Policy Forum: Equalization and Canada's Fiscal Constitution — The Tie That Binds?

Abstract

Canada has had a fiscal equalization system since 1957, and equalization was formally embedded in the constitution in 1982. However, the rationale for equalization, how the concept is defined and applied, and what its effects are or should be are all issues that continue to be vigorously debated in both political and expert circles. This article reviews some of these issues and concludes that, on the whole, equalization has played a useful role in helping Canada to get through the last half-century as well as it has. However, the system could be improved by making it more transparent--for example, by fixing the amount to be distributed at (say) the present share of the federal budget (instead of indexing it to a moving average of nominal growth in the gross domestic product), and making the distributional formula less overtly political by establishing a quasi-independent board to examine the allocation formula from time to time and make ecommendations for change. Governments at both the federal and provincial levels would then be more accountable for their actions, as they should be in a democracy.