Canadas Equalization Policy in

Comparative Perspective
Daniel Bland and Andr Lecours
Webinar, October 18, 2016

irpp.org

Fiscal Federalism as
Revenue Redistribution
As Ronald Watts notes, the basis of fiscal federalism is
the redistribution of revenue between central and
constituent unit governments. In most federal systems,
the central government is allocated substantial
taxation powers as a way to mitigate fiscal competition
among the constituent units and to draw on the
administrative advantages of centralizing certain kinds
of revenue levying and tax collection.

A Decentralized Federation
Canada is, from a fiscal perspective, one of the most
fiscally decentralized federations in the world, with the
federal government collecting just over 40 percent of
total government revenues.
Although Canadian provinces have a relatively high fiscal
capacity compared to constituent units of most other
federal countries, this fiscal capacity can vary greatly
from province to province.
Like most other federal countries, since 1957, Canada has
operated a federal equalization program that seeks to
reduce this horizontal fiscal imbalance among provinces.
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Varieties of Equalization Programs (1)

Equalization programs can take many different forms.
Designing and reforming such a program involves making
choices about at least six different features.
1. The first is the source of financing for the program. In
Canada, equalization is financed from the general
revenues of the federal government.
2. The second choice concerns the degree of equalization to
be achieved. In Canada, the operative words are
reasonably comparable levels of public services, as per
article 36(2) of the Constitution Act, 1982; there is no full
equalization in Canada.

Lack of Full Equalization

in Canada

Varieties of Equalization Programs (2)

3. The third choice is the territorial organization of the
transfers. In Canada, as in most other federations,
equalization payments are made by the federal
government.
4. The fourth choice involved in the design or reform of an
equalization program is whether to equalize strictly on
fiscal capacity or to also consider needs, which is not the
case in Canada.
5. The fifth choice to make when designing or reforming an
equalization program is its legal foundation. Canada
constitutionalized the federal governments commitment
to make equalization payments.
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Varieties of Equalization Programs (3)

6. The last choice concerns the governance structure for
equalization. The primary issue here is who will have
decision-making power over the equalization formula used
to calculate payments. In other words, what public
authority will decide which constituent units receive
equalization money and how much. The broad parameters
of equalization for example, are needs as well as fiscal
capacity to be considered? can also be influenced by the
source of authority behind the program. In Canada, the
federal government is the only decision-maker for the
program.

Thinking About Equalization:

Turning to Australia
The Australian federation: high degree of (policy and
fiscal) centralization.
A territorially-homogeneous society explains in part
this centralization: Australia does not have the good
fortune of having a Qubec, but it also does not have
some of the other regional diversities that help keep
the Canadian federation much more decentralised
(Fenna, 2007).
Australian states do not place great value in the idea of
autonomy.
There is a strong emphasis on territorial equality.
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Equalization: The Australian Model

The Equalization pool: the GST.

A consideration of both fiscal capacity and expenditure needs.
A full equalization.
A governance at arms-length: the Commonwealth Grants
Commission (CGC).
- The CGC is composed of a few commissioners and a permanent
staff.
- It holds the best expertise on equalization in the country.
- It is seen as being a-political and neutral.
- The Commonwealth government provides broad terms of
reference to the CGC.
- The CGC makes a recommendation on equalization to the
Commonwealth government.
- The Commonwealth government formally makes the decision.

The Attractiveness of the ArmsLength Governance Model

In Canada, there tends to be episodic but sometimes serious
intergovernmental conflict around equalization. In turn, this
can poison federal-provincial relations more broadly.
Provincial governments sometimes suggest that equalization
is purely driven by politics.
In Australia, equalization is mostly outside of politics.
The process is viewed as essentially technocratic.
States unhappy with their equalization treatment have little
political levers at their disposal to challenge federal
decisions.
The level of intergovernmental conflict around equalization
is low.

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Challenges in Importing to Canada Australias

Governance Model for Equalization
The equalization program as a fundamental program for
the Government of Canada.
Many provinces like the idea of being able to exercise
some political pressure on the federal government.
Who would be appointed as commissioners? Could they
be viewed in non-provincial terms?
The reality of Canada as a federation with strong
provinces is a challenge for the de-politicization of
equalization.

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Conclusion
Worth considering an arms-length agency: a depoliticization as strong as in Australia is unlikely, but some
de-politicization could be achieved.
More generally, rethinking the governance of equalization
policy should move onto the policy agenda before the next
time the program is reviewed in 2019.
Simply tweaking the program from time to time prevents
us from considering some of the bigger structural and
institutional issues relating to the federal equalization
program.

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Thank you for participating

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http://irpp.org/irpp-event/canadasequalization-policy-in-comparativeperspective/
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