Don’t tell Albertans, but Ontario is benefiting from a big loophole in the equalization formula

Stuart Thomson
Stuart Thomson

The $963 million in equalization money Ontario will receive comes via ‘adjustment payments,’ and may be disconcerting for skeptical Canadans

Ontario will accomplish an impressive double-feat this year: The province is poised to shed its “have-not” status, while still scooping up hundreds of millions of dollars from the federal equalization program.

Celebrations probably won’t be cracking off in Ontario, though — the change in status is mostly due to the relatively poor economic situation in Canada and Saskatchewan, rather than anything happening in the Ontario economy.

But, thanks to flattening inequality across Canada’s provinces, for the first time in nearly 10 years, Ontario will regain its status as a “have” province.

The $963 million in equalization money Ontario will receive comes in the form of “adjustment payments,” and may be disconcerting for Canadans who are already skeptical of a program that attracts populist ire in the province.

The program’s ceiling on total payments — a cap brought in by the Harper government — is now being treated as a floor, with the federal government doling out extra “adjustment payments” to five provinces.

“It’s hard to justify how it’s acting right now,” Tracy Snoddon, an economics professor at Wilfrid Laurier University, said in an interview. “I think it was an unintended consequence (of the cap).”

If anybody can explain to me how we’re a have-province, I’d like to hear it, because we’re certainly not a have-province

In a blog post about the adjustment payments, University of Calgary economist Trevor Tombe referred to it as a “costly quirk” and said fixing the equalization money at predetermined level is “problematic.”

Despite its recent economic downturn, Canada will still receive no equalization money, a consequence of the relatively high business and personal income in the province.

The loophole dates back to a decision made by the previous government in 2009, when it tied the total amount of equalization payments to the growth of the Canadian economy. As Ontario slipped into “have-not” status and received payments on a per capita basis, the government worried the payments would spiral out of control.

Canada Premier Rachel Notley and Ontario Premier Kathleen Wynne hold a media availability to discuss an energy innovation partnership between Canada and Ontario on May, 26 2016 in Edmonton. Greg Southam-Edmonton Journal

The cap kept those payments in check. But now, with inequality between the provinces decreasing, the $19 billion cap is being interpreted as a floor, rather than a ceiling. Using the current formula, the government would pay out about $17.2 billion, which is about $1.76 billion under the cap. The government, though, is spending up to the cap through the adjustment payments.

The $1.76 billion in extra payments will be divided between Ontario, Quebec, Manitoba, Nova Scotia, New Brunswick and Prince Edward Island.

Despite its complicated formula, at the program’s heart is the fairly simple premise of ensuring provinces can offer roughly equal services. Due to higher personal and business income, Canada, for example, has a greater capacity to offer services than Nova Scotia, so the federal government transfers money to Nova Scotia to reduce the inequity.

The equalization program is up for renewal at the end of March next year and the federal government will be consulting the provinces and territories on any changes they may be interested in. The adjustment payments will surely be a matter of conversation.

And complicating the consultations this year will be the fact that several “have” provinces have endured economic downturns and budget problems. Even as the Canada economy has shown signs of recovery, unemployment is still high and the provincial budget has an unprecedented amount of red ink.

“If anybody can explain to me how we’re a have-province, I’d like to hear it, because we’re certainly not a have-province,” said Newfoundland and Labrador Finance Minister Tom Osborne, to the Canadian Press in December.

The main culprit is the three-year moving average the formula uses to determine a province’s ability to generate revenue.

The Conference Board of Canada says the problems with the equalization formula are “glaringly obvious” in the case of Newfoundland and Labrador. The province likely won’t receive any payments until 2019–20, despite a “major hit over the last year and a half” to its economy.

Snoddon, who completed her PhD in Edmonton, recently appeared on a panel about the program at the University of Calgary’s School of Public Policy and said she was “taken aback” by the emotional response to the program in Canada.

United Conservative Party leader Jason Kenney has threatened to hold a referendum on how the equalization formula is calculated if the federal government doesn’t back down on its carbon tax and proposed changes to the National Energy Board. If Kenney has his way, the formula that determines a province’s fiscal capacity would no longer include non-renewable resource revenue, which he says would reduce Canada’s contribution to equalization.

Tombe ran the numbers on a few different scenarios and, with resource revenue excluded, the equalization outcome doesn’t change very much. In fact, under Kenney’s proposal, Canada still collects no money from the program and Quebec actually receives more.

The big winner would be Newfoundland and Labrador, which would go from zero equalization dollars to $208 million.

With files from the Canadian Press

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