WEBVTT 00:00:00.000 --> 00:00:03.100 Welcome back to the deep dive. Today, we are 00:00:03.100 --> 00:00:05.599 walking straight into the fire. Honestly, we 00:00:05.599 --> 00:00:08.179 are tackling a topic that is arguably the single 00:00:08.179 --> 00:00:11.220 most controversial aspect of Canadian federalism. 00:00:11.220 --> 00:00:13.939 Oh, yeah. It is the third rail of Canadian politics. 00:00:14.080 --> 00:00:16.920 You touch it and you get shocked. Exactly. We 00:00:16.920 --> 00:00:20.140 are talking about equalization payments. And 00:00:20.140 --> 00:00:22.579 if you follow this stuff even a little bit. you 00:00:22.579 --> 00:00:24.460 know, this is the mechanism that essentially 00:00:24.460 --> 00:00:27.480 splits the country into two teams, the have and 00:00:27.480 --> 00:00:29.820 the have not provinces, and it makes otherwise 00:00:29.820 --> 00:00:31.920 polite people just scream at their television. 00:00:32.060 --> 00:00:34.100 It really does. I mean, it's a massive system. 00:00:34.219 --> 00:00:37.100 We're talking about moving over $25 billion around 00:00:37.100 --> 00:00:41.299 the country in the 2024 -25 cycle alone. And 00:00:41.299 --> 00:00:44.359 yet, for all that noise, It's probably the most 00:00:44.359 --> 00:00:46.719 misunderstood math equation in the country. Which 00:00:46.719 --> 00:00:49.060 is exactly our mission today. We are going to 00:00:49.060 --> 00:00:51.439 decode that confusing math, look at the very 00:00:51.439 --> 00:00:53.439 messy history, and figure out why the system 00:00:53.439 --> 00:00:55.740 even exists in the first place. And we have some 00:00:55.740 --> 00:00:58.439 incredible source material to pull from, including 00:00:58.439 --> 00:01:00.899 data from Autonomous Trevor Toon, historical 00:01:00.899 --> 00:01:03.560 analyses, and official federal numbers. Right. 00:01:03.979 --> 00:01:06.579 But before we get to those, the actual buckets 00:01:06.579 --> 00:01:09.319 of money, we really have to address the biggest 00:01:09.319 --> 00:01:12.019 misconception out there. The one that drives 00:01:12.019 --> 00:01:14.200 the anger more than anything else. You mean the 00:01:14.200 --> 00:01:17.579 check writing myth? Yes. The idea that the premier 00:01:17.579 --> 00:01:20.760 of Alberta, you know, sits down at a desk, sighs 00:01:20.760 --> 00:01:23.700 heavily, writes a massive check from the provincial 00:01:23.700 --> 00:01:27.159 treasury, and mails it directly to the premier 00:01:27.159 --> 00:01:30.900 of Quebec to fund their daycares. Let's be incredibly 00:01:30.900 --> 00:01:33.939 clear right off the top here. That does not happen. 00:01:34.439 --> 00:01:36.950 Trevor Toombs has spent years trying to hammer 00:01:36.950 --> 00:01:40.049 this home. There are zero direct transfers between 00:01:40.049 --> 00:01:41.989 provincial governments. Alberta does not pay 00:01:41.989 --> 00:01:44.469 Quebec. British Columbia does not pay Nova Scotia. 00:01:44.569 --> 00:01:46.549 I like play devil's advocate for a second because 00:01:46.549 --> 00:01:49.109 the anger comes from somewhere real. If I'm a 00:01:49.109 --> 00:01:51.790 taxpayer in Calgary, I pay federal tax. That 00:01:51.790 --> 00:01:53.810 money goes to Ottawa. And then Ottawa sends a 00:01:53.810 --> 00:01:55.849 check to Quebec. So while the province of Alberta 00:01:55.849 --> 00:01:58.189 didn't write the check. The people of Alberta 00:01:58.189 --> 00:02:00.829 certainly feel like they did. And that is the 00:02:00.829 --> 00:02:03.519 nuance. The program is funded by the federal 00:02:03.519 --> 00:02:05.700 government's general revenues. So that's your 00:02:05.700 --> 00:02:08.379 federal income tax, the GST corporate taxes. 00:02:09.199 --> 00:02:10.979 Because Alberta has historically had a younger 00:02:10.979 --> 00:02:13.900 population with higher incomes, they just pay 00:02:13.900 --> 00:02:16.539 more federal tax per capita. Right. So Albertans 00:02:16.539 --> 00:02:19.099 as individuals are disproportionately funding 00:02:19.099 --> 00:02:22.000 the federal pot. Precisely. But the Alberta government 00:02:22.000 --> 00:02:24.360 itself, their provincial budget is not touched 00:02:24.360 --> 00:02:27.319 by equalization, not a single cent. OK, so it's 00:02:27.319 --> 00:02:29.520 a federal redistribution based on individual 00:02:29.520 --> 00:02:31.879 wealth, not a penalty on the provincial government. 00:02:32.319 --> 00:02:35.719 But why do we do this? What is the actual point 00:02:35.719 --> 00:02:38.580 of shuffling $25 billion around? Well, it's not 00:02:38.580 --> 00:02:41.479 just a policy. It is actually the law. It's enshrined 00:02:41.479 --> 00:02:44.300 in the Constitution Act of 1982, specifically 00:02:44.300 --> 00:02:47.840 subsection 36 -2. And the mandate there is to 00:02:47.840 --> 00:02:49.840 ensure that provincial governments have sufficient 00:02:49.840 --> 00:02:52.780 revenues to provide reasonably comparable levels 00:02:52.780 --> 00:02:55.460 of public services at reasonably comparable levels 00:02:55.460 --> 00:02:57.639 of taxation. Which is just a massive mouthful 00:02:57.639 --> 00:03:00.620 of legalese. It is. But if you think about what 00:03:00.620 --> 00:03:02.879 it means for a second, it's pretty profound. 00:03:03.659 --> 00:03:06.520 It means that a kid born in rural Nova Scotia 00:03:06.620 --> 00:03:09.819 should have access to roughly the same quality 00:03:09.819 --> 00:03:12.439 of school and hospital as a kid in downtown Toronto 00:03:12.439 --> 00:03:15.219 without their parents having to pay double the 00:03:15.219 --> 00:03:17.699 tax rate just to keep the lights on. Right, so 00:03:17.699 --> 00:03:20.479 it's really about establishing a baseline standard 00:03:20.479 --> 00:03:22.659 of living for you, regardless of your postal 00:03:22.659 --> 00:03:25.020 code. Exactly. It's often called the price of 00:03:25.020 --> 00:03:27.310 admission for a federation. OK, let's get into 00:03:27.310 --> 00:03:29.169 the mechanics then, because this is where people 00:03:29.169 --> 00:03:31.969 really start to get suspicious. How does Ottawa 00:03:31.969 --> 00:03:35.069 decide that Manitoba is quote unquote poor and 00:03:35.069 --> 00:03:37.289 British Columbia is rich? I mean, they don't 00:03:37.289 --> 00:03:39.430 just look at the provincial bank account balance. 00:03:39.590 --> 00:03:41.729 Well, and this is the most critical concept to 00:03:41.729 --> 00:03:44.810 grasp today. Payments are based on fiscal capacity, 00:03:45.289 --> 00:03:48.490 not actual revenue. Fiscal capacity. That sounds 00:03:48.490 --> 00:03:50.189 like an economist's way of saying how much money 00:03:50.189 --> 00:03:52.389 you could have. That is a perfect way to put 00:03:52.389 --> 00:03:55.830 it, actually. The formula measures a province's 00:03:55.830 --> 00:03:58.889 ability to generate revenue, not how much they 00:03:58.889 --> 00:04:01.550 actually collect in taxes. So wait, if a province 00:04:01.550 --> 00:04:04.530 decides, hey, we want to be super popular, let's 00:04:04.530 --> 00:04:07.539 slash all our taxes to zero. The federal government 00:04:07.539 --> 00:04:09.840 doesn't just rush in to fill that massive hole. 00:04:10.039 --> 00:04:11.759 Not at all. The formula uses something called 00:04:11.759 --> 00:04:14.599 a representative tax system. Yeah. So imagine 00:04:14.599 --> 00:04:17.759 five buckets of potential money in your province. 00:04:18.139 --> 00:04:20.259 You've got personal income tax, business income 00:04:20.259 --> 00:04:23.540 tax, consumption taxes like the GST, property 00:04:23.540 --> 00:04:26.180 taxes, and natural resources. Okay. Five buckets. 00:04:26.579 --> 00:04:29.019 The feds look at those buckets in your province 00:04:29.019 --> 00:04:32.170 and they ask a hypothetical question. They say, 00:04:32.550 --> 00:04:35.110 if this province applied the average national 00:04:35.110 --> 00:04:38.069 tax rate to these specific buckets, how much 00:04:38.069 --> 00:04:41.069 money would they raise? So it is entirely hypothetical? 00:04:41.389 --> 00:04:44.060 Entirely. Even if a province chooses not to tax 00:04:44.060 --> 00:04:46.639 its people very much, the formula assumes they 00:04:46.639 --> 00:04:48.500 could. They calculate this dollar amount per 00:04:48.500 --> 00:04:51.000 person and then they compare it to the 10 province 00:04:51.000 --> 00:04:53.060 standard, which is essentially the national average. 00:04:53.279 --> 00:04:55.920 It's kind of like a salary cap in sports or handicap 00:04:55.920 --> 00:04:58.720 in golf. In a way, yeah. If your province's ability 00:04:58.720 --> 00:05:01.240 to raise money is below that national average, 00:05:01.800 --> 00:05:03.540 Ottawa writes a check to top you up until you 00:05:03.540 --> 00:05:06.180 hit the line. And if you are above the average, 00:05:06.420 --> 00:05:09.000 you get a pat on the back. You get zero. You 00:05:09.000 --> 00:05:11.850 are a have province. You mentioned the buckets 00:05:11.850 --> 00:05:14.009 just a minute ago. We really have to stop on 00:05:14.009 --> 00:05:16.089 that fifth one, the natural resources bucket, 00:05:16.610 --> 00:05:18.269 because that seems to be where the math gets 00:05:18.269 --> 00:05:20.730 incredibly messy. Oh, it is the troublemaker 00:05:20.730 --> 00:05:23.949 of the whole system. Including natural resources, 00:05:24.310 --> 00:05:27.470 like oil and gas revenues, is hugely controversial, 00:05:27.970 --> 00:05:31.009 because if you include 100 % of oil revenue in 00:05:31.009 --> 00:05:33.790 the calculation, the resource -rich provinces 00:05:33.790 --> 00:05:36.889 look incredibly wealthy on paper. Right, and 00:05:36.889 --> 00:05:39.860 the national average shoots Way up. Exactly. 00:05:40.240 --> 00:05:41.800 Which would make it harder for anyone else to 00:05:41.800 --> 00:05:44.060 qualify for payments. And it would probably make 00:05:44.060 --> 00:05:46.680 the resource provinces furious because every 00:05:46.680 --> 00:05:49.079 dollar they dig out of the ground basically reduces 00:05:49.079 --> 00:05:52.160 their standing. It essentially creates a disincentive 00:05:52.160 --> 00:05:55.279 to develop resources. I mean, why drill for oil 00:05:55.279 --> 00:05:57.579 if Ottawa is just going to claw back your transfer 00:05:57.579 --> 00:05:59.839 payments dollar for dollar? So they came up with 00:05:59.839 --> 00:06:01.620 a compromise to fix that. It's called the 50 00:06:01.620 --> 00:06:04.399 % inclusion rule. So only half of the resource 00:06:04.399 --> 00:06:06.420 revenue counts toward your wealth calculation. 00:06:06.819 --> 00:06:10.079 Right. They calculate a province's fiscal capacity 00:06:10.079 --> 00:06:14.220 using 50 % of their resource revenues, or 0%, 00:06:14.220 --> 00:06:17.300 and they basically use whichever gives the province 00:06:17.300 --> 00:06:19.600 a better result. That feels like a bit of a hack. 00:06:19.759 --> 00:06:22.519 It is a bit of a hack. It's an attempt to balance 00:06:22.519 --> 00:06:26.079 the reality that resources do make a government 00:06:26.079 --> 00:06:29.720 rich with the political need to not penalize 00:06:29.720 --> 00:06:32.060 economic development. And even with that compromise, 00:06:32.139 --> 00:06:34.019 you still have this thing called the fiscal capacity 00:06:34.019 --> 00:06:36.079 cap, right? Yes, they had to put a ceiling on 00:06:36.079 --> 00:06:38.829 it. Because in the past, you actually had situations 00:06:38.829 --> 00:06:42.029 where a have -not province got so much equalization 00:06:42.029 --> 00:06:44.589 money from the feds that they ended up with more 00:06:44.589 --> 00:06:47.329 cash per person than they have provinces who 00:06:47.329 --> 00:06:49.050 weren't getting anything. Which is obviously 00:06:49.050 --> 00:06:50.930 a hard sell to the public. You know, here's some 00:06:50.930 --> 00:06:52.730 help. Oh, wait, now you're richer than the guy 00:06:52.730 --> 00:06:54.870 who just helped you. Right. So the cap ensures 00:06:54.870 --> 00:06:57.170 that after the transfer happens, a receiving 00:06:57.170 --> 00:06:59.670 province cannot be wealthier than a non -receiving 00:06:59.670 --> 00:07:02.129 province. Let's pivot to the history for a moment 00:07:02.129 --> 00:07:04.569 because the system hasn't always worked this 00:07:04.569 --> 00:07:07.910 way. The program officially started in 1957, 00:07:08.250 --> 00:07:11.170 mostly to help out the Atlantic provinces. But 00:07:11.170 --> 00:07:13.930 the 1970s seems to be when the wheels really 00:07:13.930 --> 00:07:16.029 started to wobble. The energy crisis changed 00:07:16.029 --> 00:07:18.769 everything. In the late 70s, global oil prices 00:07:18.769 --> 00:07:21.490 spiked. Suddenly Alberta and Saskatchewan were 00:07:21.490 --> 00:07:24.509 just swimming in cash. And this skewed the national 00:07:24.509 --> 00:07:27.329 average so high that the math basically broke. 00:07:27.730 --> 00:07:31.230 How so? Well, in 1978, the formula determined 00:07:31.230 --> 00:07:33.920 that Ontario The industrial heartland, historically 00:07:33.920 --> 00:07:36.339 the richest part of the country, suddenly qualified 00:07:36.339 --> 00:07:39.360 for equalization payments. Ontario. They have 00:07:39.360 --> 00:07:42.100 not province in the 1970s. Technically, according 00:07:42.100 --> 00:07:44.480 to the spreadsheet, yes. The resource wealth 00:07:44.480 --> 00:07:46.899 in the West pushed the national average so high 00:07:46.899 --> 00:07:49.699 that Ontario fell below it. But the federal government 00:07:49.699 --> 00:07:51.839 looked at that result and essentially said, no, 00:07:52.139 --> 00:07:54.019 that can't be right. They just didn't trust their 00:07:54.019 --> 00:07:56.279 own math. They realized it violated the whole 00:07:56.279 --> 00:07:59.110 spirit of the program. Ontario is obviously wealthy. 00:07:59.550 --> 00:08:01.709 The formula just wasn't reflecting it correctly 00:08:01.709 --> 00:08:05.050 relative to this massive unprecedented oil boom. 00:08:05.829 --> 00:08:07.970 So the federal government actually changed the 00:08:07.970 --> 00:08:11.449 rules specifically to exclude Ontario from getting 00:08:11.449 --> 00:08:13.490 payments. Which really proves that this whole 00:08:13.490 --> 00:08:16.610 system is as much art and politics as it is science. 00:08:16.949 --> 00:08:19.930 It absolutely is. And that tension is exactly 00:08:19.930 --> 00:08:22.730 what led to the 1982 Constitution Act, where 00:08:22.730 --> 00:08:25.379 they finally locked the core principle in. But 00:08:25.379 --> 00:08:27.740 even with it in the Constitution, the formula 00:08:27.740 --> 00:08:29.740 keeps getting tweaked. Like, Stephen Harper's 00:08:29.740 --> 00:08:31.740 government made some very significant changes. 00:08:31.920 --> 00:08:33.700 Right, the total transfer protection. I saw that 00:08:33.700 --> 00:08:35.500 in the sources. Yeah, that was a temporary shield 00:08:35.500 --> 00:08:38.000 they put in place during the 2008 financial crisis. 00:08:38.600 --> 00:08:40.600 Basically, they moved away from the pure formula 00:08:40.600 --> 00:08:43.500 based on the Al O 'Brien expert panel from 2007. 00:08:43.879 --> 00:08:46.120 The protection guaranteed that a province's total 00:08:46.120 --> 00:08:47.980 transfers wouldn't drop year over year during 00:08:47.980 --> 00:08:50.240 the recession. But when that protection expired 00:08:50.240 --> 00:08:53.799 in 2014, it hit Ontario incredibly hard. They 00:08:53.799 --> 00:08:57.860 lost about $640 million almost overnight. And 00:08:57.860 --> 00:09:01.039 that brings us perfectly to the regional battlegrounds. 00:09:01.059 --> 00:09:03.100 This is where the rubber meets the road. Let's 00:09:03.100 --> 00:09:05.039 start with the absolute elephant in the room, 00:09:05.460 --> 00:09:08.039 Quebec. Quebec is the volume leader, without 00:09:08.039 --> 00:09:11.909 a doubt. In 2023 -24, they received around $14 00:09:11.909 --> 00:09:15.269 billion. That is more than half of the total 00:09:15.269 --> 00:09:18.110 equalization pot. And that number drives people 00:09:18.110 --> 00:09:22.110 out West absolutely crazy. Why does Quebec get 00:09:22.110 --> 00:09:24.909 so much? It's primarily a function of their size 00:09:24.909 --> 00:09:27.149 and their capacity. First, they have a massive 00:09:27.149 --> 00:09:30.370 population, nearly 23 % of all of Canada. Second, 00:09:30.450 --> 00:09:33.190 despite having a very modern, diversified economy, 00:09:33.730 --> 00:09:36.169 their fiscal capacity, their ability to raise 00:09:36.169 --> 00:09:39.029 revenue per person, is consistently below the 00:09:39.029 --> 00:09:41.610 national average. But there's a massive asterisk 00:09:41.610 --> 00:09:43.370 here involving electricity, isn't there? The 00:09:43.370 --> 00:09:45.950 whole Hydro -Québec argument. Yes. This is the 00:09:45.950 --> 00:09:47.929 specific grievance you hear constantly from the 00:09:47.929 --> 00:09:51.210 West. Quebec has massive legacy hydroelectric 00:09:51.210 --> 00:09:54.190 resources. Hydro -Québec, which is a crown corporation, 00:09:54.590 --> 00:09:56.850 sells that electricity to Quebec residents at 00:09:56.850 --> 00:09:58.929 incredibly low rates, far below market value. 00:09:59.070 --> 00:10:01.250 So it's a policy choice to give their citizens 00:10:01.250 --> 00:10:04.750 cheap power. Correct. But critics argue that 00:10:04.750 --> 00:10:07.389 by keeping those prices artificially low, Quebec 00:10:07.389 --> 00:10:10.669 is actively suppressing its own revenue. If Hydro 00:10:10.669 --> 00:10:12.850 -Québec charged market rates like other places 00:10:12.850 --> 00:10:16.490 do, it would make billions more in profit, which 00:10:16.490 --> 00:10:18.269 would flow directly to the provincial government. 00:10:18.409 --> 00:10:21.049 And that would raise Quebec's fiscal capacity 00:10:21.049 --> 00:10:24.110 and their equalization payments would drop. Exactly. 00:10:24.269 --> 00:10:26.149 So the argument from the critics is basically 00:10:26.149 --> 00:10:29.009 you're subsidizing your own hydro bills to look 00:10:29.009 --> 00:10:31.389 poor on paper and then you're asking the rest 00:10:31.389 --> 00:10:34.029 of Canada to pay you for being poor. That is 00:10:34.029 --> 00:10:36.889 the crux of it. And the numbers are huge. Some 00:10:36.889 --> 00:10:39.850 estimates suggest that between 2005 and 2010, 00:10:40.009 --> 00:10:42.350 if you accounted for the true market value of 00:10:42.350 --> 00:10:44.830 that hydro, Quebec's equalization payments would 00:10:44.830 --> 00:10:48.970 have dropped by over $42 billion. $42 billion. 00:10:49.250 --> 00:10:51.429 That is a staggering number. No wonder it's a 00:10:51.429 --> 00:10:53.850 sore spot. And yet, ironically, Quebec politicians 00:10:53.850 --> 00:10:56.740 often hate the payments, too. Former Premier 00:10:56.740 --> 00:10:59.179 Bernard Landry famously called them degrading. 00:10:59.519 --> 00:11:01.860 The current Premier, Juan Swalago, has called 00:11:01.860 --> 00:11:04.559 the dependents shameful. So they want the money, 00:11:04.779 --> 00:11:06.840 but they hate the implication that they can't 00:11:06.840 --> 00:11:09.559 pay their own way. Exactly. Now let's flip to 00:11:09.559 --> 00:11:12.659 the other side of the coin. Alberta. The eternal 00:11:12.659 --> 00:11:16.100 have province. The province that really feels 00:11:16.100 --> 00:11:19.039 punished for its success. The stats in the source 00:11:19.039 --> 00:11:23.440 material are wild. Since 1957, Alberta has received 00:11:23.440 --> 00:11:28.379 just 0 .02 % of all equalization payments. They 00:11:28.379 --> 00:11:30.320 literally haven't cashed a check since the mid 00:11:30.320 --> 00:11:32.960 -60s. But the real anger there isn't just about 00:11:32.960 --> 00:11:35.340 not getting money when times are good. It's about 00:11:35.340 --> 00:11:37.679 not getting help when things go wrong. Right. 00:11:37.820 --> 00:11:41.049 And 2014 is the key date here. Yes. Global oil 00:11:41.049 --> 00:11:43.789 prices crashed. Alberta went into a brutal recession. 00:11:44.190 --> 00:11:46.370 Good -paying jobs evaporated. The provincial 00:11:46.370 --> 00:11:49.549 deficit exploded. By any normal, on -the -ground 00:11:49.549 --> 00:11:52.210 definition, Alberta was a have -not economy in 00:11:52.210 --> 00:11:54.450 that moment. But the equalization formula didn't 00:11:54.450 --> 00:11:56.950 care. No. This is what economists call the recession 00:11:56.950 --> 00:11:59.509 paradox. Even though Alberta was hurting badly, 00:11:59.730 --> 00:12:01.710 their average incomes were still so high relative 00:12:01.710 --> 00:12:03.769 to the rest of the country, and their underlying 00:12:03.769 --> 00:12:05.690 fiscal capacity remained so strong that they 00:12:05.690 --> 00:12:08.289 were still 41 % above the national average. That 00:12:08.289 --> 00:12:10.909 has to be absolutely infuriating. You're laying 00:12:10.909 --> 00:12:13.149 people off, your budget is bleeding red ink, 00:12:13.570 --> 00:12:15.169 and Ottawa looks at the spreadsheet and says, 00:12:15.529 --> 00:12:17.429 sorry, your math still looks too good. We can't 00:12:17.429 --> 00:12:20.789 help you. It fueled massive resentment. Trevor 00:12:20.789 --> 00:12:23.549 Toomey calculated that in 2015, the very height 00:12:23.549 --> 00:12:26.429 of that economic pain, Alberta actually had a 00:12:26.429 --> 00:12:31.389 net outflow of $27 billion, meaning $27 billion 00:12:31.389 --> 00:12:34.110 more left the province in federal taxes than 00:12:34.110 --> 00:12:36.669 came back in any form of federal spending. And 00:12:36.669 --> 00:12:39.690 that anger directly led to the 2021 provincial 00:12:39.690 --> 00:12:42.950 referendum. Where 61 .7 % of Albertans voted 00:12:42.950 --> 00:12:45.669 yes to remove equalization from the Constitution. 00:12:46.509 --> 00:12:48.909 entirely. But, and this is a really big, but 00:12:48.909 --> 00:12:50.830 they can't actually do that, can they? A single 00:12:50.830 --> 00:12:52.509 province can't just edit the Constitution. No, 00:12:52.509 --> 00:12:55.549 not at all. You need the 750 formula. Seven provinces 00:12:55.549 --> 00:12:57.950 representing 50 % of the population have to agree. 00:12:58.350 --> 00:13:00.730 There is zero chance that Quebec, the Atlantic 00:13:00.730 --> 00:13:03.250 provinces, or Manitoba would ever vote to delete 00:13:03.250 --> 00:13:05.470 the program that fundamentally funds their hospitals 00:13:05.470 --> 00:13:08.110 and schools. The referendum was purely symbolic, 00:13:08.570 --> 00:13:11.169 a mandate for negotiation. Right. And speaking 00:13:11.169 --> 00:13:13.549 of those other provinces, we focus so much on 00:13:13.549 --> 00:13:16.090 this Quebec -Alberta fight that we often ignore 00:13:16.090 --> 00:13:18.769 the Atlantic provinces and Manitoba, but for 00:13:18.769 --> 00:13:21.169 them the stakes are actually much higher. Oh, 00:13:21.169 --> 00:13:24.309 much higher. For Quebec, equalization is a nice 00:13:24.309 --> 00:13:27.389 substantial chunk of the budget. But for Prince 00:13:27.389 --> 00:13:29.409 Edward Island, Nova Scotia, or New Brunswick, 00:13:29.629 --> 00:13:32.230 it is an absolute lifeline. We are talking about 00:13:32.429 --> 00:13:35.490 billions of dollars annually that make up a massive 00:13:35.490 --> 00:13:37.870 percentage of their total provincial revenue. 00:13:38.049 --> 00:13:41.529 The sources noted PEI has received over $2 ,300 00:13:41.529 --> 00:13:44.370 per person in some years and Nova Scotia and 00:13:44.370 --> 00:13:47.210 New Brunswick pull in over $2 .5 billion each 00:13:47.210 --> 00:13:49.870 annually. So without this money, what happens 00:13:49.870 --> 00:13:52.429 to Halifax or Charlottetown? Collapse is a strong 00:13:52.429 --> 00:13:54.470 word, but it's really not far off. They would 00:13:54.470 --> 00:13:56.789 either have to slash public services to a level 00:13:56.789 --> 00:13:58.889 completely unacceptable in the developed world 00:13:58.889 --> 00:14:01.750 or raise taxes to a point that would drive everyone 00:14:01.710 --> 00:14:04.529 out of the province. Which brings us to perhaps 00:14:04.529 --> 00:14:06.990 the deepest criticism of the whole system, the 00:14:06.990 --> 00:14:09.350 wealthier trap. We really have to unpack this 00:14:09.350 --> 00:14:11.330 because it's not just about fairness, it's about 00:14:11.330 --> 00:14:14.570 actual economic incentives. Yes. This is the 00:14:14.570 --> 00:14:16.789 argument put forward by economist Michael Smart, 00:14:17.309 --> 00:14:20.029 and it was even conceded by Nobel laureate James 00:14:20.029 --> 00:14:23.830 Buchanan. The fear is that the formula might 00:14:23.830 --> 00:14:26.889 actually be trapping these provinces in a cycle 00:14:26.889 --> 00:14:29.269 of poverty. How does giving someone billions 00:14:29.269 --> 00:14:31.990 of dollars trap them? It's all about the clawback. 00:14:32.450 --> 00:14:34.929 Let's say you are the premier of Nova Scotia. 00:14:35.330 --> 00:14:37.909 You have a chance to develop a massive new industry 00:14:37.909 --> 00:14:40.870 that will bring in 100 million dollars of new 00:14:40.870 --> 00:14:43.600 tax revenue for your province. Great. That's 00:14:43.600 --> 00:14:46.500 amazing. You do it. But because your fiscal capacity 00:14:46.500 --> 00:14:49.299 just went up by 100 million dollars, the equalization 00:14:49.299 --> 00:14:51.139 formula kicks in and Ottawa says, oh, you don't 00:14:51.139 --> 00:14:53.480 need as much help now. So they might cut your 00:14:53.480 --> 00:14:56.820 equalization payment by 70 or 80 million dollars. 00:14:56.860 --> 00:14:59.259 So you did all that work. You took all that political 00:14:59.259 --> 00:15:01.779 risk to grow your economy and your net gain is 00:15:01.779 --> 00:15:04.279 only 20 million bucks. Exactly. The marginal 00:15:04.279 --> 00:15:07.240 tax rate on economic growth is extremely punitive. 00:15:07.639 --> 00:15:10.639 Critics argue this incentivizes have -not provinces 00:15:10.639 --> 00:15:13.639 to just keep taxes high and not chase aggressive 00:15:13.639 --> 00:15:15.700 economic growth. Because the federal government 00:15:15.700 --> 00:15:17.779 creates a floor they can't fall through, but 00:15:17.779 --> 00:15:20.440 they also create a ceiling that is incredibly 00:15:20.440 --> 00:15:22.820 hard to break through. That is a really depressing 00:15:22.820 --> 00:15:25.299 thought. That the safety net is actually a sticky 00:15:25.299 --> 00:15:28.740 web. But surely there is a counter argument to 00:15:28.740 --> 00:15:30.820 this. The counter argument comes down to simple 00:15:30.820 --> 00:15:33.960 geography. You cannot policy your way into having 00:15:33.960 --> 00:15:37.500 Alberta's oil reserves. PEI has potatoes and 00:15:37.500 --> 00:15:40.600 tourism. They don't have the two men. The goal 00:15:40.600 --> 00:15:43.159 of the program isn't to equalize economies. We 00:15:43.159 --> 00:15:46.000 physically can't do that, but to equalize the 00:15:46.000 --> 00:15:48.559 basic services citizens get. And what about the 00:15:48.559 --> 00:15:50.700 flip side of the incentive argument? We talked 00:15:50.700 --> 00:15:53.100 about provinces maybe not trying hard enough 00:15:53.100 --> 00:15:55.440 to grow. What about provinces not taxing enough? 00:15:55.919 --> 00:15:57.799 This is Trevor Toombs' sharpest point regarding 00:15:57.799 --> 00:16:00.639 Alberta. Alberta constantly complains about its 00:16:00.639 --> 00:16:03.279 provincial deficit and the lack of federal help. 00:16:03.820 --> 00:16:05.860 But Alberta is the only province in Canada with 00:16:05.860 --> 00:16:08.220 no provincial sales tax. They have relatively 00:16:08.220 --> 00:16:10.539 low income taxes. Right. Toombs points out that 00:16:10.539 --> 00:16:13.340 if Alberta simply taxed its citizens at the exact 00:16:13.340 --> 00:16:15.940 same rates as the rest of Canada does, they wouldn't 00:16:15.940 --> 00:16:18.000 have a deficit at all. They would have a massive 00:16:18.000 --> 00:16:20.779 surplus. So the message to Alberta from the rest 00:16:20.779 --> 00:16:22.879 of the country is basically, you're not broke, 00:16:23.019 --> 00:16:26.340 you're just cheap. Essentially, yes. It's very 00:16:26.340 --> 00:16:29.059 hard to ask a taxpayer in Quebec or Nova Scotia 00:16:29.059 --> 00:16:32.059 who pays incredibly high provincial taxes to 00:16:32.059 --> 00:16:34.659 feel sorry for an Albertan who pays no provincial 00:16:34.659 --> 00:16:37.299 sales tax, even if the federal math feels unfair 00:16:37.299 --> 00:16:40.440 out west. It really is just a tangled mess of 00:16:40.440 --> 00:16:43.379 math, politics and geography. So if we synthesize 00:16:43.379 --> 00:16:45.340 all of this, what are we actually looking at 00:16:45.340 --> 00:16:48.899 here? If you zoom out, equalization really is 00:16:48.899 --> 00:16:51.600 the glue of the federation. It is the price we 00:16:51.600 --> 00:16:54.580 pay to keep a country this massive and this geographically 00:16:54.580 --> 00:16:57.659 diverse together. It ensures that being born 00:16:57.659 --> 00:16:59.899 in a poor region doesn't automatically resign 00:16:59.899 --> 00:17:02.139 you to a second -class life. But the cost of 00:17:02.139 --> 00:17:05.099 that glue is incredibly high. The cost is immense 00:17:05.099 --> 00:17:08.039 regional tension. It is mathematically true that 00:17:08.039 --> 00:17:11.400 the wealth of Ontario, Alberta, and BC subsidizes 00:17:11.400 --> 00:17:13.819 the rest of the country. That creates a permanent 00:17:13.819 --> 00:17:16.140 friction. It feels like a penalty for success 00:17:16.140 --> 00:17:18.960 to some, and a fundamental right of citizenship 00:17:18.960 --> 00:17:20.940 to others. So we've gone through the mechanics, 00:17:21.039 --> 00:17:22.920 the history, the battlegrounds. I want to leave 00:17:22.920 --> 00:17:25.000 you with a final thought to mull over, something 00:17:25.000 --> 00:17:27.099 we haven't touched on yet, but that builds directly 00:17:27.099 --> 00:17:28.680 on everything we've discussed. Oh, this is a 00:17:28.680 --> 00:17:31.160 good one. We talked about how the entire formula, 00:17:31.279 --> 00:17:33.240 and really the wealth of the Have provinces, 00:17:33.640 --> 00:17:35.759 is heavily dependent on oil and gas revenue. 00:17:35.660 --> 00:17:39.700 But as Canada and the world transition away from 00:17:39.700 --> 00:17:41.680 fossil fuels toward a green economy over the 00:17:41.680 --> 00:17:44.460 next few decades, what happens to the system? 00:17:44.539 --> 00:17:47.440 It's a massive blind spot. If oil revenues collapse 00:17:47.440 --> 00:17:50.079 permanently, not just a cyclical recession, the 00:17:50.079 --> 00:17:53.079 10 province standard will plummet. Provinces 00:17:53.079 --> 00:17:55.299 that are historically wealthy might suddenly 00:17:55.299 --> 00:17:57.799 find themselves with diminished fiscal capacity. 00:17:58.599 --> 00:18:01.279 Will the traditional have -not provinces be able 00:18:01.279 --> 00:18:04.140 to survive if the feds don't have that Western 00:18:04.140 --> 00:18:07.019 oil wealth to redistribute? Will the math even 00:18:07.019 --> 00:18:09.680 work in a post -oil Canada or will the entire 00:18:09.680 --> 00:18:11.819 system bankrupt the federal government? It's 00:18:11.819 --> 00:18:14.500 a huge question. If the money pool shrinks... 00:18:14.500 --> 00:18:16.720 Yeah. The fight over who gets what is going to 00:18:16.720 --> 00:18:20.140 get a lot uglier. A $25 billion question for 00:18:20.140 --> 00:18:22.440 the ages. Well, that's it for this deep dive 00:18:22.440 --> 00:18:24.440 into equalization. Hopefully the next time a 00:18:24.440 --> 00:18:26.180 premier starts shouting about buckets of money 00:18:26.180 --> 00:18:27.940 on the news, you'll know exactly what they're 00:18:27.940 --> 00:18:30.960 actually talking about. And just remember, nobody 00:18:30.960 --> 00:18:33.039 mailed a check today. Thanks for listening. We'll 00:18:33.039 --> 00:18:33.619 see you next time.