Equalization's weak constitutional status

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Appeared in the Calgary Herald

If the average person knows much about federal cash transfers to the provinces, they might know that one program, equalization, is in the constitution. Equalization, a $14.8 billion transfer program funded out of federal taxes, ends up in the coffers of six provinces: Quebec, with the largest share at $7.4 billion, and Manitoba, Ontario, New Brunswick, Nova Scotia and Prince Edward Island, who divvy up the rest.

Equalization ostensibly fulfills a constitutional requirement (Section 36(2)), whereby less prosperous provincial governments are given funds to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation.

However, that section has led to myths about the ability to change equalization, in addition to other legends about equalization’s usefulness and desirability. So here is a fact check.

As my colleague Fred McMahon has argued in a series of books and articles over the years, transfer programs do not actually help have-not provinces (those who receive equalization) develop economically.

As McMahon points out, based on the empirical data, the lagging regions in Canada have been catching up more slowly than poorer regions in the United States, Europe, and Asia. In fact, over-equalization weakens the economies of poorer provinces because the rich flow of funds boosts government spending, pulls resources away from the private sector, and politicizes the economy. For private businesses, it becomes more about who you know in government, the region’s biggest customer, than about which goods and services are produced.

Government, by bidding resources and workers away from the private sector, artificially increases costs for the private sector. That reduces competiveness and growth—things poorer provinces need much more than bundles of cash from the rest of Canada.

So that’s one problem, and myth, about equalization: that it actually helps poorer provinces. A second myth is equally critical: that equalization is enforceable in court because of its constitutional status.

However, as legal scholar Burton H. Kellock, Q.C., and former Fraser Institute analyst Sylvia LeRoy pointed out in a 2006 paper on the subject, the legal significance of the Constitution’s equalization provisions are widely misunderstood.

For instance, University of Alberta law professor, Dale Gibson, has observed that … it could be contended that because s. 36(2) contains no reference to legislative jurisdiction, and employs soft terms like ‘committed’ and ‘principle’ rather than power-granting expressions like ‘may make laws,’ it was not intended to have any direct legal effect.

Similarly, Professor Peter Hogg, one of Canada’s leading constitutional scholars, has described equalization as statements of economic and social goals that ought to guide government but which are not enforceable in court.

In summarizing the consensus, Kellock and LeRoy observe that: The ambiguity of these terms has contributed to a consensus amongst academics, which is, to quote Hogg, that the constitutional obligation to make adequate equalization payments to the poorer provinces is probably too vague, and too political, to be justiciable.

If the form and funding of equalization payments then resembles less a constitutional imperative and more a non-enforceable informal convention, that means equalization can be changed. That puts it in the realm of politics.

Thus, here are some suggestions that McMahon and I put forward to reform equalization in the short-term and possibly abolish it in the long-term.

First, equalization should be based on the cost of providing services. It costs a lot more to deliver services in Vancouver than in Charlottetown. (Compare their house prices, for example).

Second, freeze the amount now paid out by the federal government under equalization and transfer payment programs. That would more quickly enable a third suggestion, from which provincial finances will benefit in terms of flexibility.

Remove the federal government from areas of provincial responsibility and return an equivalent amount of tax room to the provinces. This would mean, at least initially, there would primarily be one transfer payment program, not a complex of interlocking programs. Preferably and eventually, even equalization should end in exchange for a variety of more tax points.

This latter reform—equalization’s eventual end—would increase transparency and improve government incentives since taxpayers would be clear about which level of government delivers what service and at what cost.

Coincidentally, it is also a position that one our earliest prime ministers, Wilfrid Laurier would heartily endorse.

In a 1905 speech, Laurier noted this about responsible government: It is a sound principle of finance and a still sounder principle of government that those who have the duty of expending the revenue of a country should also be saddled with the responsibility of levying it and providing it. Exactly. This is why Ottawa and the provinces should try and eventually move away from transfer payment programs.

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