The issue of equalization has raised its barely comprehensible head once more. But just because it is complicated doesn’t mean it’s not important.

The Federal equalization transfers are intended to ensure that Canadians receive a similar level of public services at similar levels of taxation, regardless of where they live.

One of the key misconceptions, often repeated by commentators, is that equalization is a transfer from “have provinces” (Ontario and Alberta) to “have not provinces” (all other provinces). In fact equalization funding comes from the federal government’s general revenues and is transferred to “have-not” provincial governments. In other words all taxpayers in Canada pay into the equalization fund. Citizens earning $100,000 in Nova Scotia and Alberta pay the same amount into equalization .

The basic problem that equalization is designed to address is clearly demonstrated by comparing Alberta and Nova Scotia. Through the accidents of history and geography, the Alberta economy, with all its energy resources, generates sufficient provincial government revenues that Alberta (without even resorting to a sales tax) can cover the cost of services such as education and health care. The economy of Nova Scotia, on the other hand, cannot come close to providing the services to Nova Scotians that Albertans take for granted. Thus Nova Scotia receives federal equalization funds that in theory enable its government to provide service levels similar to Alberta’s.

Even though equalization funds do not come from the budgets of “have” provinces, Ontario and Alberta do have an interest in limiting equalization payments to other provinces. They want to ensure that federal funds are available to support national programs that will go to the citizens of “have” provinces. In this sense putting limits on equalization is a thinly veiled grab by wealthy provinces for more federal funds at the expense of provinces in greater need.

The politics and haggling over equalization are a product of Canadian federalism. In less decentralized countries there would be very little question of citizen entitlement to services regardless of where they lived. (In a similar vein we expect Nova Scotians to receive a similar level of services whether they live in Yarmouth or Halifax, in rural or urban Nova Scotia. Without the entitlements to similar services Nova Scotians would move to areas with more services, from rural to urban communities. This would further undermine less prosperous local economies.)

The majority of Canadians, including citizens of “have” provinces, support the principals of equalization and it is enshrined within our Constitution. It reflects one of the fundamental responsibilities of the democratic state to redistribute wealth so as to limit the poverty and inequality between citizens and regions.

The principle of providing similar levels of services and taxation was undermined when in 1982, as a cost cutting measure, Alberta, with its vast oil and gas revenues, was removed from the mix of provinces that produces the standard of provincial comparison. While this decreased federal costs it also curtailed “have-not” provinces’ ability to provide adequate services. As a result Alberta has the capacity to provide a higher level of service at lower levels of taxation. This is already having an impact in Manitoba and Saskatchewan. Because these provinces have insufficient revenue to provide services at similar rates of taxation, they are losing skilled workers to Alberta.

The recent agreement made no attempt to address this. Instead the federal government is taking further steps that will undermine the program. It is negotiating side deals with Newfoundland and Nova Scotia to keep oil and gas revenues out of the equalization agreement. This will lead to more calls to carve out sources of revenue and thereby erode the fundamentals of the program. In fact, it threatens to make the economic disparity between provinces worse, not better. Far better to return to a standard that takes into account all revenues of all provinces.

The recent agreement to initiate a panel to review the equalization program could provide an opportunity to get the equalization program back on track but the signals so far do not bode well. If Ottawa’s record is any indication, the review of the program will result in greater discrepancy between provinces in the levels of services provided. We are also getting indications of what the powerful corporate lobby will be pushing for.

According to a recent report from the corporate funded C.D. Howe Institute the equalization program penalizes provinces that lower corporate taxes, “reduce their debt (rather than spend money ) or develop their economies by selling off natural resources or business enterprises [government enterprises].” The solution according to the Institute is to revise the equalization formula so that it would be more conducive to tax cuts, debt repayment rather than spending on programs, and privatization. Sound familiar?

As with most other government programs, equalization is being challenged by the broader neoliberal agenda that seeks to curtail governments’ ability to promote the public good.

Unfortunately, given his record, I don’t have faith in Paul Martin’s commitment to equalization and to resisting this challenge to active government. I fear that without a return to the principles of equalization, the program will be reduced from a fundamental entitlement of Canadian federalism to a charity role that provides hand-outs at the discretion of the federal government and wealthy provinces.