OTTAWA - Equalization makes us poorer, encourages bad policy and fosters bitterness. Unfortunately we can't just take it out behind the barn and kill it with an axe. It's wedged into the Constitution and besides, its original purpose of protecting Canadians against the possibility of a provincial government collapsing financially is not unworthy. But we could certainly make it less costly, harmful and unfair.
There's nothing sacred about the existing system. The Expert Panel on Equalization and Territorial Formula Financing claimed in 2006 that, "In many ways, equalization reflects a distinctly Canadian commitment to fairness. It has been described as the glue that holds our federation together." But this is nonsense.
You could travel this country from one end to the other listening to conversations in coffee shops, offices, factories, fields and kitchens and not hear one person say: "Equalization is the glue that holds our federation together." Not one.
The issue here is practical, not sentimental: to redesign equalization payments so they protect people from provincial financial collapse without expensively subsidizing failure. And it's not that hard.
To begin with, its constitutional status poses little real problem. Section 36(2) of the Constitution Act, 1982 says: "Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation." But "committed in principle" is weak language and "reasonably comparable" is hard to define and harder still to go to court over.
Besides, per-capita income in Canada has tripled since equalization was created so it is absurd for any province to cry poverty. Especially when the federal government, through other programs, gives provincial governments nearly $30 billion a year to help them pay for health care and nearly $12 billion for other social programs, as well as paying their residents almost $40 billion in Old Age Security and $22 billion in EI alone.
Canadians are not going to find themselves burning furniture for warmth or eating the cat if their home province suffers a modest financial setback. There is simply no constitutional, economic or moral justification for keeping equalization so generous.
One part of the current system we should keep is to base any subsidy we do provide on a province's fiscal capacity - that is, its theoretical ability to raise money.
Given that a major problem with equalization is its mind-numbing complexity, it might seem better to use something simpler and more familiar like per-capita income. But the program is about public services not standards of living.
Nor would it work to switch to measuring how much money a provincial government actually raises per citizen compared to other provinces. It would be simpler, but would let a province cut taxes to a genuinely irresponsible level (yes, there is such a thing, though it's far lower than most people think) and make everyone else pay.
On the other hand, there's no good reason to base the fiscal capacity calculation on what other provinces actually do raise from various taxes, except convenience. The tax system Canada's politicians and bureaucrats have cobbled together over the years is far from ideal and I'd prefer a flat tax, in practice, and to calculate fiscal capacity. But that's a minor point.
The key problem is that, right now, any province whose fiscal capacity is below the national average gets enough in equalization payments to bring it up to that average. The standard should be three quarters of the national average instead, both for calculating fiscal capacity and for the resulting subsidy.
You'd have change it gradually, of course, because governments and citizens have arranged their affairs around the existing system and it's not nice to surprise people. But a slow, steady move to this new standard, however you measured fiscal capacity, would keep the equalization safety net but stop subsidizing day-to-day poor decisions by perfectly wealthy provinces and fostering regional bitterness. And it would eliminate the federal-provincial tug of war over benefit calculation that contributes so much undesirable complexity, because the program wouldn't be generous enough to be worth fighting over.
Equalization. We can't get rid of it, but we can make it go away.