Montreal — The fiscal stabilization program must be reformed so it can better fulfil its mandate of providing protection to provinces in the event of extraordinary declines in revenue, says a new study from the Institute for Research on Public Policy.
The premiers of energy-rich provinces that do not qualify for equalization have criticized it because it has not helped them weather a severe economic downturn. However, says James Feehan, an honorary research professor at Memorial University of Newfoundland, the equalization program is operating by and large as it ought to. As he puts it: “Having a large budgetary deficit is not a basis for equalization, nor should it be.”
Another federal transfer, the fiscal stabilization program, compensates provincial governments that suffer a large unexpected loss in revenues – as has happened with the steep drops in oil and natural gas prices over the past few years. However, payments are capped at $60 per resident. As a result, for 2014-15 to 2016-17, the Alberta government received only $251.4 million — little more than 3 percent of its $8-billion revenue decline.
Feehan concludes that the fiscal stabilization program “is inadequate and unfair to resource-dependent provinces.” As a first step in reforming the program, he recommends that the $60 cap be lifted.
The author adds that there is nevertheless scope for improving equalization, such as eliminating the fixed-growth rule for the equalization envelope. Other issues could also be considered – for example, the way in which natural resource revenues are treated in the formula used to calculate equalization payments.
Canada’s Equalization Program: Political Debates and Opportunities for Reform, by James Feehan, can be downloaded from the Institute’s website (irpp.org).
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