Submitted by Stella Lord, a Nova Scotian researcher and activist in social policy matters.
The federal budget was intended to fix the fiscal imbalance. Amongst other things this was supposed to ensure horizontal equity so that all Canadians no matter where they live in Canada receive about the same level of services at about the same level of taxation. An important part of achieving horizontal equity is through equalization. Equalization is a transfer by the federal government to the so-called ‘have not’ or poorer provinces to compensate for differences in fiscal capacity to deliver services. Equalization is enshrined in the Constitution Act, Sec. 36–2.
The equalization proposal put forward by the Harper government will improve the financial situation of most have-not provinces but it will not achieve horizontal equity. This is because the federal government has given provinces two choices for equalization. Under both options Alberta’s capacity (or at least its non-renewable resources) will be exempt from the equalization calculation. Under the first option, provinces can maintain the 1982 five-province standard for calculating equalization or they can choose the new ten-province standard. The first formula removes both the poorest and wealthiest provinces from the overall calculation of the standard, but maintains the Atlantic Accord whereby some of the revenues from non-renewable off-shore natural resources in Newfoundland/Labrador and Nova Scotia are not counted in calculating equalization payments to these provinces for the eight year duration of the accords.1 The second option for calculating equalization is to move to a ten-province standard. The ten-province option still does not include revenue from non-renewable natural resources in Alberta (and other rich provinces) in calculating the standard, but under the Harper plan it would include all of these revenues for calculating equalization payments to equalization receiving provinces. If they chose this latter formula it means that Nova Scotia and Newfoundland/Labrador will be forced to give up the Atlantic Accord negotiated with the previous government and that Mr. Harper agreed to maintain before the election.2
Basically, Mr. Harper has abandoned leadership on the issue of horizontal equity on the grounds that the provinces could not agree amongst themselves on a fair course of action. In the process, he has reneged on election promises to respect the Atlantic Accord between the federal government and Nova Scotia and Newfoundland/Labrador and that provinces in receipt of equalization such as Saskatchewan would also have their non-renewable resources disregarded.3 In the meantime, Alberta is counted in the ten-province standard, but its non-renewal natural resources aren’t. For Newfoundland/Labrador, Saskatchewan and Nova Scotia, the new equalization plan will improve their capacity to deliver some services but may not significantly do so in the long run and it will certainly deepen horizontal inequity and do little to ameliorate regional inequalities. What Mr. Harper has chosen to do is to pass on huge amounts of money to provinces where he hopes to maintain or make gains in the next election (Alberta, Ontario and Quebec). He is playing politics with national unity at the expense of small, poor provinces that appear not to matter to his electoral plans.
The Population-Based CST and Equalization
The lack of attention to real horizontal equity through equalization payments is especially problematic for have not provinces with small populations but on top of this, the new per capita CST formula for post-secondary education and social assistance/social services means that these provinces will not benefit from “associated equalization”. The per capita formula (only pressed for by Premier McGuinty of Ontario) abandons what is known as “associated equalization” on the CST next year and on health-care by 2014-15. This was embedded within the Established Programs Financing arrangement and was intended to compensate for the fact that transfers of tax points (which formed a portion of the CST) are not worth as much in provinces with small economies as they are in the large, richer provinces. If associated equalization had been taken out of the CST formula last year, it is estimated that Nova Scotia would have lost about $45 million under the CST. This loss is only compensated for this year by the fact that there is now an increase in the CST cash transfer. Another problem with the CST that affects provinces such as Nova Scotia in particular is that while the amount received for post-secondary education has never reflected actual costs this will be made worse by the population based formula. This is because the federal CST transfer is not linked to the total number of students the province educates. In Nova Scotia, almost 13,000 post-secondary students who come from out-of-province are educated at Nova Scotia’s expense. The cost to Nova Scotia is about $25 million a year. Ideally, to ensure that the funding for services is adequate and that provinces can actually meet common standards for social services, the CST should be linked to both revenues (capacity) and expenditures (needs). This would mean that, as is the case in federations such as Australia, the real costs of delivering programs and services in each province would be calculated and factors such as the ratio of working age adults to seniors and children, the need to deliver services in rural and remote areas and the reduced economies of scale in smaller provinces would be taken into account.
The Fiscal Imbalance
Submitted by Stella Lord, a Nova Scotian researcher and activist in social policy matters.
The federal budget was intended to fix the fiscal imbalance. Amongst other things this was supposed to ensure horizontal equity so that all Canadians no matter where they live in Canada receive about the same level of services at about the same level of taxation. An important part of achieving horizontal equity is through equalization. Equalization is a transfer by the federal government to the so-called ‘have not’ or poorer provinces to compensate for differences in fiscal capacity to deliver services. Equalization is enshrined in the Constitution Act, Sec. 36–2.
The equalization proposal put forward by the Harper government will improve the financial situation of most have-not provinces but it will not achieve horizontal equity. This is because the federal government has given provinces two choices for equalization. Under both options Alberta’s capacity (or at least its non-renewable resources) will be exempt from the equalization calculation. Under the first option, provinces can maintain the 1982 five-province standard for calculating equalization or they can choose the new ten-province standard. The first formula removes both the poorest and wealthiest provinces from the overall calculation of the standard, but maintains the Atlantic Accord whereby some of the revenues from non-renewable off-shore natural resources in Newfoundland/Labrador and Nova Scotia are not counted in calculating equalization payments to these provinces for the eight year duration of the accords.1 The second option for calculating equalization is to move to a ten-province standard. The ten-province option still does not include revenue from non-renewable natural resources in Alberta (and other rich provinces) in calculating the standard, but under the Harper plan it would include all of these revenues for calculating equalization payments to equalization receiving provinces. If they chose this latter formula it means that Nova Scotia and Newfoundland/Labrador will be forced to give up the Atlantic Accord negotiated with the previous government and that Mr. Harper agreed to maintain before the election.2
Basically, Mr. Harper has abandoned leadership on the issue of horizontal equity on the grounds that the provinces could not agree amongst themselves on a fair course of action. In the process, he has reneged on election promises to respect the Atlantic Accord between the federal government and Nova Scotia and Newfoundland/Labrador and that provinces in receipt of equalization such as Saskatchewan would also have their non-renewable resources disregarded.3 In the meantime, Alberta is counted in the ten-province standard, but its non-renewal natural resources aren’t. For Newfoundland/Labrador, Saskatchewan and Nova Scotia, the new equalization plan will improve their capacity to deliver some services but may not significantly do so in the long run and it will certainly deepen horizontal inequity and do little to ameliorate regional inequalities. What Mr. Harper has chosen to do is to pass on huge amounts of money to provinces where he hopes to maintain or make gains in the next election (Alberta, Ontario and Quebec). He is playing politics with national unity at the expense of small, poor provinces that appear not to matter to his electoral plans.
The Population-Based CST and Equalization
The lack of attention to real horizontal equity through equalization payments is especially problematic for have not provinces with small populations but on top of this, the new per capita CST formula for post-secondary education and social assistance/social services means that these provinces will not benefit from “associated equalization”. The per capita formula (only pressed for by Premier McGuinty of Ontario) abandons what is known as “associated equalization” on the CST next year and on health-care by 2014-15. This was embedded within the Established Programs Financing arrangement and was intended to compensate for the fact that transfers of tax points (which formed a portion of the CST) are not worth as much in provinces with small economies as they are in the large, richer provinces. If associated equalization had been taken out of the CST formula last year, it is estimated that Nova Scotia would have lost about $45 million under the CST. This loss is only compensated for this year by the fact that there is now an increase in the CST cash transfer. Another problem with the CST that affects provinces such as Nova Scotia in particular is that while the amount received for post-secondary education has never reflected actual costs this will be made worse by the population based formula. This is because the federal CST transfer is not linked to the total number of students the province educates. In Nova Scotia, almost 13,000 post-secondary students who come from out-of-province are educated at Nova Scotia’s expense. The cost to Nova Scotia is about $25 million a year. Ideally, to ensure that the funding for services is adequate and that provinces can actually meet common standards for social services, the CST should be linked to both revenues (capacity) and expenditures (needs). This would mean that, as is the case in federations such as Australia, the real costs of delivering programs and services in each province would be calculated and factors such as the ratio of working age adults to seniors and children, the need to deliver services in rural and remote areas and the reduced economies of scale in smaller provinces would be taken into account.
Stella Lord
March 28, 2007.