Welcome back to the deep dive. Today, we are
walking straight into the fire. Honestly, we
are tackling a topic that is arguably the single
most controversial aspect of Canadian federalism.
Oh, yeah. It is the third rail of Canadian politics.
You touch it and you get shocked. Exactly. We
are talking about equalization payments. And
if you follow this stuff even a little bit. you
know, this is the mechanism that essentially
splits the country into two teams, the have and
the have not provinces, and it makes otherwise
polite people just scream at their television.
It really does. I mean, it's a massive system.
We're talking about moving over $25 billion around
the country in the 2024 -25 cycle alone. And
yet, for all that noise, It's probably the most
misunderstood math equation in the country. Which
is exactly our mission today. We are going to
decode that confusing math, look at the very
messy history, and figure out why the system
even exists in the first place. And we have some
incredible source material to pull from, including
data from Autonomous Trevor Toon, historical
analyses, and official federal numbers. Right.
But before we get to those, the actual buckets
of money, we really have to address the biggest
misconception out there. The one that drives
the anger more than anything else. You mean the
check writing myth? Yes. The idea that the premier
of Alberta, you know, sits down at a desk, sighs
heavily, writes a massive check from the provincial
treasury, and mails it directly to the premier
of Quebec to fund their daycares. Let's be incredibly
clear right off the top here. That does not happen.
Trevor Toombs has spent years trying to hammer
this home. There are zero direct transfers between
provincial governments. Alberta does not pay
Quebec. British Columbia does not pay Nova Scotia.
I like play devil's advocate for a second because
the anger comes from somewhere real. If I'm a
taxpayer in Calgary, I pay federal tax. That
money goes to Ottawa. And then Ottawa sends a
check to Quebec. So while the province of Alberta
didn't write the check. The people of Alberta
certainly feel like they did. And that is the
nuance. The program is funded by the federal
government's general revenues. So that's your
federal income tax, the GST corporate taxes.
Because Alberta has historically had a younger
population with higher incomes, they just pay
more federal tax per capita. Right. So Albertans
as individuals are disproportionately funding
the federal pot. Precisely. But the Alberta government
itself, their provincial budget is not touched
by equalization, not a single cent. OK, so it's
a federal redistribution based on individual
wealth, not a penalty on the provincial government.
But why do we do this? What is the actual point
of shuffling $25 billion around? Well, it's not
just a policy. It is actually the law. It's enshrined
in the Constitution Act of 1982, specifically
subsection 36 -2. And the mandate there is to
ensure that provincial governments have sufficient
revenues to provide reasonably comparable levels
of public services at reasonably comparable levels
of taxation. Which is just a massive mouthful
of legalese. It is. But if you think about what
it means for a second, it's pretty profound.
It means that a kid born in rural Nova Scotia
should have access to roughly the same quality
of school and hospital as a kid in downtown Toronto
without their parents having to pay double the
tax rate just to keep the lights on. Right, so
it's really about establishing a baseline standard
of living for you, regardless of your postal
code. Exactly. It's often called the price of
admission for a federation. OK, let's get into
the mechanics then, because this is where people
really start to get suspicious. How does Ottawa
decide that Manitoba is quote unquote poor and
British Columbia is rich? I mean, they don't
just look at the provincial bank account balance.
Well, and this is the most critical concept to
grasp today. Payments are based on fiscal capacity,
not actual revenue. Fiscal capacity. That sounds
like an economist's way of saying how much money
you could have. That is a perfect way to put
it, actually. The formula measures a province's
ability to generate revenue, not how much they
actually collect in taxes. So wait, if a province
decides, hey, we want to be super popular, let's
slash all our taxes to zero. The federal government
doesn't just rush in to fill that massive hole.
Not at all. The formula uses something called
a representative tax system. Yeah. So imagine
five buckets of potential money in your province.
You've got personal income tax, business income
tax, consumption taxes like the GST, property
taxes, and natural resources. Okay. Five buckets.
The feds look at those buckets in your province
and they ask a hypothetical question. They say,
if this province applied the average national
tax rate to these specific buckets, how much
money would they raise? So it is entirely hypothetical?
Entirely. Even if a province chooses not to tax
its people very much, the formula assumes they
could. They calculate this dollar amount per
person and then they compare it to the 10 province
standard, which is essentially the national average.
It's kind of like a salary cap in sports or handicap
in golf. In a way, yeah. If your province's ability
to raise money is below that national average,
Ottawa writes a check to top you up until you
hit the line. And if you are above the average,
you get a pat on the back. You get zero. You
are a have province. You mentioned the buckets
just a minute ago. We really have to stop on
that fifth one, the natural resources bucket,
because that seems to be where the math gets
incredibly messy. Oh, it is the troublemaker
of the whole system. Including natural resources,
like oil and gas revenues, is hugely controversial,
because if you include 100 % of oil revenue in
the calculation, the resource -rich provinces
look incredibly wealthy on paper. Right, and
the national average shoots Way up. Exactly.
Which would make it harder for anyone else to
qualify for payments. And it would probably make
the resource provinces furious because every
dollar they dig out of the ground basically reduces
their standing. It essentially creates a disincentive
to develop resources. I mean, why drill for oil
if Ottawa is just going to claw back your transfer
payments dollar for dollar? So they came up with
a compromise to fix that. It's called the 50
% inclusion rule. So only half of the resource
revenue counts toward your wealth calculation.
Right. They calculate a province's fiscal capacity
using 50 % of their resource revenues, or 0%,
and they basically use whichever gives the province
a better result. That feels like a bit of a hack.
It is a bit of a hack. It's an attempt to balance
the reality that resources do make a government
rich with the political need to not penalize
economic development. And even with that compromise,
you still have this thing called the fiscal capacity
cap, right? Yes, they had to put a ceiling on
it. Because in the past, you actually had situations
where a have -not province got so much equalization
money from the feds that they ended up with more
cash per person than they have provinces who
weren't getting anything. Which is obviously
a hard sell to the public. You know, here's some
help. Oh, wait, now you're richer than the guy
who just helped you. Right. So the cap ensures
that after the transfer happens, a receiving
province cannot be wealthier than a non -receiving
province. Let's pivot to the history for a moment
because the system hasn't always worked this
way. The program officially started in 1957,
mostly to help out the Atlantic provinces. But
the 1970s seems to be when the wheels really
started to wobble. The energy crisis changed
everything. In the late 70s, global oil prices
spiked. Suddenly Alberta and Saskatchewan were
just swimming in cash. And this skewed the national
average so high that the math basically broke.
How so? Well, in 1978, the formula determined
that Ontario The industrial heartland, historically
the richest part of the country, suddenly qualified
for equalization payments. Ontario. They have
not province in the 1970s. Technically, according
to the spreadsheet, yes. The resource wealth
in the West pushed the national average so high
that Ontario fell below it. But the federal government
looked at that result and essentially said, no,
that can't be right. They just didn't trust their
own math. They realized it violated the whole
spirit of the program. Ontario is obviously wealthy.
The formula just wasn't reflecting it correctly
relative to this massive unprecedented oil boom.
So the federal government actually changed the
rules specifically to exclude Ontario from getting
payments. Which really proves that this whole
system is as much art and politics as it is science.
It absolutely is. And that tension is exactly
what led to the 1982 Constitution Act, where
they finally locked the core principle in. But
even with it in the Constitution, the formula
keeps getting tweaked. Like, Stephen Harper's
government made some very significant changes.
Right, the total transfer protection. I saw that
in the sources. Yeah, that was a temporary shield
they put in place during the 2008 financial crisis.
Basically, they moved away from the pure formula
based on the Al O 'Brien expert panel from 2007.
The protection guaranteed that a province's total
transfers wouldn't drop year over year during
the recession. But when that protection expired
in 2014, it hit Ontario incredibly hard. They
lost about $640 million almost overnight. And
that brings us perfectly to the regional battlegrounds.
This is where the rubber meets the road. Let's
start with the absolute elephant in the room,
Quebec. Quebec is the volume leader, without
a doubt. In 2023 -24, they received around $14
billion. That is more than half of the total
equalization pot. And that number drives people
out West absolutely crazy. Why does Quebec get
so much? It's primarily a function of their size
and their capacity. First, they have a massive
population, nearly 23 % of all of Canada. Second,
despite having a very modern, diversified economy,
their fiscal capacity, their ability to raise
revenue per person, is consistently below the
national average. But there's a massive asterisk
here involving electricity, isn't there? The
whole Hydro -Québec argument. Yes. This is the
specific grievance you hear constantly from the
West. Quebec has massive legacy hydroelectric
resources. Hydro -Québec, which is a crown corporation,
sells that electricity to Quebec residents at
incredibly low rates, far below market value.
So it's a policy choice to give their citizens
cheap power. Correct. But critics argue that
by keeping those prices artificially low, Quebec
is actively suppressing its own revenue. If Hydro
-Québec charged market rates like other places
do, it would make billions more in profit, which
would flow directly to the provincial government.
And that would raise Quebec's fiscal capacity
and their equalization payments would drop. Exactly.
So the argument from the critics is basically
you're subsidizing your own hydro bills to look
poor on paper and then you're asking the rest
of Canada to pay you for being poor. That is
the crux of it. And the numbers are huge. Some
estimates suggest that between 2005 and 2010,
if you accounted for the true market value of
that hydro, Quebec's equalization payments would
have dropped by over $42 billion. $42 billion.
That is a staggering number. No wonder it's a
sore spot. And yet, ironically, Quebec politicians
often hate the payments, too. Former Premier
Bernard Landry famously called them degrading.
The current Premier, Juan Swalago, has called
the dependents shameful. So they want the money,
but they hate the implication that they can't
pay their own way. Exactly. Now let's flip to
the other side of the coin. Alberta. The eternal
have province. The province that really feels
punished for its success. The stats in the source
material are wild. Since 1957, Alberta has received
just 0 .02 % of all equalization payments. They
literally haven't cashed a check since the mid
-60s. But the real anger there isn't just about
not getting money when times are good. It's about
not getting help when things go wrong. Right.
And 2014 is the key date here. Yes. Global oil
prices crashed. Alberta went into a brutal recession.
Good -paying jobs evaporated. The provincial
deficit exploded. By any normal, on -the -ground
definition, Alberta was a have -not economy in
that moment. But the equalization formula didn't
care. No. This is what economists call the recession
paradox. Even though Alberta was hurting badly,
their average incomes were still so high relative
to the rest of the country, and their underlying
fiscal capacity remained so strong that they
were still 41 % above the national average. That
has to be absolutely infuriating. You're laying
people off, your budget is bleeding red ink,
and Ottawa looks at the spreadsheet and says,
sorry, your math still looks too good. We can't
help you. It fueled massive resentment. Trevor
Toomey calculated that in 2015, the very height
of that economic pain, Alberta actually had a
net outflow of $27 billion, meaning $27 billion
more left the province in federal taxes than
came back in any form of federal spending. And
that anger directly led to the 2021 provincial
referendum. Where 61 .7 % of Albertans voted
yes to remove equalization from the Constitution.
entirely. But, and this is a really big, but
they can't actually do that, can they? A single
province can't just edit the Constitution. No,
not at all. You need the 750 formula. Seven provinces
representing 50 % of the population have to agree.
There is zero chance that Quebec, the Atlantic
provinces, or Manitoba would ever vote to delete
the program that fundamentally funds their hospitals
and schools. The referendum was purely symbolic,
a mandate for negotiation. Right. And speaking
of those other provinces, we focus so much on
this Quebec -Alberta fight that we often ignore
the Atlantic provinces and Manitoba, but for
them the stakes are actually much higher. Oh,
much higher. For Quebec, equalization is a nice
substantial chunk of the budget. But for Prince
Edward Island, Nova Scotia, or New Brunswick,
it is an absolute lifeline. We are talking about
billions of dollars annually that make up a massive
percentage of their total provincial revenue.
The sources noted PEI has received over $2 ,300
per person in some years and Nova Scotia and
New Brunswick pull in over $2 .5 billion each
annually. So without this money, what happens
to Halifax or Charlottetown? Collapse is a strong
word, but it's really not far off. They would
either have to slash public services to a level
completely unacceptable in the developed world
or raise taxes to a point that would drive everyone
out of the province. Which brings us to perhaps
the deepest criticism of the whole system, the
wealthier trap. We really have to unpack this
because it's not just about fairness, it's about
actual economic incentives. Yes. This is the
argument put forward by economist Michael Smart,
and it was even conceded by Nobel laureate James
Buchanan. The fear is that the formula might
actually be trapping these provinces in a cycle
of poverty. How does giving someone billions
of dollars trap them? It's all about the clawback.
Let's say you are the premier of Nova Scotia.
You have a chance to develop a massive new industry
that will bring in 100 million dollars of new
tax revenue for your province. Great. That's
amazing. You do it. But because your fiscal capacity
just went up by 100 million dollars, the equalization
formula kicks in and Ottawa says, oh, you don't
need as much help now. So they might cut your
equalization payment by 70 or 80 million dollars.
So you did all that work. You took all that political
risk to grow your economy and your net gain is
only 20 million bucks. Exactly. The marginal
tax rate on economic growth is extremely punitive.
Critics argue this incentivizes have -not provinces
to just keep taxes high and not chase aggressive
economic growth. Because the federal government
creates a floor they can't fall through, but
they also create a ceiling that is incredibly
hard to break through. That is a really depressing
thought. That the safety net is actually a sticky
web. But surely there is a counter argument to
this. The counter argument comes down to simple
geography. You cannot policy your way into having
Alberta's oil reserves. PEI has potatoes and
tourism. They don't have the two men. The goal
of the program isn't to equalize economies. We
physically can't do that, but to equalize the
basic services citizens get. And what about the
flip side of the incentive argument? We talked
about provinces maybe not trying hard enough
to grow. What about provinces not taxing enough?
This is Trevor Toombs' sharpest point regarding
Alberta. Alberta constantly complains about its
provincial deficit and the lack of federal help.
But Alberta is the only province in Canada with
no provincial sales tax. They have relatively
low income taxes. Right. Toombs points out that
if Alberta simply taxed its citizens at the exact
same rates as the rest of Canada does, they wouldn't
have a deficit at all. They would have a massive
surplus. So the message to Alberta from the rest
of the country is basically, you're not broke,
you're just cheap. Essentially, yes. It's very
hard to ask a taxpayer in Quebec or Nova Scotia
who pays incredibly high provincial taxes to
feel sorry for an Albertan who pays no provincial
sales tax, even if the federal math feels unfair
out west. It really is just a tangled mess of
math, politics and geography. So if we synthesize
all of this, what are we actually looking at
here? If you zoom out, equalization really is
the glue of the federation. It is the price we
pay to keep a country this massive and this geographically
diverse together. It ensures that being born
in a poor region doesn't automatically resign
you to a second -class life. But the cost of
that glue is incredibly high. The cost is immense
regional tension. It is mathematically true that
the wealth of Ontario, Alberta, and BC subsidizes
the rest of the country. That creates a permanent
friction. It feels like a penalty for success
to some, and a fundamental right of citizenship
to others. So we've gone through the mechanics,
the history, the battlegrounds. I want to leave
you with a final thought to mull over, something
we haven't touched on yet, but that builds directly
on everything we've discussed. Oh, this is a
good one. We talked about how the entire formula,
and really the wealth of the Have provinces,
is heavily dependent on oil and gas revenue.
But as Canada and the world transition away from
fossil fuels toward a green economy over the
next few decades, what happens to the system?
It's a massive blind spot. If oil revenues collapse
permanently, not just a cyclical recession, the
10 province standard will plummet. Provinces
that are historically wealthy might suddenly
find themselves with diminished fiscal capacity.
Will the traditional have -not provinces be able
to survive if the feds don't have that Western
oil wealth to redistribute? Will the math even
work in a post -oil Canada or will the entire
system bankrupt the federal government? It's
a huge question. If the money pool shrinks...
Yeah. The fight over who gets what is going to
get a lot uglier. A $25 billion question for
the ages. Well, that's it for this deep dive
into equalization. Hopefully the next time a
premier starts shouting about buckets of money
on the news, you'll know exactly what they're
actually talking about. And just remember, nobody
mailed a check today. Thanks for listening. We'll
see you next time.