Welcome back to The Deep Dive. Today we are,
we're walking right into the line of fire, honestly.
Yes, we really are. It's a hot one today. It
is. We are talking about, arguably, the single
most controversial, maybe the most misunderstood
mechanism in the entire Canadian Federation.
Oh, absolutely, without a doubt. It's the kind
of topic that, you know, It can launch referendums.
It ruins family Thanksgiving dinners. I've seen
it happen. Right. And it slaps this label on
your home province that people just hate. You're
either a have or a have not. It's just such a
loaded way to put it. But yeah, we're talking
about equalization. Equalization. And, you know,
we've got all the source material in France.
We're going to look at the formula, the history,
the grievances from the provinces. But I want
to start with the mission is this deep dive.
Sounds good. Let's do it. Because there is an
image. And I think everyone listening right now
probably has this image in their head. It's the
Premier of Alberta sitting at this big mahogany
desk. angrily writing out a massive personal
check. Licking the stamp and just mailing it
directly to the government of Quebec. Yeah, that
is, I mean, it's a very vivid image. It's infuriating
if you live in the West, but it's the first thing
we really have to dismantle today. Because it's
a myth. It is a total myth. That transaction,
one province writing a check to another, it does
not happen. It has actually never happened. OK,
so let's clear the air for everyone right out
of the gate. If Alberta isn't putting cash in
an envelope and mailing it to Quebec, how does
the money move? Because the money is definitely
moving. Oh, the money is absolutely moving. Billions
of dollars. But the path is completely different.
You have to understand that provincial governments
do not make contributions to equalization. Not
at all. Not a single dime. The federal government
does. So the money is funded entirely from federal
general revenues. OK, so we're talking about...
Like the GST you pay on your coffee this morning.
or your personal income tax, corporate taxes.
All of that leaves your pocket and goes straight
to Ottawa into one massive commingled pot. Right.
So it's one big federal bucket. There's no Alberta
bucket and a separate Quebec bucket. Exactly.
And then Ottawa reaches into that massive bucket
and distributes the funds to the provinces that
qualify. Based on the formula. Right. Based on
a very complex formula. So a wealthy CEO living
in Calgary and a wealthy CEO living in Montreal,
they are both paying the exact same federal tax
rates into that same pot. But the grievance,
the feeling on the ground is that the pot gets
emptied out. into one backyard way more than
the other. And that's, I mean, that's where the
nuance comes in. The reason it feels like a transfer
from Alberta to elsewhere is really just demographics
and economics. Right, because Alberta has more
high income earners. Precisely. Historically,
they have way more high earners. So per capita,
the people in Alberta are putting a lot more
money into that federal pot. But the provincial
government of Alberta itself pays nothing into
the program. That is such a crucial distinction
for you listening. It's the citizens paying federal
taxes, not the province paying a fee. But, uh,
why do we even do this? Like, what is Ottawa's
actual mission statement here? Are they just
playing Robin Hood? It's actually much deeper
than just a policy or playing Robin Hood. It
is constitutional. Really? Like, baked in? Baked
right in. A Constitution Act of 1982. Specifically,
Section 36, Subsection 2. You brought the receipts
today. I always do. The text essentially says
the goal is to ensure provincial governments
have sufficient revenues to provide. And this
is a quote, reasonably comparable levels of public
services at reasonably comparable levels of taxation.
Reasonably comparable. I mean, that sounds like
a lawyer's dream right there. It's so vague.
Very vague. But the spirit of it is pretty clear.
The idea is that whether you live in Halifax
or Montreal or Calgary, you should have access
to roughly the same quality of hospitals and
schools. and roads. Without your local government
having to tax you like 80 % just to keep the
lights on. Exactly. It's an attempt to standardize
the Canadian experience regardless of geography.
So if I'm in Manitoba, I shouldn't have to pay
double the income tax of someone in Alberta just
to have a functioning emergency room. That is
the exact mission. Yes. Okay, well that sounds
very noble in theory. Yeah. But we all know the
devil is entirely in the math here. So let's
open up the hood. How does Ottawa actually decide
who is poor enough to need a check? Because I
think this is where a lot of people just kind
of check out Yeah, the math can be dry, but it's
important It all comes down to one core concept
called fiscal capacity. Fiscal capacity, okay.
And this trips people up all the time. The formula
does not measure how much money a province has
in the bank. It doesn't look at their savings
account. It doesn't care if they are running
a massive deficit. Wait, so what does it measure?
It measures their ability to generate revenue.
Oh, okay. So it's potential. It's potential earnings,
not actual wealth. Exactly. It's like looking
at someone and saying, You have a law degree,
so you could be making $200 ,000. Regardless
of whether they actually have a job or not, spot
on. Wow. They use a model called the representative
tax system. Imagine Ottawa looks at a province,
say Saskatchewan, and they ask if this province
applied the average national tax rates to absolutely
everything. Income businesses, all of it. Yeah.
How much money could they theoretically raise?
It's a complete simulation. It's a stress test
of the provincial economy. And to do that simulation,
they look at five very specific baskets of revenue.
OK, let's go through the baskets. Number one
is personal income taxes. Number two, business
income taxes. Number three is consumption taxes,
so things like sales tax. Number four is property
taxes. OK, so far those are pretty standard.
That covers most of how we live and pay for things.
Right. And then you have the fifth basket, the
one that causes basically all the political fights
in this country, natural resource revenues. There
it is. The oil and gas factor. The oil and gas
factor. We are definitely going to unpack that
one separately because it's a beast. Essentially
Ottawa takes these five baskets. They calculate
what a province could raise and then they compare
it to something called the 10 province standard.
Which is what? Just the average. Yeah, it's the
average fiscal capacity of all 10 provinces combined.
OK, so that average line is the pass or fail
mark. Correct. If your province's ability to
raise money falls below that national average
line, Ottawa cuts you a check to top you up.
So you hit the average. Right. That top up is
the equalization payment. But if you are above
the average line, you get zero. Nothing. You
are officially labeled a have province. It's
very binary. You are either getting topped up
or you're left alone. But I want to go back to
that fit the basket, the natural resources. Why
is that specific one so controversial? Because
money is money, right? If you make it selling
software or selling crude oil, shouldn't it all
count the same? You would think so, logically.
But resources aren't distributed evenly across
the country. You can't just decide your province
is going to have a booming oil sector. All right,
geology decides that. Geology completely decides
it. But the real controversy is how the formula
counts that resource money. Under the current
rules, usually only 50 % of natural resource
revenues are included in the calculation. Wait,
only 50 %? Why do they discount half of it? It's
a political compromise. If you included 100 %
of resource revenues, the provinces with oil
would see their fiscal capacity just skyrocket
on paper. And they'd lose all their equalization
money. Immediately. It would create a massive
disincentive to actually develop the resources.
Like, why would a province approve a new drilling
project if for every single dollar they make
in royalties, Ottawa just clawed back a dollar
in equalization. Oh, I see. It's the welfare
trap logic penalized for working harder and growing
your economy. Exactly. So Ottawa includes 50
percent to let the provinces keep some of the
benefit of their own resources. Or sometimes
they fully exclude it if that yields a better
result for the province. But the provinces without
resources must hate that. Oh, they despise it.
They look at the West and say, wait a minute.
That is real cash in your pocket. Why are we
pretending half of it doesn't exist when we calculate
how rich you are? So the 50 % rule basically
satisfies absolutely no one. That sounds like
Canadian politics in a nutshell. Yeah. And to
make it worse, there's a cap on this whole system,
too, right? Yeah. It's not an infinite pool of
money. Right. The total amount Ottawa hands out
is often fixed. It grows with GDP, but it is
a capped pot, which creates a zero -sum game.
Meaning if someone gets more? someone else gets
last. Exactly. If one province's entitlement
goes up under the formula, it effectively means
a smaller share for everyone else, so it structurally
pits the provinces against each other. It becomes
less about getting what you need and more about
grabbing your slice before the pie is gone. Wow.
Okay, let's move from the abstract math into
the political reality. Yeah. Because we need
to talk about the specific players here. Let's
look at the have not provinces first. Looking
at the source data for the 2026 -2027 projections,
There is an absolute elephant in the room. Quebec.
They are projected to receive about 13 .9 billion
dollars. That is a staggering number. And when
people out west see 13 .9 billion, they just
lose their minds. Why is it so high? Is Quebec
actually that poor? Well, remember, it isn't
about being poor in the sense of poverty. It's
about fiscal capacity relative to the national
average. But that massive number, the nearly
14 billion, is primarily just a volume issue.
Just because there are so many people. Exactly.
Quebec is huge. It holds nearly 23 percent of
Canada's entire population. So the total check
is massive. But if you break it down to a per
person amount, it's not actually the highest
in the country. But seeing 14 billion on a headline
makes it a very easy target. easiest target.
But it's not just the sheer size of the check,
is it? There is a very specific technical grievance
that other provinces have with Quebec. The hydro
controversy. I hear this brought up constantly.
Yeah, this is a fascinating loophole in the system.
Critics, and you hear this a lot in Alberta,
they argue that Quebec sells hydroelectricity
to its own residents at artificially low rates.
Way below market value. Far below. But cheap
power is kind of the perk of living in Quebec,
right? Right. It attracts aluminum smelters.
It keeps everyone's heating bills down in the
winter. It totally is. But think back to what
we just talked about. Equalization measures fiscal
capacity. How much revenue you could raise. Oh,
I see where this is going. Right. By charging
those rock bottom rates, Quebec's hydro revenues
look much lower on paper. Critics argue that
if Quebec charged actual market rates for that
electricity, their revenue would skyrocket. Their
fiscal capacity would go up. And their equalization
payments would plummet. Exactly. So by heavily
subsidizing their own citizens with cheap power,
they are effectively making themselves look poorer
to Ottawa so they get a bigger allowance. That
is precisely the argument. There was actually
one estimate that suggested between 2005 and
2010, this depressed valuation netted Quebec
an extra $14 billion in equalization. That is
unbelievable. It's like refusing a promotion
at your job just so you can stay in a lower tax
bracket, but doing it with billions of dollars.
That's a great analogy. And it's not just outsiders
pointing this out. There are people inside Quebec
who know exactly what's going on. Really? It's
debated internally. Oh, absolutely. Francois
Lago, the premier, has famously called the province's
dependence on equalization shameful. He's openly
stated his aspiration to get off the payments
entirely. Interesting. And you have conservative
voices like Maxime Bernier, who calls it a poverty
trap. He argues that getting this free money.
basically incentivizes the province not to modernize
its economy. The golden handcuffs. Exactly. OK,
let's look out east, because the Atlantic provinces
are traditionally the ones everyone thinks of
as relying heavily on this system. Right. And
while Quebec gets the most total cash, Prince
Edward Island often gets the most money per capita.
True person. Yeah. Back in 2013, 2014, it was
over $2 ,300 for every single person on the island.
Wow. That is a massive chunk of their provincial
budget. It effectively subsets subsidizes the
entire operation of the province. But is that
a permanent state of affairs? Because I remember
New Brunswick had a pretty ambitious goal a while
back about getting off the system. They did.
In 2007, the premier of New Brunswick pledged
that the province would be totally self -sufficient
by 2026, meaning zero equalization dollars. And
here we are talking about the 2026 projections.
And they are projected to receive over three
point three billion dollars. Oh, they missed
it. Missed the goal by a mile. It just highlights
how incredibly difficult it is to shift these
structural economic realities. A premier can't
just decide to have a higher fiscal capacity.
You need massive economic shifts, usually a massive
tech boom or discovering a new natural resource.
Right. Now I want to bring up a plot twist, something
that I think surprises a lot of people who haven't
tracked this data closely over the years. Ontario.
Yes, Ontario. The economic engine of Canada.
The long standing. No, it hasn't. And this was
a massive shock to the Canadian system. Traditionally,
yes, Ontario was the ultimate have province.
But after the 2008 global recession, their manufacturing
sector just got completely hollowed out. The
auto industry tanked. Everything tanked. And
starting in 2009, 2010, Ontario actually began
receiving equalization payments. They became
a have not province for a full decade. That completely
flips the whole West versus East narrative on
its head. It really did. Now, They did stop receiving
payments in 2019. But if you look at the source
data table today, they are actually back on the
recipient list starting in 2023, 2024. Wait,
they are back on? They are. For 2026, 2027, they
are projected to get about $406 million. I mean,
$400 million is a drop in the bucket for Ontario's
budget. It's tiny relative to their size. Yes.
But symbolically, it is huge. Why are they back
on the list? Is their economy failing again?
Not necessarily failing, but relative to the
national average, they are slipping just a bit.
But you know, Ontario has a very specific grievance
with the formula that is totally different from
Alberta's complaints. What's their issue? They
argue the formula completely ignores the cost
of providing services. Meaning it's just way
more expensive to... live and build in Toronto.
Exactly. Ontario and BC make this argument all
the time. They say the formula ignores that it
costs significantly more to build a hospital
or pay a teacher in downtown Toronto or Vancouver
than it does in rural Manitoba. That makes total
sense. A nurse's salary in Toronto has to be
higher just so they can afford rent. Right. They
say the mandate is comparable services, but a
dollar doesn't buy the same amount of service
in Toronto as it does in Charlottetown. The formula
measures revenue potential perfectly, but it
completely ignores expenditure need it treats
a dollar as a dollar everywhere that is a really
valid blind spot in the math well that brings
us to the other side of the coin the par have
provinces and specifically we have to talk about
the loudest voice in the room Alberta Alberta
is absolutely the protagonist of this conflict
if you look at their projected payment for 2026
2027 it is exactly zero as usual right aside
from one tiny blip decades ago, it is almost
always zero. And this ties right back to those
demographics we talked about earlier, young people
and high wages. Yes. The economist Trevor Toome
has really crunched the numbers on this brilliantly.
He points out that about 21 percent of all Canadians
earning over one hundred thousand dollars live
in Alberta. Wow, a fifth of the high earners.
Exactly. And because the population skews younger,
you have fewer elderly people collecting federal
pensions. So you have this huge population sending
a ton of income tax to Ottawa and requiring way
less federal service money back. The net outflow
of cash is just massive. But, you know, speaking
to folks out West, the anger isn't just about
paying taxes. People expect to pay taxes. The
real fury is about the timing of the formula.
I want to talk about the recession lag. This
is critical because when the price of oil completely
crashed in 2014, Alberta's economy fell off a
cliff. People were losing their homes. Businesses
were shutting down left and right. And yet the
equalization check never came to help them. And
this exposes the biggest mechanical flaw in the
whole system. The formula is based on a three
year moving average. Why three years? It's designed
to be stable, to avoid wild year over year swings
in provincial budgets. But the fatal flaw is
that it looks backward. So when the 2014 crisis
hit, the formula was still looking at economic
data from 2011, 2012 and 2013 when oil was like
100 bucks a barrel. Exactly. When Alberta was
absolutely booming. So Alberta was drowning in
2014, screaming for a lifeline. And the formula
looked at them and said, well, according to my
paperwork from three years ago, you guys are
rich, so no money for you. I mean, that is just
a recipe for political rage. It makes the system
feel. entirely rigged against them. Imagine losing
your job and having the government deny your
unemployment benefits because you made a great
salary two years ago. That's how it felt. By
the time the three -year moving average finally
caught up to the reality of the crash, the worst
of the shock was already over. Or Alberta still
looked rich relative to the Maritimes, so they
still got nothing. And that frustration just
kept boiling over. It led to an actual formal
referendum in 2021. October 2021. They put the
question right on the ballot. And 61 .7 % of
Albertans voted yes to remove the principle of
equalization from the Constitution. But let's
be real here. A single province cannot just take
a red pen and cross out a section of the Constitution.
That is not how Canadian federalism works. No,
they absolutely can't. And to be fair, the provincial
government knew that. It wasn't about legally
changing the text of the Constitution the next
morning. It was a tactic. Exactly. It was a negotiation
tactic. It was basically a primal scream directed
at Ottawa to say the system is fundamentally
broken and we need to talk right now. It was
all about gaining political leverage. Now, it
is worth noting. just for the sake of accuracy,
because I've seen this headline used to debunk
Alberta's complaints. In 2020, Alberta actually
was technically a net receiver of federal spending.
Yes, but we have to put a massive asterisk next
to that stat. Because it was COVID. It was COVID.
That was emergency deficit spending, the CERB
payments, the... massive business loans that
went everywhere across the country. It was not
the equalization program finally kicking in to
help Alberta. It was national emergency spending.
So using that 2020 anomaly to say, look, the
system works is highly disingenuous. Fair point.
So we've looked at the formula. We've seen the
winners and the losers. But this system hasn't
just been a static math problem. Yeah. Politicians
have used this program as a political football
for decades. Constantly. It's irresistible to
them. The program started way back in 1957, but
the big shift was 1982 when Piero Trudeau locked
it into the Constitution. Which made it basically
impossible to kill. Very hard to scrap. You can't
just pass a simple bill in parliament to end
it. You need a constitutional amendment, which,
as we know in Canada, is nearly impossible to
get. But they can tweet the formula right. The
federal government can turn the knobs. Oh, and
they do turn the knobs. There was a really fascinating
period under Stephen Harper. In 2009, his government
introduced something called Total Transfer Protection,
or TTP. What exactly did that do? It was essentially
a floor. A guarantee that a province's total
federal transfers wouldn't drop year over year.
It was a safety net to prevent the shock of suddenly
losing a ton of funding. Sounds reasonable. And
then they cut the net. They did. In 2014, conservative
government canceled it. And the timing was highly
suspicious to a lot of people, because canceling
TTP cost Ontario specifically about $640 million.
Ouch. And Ontario had a liberal government at
the time, right? Exactly. Ontario liberals versus
federal conservatives. Many people interpreted
that cancellation as a direct political punishment
aimed at a rival government. It really highlights
how discretionary some of these purely mathematical
formulas actually are in practice. You can change
the inputs to hurt your enemies and help your
friends. We saw that exact dynamic again with
the 2019 renewal. The equalization formula was
set to expire. Alberta and Saskatchewan were
gearing up for this massive negotiation. They
were hoping to finally fix the recession lag
and change the natural resource calculation.
And what did Ottawa do? The federal government
just renewed it. Wait, they just copy paste to
the old deal? Basically, yes. Little to no consultation,
no big debate. They just locked the old formula
in until 2024. Wow. It was seen as a massive
snub to the West. It just reinforced this deeply
held idea that Ottawa simply does not listen
to their concerns. I want to circle back to a
big picture idea you touched on earlier. The
welfare trap. Because we talked about it with
Quebec and Hydro. Is there actual economic consensus
that equalization holds provinces back from developing?
Like if I'm getting free money. Why would I work
harder just to lose it? It is a huge debate among
top economists, people like Michael Smart and
even James Buchanan. Who helped design it, right?
Yes, Buchanan helped design the original concepts.
They have really wrestled with this. The theory
is straightforward. If a have -not province raises
its taxes to generate its own revenue or say
they develop a massive new mining industry, the
formula might reduce their equalization payment
by almost the exact same amount they gained.
So for every dollar of effort you put in, you
lose a dollar of federal support. Exactly. It
operates effectively as a 100 % tax on economic
development. Buchanan actually admitted later
in his life that this idea had serious flaws
and could create a culture of dependence. Because
if you get paid to stay poor, the incentive to
become rich and lose your check is pretty weak.
Right. Why take the political risk of approving
a controversial mine if the financial benefit
just gets clawed back by Ottawa? So what does
this all mean for you, the listener? We have
this massive system that is constitutionally
mandated to keep the country together, to make
things fair. But it seems like it's doing the
exact opposite. It is the Great Canadian Paradox.
The program was designed to unite the country.
By ensuring that a Canadian is a Canadian no
matter where they live. Whether you're in a tiny
fishing village in Newfoundland or a high -rise
condo in Vancouver, you deserve a certain standard
of care. Which is a beautiful idea. It is. But
the mechanism, the actual math we use to measure
that wealth, ends up dividing the country because
it creates these rigid labels. It forces us to
constantly look at our neighbors and ask, why
are they getting a check, and I'm not. And it
relies on data that is always lagging three years
behind reality. Right. It balances on a razor's
edge because it tries to equalize fiscal capacity,
not economic outcomes. And that is a very hard
academic distinction to sell to a voter in Alberta
who just lost their job in the oil patch, watching
billions of dollars flow to a province that keeps
its electricity rates artificially low. It feels
fundamentally unfair, even if the math says it's
technically correct. It's a system designed for
a static world trying to operate in a highly
dynamic economy. And it's not going away anytime
soon. As long as we have massive regional differences,
oil in the West, hydro and Quebec manufacturing
in Ontario, trying to flatten all of that out
with a single math equation is always going to
be incredibly messy. Always. So here is the thought
I want to leave you with today. We generally
accept that the goal is comparable services.
That's a good thing. But if the formula actively
punishes economic growth, and essentially subsidizes
low utility rates in certain provinces, are we
actually achieving comparable services? Good
question. Or have we just created a system where
some provinces are effectively paid to stay exactly
where they are? You have to ask yourself, is
equalization a helping hand or is it a set of
golden handcuffs? That really is the multi -billion
dollar question. Thanks for joining us on this
deep dive. It is a heavy topic today, but it's
one you really need to understand to understand
how Canada actually works. We will catch you
on the next one.