For as long as equalization has existed, the provinces have groused about how Ottawa apportions those funds, aimed at ensuring that Canadians enjoy reasonably comparable social services at reasonably comparable levels of taxation.
Now, Newfoundland is escalating those decades of griping and taking the federal government to court, arguing that Ottawa is shirking its constitutional obligations.
In its statement of claim filed with the Supreme Court of Newfoundland and Labrador, the province contends that it should receive higher payments under the program, and that the current design unconstitutionally denies it those funds.
The lawsuit itself should be summarily dismissed. The Constitution indeed does lay out the obligation for the federal government to make equalization payments, but it is silent on the design of any program. It’s a policy choice, and in the realm of politics, not the law.
But Newfoundland raises two important points that merit discussion (although the province may wish to ponder the maxim that you should be careful what you wish for).
It raises two main objections. First, that equalization payments do not take into account the cost of providing services. Newfoundland contends that it has a higher built-in cost structure because of its smaller population spread over a large number of rural communities. Second, Newfoundland argues that the way in which resource revenues are treated put it at an unfair disadvantage, particularly when there are “adjustment payments” made that distribute dollars beyond just the have-not provinces.
On the first complaint, Newfoundland is making a good point – although perhaps not the point it intends. University of Calgary economics professor Trevor Tombe noted in an interview that Canada’s equalization program is unique compared with similar policies in other countries in that it apportions funds on a per capita basis, without any adjustment for the cost of services or for demographics.
There is a strong argument to be made that the equalization program should account for the cost of delivering services. If hiring a nurse or teacher is less costly in one province, a dollar of equalization will overcompensate that province. (It’s a situation similar to visiting a country where the Canadian dollar is stronger; the tourist’s dollar buys more.)
The problem for Newfoundland is that such an adjustment would leave it worse off, given the lower price levels in the region compared with Canada’s large urban centres. Ontario would be the big winner under such a scenario, Prof. Tombe says, since the province is just poor enough, with a high cost base to boot. (He adds that other methodologies might produce different outcomes. Newfoundland declined to specify what formula it might propose.)
The filing also mentions demographics. There, Newfoundland might come out ahead, since it does have an older population. But anyone proposing that reform would have to think hard about the net effect: An older population would increase health care costs, but decrease education expenditures. Since equalization is meant to underpin all services, it would be wrong to simply conclude that an older population is by itself a decisive factor.
Newfoundland also complains that the current way that Ottawa divvies up surplus equalization funds is unfair. It may be surprising to some, but the equalization program does more than simply provide payments to have-not provinces. That’s because of the funding formula put in place by the Harper government, and maintained by the Trudeau Liberals, that ties the growth in the equalization pool of dollars to the three-year average growth rate in the Canadian economy.
That formula was designed to rein in costs, but in recent years has left a surplus to be distributed after the mandate of equalization – to reduce fiscal disparities – has been fulfilled. When that surplus is distributed in “adjustment payments,” Newfoundland generally loses out because all of its natural-resource revenue is included. The province estimates it would have received $581-million last year if natural-resource revenue was excluded. Instead, it received nothing.
The solution to Newfoundland’s complaint is obvious: Only have-not provinces should receive equalization payments. Excess funds should simply not be spent.
Canada’s equalization system is badly in need of a fundamental rethinking. Newfoundland’s filing raises the right questions – even if its proposed answers are wrong-headed.