COMMENTARY: Equalization Payments and Their Relationship to Growth in ‘Have-Not’ Provinces – Fraser Institute

By Ben Eisen and Alex Whalen

 

Equalization Program Explained Here

Recently, the federal government announced the equalization payments for the 2026/27 fiscal year.   Here are the payments for 2026/27 fiscal year and previous years for comparison

Table A – Equalization payments to Canadian provinces

Province	2026-27$M	2025-26$M	2024-25$M	2023-24$M	2022-23$M	2021–22$M	2020–21$M	2019–20$M	2018–19$M	2017–18$M	2016–17$M	2015–16$M	2014–15$M	2013–14$M	2012–13$M	2011–12$M	2010–11$M
Quebec	13,907	13,567	13,316	14,037	13,666	13,119	13,253	13,124	11,732	11,081	10,030	9,521	9,286	7,833	7,391	7,815	8,552
Manitoba	5,044	4,689	4,352	3,510	2,933	2,719	2,510	2,255	2,037	1,820	1,736	1,738	1,750	1,792	1,671	1,666	1,826
Nova Scotia	3,538	3,465	3,284	2,803	2,458	2,315	2,146	2,015	1,933	1,779	1,722	1,690	1,619	1,458	1,268	1,167	1,110
New Brunswick	3,360	3,123	2,897	2,631	2,360	2,274	2,210	2,023	1,874	1,760	1,708	1,669	1,666	1,513	1,495	1,483	1,581
Prince Edward Island	723	666	610	561	503	484	454	419	419	390	380	361	360	340	337	329	330
Ontario	406	546	576	421	0	0	0	0	963	1,424	2,304	2,363	1,988	3,169	3,261	2,200	972
Alberta	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
British Columbia	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Newfoundland and Labrador	182	113	218	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Saskatchewan	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
Total	27,160	26,170	25,253	23,963	21,920	20,911	20,573	19,619	18,958	18,254	17,880	17,341	16,669	16,105	16,423	14,659	14,372

The equalization program is intended to help lower-income provinces provide government services at a level reasonably comparable to other provinces. However, there are reasons to fear that the program has unintended consequences that are promoting unwise policy choices in recipient provinces that are further entrenching them in “have-not” status.

As in most years, the Maritime provinces will be amongst the largest per capita recipients of equalization payments. Only Manitoba comes close. Further, we calculate that as a share of provincial revenue, the three Maritime provinces will receive the largest equalization grants in Canada—above 20 per cent of all revenue in each case.

There are several reasons to be concerned that such large equalization payments (and how they’re calculated) may create negative distortions when it comes to economic growth in the region. First, let’s consider the issue of natural resource development. How to approach natural resource exploration, and particularly hydraulic fracturing, has been a controversial topic in the region for many years.

This debate cannot be fully understood, however, without considering the incentive effects created by the equalization program. Whenever a have-not province increases its natural resource revenue, its equalization entitlements are reduced. This is sometimes referred to as a “clawback” effect. In 2020, we published a paper measuring the clawback effect and found it depends greatly on the year and province-specific details. We showed, for instance, in 2020/21 that a 10 per cent marginal increase in natural resource revenues would face a clawback rate of approximately 45 per cent in all of the Maritime provinces (meaning the equalization payment would be reduced by this amount). It’s easy to see how such a large effect could influence policymaking.

This effect has been identified, recognized, and addressed in the past. It’s the very reason the “offshore accords” were signed between the federal government and the governments of Nova Scotia and Newfoundland and Labrador. This agreement protected the involved provinces from steep equalization losses as a result of developing offshore resources.

Clearly, there has been a previous understanding that the equalization program can disincentivize resource development and it’s important for policymakers to be cognizant of those effects today.

There are other incentive effects in have-not provinces to consider. Leading Canadian economists Michael Smart and Ergete Ferede have argued that equalization incentivizes the maintenance of high and growth-discouraging taxes in the recipient provinces because some of the fiscal effects from those taxes are effectively passed along to taxpayers in the rest of the country. In short, have-not provinces can be partially compensated for the negative economic effects of higher income taxes.

Another concern raised by economist Bev Dahlby is that equalization distorts spending decisions in have-not provinces, encouraging purely consumptive spending at the expense of expenditures that might help boost growth. Ferede summarizes this finding by saying “the share of unproductive government expenditure is higher and the share of productive government expenditure is lower in the recipient provinces compared to non-receiving provinces.”

Equalization is a well-intended program that aims to ensure that public services are comparably good in richer and poorer provinces. However, the program creates bad policy incentives in recipient provinces that may work against their efforts to grow the economy. Specifically, the program may disincentivize natural resource development, incentivize higher and more economically damaging taxes, and distort spending decisions in favour of unproductive expenditures. These concerns underscore the need for policymakers to think carefully about how equalization shapes incentives in recipient provinces.

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