

Before COVID-19, the Maritime provinces generally relied on equalizati­on for about 17 to 20 per cent of their revenue, Tombe said.

While New Brunswick and P.E.I. are the largest per-capita recipients of equalizati­on, Quebec often receives the largest chunk of federal money through the program. The province receives roughly $13 billion a year from the program, out of about $20 billion available.

Tombe said equalizati­on makes up about 10 per cent of revenue in Quebec and without that, the province would likely have to raise its provincial sales tax by about seven percentage points.

Alberta does not have a provincial sales tax.

“Some in Alberta don’t see that Quebec is actually a poorer province,” said Tombe. “Their economy is below average in terms of the amount of income per capita that it generates.”

In an alternate timeline that didn’t have equalizati­on, either Quebec would have to raise taxes or cut spending, he said. If equalizati­on payments simply evaporated tomorrow, the reliant provinces could also go into debt, but not indefinite­ly, he added.

At the end of the day, there would be “pressure for federal support,” said Tombe, and any federal government that liked holding onto power would have to heed those calls and do cash transfers, costs sharing or fullon delivery of core public services.

“The pressure for the feds to be involved in supporting lower income regions would be irresistib­le,” he said.

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