A SHORT HISTORY OF
EQUALIZATION
Thomas J. Courchene
Energy prices have had a profound and pervasive impact on the political economy of
Canada, running the gamut from the constitutional dossier, to Canada-US relations, to
federal-provincial relations and, of course, to equalization payments. Finance Minister
Flaherty’s challenge on the equalization front is to find a stable, formula-based and
equitable framework that will allow all provinces to work together again in our nationbuilding project. Daunting as this task will be, it will not be the end of the energy
challenges: the controversial environment-energy nexus is already waiting in the wings.
Les prix de l’énergie ont de vastes répercussions sur l’économie politique du
Canada, du dossier constitutionnel aux relations canado-américaines ou fédéralesprovinciales, en passant évidemment par les paiements de péréquation. Sur ce
dernier front, le défi du ministre des Finances Jim Flaherty consiste à élaborer un
cadre axé sur une formule à la fois stable et équitable qui permettra à toutes les
provinces de collaborer au profit du développement national. Un défi de taille qui
ne fait qu’annoncer d’autres enjeux énergétiques, en ce qui touche notamment le
lien controversé énergie-environnement.
W
hile it is commonplace to assert that Canada
needs to make the transition from a resourcebased economy and society to a knowledge-based
economy and society, the dramatic rise of China and India
with their insatiable appetites for resources has driven home
to Canadians that there are still huge rewards to being hewers
of wood and drawers of water. Nowhere is this more true than
in the energy sector, where activities associated with oil and
gas development and exports are serving to ensure that
Canada’s overall economic growth remains in the respectable
range. This is obviously good news for Finance Minister Jim
Flaherty: Ottawa’s overall revenues are certainly buoyed by the
performance of the energy sector, even if most of the direct
energy-related revenues accrue to the producing provinces.
However, the irony here is that these burgeoning
provincial energy revenues are interacting with Canada’s
approach to horizontal and vertical fiscal imbalance in ways
that ensure that Flaherty’s budget must address what
arguably qualifies as the most intractable distributional tugof-war that Canadian federalism has ever experienced. Fiscal
imbalance has all the markings of a negative-sum economic
and political game, and it will therefore take adroit stewardship to convert it to a mere zero-sum game.
A
nyone who is even mildly interested in the arcane details
of fiscal federalism, let alone equalization, could see this
challenge coming — a tripling of energy prices under the five-
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OPTIONS POLITIQUES
MARS 2007
province standard was bound to trigger huge revenue differences across provinces on the one hand and to lead to confiscatory tax rates for non-Alberta energy producers on the other. But
when Prime Minister Paul Martin in rapid succession tossed out
Canada’s traditional approach to equalization and then effectively promised Newfoundland and Nova Scotia that there
would be no equalization clawbacks on their energy revenues,
Canada’s system of equalization payments imploded.
T
he purpose of the ensuing historical overview is to highlight the reality that fossil energy has always created
challenges for the operation of Canada’s Equalization
Program but as well has also played and continues to play a
pivotal role in the political, economic and even constitutional evolution of the federation itself. For example, as problematical as the National Energy Program was, it arguably
facilitated the passing of the Canada-US Free Trade
Agreement. The convenient entry point to this history-cumanalysis is to cast our attention back a half-century ago to the
advent of Canada’s Equalization Program.
While the analytical (and rhetorical) underpinnings of
equalization may have been best expressed in the RowellSirois Commission’s recommendations for regional adjustment grants, the 1957 introduction of our formal Equalization
Program had its origins in more practical considerations.
Specifically, following on the recommendation of the mid1950s Tremblay Commission (Quebec’s Royal Commission of
A short history of equalization
of the resource revenues accruing to a
In the 1962 quinquennial revision of
Inquiry on Constitutional Matters),
province would be deducted from that
the tax arrangements, the share of PIT
Quebec instituted its own personal
province’s equalization entitlement. The
entering the equalization formula was
income tax (PIT) system. Since the
return to the top-two-province standard
increased to 16 percent (with an interim
provinces had the constitutional right
meant that Ontario was again the only
increase to 13 percent in 1958). For presto levy direct taxes under section 92(2),
“have” province, but the resourceent purposes, however, the importance
Ottawa feared that this would trigger a
revenue override precluded Alberta and
of the 1962 revisions is that natural
series of separate income taxes across
BC from receiving equalization.
resources entered the formula for the first
the provinces. Therefore, in 1957,
The 1967 fiscal arrangements repretime, thereby beginning a complex and
Ottawa agreed to transfer shares of the
sented a watershed in the evolution of
volatile relationship that has influenced
three so-called standard taxes to the
equalization. First, they introduced the
the evolution of Canadian federalism
provinces — 10 percent of the PIT, 9 perrepresentative tax system (RTS)
well beyond the fiscal arena. The concern
cent of the corporate income tax (CIT)
approach to equalization, which calcuat issue in this time frame was that
and 50 percent of succession duties.
lates a province’s fiscal capacity for each
resource-rich Alberta was receiving equalSince these transfers were on a derivarevenue source as the product of the relization. To prevent this, the formula was
tion basis, i.e., in line with what
evant national average tax rate
was actually collected in the varand the province’s tax base.
ious provinces, this meant that
At this juncture, it is important to
the richer provinces would
recognize that equalization has played Second, the program became
comprehensive in the sense that
receive larger per capita transanother key role in the evolution of
all provincial taxes and revenues
fers. The federal solution to this
our federation. Over the years the
(including a catch-all miscellaresulting revenue inequality was
neous-revenues category) and
to launch Canada’s formal
federal government transferred
Equalization Program, which, in
progressively larger shares of the PIT some local ones as well were
now subject to equalization.
its inaugural version, guaranteed
that all provinces’ revenues from and CIT to the provinces, which made Third, 100 percent of resource
Canada one of the most taxrevenues entered the formula,
these shares of the standard
taxes would be brought up to decentralized federations in the world. classified in over a dozen revenue categories (e.g., new oil,
the per capita level of the averArguably this tax decentralization
heavy oil, mined oil, Crown leasage of the richest two provinces.
would not have been politically
es, natural gas). Fourth, the NAS
Hence, by the very nature of
acceptable to the “have-not”
again became the standard.
the top-two-province standard
(TTPS) there could be only one provinces were it not for the existence Finally, the logic of the RTS is
that if one can easily identify a
non-equalization-receiving
of equalization. In this sense,
new revenue base, then one can
province — in this time frame it
equalization also benefits the rich
make it a separate category for
was Ontario. Note that equalizapurposes,
which
tion payments come from provinces, since it allows them to reap formula
Ottawa’s revenues; provinces do the benefits of their superior tax bases. explains why there were about a
dozen energy revenue categories.
not contribute directly.
expanded to include resource revenues
— 50 percent of the three-year average of
t this juncture, it is important to
he 1972 arrangements largely
provincial resource revenues would now
recognize that equalization has
involved tinkering — removing
be eligible for equalization. While this
played another key role in the evolumedicare premiums and racetrack revwould exclude Alberta from receiving
tion of our federation. Over the years
enues from the miscellaneous category
equalization, it would have substantially
the federal government transferred proand creating separate revenue cateincreased the total level of equalization.
gressively larger shares of the PIT and
gories for them.
To temper this expansion the equalizaCIT to the provinces, which made
It is clear then that resource revtion standard was reduced from the TTPS
Canada one of the most tax-decentralenues, and particularly energy revto a national-average standard (NAS).
ized federations in the world. Arguably
enues, were a complicating factor even
This modification was short-lived.
this tax decentralization would not
before the energy price shocks. Indeed,
Following up on its 1963 election plathave been politically acceptable to the
and as will become evident, the period
form, the new Pearson government
“have-not” provinces were it not for the
1967 to 1973 is the only period in the
restored the TTPS standard and removed
existence of equalization. In this sense,
history of Canada’s Equalization
resource revenues from the formula,
equalization also benefits the rich
Program when 100 percent of both
replacing them with the “resource-revprovinces, since it allows them to reap
energy revenues and energy tax bases
enue override”; henceforth, 50 percent
the benefits of their superior tax bases.
was included in the formula.
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Thomas J. Courchene
Enter the first energy price spike,
which sent the world price of oil from
about $8 in 1972 to $40 in 1974 (in
2004 Canadian dollars). Canada’s reaction was immediate and dramatic.
First, we froze the domestic energy
price, initially at $4 per barrel in 1974
dollars when the actual Canadian dollar world price was $10 (see the orange
and red lines, respectively, on figure 1).
Consequently and simultaneously,
Ottawa imposed a $6 per barrel tax on
exported oil, where this export price
rose automatically to bridge the gap
between the domestic price and the
continuing-to-rise world price. Part of
the rationale for this tax was to generate funds to subsidize foreign oil
imports entering eastern Canada in
order to maintain the uniform and
policy-determined price of gasoline
across the country.
In this same time frame, the energyproducing provinces substantially
increased their royalty rates for oil and
gas, which Ottawa countered in part by
disallowing the deduction of these royalty payments for purposes of corporate
income tax calculations. Motivating
much of this was the interplay between
equalization and energy prices.
Calculations made at the time indicated
that if Canada went to world energy
prices in 1974, equalization payments
would have tripled, Ontario would have
become a have-not province, each additional dollar of energy revenue accruing
to the producing provinces would have
cost Ottawa 75 cents in equalization,
and the overall equalization bill would
have been such that it would have
required a 25 percent increase in overall
personal income taxation.
revenues that ought to be flowing into
provincial treasuries were being effectively transferred to Canadians in the
form of subsidized domestic energy
prices on the one hand and transferred
to Ottawa via the export tax on the
other. And these forgone royalties
soared as the difference between the
world price and the domestic price
likewise soared.
N
T
ot surprisingly, Ottawa’s series of
measures (subsidized prices,
export taxes, disallowing provincial
royalties for CIT) still fell way short of
what the minority Trudeau government could live with on the fiscal
front. Therefore, abruptly and without
consultation, Ottawa altered the equalization formula. So-called basic energy
revenues (defined as the energy revenues that existed in 1973-74) would
continue to be equalized in full, while
only one-third of additional energy revenues would henceforth enter the formula. Among other things, this would
allow Ottawa to gradually raise the
fixed domestic price without putting
the federal fiscal house in jeopardy.
From Alberta’s vantage point,
Ottawa’s overall approach to the global energy price shock was viewed as an
effective confiscation of their rents:
he 1977 reworking of the fiscal
arrangements attempted to finetune the relationship between energy
revenues and equalization. One change
was the introduction of a resource cap:
energy-related equalization could not
exceed one-third of total equalization.
The second was to jettison the “basic
and additional” approach to energy
revenues and to replace it by allowing
50 percent of all non-renewable
resource revenues to enter the formula.
This was a strategic error since, as
domestic energy prices rose, the 50 percent regime generated much larger
equalization flows than did the basicadditional variant, especially when
international prices skyrocketed in
connection with the 1978-79 Iranian
revolution and the 1980 Iran-Iraq war.
The intriguing but obviously very troubling consequence of this strategic
FIGURE 1. CRUDE OIL PRICES, 1972-2005
Crude oil prices (dollars per barrel)
120
$US (world price)
$C (world price)
Real $C (2004)
Subsidized price
100
80
60
40
20
0
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Source: Thomas J. Courchene, adapted from “Energy Prices, Equalization and Canadian Federalism,” Queen’s Law Journal, vol. 31, no. 2, 2006, figure 1.
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OPTIONS POLITIQUES
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Thomas J. Courchene
deemed to be at stake. One of the earon Canada lands. It was not surprising
error was that the province of Ontario
lier occasions related to the Canada-US
that the reaction from the oil patch,
became entitled to equalization payFTA. Former premier Peter Lougheed
and from Alberta, was openly hostile.
ments for each and every fiscal year
was an ardent supporter of the FTA,
This impasse was alleviated somewhat
from 1977-78 to 1981-82.
arguing that among other reasons the
by the 1981 Canada-Alberta Energy
Ottawa’s way of dealing with
FTA would ensure that there could
Pricing and Taxation Agreements
Ontario joining the ranks of the havenot provinces was to prevent
it retroactively from receiv- From Alberta’s vantage point, Ottawa’s overall approach to
ing equalization. This was
the global energy price shock was viewed as an effective
accomplished by a provision
of Bill C-24, passed in 1981, confiscation of their rents: revenues that ought to be flowing
commonly referred to as the into provincial treasuries were being effectively transferred to
“personal income override” Canadians in the form of subsidized domestic energy prices
which stated that a province
on the one hand and transferred to Ottawa via the export tax
with per capita personal
income above the national on the other. And these forgone royalties soared as the
average was ineligible for difference between the world price and the domestic price
equalization. Although it was likewise soared.
cast in these general terms, it
never be another NEP. Lougheed even
(EPTA), which allowed a more rapid
affected only Ontario (as planned!).
tried to rally Ontario on side, by makincrease in the domestic price. Under
Ontario agreed to this override, on the
ing the point that Ontario should view
the EPTA, the actual domestic price for
understanding that Ottawa would
the energy provisions of the FTA as
1986 was to be $58. By then, however,
rework the program in ways that would
Alberta’s Autopact.
world prices had collapsed to $20, and
ensure that more of the cost of equalizaIn the meantime, the principle of
since then Canadian prices have
tion would be paid by those provinces
equalization had become so accepted
remained at world levels. Essentially,
triggering the increases, i.e., by the enerby provinces and Canadians that it was
therefore, world energy prices colgy-rich provinces. However, and as
enshrined in the Constitution Act, 1982
lapsed to Canadian levels and effecalready noted, Alberta could mount a
as section 36(2) (appropriately, on the
tively unwound the bite of the NEP.
claim that it was contributing enoroccasion of its 25th anniversary). While
But not quite, since the oil patch
mously to Ottawa and the rest of Canada
was still concerned that Ottawa was able,
and Canadians via the federally legislatembraced in principle, in practice the
with abandon, to tax and regulate the
ed low domestic oil price.
program lay in shambles. In the 1982
energy sector, which is, after all, under
fiscal arrangements, the priorities of
provincial
ownership.
Without
going
the federal government with respect to
ith the Iranian revolution and
too deeply into detail, the resource
equalization were twofold: to find a
the Iran-Iraq war, global prices
provinces were able to lobby successfully
way to minimize or in any event to
doubled from their already high levels.
to have section 92A enshrined in the
reduce the impact of energy on the forThis left our domestic price at someConstitution Act, 1982 as part of the overmula, and to find a way to exclude
thing like 40 percent of this new globall Charter and patriation package.
Ontario via the operation of the formual level. It was not just Canada’s
Section 92A granted the provinces exclula, not via arbitrary and retroactive
Equalization Program that needed an
sive legislative authority over the develdecrees. The resulting flurry of research
overhaul; Ottawa’s overall approach to
opment, conservation and management
activity
included
the
1982
energy policy was in shambles.
of natural resources, as well as the ability
Parliamentary Task Force on FederalEnter the 1980 National Energy
to raise money and to tax with respect to
Provincial Fiscal Arrangements and the
Program (NEP), which imposed a range
natural resources, forestry and sites for
1982 Economic Council report,
of new taxes directly on the oil patch,
hydro power generation. From the
Financing Confederation: Today and
exacted a levy to support Canadian
resource provinces’ standpoint, section
Tomorrow. Beyond these reports, specifownership of the energy sector, intro92A may well provide additional insuric proposals in the early 1980s time
duced the PIP (Petroleum Incentive
ance against future federal intrusion in
frame included: two-tier systems; revProgram) grants, which steered explothe resource areas, especially in times
enue sharing pools; equalizing for both
ration away from the provinces to the
like the present when domestic energy
revenue means and expenditure needs
Canada lands, and introduced the
prices have topped C$80 per barrel.
as in Australia; full NAS equalization
infamous “back-in provision” whereby
The NEP remains indelibly etched
with 100 percent inclusion of
the federal government could reserve
in the psyche of Albertans, ready to
resources; schemes that called for NAS
for itself a 25 percent interest in all
emerge when their interests are
with partial resource inclusion (the
existing and future petroleum rights
W
26
OPTIONS POLITIQUES
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A short history of equalization
NAS-20 proposal of Saskatchewan); an
intriguing proposal from Quebec for
having a single category for resources
(defined by actual revenues) that
would be equalized via the disparities
arising from an average of broad-based
tax bases (essentially PIT, CIT and
provincial sales taxes) rather than the
much larger disparities arising from the
resource bases themselves; and so on.
All of this should be very familiar, since
most of these proposals surfaced again
over the last year or so.
formula, the resource tax bases in
Alberta and the Atlantic provinces were
excluded. Drawing from recent data, in
2003 the FPS embodied only 39 percent
of all resource-revenue bases in Canada
(i.e., 61 percent were in the excluded
provinces). This means that a province
with no fossil energy, such as New
Brunswick, would receive only 39 percent of the energy equalization that it
would receive under a full NAS standard. On the other hand, because
Alberta’s base and the east coast offshore
base are not in the formula, provinces
like Saskatchewan now become very
rich in terms of energy resource tax
bases, and therefore become subject to
very high clawback rates.
mula; i.e., the maximum equalization
clawback will be 70 percent. In order to
ensure that Newfoundland and Nova
Scotia would qualify for this 70 percent
inclusion rate, they were given separate
tax bases for their offshore revenues —
one for Newfoundland and one for
Nova Scotia — so that by definition
they have 100 percent of the tax base,
not just the needed 70 percent.
H
owever, major concerns over the
operations of the FPS came to the
fore
with
the
revelation
that
Saskatchewan’s
energy-related
equalizahe initial federal proposal in the
tion clawbacks (i.e., the reductions in
November 1981 budget called for
equalization it would otherwise receive
an Ontario standard. Since all
because it is a “have” province for enerprovinces’ per capita revenues would
gy) actually exceeded its total revenues
be brought up to Ontario’s level, by
from its energy sector — $1.126 billion
definition Ontario could never be a
ll in all, however, the FPS was a
versus $1.038 billion, for an average
have-not province. Moreover, given
stroke of political genius in that it
clawback rate of 108 percent. These conthat Ontario had little in the way of an
effectively survived for a quarterfiscatory
equalization
clawbacks
energy revenue base, an Ontario stancentury. As a result, the period between
occurred for several reasons. The first has
dard would minimize the impact of
1982 and the recent and on-going
already been noted: with Alberta’s base
energy on the formula. In the event,
energy price spike was relatively calm
out of the formula, Saskatchewan
and persuaded by the provinces that a
on the equalization front. The princibecomes a very rich province and for
single province might end up being
pal exception was the east coast offsome of the resource categories it has
too volatile a standard, Ottawa adaptshore oil and gas discoveries, and the
close to 100 percent of the formula tax
ed the famous five-province standard
Atlantic and Nova Scotia Offshore
base, with correspondingly high claw(FPS), where the five provinces includAccords that provided some sheltering
back rates. Second, even
Without going too deeply into detail, the resource provinces
though Saskatchewan had
were able to lobby successfully to have section 92A enshrined over 70 percent of the base in
in the Constitution Act, 1982 as part of the overall Charter and almost all of the resource categories, it was not allowed to
patriation package. Section 92A granted the provinces
qualify for the generic soluexclusive legislative authority over the development,
tion because Ottawa arbitrarconservation and management of natural resources, as well as ily required Saskatchewan to
have at least 70 percent of the
the ability to raise money and to tax with respect to natural
tax base, including
resources, forestry and sites for hydro power generation. From overall
the tax bases of the non-FPS
the resource provinces’ standpoint, section 92A may well
provinces. This is double
provide additional insurance against future federal intrusion in jeopardy. A third reason is
that somewhere in the back
the resource areas, especially in times like the present when
rooms of the equalization
domestic energy prices have topped C$80 per barrel.
secretariat, decisions were
effectively made that Saskatchewan is
ed in the FPS are BC, Saskatchewan,
of their energy revenues (on a sliding
collecting significantly less revenue than
Manitoba, Ontario and Quebec.
scale over 10 years) from equalization
it should be. This led to further increases
clawbacks. As these accords matured,
in Saskatchewan’s tax bases for selected
Ottawa
ensured
that
both
provinces
xcluded are energy-rich Alberta on
energy categories in the formula, thereby
qualified for the so-called generic soluthe high side and the four Atlantic
exacerbating the clawbacks: e.g., revtion, namely that if a province has 70
provinces on the low side, where the
enues from the category “sales of Crown
percent or more of an equalization tax
populations of the two were then
leases” in 2000-01 were $61.5 million
base, then it can shelter 30 percent of
roughly equivalent. While 100 percent
and the associated equalization
these revenues from entering the forof resource revenues was included in the
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Thomas J. Courchene
clawbacks were $145 million, for an average tax rate of 236 percent. With appropriate changes, the possibility still existed
to put equalization back on track, but
this possibility ended in the immediate
aftermath of Paul Martin’s minority election victory in June of 2004. The July
2004 Council of the Federation meeting
unanimously proposed to increase equalization to its previous high level (2001)
and then to increase it annually. To the
surprise of many, Prime Minister Martin
in the October 2004 First Ministers’
Conference did restore equalization to its
previous high and then set it on a schedule to increase by 3.5 percent annually
over the next decade. This effectively jettisoned Canada’s traditional approach to
equalization. Hitherto, the equalization
formula generated both the total
amount of equalization and its distribution across the receiving provinces.
Henceforth, the total for any year would
be fixed, so that the role of any formula
would only be to allocate this fixed pool
across
the
recipient
provinces.
Intriguingly, in this context, whether
100 percent or 0 percent of energy revenues/royalties is in the formula is irrelevant in terms of the overall payments.
But it will obviously have a major impact
on their distribution.
T
revised set of the Atlantic and Nova
Scotia Offshore Accords. Given that the
value of energy-related revenues accruing to Newfoundland and Labrador at,
say, US $60 per barrel of oil would be
approaching $900 million or $1,800 per
capita, and given that, after equalization, this province is now only about
$500 per capita below Ontario, the per
capita revenue of Newfoundland will
easily surpass that of Ontario and of all
other provinces except Alberta and
maybe BC and Saskatchewan.
The reaction to this was fast and
furious. Saskatchewan, with near-confiscatory clawbacks still in place, demanded the same deal as Newfoundland and
Nova Scotia. Ontario leapt into the fray,
essentially demanding what it did in the
early 1980s, namely, that equalization
should not increase unless the energyrich provinces were made to pay a larger share of what were, after all,
energy-driven equalization increases.
Beyond this, Ontario argued that it was
unfair that its Canada Health and Social
Transfer (CHST) was clawed back to the
tune of a billion dollars (in line with the
1977 tax-point transfer provisions)
when arguably richer provinces like BC,
Saskatchewan and Newfoundland and
Labrador were not subject to these clawbacks. In the end, Ontario obtained a
deal of sorts from Ottawa.
equalization. In general, the spectrum of
proposals closely resembled that of the
1980-82 period, with recommendations
for 100 percent, 50 percent, 20 percent
and even 0 percent inclusion rates for
resources in any new formula. With oil
prices hovering at US $60 per barrel and
with provinces able to pocket all these
royalties (unlike the first energy shock,
where potential energy rents were transferred to Canadians in terms of low energy prices), the implications were critically
important. In the face of widening
provincial revenues, would all provinces
be able to continue to provide reasonably
comparable levels of public services at
reasonably comparable levels of taxes?
In order to provide guidance with
respect to the way forward, two formal
studies were commissioned from the federal Department of Finance’s Expert
Panel on Equalization and Territorial
Formula Financing and the Council of
the Federation’s Advisory Council on
Fiscal Imbalance. The latter recommended 100 percent inclusion of all revenues
to be equalized to the NAS. Should this
generate a level of equalization deemed
to be excessive, then its recommendation
would be to scale this standard down on
an equal per capita basis until the “appropriate” overall amount of equalization is
achieved. The Expert Panel recommended that we return to our long-standing
tradition of allowing the formula to generate both the total amount and the distribution of equalization payments.
Beyond this it recommended 100 percent
he final policy decision in this evolution of equalization milestones is
at the same time the most inexplicable
ften referred to as an integral part
and most inappropriate. In the final
of the east-west “glue” of the feddays of the 2004 election, Prime
eration, equalization appeared to be
Minister Paul Martin, in private
communication
with Given that the value of energy-related revenues accruing to
Newfoundland and Labrador Newfoundland and Labrador at, say, US $60 per barrel of oil
premier Danny Williams, com- would be approaching $900 million or $1,800 per capita, and
mitted Ottawa to effectively
given that, after equalization, this province is now only about
ensuring that the equalization
clawbacks on east coast offshore $500 per capita below Ontario, the per capita revenue of
energy (including energy-related Newfoundland will easily surpass that of Ontario and of all other
revenues like CIT) would be provinces except Alberta and maybe BC and Saskatchewan.
reduced to zero. After a series of
inclusion for non-resource revenues but
very public negotiation sessions, a deal
imploding into a series of bilateral peronly 50 percent inclusion of resource revto this effect was consummated in early
sonalized deals.
enues. It then added a problematic rider:
2005. While Newfoundland and Nov
This unwinding of Canada’s tradino equalization-receiving province
Scotia energy revenues would still enter
tional approach to equalization with no
should end up with more revenues than
the formula, any equalization clawbacks
acceptable alternative in view led to a
the richest non-equalization-receiving
on these revenues would be repaid to
flurry of academic and think-tank
province. Phrased differently, this is an
these provinces via the workings of a
research and proposals for reworking
28
OPTIONS POLITIQUES
MARS 2007
O
A short history of equalization
then be reallocated to all provinces on
an equal per capita basis. Obviously, the
parameters can be varied. Were the
Conservatives
to
opt
for
an
Equalization Program with zero inclusion of natural resources (e.g., along the
lines of their election platform), this
second overarching tier
Word has it that the 2007 budget will likely opt for the Expert might embody, say, a 30 percent clawback on the CHST
Panel’s 50 percent inclusion plan. If true, hopefully it will
transfers in order to offset
incorporate a more flexible version of the Ontario cap. Given some of the larger interprovincial revenue disparithat Premier Williams continues to rail against Ottawa, one
ties that would exist if
might surmise that the Martin-Williams offshore deal will be
resources were removed
unwound. This would put Nova Scotia, Newfoundland,
from
the
Equalization
Saskatchewan and perhaps BC all in the same camp of facing Program. In any event, the
principles should be clear:
very high taxback rates. Finally, as with the Council of the
the second tier is doing
Federation report, the Expert Panel also recommends scaling
some overarching equalizadown the standard on a per capita basis, if the resulting
tion because we cannot
equalization total is deemed excessive.
agree how to manage this in
an equitable or acceptable
manner within the stricter confines of
way of a proposal along these lines,
puts Saskatchewan back into a situation
the formal Equalization Program.
consider the following two-tier scheme.
where equalization clawbacks again
By way of conclusion, energy
Tier 1 would be an equalization proeffectively confiscate its energy revenues
prices and energy policy have obviousgram, say, along the Expert Panel lines
until it crosses the threshold and
ly had an enormous impact on the
but without the confiscatory cap. The
becomes a “have” province.
political economy of Canada, running
overarching second tier would involve
Word has it that the 2007 budget will
the gamut from the constitutional
the monies associated with the vertical
likely opt for the Expert Panel’s 50 percent
dossier, to the FTA and Canada-US relabalance transfers (i.e., the former CHST,
inclusion plan. If true, hopefully it will
tions, to the politics of the federation,
which has become CHT, CST, etc).
incorporate a more flexible version of the
to federal-provincial relations and, of
These CHSTs are now revenue-tested (or
Ontario cap. Given that Premier Williams
course, to Canada’s system of equalizaclawed back) to a degree for Ontario
continues to rail against Ottawa, one
tion payments. In terms of equalizaand Alberta, because they have per capimight surmise that the Martin-Williams
tion, the challenge for the Harper
ta PIT/CIT revenues larger than the
offshore deal will be unwound. This
Conservatives and Finance Minister
national average. But any such revenuewould put Nova Scotia, Newfoundland,
Flaherty in particular is to find a stable,
testing or clawback provisions should
Saskatchewan and perhaps BC all in the
formula-based and equitable framerelate to the overall revenues of the
same camp of facing very high taxback
work that serves to once again allow all
provinces — own-source revenues plus
rates. Finally, as with the Council of the
provinces to work together in our
equalization — and not to a subset.
Federation report, the Expert Panel also
nation-building project. The inherentTherefore the second tier would involve
recommends scaling down the standard
ly zero-sum nature of any solution
the vertical transfers that made up the
on a per capita basis, if the resulting equalmakes this a daunting challenge. But
former CHST. These would become revization total is deemed excessive.
this will not be the last of the energyenue-tested equal per capita transfers.
related challenges that Canadians must
Revenue-testing
could
work
as
follows.
hile the purpose of this
confront. The complex and controverFor provinces that have overall per capioverview is to focus on the
sial relationship between the environta revenues (own-source revenues plus
interaction between energy and
ment and the energy sector is already
equalization) above, say, 110 percent of
Canadian federalism, there do exist
waiting in the wings.
the natural average, each additional
other alternatives that bring more
revenue dollar above this 110 percent
parameters into play in order to try to
IRPP Senior Scholar Thomas J. Courchene
threshold would result in a 20 cent
escape the zero-sum nature of the horiis also Jarislowsky-Deutsch Professor of
decrease in their CHST payment. To
zontal balance game. They adhere to
Economic and Financial Policy at Queen’s
ensure that Ottawa does not benefit
the Dwight D. Eisenhower dictum: if
University. [email protected]
from this scheme, the clawbacks would
you can’t solve a problem, enlarge it.
“Ontario cap.” For purposes of implementing this cap, the Expert Panel
defines revenues as 100 percent of all revenues. Clearly this is a 100 percent clawback until the energy-rich province loses
all equalization, after which the clawback
obviously falls to zero. Essentially, this
One approach to enlarging the equalization issue is to combine horizontal
and vertical balance transfers into an
integrated whole. That is, we would follow Australian practice and address horizontal imbalance via the overall system
of federal-provincial cash transfers. By
W
POLICY OPTIONS
MARCH 2007
29