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Issue Profile: Equalization Payments (and why you are probably wrong about them)

I am clearly someone who doesn’t shy away from controversy.  I mean, I started a blog that mixes religion and politics.  I recognized that this was most people’s idea of a nightmare, and I still chose to use up my precious free time by writing about this stuff.  Free time that could be used to do awesome things.  Things like… watching Game of Breaking Bad… I assume.  I really don’t have a lot of free time is what I’m saying.

Why did I just give you a paragraph about how dumb I am to be writing this blog?  Because I want to underscore the fact that when I say this topic is controversial, I really mean it.  People love to hate this issue.  So, let’s open big ol’ can of controversy.  Prepare yourself for the TTC explanation of Equalization Payments.

(For the one nerd who reads this and wants to spell it “equalisation” – you are wrong.)

Explaining the issue:

Mention equalization payments in Alberta and you will get an earful of tar sand.  95%* of people can’t wait for someone to bring up equalization just so they can yell about all of our money going to Quebec.  Many of these people will be white and male.  Please feel sorry for them, they have it rough.

The other 5%* of people will stand meekly waiting for the yelling people to leave in a rage before quietly approaching to gently “educate” you that Alberta doesn’t actually give our money to anyone.  These people are eager to point out what the federal government does with the revenue they receive is completely up to them.

Here’s the thing: Both these people are wrong… and right… sort of.  They both get portions of this right and portions wrong.  We’ll explain in more detail further down, but the system is more complicated than that.  Alberta doesn’t cut a cheque to any other province.  And it’s also true that everyone in Canada is taxed using the same system.  But there’s way more to it than that.

Why is it an issue:

Because there’s votes there.  Albertans hate equalization payments so it’s good politics to trash them.  Everybody has done it.  The NDP did it.  The Alberta Party got in on the action.  And the UCP has thrown shade at every turn and has even promised a referendum (while conveniently omitting that their leader was part of the federal cabinet that approved the current system).

Albertans are already angry with Ottawa for many reasons, and the notion that we are getting the shaft only confirms our suspicions.  After all, we are just hard-working people who just want to be left alone.  But instead OUR tax dollars are paying for FREE CHILDCARE IN… QUEBEC?!?!?  THE HORROR!!!  Sorry… I went full on pickup truck Albertan there.

This issue essentially boils down to our politicians telling us what we want to hear.  And no one has ever dropped in the polls for doing that.

TTC’s take:

There are a ton of myths about equalization.  Most of them have a grain of truth, depending on how you look at things.

For starters, Alberta doesn’t cut anyone a cheque.  How would that even work?  It’s not like the federal government goes, “great job being rich Alberta.  Now give us 18 billion dollars.”  The meek 5 percenter from above is mostly right.  Everyone in Canada is taxed in exactly the same way.  Someone who makes $10 pays the exact same amount in federal taxes no matter what province they live in.  The same goes for all other kinds of tax.  It just so happens that Alberta has the highest average income in the country – and it’s not even close.  The way our tax system is set up, the more you make, the more you pay.  There are simply provinces which qualify based on their economy.  The money all comes from the taxes that the federal government has already collected.  Now, you may argue that we should reform the tax system, but that is a separate matter.

So, the federal government collects more tax from Alberta (per person) than they do from anywhere else.  Why do they turn around and give it all to Quebec?  “It’s about bribing people for votes!”  No, you ignorant Letterkenny castoff, it’s not.  There is a formula that the government is bound by which determines who gets what.  That formula was last updated by the guy now swearing that it’s unfair to Alberta.

The formula is applied to each province’s revenues before they are budgeted.  What that means is that the federal government doesn’t know what each province will use the money that they receive on.  It also means they don’t actually know which provinces will get equalization payments and which ones won’t.  They simply know the criteria that a province’s economy will be judged on.  There actually no “have” and “have not” provinces.

Now maybe you knew all of that.  Maybe you still think that Alberta (and Newfoundland et al) deserve to keep our money here because we are more fortunate than other provinces to have natural resources.  If they don’t like it, then maybe they should move here.  I would disagree with you, but at least you’re being consistent in your logic.  Except, not really…

There is some real revisionist history going on in Alberta regarding these payments.  Alberta actually used to receive them.  In the 1950s, we took that “dirty bribe money” and poured into the development of something… I can’t remember… Oh Right!  The oil sands!  You know, the main reason that Alberta now has the highest income in the country?  It’s pretty hypocritical to have 25% of our provincial economy based on something that we wouldn’t have if other provinces hadn’t paid for it.

Now, there are still legitimate arguments here.  What guarantee do we or the federal government have that receiving provinces will use these funds to pay for things that will stimulate the economy?  Doesn’t it behoove provinces to keep their taxes low enough that they receive money from elsewhere?  Also, to what degree is it fair for provinces to prop each other up, no matter how indirect?  And who is making these decisions?  The federal government “consults” the provinces, but they get no actual say in the end.

These are fair arguments that we should be having.  For starters, last time the formula was renewed, Alberta was compensated with an extra $1 billion in healthcare funding.  And, it’s worth remembering that we are all Canadian and deserve the same opportunities.  And if provinces start to struggle financially, it drags down our dollar and hurts investment for all of us.

But let’s not pretend the system is perfect.  It can and absolutely is used to funnel money to places where the governing federal party is trying to pick up votes – if they have the chance to renew and amend the formula.  There is a line that everyone will differ on where it becomes unfair to provinces that don’t receive payments.

Finally, despite it being good politics, Alberta politicians need to stop pretending they can do anything about this.  We don’t get a say in it.  It has been a trend in this election to promise things that are beyond provincial control.  Equalization is way, way out of provincial control.  It is a requirement in our constitution.  A referendum in one province would be meaningless.

Equalization should exist.  We are Canadian first and Albertan second.  We should help each other out.  The system isn’t perfect and never will be, but scrapping it altogether hurts everyone.  And it is far too intertwined in our economic system to simply back out of, even if we could.  We should be debating the formula and strings that are attached to funding, but that is a debate that needs to occur at the federal level.

 

Please note: Statistics marked with a * are made up 90%* of the time.

 

 

I encourage you to comment with your thoughts.  I love to debate and clarify.  Before you engage though, please take a moment to review the FAQ and About TTC pages.

5 thoughts on “Issue Profile: Equalization Payments (and why you are probably wrong about them) Leave a comment

  1. Mr Marbury, thank you for another great post. This is a very interesting, and clearly misunderstood topic. Thank you for providing some clarity and information on it.

    For those who may be interested, here is a link to an article in the Globe and Mail, written by economist Trevor Tombe, about Canada’s equalization program:

    https://www.theglobeandmail.com/amp/opinion/article-why-equalization-is-not-unfair-to-alberta/

    Like

  2. Mr Marbury, thank you for another great post. This is a very interesting, and clearly misunderstood topic. Thank you for providing some clarity and information on it.

    For those who may be interested, here is a link to an article in the Globe and Mail, written by economist Trevor Tombe, about Canada’s equalization program:

    https://www.theglobeandmail.com/amp/opinion/article-why-equalization-is-not-unfair-to-alberta/

    Like

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