Equalization payments
Equalization payments are transfer payments by the federal government of Canada to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity" or their ability to deliver government services.
Contrary to popular belief, it does not redistribute wealth from richer provinces to poorer ones, since money for equalization payments comes from general federal government funds. Rather, as with every federal program, it is paid for most by the individual Canadian taxpayers who pay the most taxes, whatever their province of residence. Ontario and Alberta are the only provinces that do not receive equalization payments, but as discussed, the money for equalization payments to the other provinces is not somehow taken from their treasuries.
Unlike conditional transfer payments such as the Canada Health and Social Transfer, the money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee equal levels of health care, education, and welfare in all the provinces.
Today the total amount of the program is around 10 billion Canadian dollars per year.
History
The basics of equalization payments has been around since Canadian Confederation when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed.
A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist James Buchanan and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada.
The original program had the goal of giving each province the same per capita revenue as wealthy Ontario. Five years later this goal was reduced to ensuring each province had revenue that equaled the national per capita average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy, this gave Canada by far the world's most generous system of equalization payments.
In the 1982 Constitution Act creating a new constitution included the rights of the poorer provinces to equalization payments and it is extremely unlikely that this provision will be amended.
Criticisms
Equalization payments have mostly been criticized by leaders of the wealthy provinces. Premiers of oil rich Alberta and Ontario with its large manufacturing base have both criticized the drain on their finances. Some economists also believe that they have contributed to the Martimes' longstanding economic backwardness.
Supporters argue they are necessary to ensure that all Canadians can expect an equal level of service from their government. Legislation like the Canada Health Act requires equal levels of care, something the poorer provinces would not be able to provide without aid from the richer provinces.
Equalization payments also still leave the provinces far from equal. Alberta has far lower taxes and a generally higher level of social services dues to its oil wealth, while schools in provinces like Newfoundland under perform compared to the national average.
The payments have the added benefit of promoting national unity. Quebec, the most populous of the "have not" provinces, is by far the largest single recipient of the payments.
The equalization payments also create a very large scale welfare trap. For instance as Nova Scotia began to develop its lucrative off-shore gas reserves it found that for every dollar in new money brought in it would lose a dollar of equalization payments, discouraging provincial growth.
