The Decibel - Canada’s controversial system of equalization payments, explained

Episode Date: September 22, 2026

Canada has had a system of equalization payments for decades, where money collected by federal income taxes gets distributed to provinces worse off financially than others. It has proven to be controversial in some areas, like Alberta where Premier Danielle Smith has claimed that equalization is a ‘gravy train’ for the rest of Canada through these payments. Members of the Alberta separatist movement have also used this as a reason to push for separation.But there are a lot of misconceptions about this complicated program. So today, we speak with Patrick Brethour, the Globe’s Editorials editor and former tax and fiscal policy reporter. He’ll demystify the equalization program by explaining how it works, why it’s so controversial, and what he thinks would make it better.Questions? Comments? Ideas? Email us at [e-mail] Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Alberta Premier Danielle Smith has spent a lot of time talking about Albertans subsidizing the rest of Canada. The fact is Alberta taxpayers can no longer be asked to continue to subsidize the entire country through equalization and federal transfers. She's talking about equalization payments, where money raised by the federal government is distributed to provinces worse off financially. The equalization program is also a flashpoint for the Alberta separatist movement. Those in favor of leaving Canada believe that Albertans are getting the short end of the stick from Ottawa. But there are misconceptions about how exactly this program works. So today, we're going to break down this, yes, somewhat complicated calculation. Patrick Brethauer has written a lot about this issue.

He's the Globe's Editorials Editorial's Editor and Formerly the Globe's Tax and Fiscal Policy Reporter. He's here to break down how equalization works, why it's so controversial, and how he thinks it can be improved. I'm Cheryl Sutherland, and this is the decibel from The Globe and Mail. Hi, Patrick, thanks so much for coming back on the show. Glad to be back. So we're going to get into a lot of calculations today, but I want to start very basic here, okay?

So what is an equalization payment? Like, what are we talking about? So the goal of this program, which turns 70 next year, by the way, is pretty simple. It's to try and ensure that there are roughly comparable levels of service, and that's an important word, roughly, roughly comparable levels of public services at roughly comparable levels of taxation across the country. So that's a goal. That seems straightforward. The route there is anything but straightforward. So what does that mean then for the federal government? Like how is money moving? The key thing is, and you hit the nail in the head, it is a federal government program. It is

federal tax dollars that the federal government spends and sends the provinces. There's a lot of misinformation out there that intimates it somehow provinces send money to each other. Not true. So the federal government, there's a calculated amount for each province each year, determines if a province is a have or have not. And if you're a have not, and sometimes if you're a half, which we'll hear about in a bit, if you're a have not province, you get money from the government. Okay.

And so let's just be crystal clear here because you talked about this just a second ago, that the money comes from the federal government, right? Because you hear it's richer provinces paying the poorer provinces. So that's not true, is what you're saying. There are some federations in the world where subnational jurisdictions do pay directly into an equalization-like scheme. Canada is not one of them. So the money for equalization comes from the same place that the money for the Defense Department, Health Canada. Every other federal expenditure comes from, comes from people paying.

federal taxes and charges of some sort, period. I can give you a round figure as to how much Alberta contributes as a province, and that number is zero. Oh. Okay. And so what can the provinces use the money for? Notionally, it's for services such as health or education, but at this point, it is, there are no real conditions on it. Okay. Given the dependence of some of the provinces on this, there's no doubt that it's being used to subsidize.

basic services, but there are no particular restrictions. Okay, and so you mentioned there are the have and have not provinces. Let's lay them out. So which provinces get this money in Canada and which don't? At the moment, the provinces that don't, just are working from the West Coast, BC, Alberta, Saskatchewan don't get equalization payments. They are half provinces. Manitoba is a have not province.

It gets payments. Quebec, New Brunswick and Nova Scotia, Prince Edward Island and Newfoundland are all have not provinces. Newfoundland by a hair. And you'll notice that I left out Ontario. Why do I do that? Because it is both have province and it gets equalization payments. Very interesting.

And we will get into that in a moment. So we're just talking about the provinces here, right? Like, can you remind us why the territories aren't involved? Sure. There's a separate program that functions like equalization specifically for the territories. Okay. We talked about the have and have not provinces. And one of the have provinces is Alberta.

do Albertans send more money to the federal government? So on a per capita basis, they do. That sounds unfair. But why do they do that? Yes. Because on average, their incomes are higher than the rest of Canada. So in paying their federal income taxes, they have the delight as being high earners of paying more in federal taxes.

Now, Ontario as a whole, because there are more people, sends more money. But, yeah, news slash rich people pay higher taxes. So how much money are we talking about here? Like how much money is the federal government setting aside for this program and how is it distributed? So in the current fiscal year, the equalization program is just a titch over $27 billion, which makes it substantial, certainly more than we will spend, I think three times more than we will spend on child care of subsidies. Of that, Quebec gets the most on a dollar basis of $13.9 billion. and it goes down from there. Manitoba gets $5 billion.

New Brunswick 3.3, Nova Scotia 3.5. Prince Edward Island, $723 million, and Newfoundland squeaks in with the 182, and we'll talk about this in a minute. Ontario gets $406 million. Now, on a per capita basis, Quebec actually is really at the back of, pretty much at the back of the pack.

It actually is Prince Edward Island on a per capita basis that gets the highest amount of equalization. So we're going to get into where these numbers come from and how the government calculates who's getting what. But first, can we talk about how important these funds are for the provinces receiving them? Well, for some provinces, very important indeed. For Prince Edward Island, for instance, the equalization payments are roughly equivalent to 40% of the revenue that the province raises from its own sources. You know, that's a lot less for, say, Quebec, where it's, you know, in the order of 10%. But still, if one were to take $13 billion away from Quebec, I imagine it wouldn't happen without some measure of controversy.

What would kind of look like without these payments? Well, that's a great thought experiment. So without that, you would have, particularly the Atlantic provinces, really struggling to fund health care, education, roads, basic services to the level that, you know, you would see in Alberta and Ontario and the other half provinces. And I guess we should wonder, first of all, would you want to live? in that kind of country that had those kind of vast regional disparities. But even if you did want to live in it, what would be the next thing would happen? People would leave. People would leave those provinces and then they would come to the province where you live.

So part of what we are paying for when we're paying equalization is to avoid that kind of social upheaval as well. Okay. So the program, you know, on service level has good intentions, but as many people will know, this is a very contentious program. Why is that? So I think part of that is it becomes a symbol for things that people don't like generally. I send money to Ottawa.

I don't think they use it for good ends. I see other provinces getting equalization for Alberta, when they sort of oppose things Alberta wants to do on energy, but they're happy to take the proceeds of that industry and spend that every year. And that, you know, again, I'll take issue with people that say that Alberta contributes, but certainly the Alberta economy and taxpayers in Alberta absolutely do. So, you know, are they right to be irritated? I'll leave that up to, you know, listeners.

But certainly that, I think, it becomes a flashpoint. That said, there are real problems with the Equalization Program that has created some dependency among some of the have-not provinces that have allowed the provinces that receive payments to maybe not focus as much on economic growth as they should. And then also raise some questions of equity, far as whether this is the best use of that money within the federal government or, you know, whether other spending could be higher, the deficit could be lower, taxes could be lower,

those are fair questions to ask and I think fair debate to have. We'll be right back. So Patrick, we've now come to the part of the show when we're going to talk about calculations. We're going to get nerdy. I am here for that. So the way the federal government figures out how much each province gets has to do with something called fiscal capacity. Explain what fiscal capacity is. So fiscal capacity is sort of a theoretical construct that looks at a province's economy and then applies average tax rates, corporate tax rates, to

that, to imagine that if everyone applied those average tax rates, that would be the fiscal capacity of those provinces. So that would mean, for instance, that when equalization is being calculated, a British fiscal capacity includes an average provincial sales tax. tax, even though in reality, Alberta does not have a sales tax. So it's a bit of a construct and a bit, a bit of a theoretical model, but that is the underpinning. And then it takes those fiscal capacities. There are little tweaks and little caveats and asterisks, but essentially takes those fiscal capacities, creates an average and then looks to see which provinces are above it and

which are below it. The ones that are above it are half provinces, the ones that are below it or have not provinces. It brings provinces up to the average, but it still means there are provinces far above that average. So for instance, Alberta's fiscal capacity, even after equalization, is much higher

than the have-not provinces. So it leaves them better off, but it does not bring everyone up to the same level. It brings up the poorer provinces to the average level of fiscal capacity. Okay, so fiscal capacity

is the amount of money that a government could raise. It's like it's not actually the money that it is raising. Yes. So to give an example, the federal government is looking at the average

of something like a sales tax and says if Alberta were charging a sales tax, the provincial government would have this much revenue. So that counts towards their fiscal capacity. Correct. I am following. Excellent. Thank you. Okay.

And how many categories does it do this with? So consumption taxes are one of five broad revenue categories. The others are personal income taxes, business income taxes, property taxes, and natural resources revenues. Okay. How does the government determine how much money they have to distribute in a year? So you might think it would be based on the fiscal capacity, and that was true at one point, but that's not true any longer. It hasn't been true since 2008. And what happened in 2008?

Energy prices started surging. And that meant Alberta's fiscal capacity started shooting through the roof. And without any change, that would have meant that the total amount that Ottawa spends on equalization would have soared right along with Alberta's fiscal capacity. Because Alberta's fiscal capacity will be so much bigger than all the other. provinces that that average is going to jump up and everyone else is now going to be much more below it and the overall cost of equalization is going to surge and we don't want to do that. So the Harper government saw that problem and said we have to totally change how we calculate equalization and do something completely different. Fiscal capacity we'll use to divvy up the

equalization pool but to calculate it, we're going to base that on the three-year weighted average of national GDP growth. It's now. a link to grow broadly in line with the economy, quite, quite different from fiscal capacity. But the idea behind that was that that measure would prevent an explosion in the cost of the equalization program and would function as a ceiling, as a lid on the cost. Ironically, as it turned out, years later, that ceiling has now become a floor. The equalization pool ends up being bigger than it would if you were just looking at the fiscal capacities. So that's actually now, weirdly enough, inflating the cost of equalization.

Can you explain that a little bit more? So why is it that this three-year average is actually making the equalization payments more? So if you were looking at, on one hand, just the gap between the provinces, because Alberta, you know, oil prices have not been surging as much, the gap between Alberta's fiscal capacity, still very big, and the rest of the provinces is not so big as it seemed like it would be in 2008. If you use an entirely different calculation based on economic growth, that really doesn't relate to what that gap is. It just year after year, if Canada's economy grows 5%, three years in a row,

equalization will go. This year, Ontario, which is a half province, got $406 million. That happened because after the equalization program had fulfilled its purpose of bringing all the have-not provinces up to the average fiscal capacity, there was still $739 million left over because the pool was bigger than it needed to be. Rather than keep the money, Ottawa started giving out money to the have-not provinces,

but, and it's an important and good rule, it would be a bit odd if the equalization program ended up making those have-not provinces better off than a half-province. That would make no sense. And that's why Ontario, which is the least best-off have-province, ended up getting $406 million,

because that was the amount you needed to make sure that it was no worse off than Quebec and New Brunswick and Nova Scotia and Prince Edward Island and Newfoundland. Okay. So if I'm understanding this correctly, the Harper government changed the calculation for how much money goes into equalization. So it's connected to GDP growth instead of fiscal capacity, which means that if the economy is growing, the pool of money the government is distributing is also growing, no matter what the difference is between the province's fiscal capacity.

And so once the have-not provinces have been brought up to the average, there ends up being some excess. And that is going to Ontario because they're kind of next in line, even though they're a half-provence. Indeed. It's almost like if you were splitting the bill and everyone was throwing in money and everyone's, you know, threw in too much. What are you going to do with the excess? The sensible thing would be to say, hey, we should each take back, you know, what we put in. But, you know, in Ottawa's view, you just leave that there, and it is distributed in the restaurant, I guess. Yeah, okay, so why does the government spend this excess money? Like, why does it give it to a province like Ontario instead of just holding onto it or spending it somewhere else?

The short answer is that Ottawa is not summoned yet the courage to change the program. So the Trudeau government had two chances and declined twice to change the formula that the Harper government put in. Now, whether the Carney government will, when the program's rules are next, due for renewal in 2029, we'll see. Okay, let's take a moment to talk about Quebec, because as we mentioned earlier, they're getting $13.9 billion. Is that right? 13.9.07 billion.

Oh, okay. Yes. 07. Very important, yes. There's something interesting here about Quebec and electricity rates. Can you talk about how energy factors into what Quebec gets? Sure. So in Quebec, hydroelectric prices are below what sheer market forces would say they should

be. That means that the amount of revenue that's counted in an equalization program is lower than it otherwise would be. If Quebec charged sort of going rates to its own residents and businesses, Hydro, Quebec would take in more revenue. Quebec's fiscal capacity would be higher. It would take in less equalization. Now, if you remember a moment ago, we were talking about Alberta's sales tax, and the equalization program says, tish-ch-ch-dish, does it matter that you don't have a sales tax? We're going to assume you do. your fiscal capacity. Right. Yeah. But the system does not assume that for Quebec's policy decision on artificially low electricity rates. It simply says, okay. Okay. So that is like, I think that's

probably the contentious point here, right? Like, why isn't the same thing done in Quebec for its electricity rates that is done for Alberta's sales tax? Yeah. So for me, there's not a good reason. There's not a good reason for this other than it being the status quo and maybe being hard to change, but that's not a good reason. There are a couple within that decent points that would make it difficult to calculate, but still worth doing. One would be, what should that price be?

What price do you assume? So that will be quite contentious. Certainly something higher would be the answer. Then the other question would be, well, why stop just at what price Quebec should charge for hydroelectricity? I mean, you might as equally say what royalty rate should Alberta charge oil.

Maybe that rate should be our. So there could be a can of worms your opening. But for me, the artificially low electricity rates that Hydro-Cubec charges, that's a pretty egregious example and a pretty stark contrast with how the sales tax, non-existent sales tax of Alberta is treated. So just to summarize here, so Quebec is foregoing revenue from its residents and corporations, which reduces its fiscal capacity.

And that means that the province gets more equalization payments. That's right. Interesting. So you've written a lot about this program. What do you think would make it better? So one would, like the low hanging fruit quite clearly, is to just take the bold step of once the equalization pool has done its job, stop paying out money. In other words, that $739 million we were talking about, just don't do that.

Stop spending excess money. Yeah, stop spending the excess money. That to me just seems a complete no-brainer, and you should do that right now. Beyond that, there are some interesting changes. We've talked about Quebec's hydro payments. Realistically, that probably has to be blended into sort of a wider reform. You could do a wider range of reforms, such as looking at the cost of providing services. Obviously, living in Toronto costs more than living in Charlottetown.

If you're a nurse in Charlottetown versus a nurse in Toronto, you probably have to be paid more in Toronto. Maybe equalization payments should reflect that. They don't currently. They just sort of suppose that the cost of services is the same across. the country. Right now, we actually reimburse more than 100% of the fiscal gap, but let's assume that we have made the change we talked about a moment ago. Maybe it should not be a full reimbursement. Maybe it should be 95% of the gap reimbursed, creating an incentive for provinces to take a hard look at their economic development plans. Explain that one more. So you're saying that like, so when we're talking about

equalization, it's 100% that's paid out. So like we're getting to this equalization formula by the federal government. But you're suggesting that it should be 95%. Is that what you're saying? Yeah, that would be an option, and that would create an incentive for a province to take a hard look at economic development. New Brunswick might feel differently about its ban on fracking natural gas in that instance. How much would that change what the federal government spends? Some of the consequences of those kind of changes can be a bit unpredictable. For instance, the cost of living adjustment, if that were the only thing you did, Ontario would actually end up getting a very large sum of money because it's more expensive than living in Toronto.

Yeah. So realistically, though, whatever change you did, if the government simply sucked that money out of equalization, that's probably not politically feasible. The editorial we ran in July recommended that any savings you get that you then redeploy and hand back to the provinces but make it conditional on them doing things that you want to do, such as lowering interprovincial trade barriers, which would, of course, help their economies. We've talked about this a lot in this conversation, about how this is a politicized issue. Is there a way to make this less political? Is that even possible? So, interesting question. In some countries, the formula is taken out of the hand of politicians and put into sort of a committee, a bit of a depoliticized committee.

And that has a certain appeal to it. For me, though, this is fundamentally a political question. It's what kind of country you want to live in. And a lot of this comes down to the elected representatives of the province is talking to the elected federal representatives. So I think the allure of depoliticizing it seems appealing. I do think it would be a mistake. I think politics is one word for, democracy is another. So let's talk about that a little bit just to end here.

So we know that Alberta Premier Danielle Smith has been very upset about this program. And also the Alberta separatists have talked about it a lot as well. What's the argument for still having these payments? So when Danielle Smith says that Alberta taxpayers can no longer subsidize the rest of the country. My question for her and everyone else is, well, what do you suggest the remedy is that people stop paying their federal taxes? Because that's where the money comes from. Clearly, if that's what she means, it would be farcical. That's not what she means. If what she's hinting at is there should be a retrenchment of equalization and those funds should be used for other purposes that would be

more productive, I think there's something to talk about there. But ultimately, equalization is about ensuring that the country functions as a country, that you don't go to parts of Canada and wonder, where am I? What is happening here? Why are all the hospitals shut down? Why are all the schools so poorly maintained? Why are all the roads so pothold? So that is the kind of country that we might live in without equalization,

vast differences, vast disparities. And that would be a nastier country, a much less pleasant country. And I would add again, it would be not without consequences, for the have provinces, because people would leave those promises, they would come here, and then you would have a fair degree of social at people that would leave you pining for the days when our problem was the equalization formula.

Patrick, we'll leave it there. Thank you so much. Thank you. That was Patrick Breathauer, the Globe's Editorials Editorials Editor. That's all for today. I'm Cheryl Sutherland. This episode was mixed and edited by Rachel Levy McLaughlin. Our host is Manika Ramman Wilms. Our producers are Madeline White, Rachel Levy McLaughlin, Michal Stein, and me.

Our editor is David Crosby. Adrian Chung is our senior producer, and Angela Pichenza is our executive editor. Thanks so much for listening.