Fiscal Federalism and the Future of Canada Selected Proceedings from the Conference – September 28-29, 2006 Is Equalization Broken? Can Equalization be Fixed? Janice MacKinnon* Foreword Introduction In September of 2006, Queen’s Institute of Equalization has been described as “the glue Intergovernmental Relations hosted Fiscal Federalism that holds our federation together” and a program and the Future of Canada, a conference organized by that “reflects a distinctly Canadian commitment to the then IIGR Director Sean Conway, Peter Leslie and fairness.”1 The principle of fairness is reflected Christian Leuprecht. Given that several of the in the redistributive nature of the program in that conference presentations dealt with the future of equalization has the effect of redistributing equalization and given that the 2007 federal budget will outline the Harper government’s preferred future revenue from the richer to the poorer provinces. for equalization, the Institute felt it appropriate to Its role in fostering national unity is related to the publish these contributions in working paper format fact that the goal of the inter-provincial prior to the federal budget. redistribution of resources is to ensure that Canadians from all regions “have access to Appropriately this working paper series begins with comparable public services at reasonably brief summaries of the two commissioned reports on comparable levels of taxation”.2 The importance equalization and territorial formula financing – one of equalization to Canada is reflected in the fact from the Council of the Federation’s Advisory Panel that it is part of the Canadian Constitution. on Fiscal Imbalance and the other from the federal Expert Panel on Equalization and Territorial Formula Financing. These will be followed by analyses by Despite the importance of equalization to other conference participants whose contributions will Canada’s sense of identity, recently there has been relate to these two proposals as well as to the larger evidence that equalization is ‘broken’. The fiscal federalism issues now in play. The views program has been the source of federal-provincial expressed in these working papers are those of the tension and of controversy among the provinces. authors, not those of the Institute of Intergovernmental Moreover, both levels of government have Relations. commissioned reviews of equalization. The federal report, Achieving a National Purpose: As the only organization in Canada whose mandate Putting Equalization Back on Track , was is solely to promote research and communication on prepared by a panel of experts commissioned by the challenges facing the federal system, we are pleased to introduce these working papers into the the government of Prime Minister Paul Martin. public debate on equalization and fiscal imbalance The provincial-territorial report, Reconciling the Irreconcilable: Addressing Canada’s Fiscal 3 Thomas J. Courchene Imbalance , was done by the Advisory Panel to Acting Director the Council of the Federation – which represents February 2007 the provinces and territories – and it considered equalization as well as the issue of the fiscal * Professor of Public Policy at the University of imbalance. Both the federal and provincial- Saskatchewan, a former Saskatchewan Finance territorial reports agree that equalization needs to Minister and Chair of the Board of Directors of the be changed, although they diverge in their views Institute for Research on Public Policy of what changes are required. This evidence that equalization is ‘broken’ leaves two related Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 3 1 Janice MacKinnon, Is Equalization Broken? Can Equalization be Fixed? questions unanswered: how badly is equalization negotiations over proposed changes to the ‘broken’ and how can it be ‘fixed’? equalization formula. The Issues Ministers, as any deputy minister knows, The most compelling evidence that always say that they intend to focus on the general equalization is not irreparably broken is the fact principles and practical political realities involved that no province disputes the principle of in programs like equalization because the truth is equalization. Instead, the debate among they do not understand the complex technical Canadian governments and academics is about issues involved. (That, of course, is why we have the scope and decision-making structure of the deputy ministers.) True to form, I will focus on equalization program. In terms of the decision- the broader issues and practical political realities making structure, the Council of the Federation involved in assessing and fixing the shortcomings report recommends the creation of a First of equalization. In short, I will focus on the big Ministers’ Fiscal Council by the federal, picture issues and leave others to address the provincial and territorial governments “as the specific changes to equalization that are being principal institution in Canada for dealing with recommended by the federal and provincial- intergovernmental fiscal issues”.4 Because the territorial reports. Council would negotiate all federal-provincial transfers every five years, it is argued that there Fixing equalization requires a big picture would be “greater stability and predictability to perspective in two senses. Equalization has to be the process”.5 Also, the power of the federal seen in the much broader context of federal- government to make unilateral decisions about provincial fiscal relations. Also, it has to be equalization and other federal transfers would be remembered that equalization is only one policy curtailed. tool available to the federal government to address inequalities in Canada. Assuming that there are An even more contentious debate centers on significant limits to the federal government’s the scope of the equalization program. Many capacity to use equalization to address the provinces that receive equalization argue in horizontal fiscal imbalance this does not favor of expanding the program, while provinces necessarily mean that the federal government can like Ontario that do not receive equalization not act to lessen inequalities in Canada. There are contend that such enhancements are other programs that can be enhanced to promote unaffordable. Thus, a key issue that has to be greater fairness in Canada. addressed is the extent to which equalization should address what has been called the What is Broken: the ‘Side Deals’ horizontal fiscal imbalance – the “great disparity Deciding what needs to be ‘fixed’ and what in the ability of individual provinces and does not need to be ‘fixed’ about equalization territories to deliver comparable levels of requires an understanding of what is broken. Most services at reasonably comparable rates of recently, the decision by the government of Prime taxation.”6 Minister Paul Martin to abandon the rules based formula-driven approach to equalization and to The Approach sign “side deals” with Newfoundland and Nova My approach in addressing these issues has Scotia did a lot of damage to equalization. Almost been influenced by my experience as a as important as the terms of the side deals was the provincial Finance Minister in the 1990s and by process used by the Premier of Newfoundland to my career as a Canadian historian. From a pressure the federal government. Newfoundland historical perspective, it is important to Premier Danny William’s tactic of relying heavily understand the role that equalization played on the media to make his province’s case and his when it was created and the extent to which use of antics like taking down the Canadian flag circumstances have changed since the program were not lost on other provinces. Nor was the was established in 1957. From a political success that he achieved using these kinds of perspective, during my tenure as Saskatchewan’s tactics. In the 1990s, when I was a provincial Finance Minister, I was involved in the 1993 finance minister and was involved in the renegotiation of equalization, success by a Fiscal Federalism and the Future of Canada – Conference Proceedings, Sept 28-29, 06 – Folio 3 2 Janice MacKinnon, Is Equalization Broken? Can Equalization be Fixed? provincial government required working with Fixing Equalization: The Process other provinces on specific issues to find What is critical is that the arguably common ground. The lesson of the side deals unreasonable positions taken by Ontario and was that success requires aggressive, persistent Saskatchewan and their more aggressive approach and high profile advocacy of a province’s own in advancing them is a direct result of the side interests, and the rallying of its electorate to its deals with Newfoundland and Nova Scotia and the cause, rather than seeking common ground with high profile tactics used to achieve them. What is other provinces. Hence, other provinces became ‘broken’, then, is the power of the federal more aggressive in their positions and more government to use an ad hoc process to reach an narrowly focused on their own provincial agreement with two provinces despite the impact interests. these deals have on other provinces. The solution is to return to a rules based formula driven The terms of the side deals also led to an equalization program, which prevents the federal understandable sense of unfairness in other government from using an ad hoc decision making provinces and this was reflected in the positions process. taken by the provinces of Saskatchewan and Ontario.