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Equalization: Is Quebec committing a hold-up?

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Canadian provincial flags. Photo: S0MEBODY 3LSE/Flickr

Is it normal that Albertans pay the much too generous social programs to which the people of Quebec are treating themselves through equalization, especially when they are being patronized regarding the environment by people that refuse to exploit their own gas and oil resources?

That would summarize Danielle Smith's view, the very libertarian leader of the Wildrose. In last April's elections, this party to the right of the right seriously threatened the Conservatives, who have been in power in Alberta for the last 41 years. Are her claims well founded?

Financial transfers within the Canadian federation are a complex phenomenon, with sensitivity to the vagaries of the economic climate. It's an area in which simplistic views are at a greater risk to feed prejudice than to illuminate discussions.

The equalization program's aim is to enable poorer provinces, with a consequently lower fiscal capacity, to offer roughly comparable public services. The program rests on a formula which calculates the difference between each province's fiscal capacity and a Canadian norm (Fiscal capacity refers to the potential revenues that a province could earn if it applied the 10 provinces' average tax rates.) The federal government awards a sum per capita to fill the gap for provinces whose fiscal capacity falls below the norm. Presently, six provinces receive equalization payments, whereas four do not: Alberta, British Columbia, Saskatchewan, and Newfoundland. With the exception of British Columbia, these are the provinces in which is concentrated gas and oil exploitation.

The sum granted to Quebec per capita is far lower than that awarded to other - poorer -- receiving provinces. Quebec's $984 per capita received in 2011 should thus be compared with Nova Scotia's $1,254, Manitoba's $1,388, New Brunswick's $1,990, and P.E.I.'s $2,358. But since Quebec is far more populous, it receives half of the equalization envelope, i.e. 7.6 out of 14.6 billion. Ontario, which only lately swung over to the receiving provinces side, receives only $181 per capita, but gets a 2.3 billion payment given the fact that its population totals 13 million inhabitants.

Equalization, it should be noted, is not a mechanism which directly transfers financial resources from one province to the other. It's a federal program to transfer money to provincial governments, just like the Canadian Health Transfer or the Canadian Social Transfer. Transfers to people or businesses -- e.g. the Old Age Security, Employment Insurance, the Child Tax Benefit -- are an important part of the federal government's operations. For the most part, it's just a big income redistribution machine. Therefore, it's more much logical to look at the balance sheet for the whole of the federal government's spending in a province in relation to the tax revenues it collects there.

Statistics Canada's data shows that the balance of the federal government's transactions in Quebec (revenues minus spending including debt charges applied in proportion to population) has long been negative. The size of this deficit is quite sensitive to economic conditions. During the 1997-2007 growth period, whilst the federal government was piling up budgetary surpluses, it was spending 3.9 billion more per year on average in Quebec than it was earning there. A major part of the 7.6 billion paid in equalization to Quebec, which falls on the spending side of the equation, therefore comes from the taxes collected within Quebec itself. Indeed, the payment is larger than the federal government's deficit in its transactions with Quebec.

Furthermore, provinces use financial transfers to buy products in other provinces. Quebec has an annual deficit of around 2 billion in interprovincial commerce. Hence, another part of the transfers received return to where they came from.

Regarding the so-called "too generous" social programs that Quebec can "treat itself to" thanks to Albertans, the Quebec government presented an interesting rebuttal in a brochure accompanying the 2011-2012 budget. According equalization payment calculations, Quebec has a fiscal capacity of $6,088 per capita before equalization and $7,072 after equalization, i.e. a $984 gain in fiscal capacity.

This calculation however does not entirely reflect the average fiscal capacity of provinces because only half of revenues earned from natural resources are taken into account in the formula. In reality, provinces rather collect around $7,436 per capita. Quebec therefore would have to tax its population $364 per capita more to offer services level with the Canadian average. But in fact, the revenue which Quebec actually collects is $8,520 per capita, therefore $1,084 more than the Canadian average. This tax differential reflects the province's decision to offer more public services. It is therefore untrue to claim that Quebec is treating itself to more extensive public services funded by other Canadians: they are funded by higher provincial taxes than elsewhere.

The same calculations applied to Alberta's case show that the province has a fiscal capacity of $12,710 per capita, but that it collects revenues of only $9,545, on average. Despite its lower tax rates, its fiscal revenues are obviously larger than Quebec's because of oil. If the province does not offer public services as extensive as those in Quebec, it's because it chooses so, rather than because it lacks the fiscal resources to fund them.

Closer examination of the data brings to light worrying tendencies with regards to transfers more generally. As the Quebec government points out in its previously mentioned brochure, the main federal transfers to provinces have lessened from 3.7 per cent of GDP in 1981 to 3.1 per cent in 2011. But there's more. In 1981, transfers with a high redistribution rate, such as social welfare transfers and equalization, made up as much as the other transfers, i.e. 1.8 per cent of GDP. In 2011, this portion had fallen to 0.9 per cent of GDP, whereas that dedicated to transfers in proportion to population, such as health and higher education transfers, reached 2.3 per cent of GDP. In contrast to what some would like to have us believe, federal transfers to provinces are redistributing less and less.

Pierre Beaulne is an economist with Centrale des syndicats du Québec. This article was first posted on Behind the Numbers.

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