WEBVTT 00:00:00.000 --> 00:00:04.179 Welcome back to The Deep Dive. Today we are, 00:00:04.179 --> 00:00:06.620 we're walking right into the line of fire, honestly. 00:00:06.660 --> 00:00:08.960 Yes, we really are. It's a hot one today. It 00:00:08.960 --> 00:00:12.439 is. We are talking about, arguably, the single 00:00:12.439 --> 00:00:16.739 most controversial, maybe the most misunderstood 00:00:16.739 --> 00:00:18.780 mechanism in the entire Canadian Federation. 00:00:18.839 --> 00:00:20.960 Oh, absolutely, without a doubt. It's the kind 00:00:20.960 --> 00:00:25.179 of topic that, you know, It can launch referendums. 00:00:25.239 --> 00:00:27.300 It ruins family Thanksgiving dinners. I've seen 00:00:27.300 --> 00:00:30.100 it happen. Right. And it slaps this label on 00:00:30.100 --> 00:00:32.640 your home province that people just hate. You're 00:00:32.640 --> 00:00:34.700 either a have or a have not. It's just such a 00:00:34.700 --> 00:00:36.359 loaded way to put it. But yeah, we're talking 00:00:36.359 --> 00:00:39.039 about equalization. Equalization. And, you know, 00:00:39.079 --> 00:00:40.560 we've got all the source material in France. 00:00:40.700 --> 00:00:42.439 We're going to look at the formula, the history, 00:00:43.979 --> 00:00:46.240 the grievances from the provinces. But I want 00:00:46.240 --> 00:00:48.100 to start with the mission is this deep dive. 00:00:48.159 --> 00:00:50.039 Sounds good. Let's do it. Because there is an 00:00:50.039 --> 00:00:53.009 image. And I think everyone listening right now 00:00:53.009 --> 00:00:56.570 probably has this image in their head. It's the 00:00:56.570 --> 00:00:58.869 Premier of Alberta sitting at this big mahogany 00:00:58.869 --> 00:01:02.270 desk. angrily writing out a massive personal 00:01:02.270 --> 00:01:06.069 check. Licking the stamp and just mailing it 00:01:06.069 --> 00:01:08.129 directly to the government of Quebec. Yeah, that 00:01:08.129 --> 00:01:10.790 is, I mean, it's a very vivid image. It's infuriating 00:01:10.790 --> 00:01:14.489 if you live in the West, but it's the first thing 00:01:14.489 --> 00:01:16.829 we really have to dismantle today. Because it's 00:01:16.829 --> 00:01:19.030 a myth. It is a total myth. That transaction, 00:01:19.329 --> 00:01:21.689 one province writing a check to another, it does 00:01:21.689 --> 00:01:23.790 not happen. It has actually never happened. OK, 00:01:23.810 --> 00:01:25.969 so let's clear the air for everyone right out 00:01:25.969 --> 00:01:29.340 of the gate. If Alberta isn't putting cash in 00:01:29.340 --> 00:01:33.939 an envelope and mailing it to Quebec, how does 00:01:33.939 --> 00:01:36.319 the money move? Because the money is definitely 00:01:36.319 --> 00:01:39.019 moving. Oh, the money is absolutely moving. Billions 00:01:39.019 --> 00:01:42.400 of dollars. But the path is completely different. 00:01:42.739 --> 00:01:44.599 You have to understand that provincial governments 00:01:44.599 --> 00:01:47.340 do not make contributions to equalization. Not 00:01:47.340 --> 00:01:49.719 at all. Not a single dime. The federal government 00:01:49.719 --> 00:01:52.799 does. So the money is funded entirely from federal 00:01:52.799 --> 00:01:54.439 general revenues. OK, so we're talking about... 00:01:54.439 --> 00:01:56.840 Like the GST you pay on your coffee this morning. 00:01:57.159 --> 00:02:00.219 or your personal income tax, corporate taxes. 00:02:00.620 --> 00:02:02.659 All of that leaves your pocket and goes straight 00:02:02.659 --> 00:02:06.659 to Ottawa into one massive commingled pot. Right. 00:02:06.879 --> 00:02:09.439 So it's one big federal bucket. There's no Alberta 00:02:09.439 --> 00:02:11.620 bucket and a separate Quebec bucket. Exactly. 00:02:11.870 --> 00:02:14.610 And then Ottawa reaches into that massive bucket 00:02:14.610 --> 00:02:17.689 and distributes the funds to the provinces that 00:02:17.689 --> 00:02:19.949 qualify. Based on the formula. Right. Based on 00:02:19.949 --> 00:02:22.629 a very complex formula. So a wealthy CEO living 00:02:22.629 --> 00:02:25.969 in Calgary and a wealthy CEO living in Montreal, 00:02:26.430 --> 00:02:29.370 they are both paying the exact same federal tax 00:02:29.370 --> 00:02:32.210 rates into that same pot. But the grievance, 00:02:32.289 --> 00:02:35.030 the feeling on the ground is that the pot gets 00:02:35.030 --> 00:02:38.419 emptied out. into one backyard way more than 00:02:38.419 --> 00:02:40.219 the other. And that's, I mean, that's where the 00:02:40.219 --> 00:02:42.599 nuance comes in. The reason it feels like a transfer 00:02:42.599 --> 00:02:45.939 from Alberta to elsewhere is really just demographics 00:02:45.939 --> 00:02:48.379 and economics. Right, because Alberta has more 00:02:48.379 --> 00:02:50.439 high income earners. Precisely. Historically, 00:02:50.439 --> 00:02:52.580 they have way more high earners. So per capita, 00:02:52.780 --> 00:02:54.939 the people in Alberta are putting a lot more 00:02:54.939 --> 00:02:57.419 money into that federal pot. But the provincial 00:02:57.419 --> 00:03:00.020 government of Alberta itself pays nothing into 00:03:00.020 --> 00:03:02.740 the program. That is such a crucial distinction 00:03:02.740 --> 00:03:05.520 for you listening. It's the citizens paying federal 00:03:05.520 --> 00:03:09.919 taxes, not the province paying a fee. But, uh, 00:03:10.099 --> 00:03:12.419 why do we even do this? Like, what is Ottawa's 00:03:12.419 --> 00:03:14.460 actual mission statement here? Are they just 00:03:14.460 --> 00:03:16.599 playing Robin Hood? It's actually much deeper 00:03:16.599 --> 00:03:18.780 than just a policy or playing Robin Hood. It 00:03:18.780 --> 00:03:21.199 is constitutional. Really? Like, baked in? Baked 00:03:21.199 --> 00:03:24.759 right in. A Constitution Act of 1982. Specifically, 00:03:25.099 --> 00:03:28.090 Section 36, Subsection 2. You brought the receipts 00:03:28.090 --> 00:03:31.050 today. I always do. The text essentially says 00:03:31.050 --> 00:03:33.030 the goal is to ensure provincial governments 00:03:33.030 --> 00:03:35.490 have sufficient revenues to provide. And this 00:03:35.490 --> 00:03:39.000 is a quote, reasonably comparable levels of public 00:03:39.000 --> 00:03:41.879 services at reasonably comparable levels of taxation. 00:03:42.259 --> 00:03:43.939 Reasonably comparable. I mean, that sounds like 00:03:43.939 --> 00:03:45.939 a lawyer's dream right there. It's so vague. 00:03:46.099 --> 00:03:48.479 Very vague. But the spirit of it is pretty clear. 00:03:48.719 --> 00:03:50.699 The idea is that whether you live in Halifax 00:03:50.699 --> 00:03:53.099 or Montreal or Calgary, you should have access 00:03:53.099 --> 00:03:56.319 to roughly the same quality of hospitals and 00:03:56.319 --> 00:03:59.639 schools. and roads. Without your local government 00:03:59.639 --> 00:04:02.080 having to tax you like 80 % just to keep the 00:04:02.080 --> 00:04:04.780 lights on. Exactly. It's an attempt to standardize 00:04:04.780 --> 00:04:07.639 the Canadian experience regardless of geography. 00:04:07.919 --> 00:04:10.400 So if I'm in Manitoba, I shouldn't have to pay 00:04:10.400 --> 00:04:13.060 double the income tax of someone in Alberta just 00:04:13.060 --> 00:04:14.919 to have a functioning emergency room. That is 00:04:14.919 --> 00:04:17.279 the exact mission. Yes. Okay, well that sounds 00:04:17.279 --> 00:04:20.300 very noble in theory. Yeah. But we all know the 00:04:20.300 --> 00:04:23.279 devil is entirely in the math here. So let's 00:04:23.279 --> 00:04:27.860 open up the hood. How does Ottawa actually decide 00:04:27.860 --> 00:04:31.939 who is poor enough to need a check? Because I 00:04:31.939 --> 00:04:33.379 think this is where a lot of people just kind 00:04:33.379 --> 00:04:36.620 of check out Yeah, the math can be dry, but it's 00:04:36.620 --> 00:04:39.879 important It all comes down to one core concept 00:04:39.879 --> 00:04:42.279 called fiscal capacity. Fiscal capacity, okay. 00:04:42.420 --> 00:04:45.000 And this trips people up all the time. The formula 00:04:45.000 --> 00:04:47.540 does not measure how much money a province has 00:04:47.540 --> 00:04:49.519 in the bank. It doesn't look at their savings 00:04:49.519 --> 00:04:51.480 account. It doesn't care if they are running 00:04:51.480 --> 00:04:53.459 a massive deficit. Wait, so what does it measure? 00:04:53.620 --> 00:04:56.100 It measures their ability to generate revenue. 00:04:56.259 --> 00:04:59.279 Oh, okay. So it's potential. It's potential earnings, 00:04:59.540 --> 00:05:01.720 not actual wealth. Exactly. It's like looking 00:05:01.720 --> 00:05:03.750 at someone and saying, You have a law degree, 00:05:03.750 --> 00:05:06.449 so you could be making $200 ,000. Regardless 00:05:06.449 --> 00:05:08.370 of whether they actually have a job or not, spot 00:05:08.370 --> 00:05:11.850 on. Wow. They use a model called the representative 00:05:11.850 --> 00:05:15.990 tax system. Imagine Ottawa looks at a province, 00:05:16.689 --> 00:05:19.990 say Saskatchewan, and they ask if this province 00:05:19.990 --> 00:05:23.629 applied the average national tax rates to absolutely 00:05:23.629 --> 00:05:26.250 everything. Income businesses, all of it. Yeah. 00:05:26.250 --> 00:05:28.250 How much money could they theoretically raise? 00:05:28.470 --> 00:05:30.970 It's a complete simulation. It's a stress test 00:05:30.970 --> 00:05:34.009 of the provincial economy. And to do that simulation, 00:05:34.009 --> 00:05:37.050 they look at five very specific baskets of revenue. 00:05:37.209 --> 00:05:38.850 OK, let's go through the baskets. Number one 00:05:38.850 --> 00:05:41.750 is personal income taxes. Number two, business 00:05:41.750 --> 00:05:44.629 income taxes. Number three is consumption taxes, 00:05:44.689 --> 00:05:47.730 so things like sales tax. Number four is property 00:05:47.730 --> 00:05:50.149 taxes. OK, so far those are pretty standard. 00:05:50.189 --> 00:05:53.250 That covers most of how we live and pay for things. 00:05:53.389 --> 00:05:55.930 Right. And then you have the fifth basket, the 00:05:55.930 --> 00:05:58.029 one that causes basically all the political fights 00:05:58.029 --> 00:06:00.689 in this country, natural resource revenues. There 00:06:00.689 --> 00:06:03.810 it is. The oil and gas factor. The oil and gas 00:06:03.810 --> 00:06:05.470 factor. We are definitely going to unpack that 00:06:05.470 --> 00:06:07.689 one separately because it's a beast. Essentially 00:06:07.689 --> 00:06:11.470 Ottawa takes these five baskets. They calculate 00:06:11.470 --> 00:06:13.769 what a province could raise and then they compare 00:06:13.769 --> 00:06:16.189 it to something called the 10 province standard. 00:06:16.310 --> 00:06:18.420 Which is what? Just the average. Yeah, it's the 00:06:18.420 --> 00:06:21.399 average fiscal capacity of all 10 provinces combined. 00:06:21.680 --> 00:06:24.220 OK, so that average line is the pass or fail 00:06:24.220 --> 00:06:27.040 mark. Correct. If your province's ability to 00:06:27.040 --> 00:06:29.939 raise money falls below that national average 00:06:29.939 --> 00:06:32.600 line, Ottawa cuts you a check to top you up. 00:06:32.720 --> 00:06:35.319 So you hit the average. Right. That top up is 00:06:35.319 --> 00:06:38.139 the equalization payment. But if you are above 00:06:38.139 --> 00:06:41.509 the average line, you get zero. Nothing. You 00:06:41.509 --> 00:06:43.649 are officially labeled a have province. It's 00:06:43.649 --> 00:06:46.029 very binary. You are either getting topped up 00:06:46.029 --> 00:06:48.370 or you're left alone. But I want to go back to 00:06:48.370 --> 00:06:50.870 that fit the basket, the natural resources. Why 00:06:50.870 --> 00:06:54.250 is that specific one so controversial? Because 00:06:54.250 --> 00:06:56.790 money is money, right? If you make it selling 00:06:56.790 --> 00:06:59.250 software or selling crude oil, shouldn't it all 00:06:59.250 --> 00:07:01.709 count the same? You would think so, logically. 00:07:01.910 --> 00:07:04.370 But resources aren't distributed evenly across 00:07:04.370 --> 00:07:06.310 the country. You can't just decide your province 00:07:06.310 --> 00:07:08.439 is going to have a booming oil sector. All right, 00:07:08.680 --> 00:07:11.019 geology decides that. Geology completely decides 00:07:11.019 --> 00:07:13.819 it. But the real controversy is how the formula 00:07:13.819 --> 00:07:16.500 counts that resource money. Under the current 00:07:16.500 --> 00:07:19.980 rules, usually only 50 % of natural resource 00:07:19.980 --> 00:07:22.300 revenues are included in the calculation. Wait, 00:07:22.300 --> 00:07:25.100 only 50 %? Why do they discount half of it? It's 00:07:25.100 --> 00:07:28.740 a political compromise. If you included 100 % 00:07:28.740 --> 00:07:32.220 of resource revenues, the provinces with oil 00:07:32.220 --> 00:07:35.220 would see their fiscal capacity just skyrocket 00:07:35.220 --> 00:07:37.240 on paper. And they'd lose all their equalization 00:07:37.240 --> 00:07:39.480 money. Immediately. It would create a massive 00:07:39.480 --> 00:07:41.959 disincentive to actually develop the resources. 00:07:42.439 --> 00:07:44.939 Like, why would a province approve a new drilling 00:07:44.939 --> 00:07:47.959 project if for every single dollar they make 00:07:47.959 --> 00:07:51.220 in royalties, Ottawa just clawed back a dollar 00:07:51.220 --> 00:07:53.160 in equalization. Oh, I see. It's the welfare 00:07:53.160 --> 00:07:55.899 trap logic penalized for working harder and growing 00:07:55.899 --> 00:07:58.720 your economy. Exactly. So Ottawa includes 50 00:07:58.720 --> 00:08:00.779 percent to let the provinces keep some of the 00:08:00.779 --> 00:08:03.000 benefit of their own resources. Or sometimes 00:08:03.000 --> 00:08:05.279 they fully exclude it if that yields a better 00:08:05.279 --> 00:08:07.300 result for the province. But the provinces without 00:08:07.300 --> 00:08:10.420 resources must hate that. Oh, they despise it. 00:08:10.699 --> 00:08:12.199 They look at the West and say, wait a minute. 00:08:12.399 --> 00:08:14.680 That is real cash in your pocket. Why are we 00:08:14.680 --> 00:08:17.279 pretending half of it doesn't exist when we calculate 00:08:17.279 --> 00:08:20.639 how rich you are? So the 50 % rule basically 00:08:20.639 --> 00:08:23.439 satisfies absolutely no one. That sounds like 00:08:23.439 --> 00:08:25.680 Canadian politics in a nutshell. Yeah. And to 00:08:25.680 --> 00:08:28.019 make it worse, there's a cap on this whole system, 00:08:28.279 --> 00:08:30.399 too, right? Yeah. It's not an infinite pool of 00:08:30.399 --> 00:08:32.519 money. Right. The total amount Ottawa hands out 00:08:32.519 --> 00:08:35.220 is often fixed. It grows with GDP, but it is 00:08:35.220 --> 00:08:38.039 a capped pot, which creates a zero -sum game. 00:08:38.240 --> 00:08:40.759 Meaning if someone gets more? someone else gets 00:08:40.759 --> 00:08:43.279 last. Exactly. If one province's entitlement 00:08:43.279 --> 00:08:46.179 goes up under the formula, it effectively means 00:08:46.179 --> 00:08:49.019 a smaller share for everyone else, so it structurally 00:08:49.019 --> 00:08:51.440 pits the provinces against each other. It becomes 00:08:51.440 --> 00:08:53.500 less about getting what you need and more about 00:08:53.500 --> 00:08:56.120 grabbing your slice before the pie is gone. Wow. 00:08:56.200 --> 00:08:58.480 Okay, let's move from the abstract math into 00:08:58.480 --> 00:09:00.320 the political reality. Yeah. Because we need 00:09:00.320 --> 00:09:02.740 to talk about the specific players here. Let's 00:09:02.740 --> 00:09:05.179 look at the have not provinces first. Looking 00:09:05.179 --> 00:09:08.700 at the source data for the 2026 -2027 projections, 00:09:09.230 --> 00:09:11.669 There is an absolute elephant in the room. Quebec. 00:09:12.230 --> 00:09:15.990 They are projected to receive about 13 .9 billion 00:09:15.990 --> 00:09:19.169 dollars. That is a staggering number. And when 00:09:19.169 --> 00:09:22.730 people out west see 13 .9 billion, they just 00:09:22.730 --> 00:09:25.309 lose their minds. Why is it so high? Is Quebec 00:09:25.309 --> 00:09:27.679 actually that poor? Well, remember, it isn't 00:09:27.679 --> 00:09:29.840 about being poor in the sense of poverty. It's 00:09:29.840 --> 00:09:32.320 about fiscal capacity relative to the national 00:09:32.320 --> 00:09:34.940 average. But that massive number, the nearly 00:09:34.940 --> 00:09:38.399 14 billion, is primarily just a volume issue. 00:09:38.519 --> 00:09:40.159 Just because there are so many people. Exactly. 00:09:40.279 --> 00:09:43.019 Quebec is huge. It holds nearly 23 percent of 00:09:43.019 --> 00:09:46.000 Canada's entire population. So the total check 00:09:46.000 --> 00:09:48.399 is massive. But if you break it down to a per 00:09:48.399 --> 00:09:51.259 person amount, it's not actually the highest 00:09:51.259 --> 00:09:53.779 in the country. But seeing 14 billion on a headline 00:09:53.779 --> 00:09:56.649 makes it a very easy target. easiest target. 00:09:56.830 --> 00:09:58.590 But it's not just the sheer size of the check, 00:09:58.809 --> 00:10:01.929 is it? There is a very specific technical grievance 00:10:01.929 --> 00:10:04.590 that other provinces have with Quebec. The hydro 00:10:04.590 --> 00:10:06.789 controversy. I hear this brought up constantly. 00:10:06.909 --> 00:10:09.389 Yeah, this is a fascinating loophole in the system. 00:10:09.789 --> 00:10:11.549 Critics, and you hear this a lot in Alberta, 00:10:11.750 --> 00:10:13.730 they argue that Quebec sells hydroelectricity 00:10:13.730 --> 00:10:16.129 to its own residents at artificially low rates. 00:10:16.350 --> 00:10:19.350 Way below market value. Far below. But cheap 00:10:19.350 --> 00:10:21.929 power is kind of the perk of living in Quebec, 00:10:22.049 --> 00:10:24.309 right? Right. It attracts aluminum smelters. 00:10:24.570 --> 00:10:26.509 It keeps everyone's heating bills down in the 00:10:26.509 --> 00:10:28.669 winter. It totally is. But think back to what 00:10:28.669 --> 00:10:32.009 we just talked about. Equalization measures fiscal 00:10:32.009 --> 00:10:35.350 capacity. How much revenue you could raise. Oh, 00:10:35.350 --> 00:10:37.730 I see where this is going. Right. By charging 00:10:37.730 --> 00:10:41.049 those rock bottom rates, Quebec's hydro revenues 00:10:41.049 --> 00:10:44.169 look much lower on paper. Critics argue that 00:10:44.169 --> 00:10:46.750 if Quebec charged actual market rates for that 00:10:46.750 --> 00:10:49.830 electricity, their revenue would skyrocket. Their 00:10:49.830 --> 00:10:52.690 fiscal capacity would go up. And their equalization 00:10:52.690 --> 00:10:55.529 payments would plummet. Exactly. So by heavily 00:10:55.529 --> 00:10:58.049 subsidizing their own citizens with cheap power, 00:10:58.389 --> 00:11:00.350 they are effectively making themselves look poorer 00:11:00.350 --> 00:11:03.009 to Ottawa so they get a bigger allowance. That 00:11:03.009 --> 00:11:05.409 is precisely the argument. There was actually 00:11:05.409 --> 00:11:08.490 one estimate that suggested between 2005 and 00:11:08.490 --> 00:11:11.769 2010, this depressed valuation netted Quebec 00:11:11.769 --> 00:11:15.370 an extra $14 billion in equalization. That is 00:11:15.370 --> 00:11:17.289 unbelievable. It's like refusing a promotion 00:11:17.289 --> 00:11:19.549 at your job just so you can stay in a lower tax 00:11:19.549 --> 00:11:21.629 bracket, but doing it with billions of dollars. 00:11:21.850 --> 00:11:24.169 That's a great analogy. And it's not just outsiders 00:11:24.169 --> 00:11:26.409 pointing this out. There are people inside Quebec 00:11:26.409 --> 00:11:29.570 who know exactly what's going on. Really? It's 00:11:29.570 --> 00:11:32.629 debated internally. Oh, absolutely. Francois 00:11:32.629 --> 00:11:35.629 Lago, the premier, has famously called the province's 00:11:35.629 --> 00:11:39.230 dependence on equalization shameful. He's openly 00:11:39.230 --> 00:11:41.409 stated his aspiration to get off the payments 00:11:41.409 --> 00:11:44.929 entirely. Interesting. And you have conservative 00:11:44.929 --> 00:11:47.590 voices like Maxime Bernier, who calls it a poverty 00:11:47.590 --> 00:11:50.710 trap. He argues that getting this free money. 00:11:50.919 --> 00:11:54.039 basically incentivizes the province not to modernize 00:11:54.039 --> 00:11:57.179 its economy. The golden handcuffs. Exactly. OK, 00:11:57.179 --> 00:11:59.519 let's look out east, because the Atlantic provinces 00:11:59.519 --> 00:12:01.279 are traditionally the ones everyone thinks of 00:12:01.279 --> 00:12:04.059 as relying heavily on this system. Right. And 00:12:04.059 --> 00:12:06.059 while Quebec gets the most total cash, Prince 00:12:06.059 --> 00:12:08.480 Edward Island often gets the most money per capita. 00:12:08.580 --> 00:12:11.379 True person. Yeah. Back in 2013, 2014, it was 00:12:11.379 --> 00:12:15.580 over $2 ,300 for every single person on the island. 00:12:15.820 --> 00:12:18.519 Wow. That is a massive chunk of their provincial 00:12:18.519 --> 00:12:20.909 budget. It effectively subsets subsidizes the 00:12:20.909 --> 00:12:23.870 entire operation of the province. But is that 00:12:23.870 --> 00:12:26.190 a permanent state of affairs? Because I remember 00:12:26.190 --> 00:12:28.389 New Brunswick had a pretty ambitious goal a while 00:12:28.389 --> 00:12:30.230 back about getting off the system. They did. 00:12:30.309 --> 00:12:34.190 In 2007, the premier of New Brunswick pledged 00:12:34.190 --> 00:12:36.429 that the province would be totally self -sufficient 00:12:36.429 --> 00:12:40.649 by 2026, meaning zero equalization dollars. And 00:12:40.649 --> 00:12:42.870 here we are talking about the 2026 projections. 00:12:43.110 --> 00:12:45.509 And they are projected to receive over three 00:12:45.509 --> 00:12:48.090 point three billion dollars. Oh, they missed 00:12:48.090 --> 00:12:51.000 it. Missed the goal by a mile. It just highlights 00:12:51.000 --> 00:12:53.799 how incredibly difficult it is to shift these 00:12:53.799 --> 00:12:56.779 structural economic realities. A premier can't 00:12:56.779 --> 00:12:59.360 just decide to have a higher fiscal capacity. 00:12:59.659 --> 00:13:02.860 You need massive economic shifts, usually a massive 00:13:02.860 --> 00:13:05.759 tech boom or discovering a new natural resource. 00:13:06.019 --> 00:13:08.059 Right. Now I want to bring up a plot twist, something 00:13:08.059 --> 00:13:10.759 that I think surprises a lot of people who haven't 00:13:10.759 --> 00:13:13.649 tracked this data closely over the years. Ontario. 00:13:13.950 --> 00:13:15.789 Yes, Ontario. The economic engine of Canada. 00:13:16.029 --> 00:13:19.029 The long standing. No, it hasn't. And this was 00:13:19.029 --> 00:13:21.690 a massive shock to the Canadian system. Traditionally, 00:13:22.070 --> 00:13:24.330 yes, Ontario was the ultimate have province. 00:13:24.750 --> 00:13:28.009 But after the 2008 global recession, their manufacturing 00:13:28.009 --> 00:13:30.250 sector just got completely hollowed out. The 00:13:30.250 --> 00:13:32.899 auto industry tanked. Everything tanked. And 00:13:32.899 --> 00:13:36.360 starting in 2009, 2010, Ontario actually began 00:13:36.360 --> 00:13:38.799 receiving equalization payments. They became 00:13:38.799 --> 00:13:41.740 a have not province for a full decade. That completely 00:13:41.740 --> 00:13:43.980 flips the whole West versus East narrative on 00:13:43.980 --> 00:13:47.059 its head. It really did. Now, They did stop receiving 00:13:47.059 --> 00:13:50.059 payments in 2019. But if you look at the source 00:13:50.059 --> 00:13:52.639 data table today, they are actually back on the 00:13:52.639 --> 00:13:55.779 recipient list starting in 2023, 2024. Wait, 00:13:55.779 --> 00:13:59.440 they are back on? They are. For 2026, 2027, they 00:13:59.440 --> 00:14:02.480 are projected to get about $406 million. I mean, 00:14:02.559 --> 00:14:05.080 $400 million is a drop in the bucket for Ontario's 00:14:05.080 --> 00:14:07.799 budget. It's tiny relative to their size. Yes. 00:14:08.090 --> 00:14:10.950 But symbolically, it is huge. Why are they back 00:14:10.950 --> 00:14:12.929 on the list? Is their economy failing again? 00:14:13.070 --> 00:14:15.330 Not necessarily failing, but relative to the 00:14:15.330 --> 00:14:17.190 national average, they are slipping just a bit. 00:14:17.450 --> 00:14:19.830 But you know, Ontario has a very specific grievance 00:14:19.830 --> 00:14:21.929 with the formula that is totally different from 00:14:21.929 --> 00:14:24.809 Alberta's complaints. What's their issue? They 00:14:24.809 --> 00:14:27.590 argue the formula completely ignores the cost 00:14:27.590 --> 00:14:29.809 of providing services. Meaning it's just way 00:14:29.809 --> 00:14:32.600 more expensive to... live and build in Toronto. 00:14:33.419 --> 00:14:35.679 Exactly. Ontario and BC make this argument all 00:14:35.679 --> 00:14:38.320 the time. They say the formula ignores that it 00:14:38.320 --> 00:14:40.679 costs significantly more to build a hospital 00:14:40.679 --> 00:14:43.559 or pay a teacher in downtown Toronto or Vancouver 00:14:43.559 --> 00:14:46.299 than it does in rural Manitoba. That makes total 00:14:46.299 --> 00:14:48.480 sense. A nurse's salary in Toronto has to be 00:14:48.480 --> 00:14:51.039 higher just so they can afford rent. Right. They 00:14:51.039 --> 00:14:53.139 say the mandate is comparable services, but a 00:14:53.139 --> 00:14:54.919 dollar doesn't buy the same amount of service 00:14:54.919 --> 00:14:57.679 in Toronto as it does in Charlottetown. The formula 00:14:57.679 --> 00:15:00.120 measures revenue potential perfectly, but it 00:15:00.120 --> 00:15:02.679 completely ignores expenditure need it treats 00:15:02.679 --> 00:15:05.940 a dollar as a dollar everywhere that is a really 00:15:05.940 --> 00:15:08.059 valid blind spot in the math well that brings 00:15:08.059 --> 00:15:10.419 us to the other side of the coin the par have 00:15:10.419 --> 00:15:13.100 provinces and specifically we have to talk about 00:15:13.100 --> 00:15:16.139 the loudest voice in the room Alberta Alberta 00:15:16.139 --> 00:15:18.440 is absolutely the protagonist of this conflict 00:15:18.440 --> 00:15:20.759 if you look at their projected payment for 2026 00:15:20.759 --> 00:15:24.100 2027 it is exactly zero as usual right aside 00:15:24.100 --> 00:15:26.799 from one tiny blip decades ago, it is almost 00:15:26.799 --> 00:15:29.120 always zero. And this ties right back to those 00:15:29.120 --> 00:15:31.460 demographics we talked about earlier, young people 00:15:31.460 --> 00:15:34.620 and high wages. Yes. The economist Trevor Toome 00:15:34.620 --> 00:15:37.299 has really crunched the numbers on this brilliantly. 00:15:37.840 --> 00:15:40.720 He points out that about 21 percent of all Canadians 00:15:40.720 --> 00:15:43.299 earning over one hundred thousand dollars live 00:15:43.299 --> 00:15:45.899 in Alberta. Wow, a fifth of the high earners. 00:15:46.159 --> 00:15:49.200 Exactly. And because the population skews younger, 00:15:49.539 --> 00:15:52.259 you have fewer elderly people collecting federal 00:15:52.259 --> 00:15:54.940 pensions. So you have this huge population sending 00:15:54.940 --> 00:15:57.740 a ton of income tax to Ottawa and requiring way 00:15:57.740 --> 00:16:00.440 less federal service money back. The net outflow 00:16:00.440 --> 00:16:03.360 of cash is just massive. But, you know, speaking 00:16:03.360 --> 00:16:06.279 to folks out West, the anger isn't just about 00:16:06.279 --> 00:16:08.940 paying taxes. People expect to pay taxes. The 00:16:08.940 --> 00:16:11.039 real fury is about the timing of the formula. 00:16:11.600 --> 00:16:13.639 I want to talk about the recession lag. This 00:16:13.639 --> 00:16:15.879 is critical because when the price of oil completely 00:16:15.879 --> 00:16:19.000 crashed in 2014, Alberta's economy fell off a 00:16:19.000 --> 00:16:21.480 cliff. People were losing their homes. Businesses 00:16:21.480 --> 00:16:23.799 were shutting down left and right. And yet the 00:16:23.799 --> 00:16:26.159 equalization check never came to help them. And 00:16:26.159 --> 00:16:28.399 this exposes the biggest mechanical flaw in the 00:16:28.399 --> 00:16:31.299 whole system. The formula is based on a three 00:16:31.299 --> 00:16:34.480 year moving average. Why three years? It's designed 00:16:34.480 --> 00:16:37.980 to be stable, to avoid wild year over year swings 00:16:37.980 --> 00:16:40.860 in provincial budgets. But the fatal flaw is 00:16:40.860 --> 00:16:43.740 that it looks backward. So when the 2014 crisis 00:16:43.740 --> 00:16:46.059 hit, the formula was still looking at economic 00:16:46.059 --> 00:16:50.200 data from 2011, 2012 and 2013 when oil was like 00:16:50.200 --> 00:16:52.759 100 bucks a barrel. Exactly. When Alberta was 00:16:52.759 --> 00:16:55.200 absolutely booming. So Alberta was drowning in 00:16:55.200 --> 00:16:58.200 2014, screaming for a lifeline. And the formula 00:16:58.200 --> 00:16:59.980 looked at them and said, well, according to my 00:16:59.980 --> 00:17:01.899 paperwork from three years ago, you guys are 00:17:01.899 --> 00:17:04.420 rich, so no money for you. I mean, that is just 00:17:04.420 --> 00:17:07.519 a recipe for political rage. It makes the system 00:17:07.519 --> 00:17:11.019 feel. entirely rigged against them. Imagine losing 00:17:11.019 --> 00:17:12.880 your job and having the government deny your 00:17:12.880 --> 00:17:14.960 unemployment benefits because you made a great 00:17:14.960 --> 00:17:17.460 salary two years ago. That's how it felt. By 00:17:17.460 --> 00:17:19.319 the time the three -year moving average finally 00:17:19.319 --> 00:17:21.480 caught up to the reality of the crash, the worst 00:17:21.480 --> 00:17:24.420 of the shock was already over. Or Alberta still 00:17:24.420 --> 00:17:26.220 looked rich relative to the Maritimes, so they 00:17:26.220 --> 00:17:28.359 still got nothing. And that frustration just 00:17:28.359 --> 00:17:31.319 kept boiling over. It led to an actual formal 00:17:31.319 --> 00:17:35.839 referendum in 2021. October 2021. They put the 00:17:35.839 --> 00:17:40.339 question right on the ballot. And 61 .7 % of 00:17:40.339 --> 00:17:43.180 Albertans voted yes to remove the principle of 00:17:43.180 --> 00:17:45.680 equalization from the Constitution. But let's 00:17:45.680 --> 00:17:49.319 be real here. A single province cannot just take 00:17:49.319 --> 00:17:51.619 a red pen and cross out a section of the Constitution. 00:17:51.759 --> 00:17:54.279 That is not how Canadian federalism works. No, 00:17:54.400 --> 00:17:56.460 they absolutely can't. And to be fair, the provincial 00:17:56.460 --> 00:17:58.279 government knew that. It wasn't about legally 00:17:58.279 --> 00:18:00.200 changing the text of the Constitution the next 00:18:00.200 --> 00:18:02.680 morning. It was a tactic. Exactly. It was a negotiation 00:18:02.680 --> 00:18:05.619 tactic. It was basically a primal scream directed 00:18:05.619 --> 00:18:07.839 at Ottawa to say the system is fundamentally 00:18:07.839 --> 00:18:10.579 broken and we need to talk right now. It was 00:18:10.579 --> 00:18:12.920 all about gaining political leverage. Now, it 00:18:12.920 --> 00:18:15.029 is worth noting. just for the sake of accuracy, 00:18:15.269 --> 00:18:18.089 because I've seen this headline used to debunk 00:18:18.089 --> 00:18:20.849 Alberta's complaints. In 2020, Alberta actually 00:18:20.849 --> 00:18:23.809 was technically a net receiver of federal spending. 00:18:24.190 --> 00:18:26.869 Yes, but we have to put a massive asterisk next 00:18:26.869 --> 00:18:29.269 to that stat. Because it was COVID. It was COVID. 00:18:29.410 --> 00:18:32.750 That was emergency deficit spending, the CERB 00:18:32.750 --> 00:18:36.069 payments, the... massive business loans that 00:18:36.069 --> 00:18:38.450 went everywhere across the country. It was not 00:18:38.450 --> 00:18:40.609 the equalization program finally kicking in to 00:18:40.609 --> 00:18:43.950 help Alberta. It was national emergency spending. 00:18:44.829 --> 00:18:47.529 So using that 2020 anomaly to say, look, the 00:18:47.529 --> 00:18:50.650 system works is highly disingenuous. Fair point. 00:18:51.210 --> 00:18:52.869 So we've looked at the formula. We've seen the 00:18:52.869 --> 00:18:55.589 winners and the losers. But this system hasn't 00:18:55.589 --> 00:18:58.089 just been a static math problem. Yeah. Politicians 00:18:58.089 --> 00:19:00.210 have used this program as a political football 00:19:00.210 --> 00:19:02.910 for decades. Constantly. It's irresistible to 00:19:02.910 --> 00:19:06.069 them. The program started way back in 1957, but 00:19:06.069 --> 00:19:08.930 the big shift was 1982 when Piero Trudeau locked 00:19:08.930 --> 00:19:11.240 it into the Constitution. Which made it basically 00:19:11.240 --> 00:19:13.460 impossible to kill. Very hard to scrap. You can't 00:19:13.460 --> 00:19:15.400 just pass a simple bill in parliament to end 00:19:15.400 --> 00:19:17.380 it. You need a constitutional amendment, which, 00:19:17.500 --> 00:19:19.680 as we know in Canada, is nearly impossible to 00:19:19.680 --> 00:19:21.539 get. But they can tweet the formula right. The 00:19:21.539 --> 00:19:23.279 federal government can turn the knobs. Oh, and 00:19:23.279 --> 00:19:26.079 they do turn the knobs. There was a really fascinating 00:19:26.079 --> 00:19:29.619 period under Stephen Harper. In 2009, his government 00:19:29.619 --> 00:19:31.940 introduced something called Total Transfer Protection, 00:19:32.079 --> 00:19:35.140 or TTP. What exactly did that do? It was essentially 00:19:35.140 --> 00:19:38.509 a floor. A guarantee that a province's total 00:19:38.509 --> 00:19:40.670 federal transfers wouldn't drop year over year. 00:19:40.950 --> 00:19:43.450 It was a safety net to prevent the shock of suddenly 00:19:43.450 --> 00:19:45.789 losing a ton of funding. Sounds reasonable. And 00:19:45.789 --> 00:19:48.490 then they cut the net. They did. In 2014, conservative 00:19:48.490 --> 00:19:51.430 government canceled it. And the timing was highly 00:19:51.430 --> 00:19:54.390 suspicious to a lot of people, because canceling 00:19:54.390 --> 00:19:59.329 TTP cost Ontario specifically about $640 million. 00:19:59.849 --> 00:20:02.029 Ouch. And Ontario had a liberal government at 00:20:02.029 --> 00:20:04.509 the time, right? Exactly. Ontario liberals versus 00:20:04.509 --> 00:20:07.250 federal conservatives. Many people interpreted 00:20:07.250 --> 00:20:10.430 that cancellation as a direct political punishment 00:20:10.430 --> 00:20:13.009 aimed at a rival government. It really highlights 00:20:13.009 --> 00:20:15.210 how discretionary some of these purely mathematical 00:20:15.210 --> 00:20:18.170 formulas actually are in practice. You can change 00:20:18.170 --> 00:20:19.990 the inputs to hurt your enemies and help your 00:20:19.990 --> 00:20:22.710 friends. We saw that exact dynamic again with 00:20:22.710 --> 00:20:26.109 the 2019 renewal. The equalization formula was 00:20:26.109 --> 00:20:29.089 set to expire. Alberta and Saskatchewan were 00:20:29.089 --> 00:20:32.190 gearing up for this massive negotiation. They 00:20:32.190 --> 00:20:34.990 were hoping to finally fix the recession lag 00:20:34.990 --> 00:20:37.190 and change the natural resource calculation. 00:20:37.450 --> 00:20:38.910 And what did Ottawa do? The federal government 00:20:38.910 --> 00:20:41.289 just renewed it. Wait, they just copy paste to 00:20:41.289 --> 00:20:44.829 the old deal? Basically, yes. Little to no consultation, 00:20:45.089 --> 00:20:47.769 no big debate. They just locked the old formula 00:20:47.769 --> 00:20:51.589 in until 2024. Wow. It was seen as a massive 00:20:51.589 --> 00:20:55.039 snub to the West. It just reinforced this deeply 00:20:55.039 --> 00:20:58.200 held idea that Ottawa simply does not listen 00:20:58.200 --> 00:21:00.640 to their concerns. I want to circle back to a 00:21:00.640 --> 00:21:02.940 big picture idea you touched on earlier. The 00:21:02.940 --> 00:21:05.079 welfare trap. Because we talked about it with 00:21:05.079 --> 00:21:08.420 Quebec and Hydro. Is there actual economic consensus 00:21:08.420 --> 00:21:11.700 that equalization holds provinces back from developing? 00:21:12.059 --> 00:21:14.140 Like if I'm getting free money. Why would I work 00:21:14.140 --> 00:21:17.039 harder just to lose it? It is a huge debate among 00:21:17.039 --> 00:21:19.359 top economists, people like Michael Smart and 00:21:19.359 --> 00:21:21.339 even James Buchanan. Who helped design it, right? 00:21:21.359 --> 00:21:23.559 Yes, Buchanan helped design the original concepts. 00:21:23.960 --> 00:21:26.299 They have really wrestled with this. The theory 00:21:26.299 --> 00:21:29.299 is straightforward. If a have -not province raises 00:21:29.299 --> 00:21:31.660 its taxes to generate its own revenue or say 00:21:31.660 --> 00:21:34.900 they develop a massive new mining industry, the 00:21:34.900 --> 00:21:36.960 formula might reduce their equalization payment 00:21:36.960 --> 00:21:38.859 by almost the exact same amount they gained. 00:21:39.099 --> 00:21:40.980 So for every dollar of effort you put in, you 00:21:40.980 --> 00:21:43.789 lose a dollar of federal support. Exactly. It 00:21:43.789 --> 00:21:47.109 operates effectively as a 100 % tax on economic 00:21:47.109 --> 00:21:49.910 development. Buchanan actually admitted later 00:21:49.910 --> 00:21:52.130 in his life that this idea had serious flaws 00:21:52.130 --> 00:21:54.390 and could create a culture of dependence. Because 00:21:54.390 --> 00:21:57.990 if you get paid to stay poor, the incentive to 00:21:57.990 --> 00:22:00.970 become rich and lose your check is pretty weak. 00:22:01.180 --> 00:22:04.019 Right. Why take the political risk of approving 00:22:04.019 --> 00:22:06.759 a controversial mine if the financial benefit 00:22:06.759 --> 00:22:09.160 just gets clawed back by Ottawa? So what does 00:22:09.160 --> 00:22:11.099 this all mean for you, the listener? We have 00:22:11.099 --> 00:22:14.119 this massive system that is constitutionally 00:22:14.119 --> 00:22:16.839 mandated to keep the country together, to make 00:22:16.839 --> 00:22:18.799 things fair. But it seems like it's doing the 00:22:18.799 --> 00:22:21.539 exact opposite. It is the Great Canadian Paradox. 00:22:21.920 --> 00:22:24.079 The program was designed to unite the country. 00:22:24.329 --> 00:22:26.910 By ensuring that a Canadian is a Canadian no 00:22:26.910 --> 00:22:29.250 matter where they live. Whether you're in a tiny 00:22:29.250 --> 00:22:31.529 fishing village in Newfoundland or a high -rise 00:22:31.529 --> 00:22:34.309 condo in Vancouver, you deserve a certain standard 00:22:34.309 --> 00:22:37.250 of care. Which is a beautiful idea. It is. But 00:22:37.250 --> 00:22:40.089 the mechanism, the actual math we use to measure 00:22:40.089 --> 00:22:42.349 that wealth, ends up dividing the country because 00:22:42.349 --> 00:22:45.049 it creates these rigid labels. It forces us to 00:22:45.049 --> 00:22:46.930 constantly look at our neighbors and ask, why 00:22:46.930 --> 00:22:49.490 are they getting a check, and I'm not. And it 00:22:49.490 --> 00:22:52.730 relies on data that is always lagging three years 00:22:52.730 --> 00:22:55.900 behind reality. Right. It balances on a razor's 00:22:55.900 --> 00:22:59.160 edge because it tries to equalize fiscal capacity, 00:22:59.240 --> 00:23:02.839 not economic outcomes. And that is a very hard 00:23:02.839 --> 00:23:05.500 academic distinction to sell to a voter in Alberta 00:23:05.500 --> 00:23:08.720 who just lost their job in the oil patch, watching 00:23:08.720 --> 00:23:11.039 billions of dollars flow to a province that keeps 00:23:11.039 --> 00:23:13.640 its electricity rates artificially low. It feels 00:23:13.640 --> 00:23:16.420 fundamentally unfair, even if the math says it's 00:23:16.420 --> 00:23:18.559 technically correct. It's a system designed for 00:23:18.559 --> 00:23:20.900 a static world trying to operate in a highly 00:23:20.900 --> 00:23:23.619 dynamic economy. And it's not going away anytime 00:23:23.619 --> 00:23:26.640 soon. As long as we have massive regional differences, 00:23:26.799 --> 00:23:29.380 oil in the West, hydro and Quebec manufacturing 00:23:29.380 --> 00:23:31.720 in Ontario, trying to flatten all of that out 00:23:31.720 --> 00:23:33.759 with a single math equation is always going to 00:23:33.759 --> 00:23:36.180 be incredibly messy. Always. So here is the thought 00:23:36.180 --> 00:23:38.200 I want to leave you with today. We generally 00:23:38.200 --> 00:23:40.099 accept that the goal is comparable services. 00:23:40.380 --> 00:23:42.480 That's a good thing. But if the formula actively 00:23:42.480 --> 00:23:45.779 punishes economic growth, and essentially subsidizes 00:23:45.779 --> 00:23:48.599 low utility rates in certain provinces, are we 00:23:48.599 --> 00:23:50.299 actually achieving comparable services? Good 00:23:50.299 --> 00:23:53.640 question. Or have we just created a system where 00:23:53.640 --> 00:23:56.599 some provinces are effectively paid to stay exactly 00:23:56.599 --> 00:23:59.519 where they are? You have to ask yourself, is 00:23:59.519 --> 00:24:02.480 equalization a helping hand or is it a set of 00:24:02.480 --> 00:24:04.839 golden handcuffs? That really is the multi -billion 00:24:04.839 --> 00:24:06.980 dollar question. Thanks for joining us on this 00:24:06.980 --> 00:24:09.420 deep dive. It is a heavy topic today, but it's 00:24:09.420 --> 00:24:11.420 one you really need to understand to understand 00:24:11.420 --> 00:24:13.799 how Canada actually works. We will catch you 00:24:13.799 --> 00:24:14.299 on the next one.