National Newswatch

Albertans will vote on Oct. 18 in a provincial referendum on equalization. Opponents of the referendum have cast it as both needlessly divisive and a distraction from the larger issue of the province’s transition away from the fossil fuel industry. It is neither. In fact, it should be the starting point to a much broader national dialogue on the financial flow between provinces and the federal government—a flow in desperate need of repair and rebalancing.

As with most significant changes, the first step is the hardest part. Alberta must force the other provinces and Ottawa to come to the table and negotiate a new fiscal arrangement.

As University of Calgary professor emeritus Rainer Knopff recently explained, the referendum is a mechanism to require the other provinces and Ottawa to reform fiscal federalism (that is, the relationship between the federal and provincial governments with respect to taxing, borrowing and government spending) in good faith. Specifically, Knopff argues that when any provincial government passes legislation applying to constitutional amendments, it triggers the duty to negotiate on the part of other governments (in Alberta, such legislation requires a referendum).

If an equalization resolution by Alberta’s legislative assembly is successful, the other provinces and the federal government could have a “duty to negotiate” equalization—and other significant federal transfers for health care and social programs.

Of course, the equalization program aims to redistribute revenue from provinces with above-average “fiscal capacity” (i.e. ability to raise their own revenue) to provinces with below-average fiscal capacity, to ensure that each province can reasonably provide comparable government services. But there are clear flaws in the current program. Consider that Ontario’s per-person income—a useful proxy of fiscal capacity—was consistently higher than in British Columbia (between 2009/10 and 2018/19) yet Ontario received equalization while B.C. received nothing.

Or consider that the fiscal capacities of the provinces narrowed between 2007/08 and 2018/19, yet equalization payments to recipient provinces actually increased from $12.9 billion to $19.0 billion rather than declining as intended under the program. This is due to a Harper-era reform that imposed fixed rates of growth in equalization payments. Clearly, there are blatant problems within the equalization program.

But beyond equalization, there are other challenges. Consider the largest federal transfer, the Canada Health Transfer (CHA). Ottawa sends money to provinces to help support health care, subject to certain terms and conditions set out in the Canada Health Act. But these “strings,” which include prohibiting patients from directly sharing the costs of services through mechanisms such as co-payments, restrict the provinces from experimenting and innovating in ways that would lead to real improvements. Despite comparatively high spending, Canada’s health-care system consistently underperforms other universal health-care countries.

We can also learn from welfare reform in the 1990s. The federal government reduced transfers to the provinces for welfare and social assistance in exchange for removing most “strings” attached to federal funding. This led to a host of provincial reforms and innovation, which produced improved programs, a marked declined in welfare dependency and reduced government spending on social assistance.

The upcoming referendum in Alberta could prompt a national dialogue about the current state of fiscal federalism. Whatever the outcome, it’s clear the existing system of federal transfers to the provinces is in need of reform.

Tegan Hill and Niels Veldhuis are economists with the Fraser Institute.

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