People knowledgeable about Canada's equalization system are fond of claiming that only five or six people really understand the program. While this figure always struck me as low (chosen, I suspect, to make both experts and non-experts feel better about themselves), it is true that equalization remains something of a mystery to most political scientists. Many know that equalization transfers resources to provinces with below-average fiscal capacity; that the purpose of these transfers is to ensure that all Canadians enjoy comparable levels of services at comparable levels of taxation and that the payments are an explicit attempt to reconcile demands for national solidarity and provincial autonomy (hence their unconditional nature). But few, I suspect, understand technical debates over spending caps or inclusion rates for natural resource revenues, arcane concepts like the representative tax system, or why, unlike Australia, Canada never adjusted payments to account for the cost of delivering public services. And if political scientists are at the mercy of a handful of experts on these issues, then Canadians surely are as well.
It is precisely this ignorance that Fiscal Federalism and Equalization Policy in Canada seeks to remedy. This succinct, 114-page primer analyzes equalization's history (chapter one), politics (chapter two), economics (chapter three) and relationship with the broader transfer system (chapter four). Those familiar with the work of Daniel Béland and André Lecours will be familiar with many of the arguments, particularly those concerning the origins and evolution of the program and the need to depoliticize policy making. But the book is not simply a rehashing of existing research. Béland and Lecours team up with two economists (Haizhen Mou and Rose Olfert) and a widely known expert on Canadian federalism and social policy (Gregory Marchildon) to produce an interdisciplinary volume that is more than the sum of its disciplinary parts.
I highly recommend the book to anyone (academics, students and citizens) learning about equalization for the first time. I also recommend it to experts looking to refine or consolidate their learning, because nowhere else will they find so much about the program in just 114 pages. Finally, I recommend it to anyone interested in contemporary equalization policy debates.
The authors’ biggest concerns with equalization are four: (1) the significant disparities in provincial fiscal capacity (disparities that have narrowed somewhat with the recent fall in commodity prices), (2) the declining share of provincial program expenditures covered by federal cash transfers, (3) the fact that equalization only corrects for differences in provinces’ revenue-raising capacity, not the different costs provinces have to pay for providing similar public services, and (4) the intergovernmental conflict that equalization can cause. Note that none of these concerns refers to the relationship between equalization and economic efficiency. The authors review the literature on the economic costs and benefits of equalization and conclude, on the basis of weak and contradictory evidence, that the economic effects are unclear.
In theory, the federal government could address problems 1 through 3 by expanding equalization and adjusting payments to account for service costs. Instead, the authors recommend expanding the Canadian Health Transfer and varying per capita payments to reflect demographic and geographic variables, which, they believe, is an easier sell politically.
With respect to the fourth problem—the politics of equalization—the authors recommend the creation of an independent council similar to the Australian Commonwealth Grants Commission, an arms-length body responsible for advising the Commonwealth government on the distribution of equalization payments. While decisions over equalization would remain with the federal government, an independent council would potentially “depoliticize” policy making by limiting informal provincial influence and federal discretion, both of which, according to the authors, contribute to intergovernmental bickering and suboptimal policy. A council would achieve depoliticization, in part, by dispelling various myths about equalization, including the notion that the program is financed by the budgets of “have” provinces.
Both proposals are interesting, though neither is without problems. Adjusting health transfers for geography and demography is a simple and transparent way of addressing cost differences, but it would not necessarily narrow provincial disparities broadly conceived. The best evidence of this comes from Gusen's Reference Gusen2012 study of equalization and expenditure need, which covers a much wider range of services, needs and costs. Gusen finds that the oldest and most rural provinces are not necessarily the most underequalized. That honour goes to Ontario, a highly urbanized province with above-average wage costs.
The second proposal—the one for an independent council—is interesting, though it is not clear whether it would work, much less how it would come to be. The model's success in Australia is not, to my mind, cause for optimism in Canada.
My final quibble (and these are really just quibbles) concerns the question of provincial debt. The authors want federal transfers to increase, both to narrow provincial fiscal disparities and to pay for rising healthcare costs. This is not necessarily a bad idea, but it could—if a rather large cross-national literature is any indication (Rodden, Reference Rodden2006, Reference Rodden2016)—undermine provincial accountability and increase provincial borrowing in turn (a possibility the authors could have explored alongside their discussions of flypaper effects and welfare traps). This would be a concern in any multi-level system, but it is particularly worrying in Canada where the subnational sector is already the most indebted in the OECD (Hanniman, Reference Hanniman, Goodyear-Grant, Johnston, Kymlicka and Mylesforthcoming). The challenge is not, therefore, simply to increase transfers. Rather, it is to do so in a way that reconciles solidarity and fiscal discipline. This is no easy task, but perhaps this is another area in which an independent council could help.
Regardless of where one stands on these issues, Fiscal Federalism and Equalization Policy in Canada provides an excellent foundation for debate. It is a clear, concise and multi-disciplinary treatment of a topic that has intimidated Canadian political scientists for far too long.
