The length of two swords

Recently, the brilliant UK actor Philip Glenister (Life on Mars, Ashes to Ashes, State of Play, Mad Dogs, Hidden, etc.) was interviewed on the Andrew Marr show in connection with his latest role, that of Chief Government Whip in the play “This House“, which is set in 1974, when Labour had a shaky minority government.The discussion turned to the innately adversarial nature of politics in the UK House of Commons, with Marr noting that the play was in some ways an attack on the British parliamentary tradition, that of two sides against each other, and that underneath, there was a dream of a better way of doing things, a call for politics to be more consensual. Glenister noted that UK was “one of the few democracies, just by the layout of our parliament… it’s in a rectangular shape as opposed to in the round. It’s only one of two in the world.”

If Glenister is correct, and there are only two democracies in the world with rectangular Chambers which force government and opposition to face off against each other on opposing sides, then the Canada is the other one. The Canadian House of Commons, the Senate and most of the Canadian provincial and territorial legislatures are also rectangular, the exceptions being the Legislative Assembly of Manitoba, the Legislative Assembly of Nunavut and the Legislative Assembly of the Northwest Territories.

What is being implied here is that layout of the Chamber, government on one side, opposition parties on the other, makes our politics more adversarial because it imposes an “Us vs Them” feel from the outset. This is the same argument put forward by architects in this very interesting article, “The Shape of Debate to Come“.

However, it is debatable to what extent the shape of the chamber might influence how adversarial or consensual debate will be. As Professor White notes in the above article, countries which end up with a more consensual approach to politics also tend to use some form of proportional representation rather than First-Past-the-Post:

But, in an email, he said there was “pretty much zero” chance of more co-operative behaviour in Canadian legislatures. And he put the differences in approach in legislatures such as Wales and Scotland more down to mixed electoral systems, not just first-past-the-post.

He said: ”Unquestionably the opposing rows of benches in standard Westminster parliaments reinforces the adversarial nature of the place; for my students I liken it to opposing armies or sports teams squaring off. At the same time, I see seating arrangements as very much secondary to underlying political culture and prevailing political norms.

“The Manitoba [legislature], which is semi-circular, has exceedingly nasty, adversarial partisan politics, and the US Congress these days is hardly a paragon of non-partisanship.”

Because PR makes it very difficult for any one party to form a majority government on its own, this means that coalition government tends to be the norm in countries which use some form of PR, and that reality alone will require parties to work harder to find some sort of consensus. As Prof. White points out, despite sitting in the round, politics in both Manitoba and the US Congress are very partisan and adversarial, and both jurisdictions use FPTP. The Australian House of Representatives is horseshoe-shaped, and politics Down Under is every bit as partisan as it is up here, particularly in the current minority parliament. Australia uses the Alternative Vote to elect its MPs, a voting system which requires voters to rank the candidates on the ballot in order of preference, and to win the seat, a candidate must gain over 50% of the vote, either outright, or through transferred preferences. AV, like FPTP, is not at all proportional, which may explain why political debate in the House of Representatives is partisan and adversarial.

This summer, it was reported that the UK Parliament could be closed for five years for extensive refurbishment, with MPs and Lords “convened in a replica chamber or a conference centre for the duration of the repair work, which could start in 2015.” This immediately alarmed some. The Spectator’s Fraser Nelson raised the threat of some advocating that a new, refurbished chamber would be “a chance to move the MPs to a lifeless, European style semi-circular chamber that supposedly encourages them to co-operate.” Fraser comments on how deathly boring debate is in the Scottish Parliament, which is circular. He does not mention that Scottish Members of Parliament (MSPs) are elected using Mixed-Member Proportional representation (MMP).

But is the electoral system alone enough to determine how consensual or adversarial politics will be in a given jurisdiction? Thomas Carl Lundberg, in his paper “Politics is Still an Adversarial Business: Minority Government and Mixed-Member Proportional Representation in Scotland and New Zealand“, concluded that while both nations introduced MMP in part to bring about a “new politics”, in the end, “the impact of institutional engineering upon the behaviour of politicians has been limited.” New Zealand adopted MMP in 1996, Scotland in 1999. New Zealand has seen the formation of mostly minority governments under MMP (albeit minority coalition government rather than single-party minority government) supported by other smaller parties through confidence and supply agreements, while Scotland has experienced two terms of majority coalition government, one term of single-party  minority government, and most recently, to the surprise of most, a single-party majority government.

The reasons why MMP has had limited success in curbing adversarial politics in Scotland and New Zealand, according to Lundberg are varied. Long before New Zealand adopted MMP, it had a very strong two-party system (Labour on the left and the National Party on the right) and a long history of single-party majority government. With the introduction of MMP in 1996, that didn’t really change. Politics remained quite adversarial between Labour and the National Party, but both of the main parties learned to work with the much smaller parties in order to form governments.

Scotland on the surface may appear more consensual, but there are other tensions at work. Scotland has a true multiparty system, that is one in which “there are three to five relevant parties which are not separated (polarised) by a large or intense ideological distance” (which isn’t the case in New Zealand). Rather, Scotland’s party system “is characterised by two significant cleavages” – class divisions and “the process of building the UK (with England at the centre dominating the periphery composed of Scotland, Wales and Ireland) in the latter.” The two largest parties in Scotland are Labour and the Scottish National Party – both are centre-left, and they have a long, adversarial relationship dating back before devolution, or to quote the former leader of the Scottish Liberal Democrats: “there is a level of visceral hatred between the Nationalists and Labour to this day. So, it just transferred from London to Edinburgh … we just so massively underestimated how important it is for people to have good, personal relationships across all parties.”

Simply put, how adversarial or consensual politics might be in a given democracy will depend on many factors. While the shape of the debating chamber and the voting system used to elect members undoubtedly play a part, changing one or both will not necessarily bring about more polite politics.

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On the decline of Statements by Members

From the Canadian House of Commons Standing Orders:

31.  A Member may be recognized, under the provisions of Standing Order 30(5), to make a statement for not more than one minute. The Speaker may order a Member to resume his or her seat if, in the opinion of the Speaker, improper use is made of this Standing Order.

The Standing Orders of the Canadian House of Commons allow Members who are not ministers to address the House for up to one minute on virtually any matter of local, provincial, national or international concern. These Statements by Members take place in the 15 minutes before the daily Question Period, at 2:00 p.m. on Monday, Tuesday, Wednesday and Thursday, and at 11:00 a.m. on Friday.

As Standing Order 31 states, the Speaker will order a Member to resume his or her seat if they make improper use of this Standing Order. The guidelines are fairly clear:

  • Members may speak on any matter of concern and not necessarily on urgent matters.
  • Personal attacks are not permitted.
  • The Speaker may interrupt an individual statement and ask the Member to resume his or her seat when:
    • offensive language has been used;
    • a Senator or the actions of the Senate have been criticized;
    • a ruling of a court of law has been denounced; or
    • the character of a judge has been attacked.
  • Speakers have also cautioned Members not to:
    • use this period to make defamatory comments about non-Members;
    • use the verbatim remarks of a private citizen as a statement; or
    • make statements of a commercial nature.

Most Members follow the guidelines and use their minute to raise an issue that is of interest or concern to their constituents, to bring attention to the accomplishments of a local sports team or individual, etc. However, increasingly, these Members’ Statements have become far more partisan and personal attacks against other Members or other parties’ policies are daily occurrences.

Evan Sotiropoulos provided a detailed study of Statements by Members during the 38th and 39th Parliaments in the Canadian Parliamentary Review. As Sotiropoulos notes:

The 38th Parliament and the 39th Parliament present fertile ground for comparative research. Both were minority governments with the same Speaker (Peter Milliken) following the same Standing Orders. Stated otherwise, a number of key independent variables used to explain the dependent variable, that is to say, the level of unparliamentary/partisan language in the daily Statements by Members – were constant. The crucial difference was that the 38th Parliament was a Liberal-led government, whereas the 39th Parliament was Conservative-led. Therefore, the idea that the official Opposition, regardless of party affiliation, would use its time in a more partisan manner could be analyzed against two similar, yet distinct Parliaments.

What Sotiropoulos found, however, was that the Conservative Party, whether in opposition or in government, was more likely to use Members’ Statements to make partisan attacks than were the Liberals:

The Conservative Party, both in opposition and in government, regularly was more partisan in its use of Members’ Statements than its main adversary, the Liberal Party.

According to this research in the 38th Parliament, a Conservative MP was three times more likely than his Liberal counterpart to stand up during Members’ Statements and deliver a political/partisan statement. In the 39th Parliament, the opposition Liberals became more unparliamentary/partisan in their Members’ Statements – confirming, to some extent, the initial theory that the official Opposition would use its time in a more partisan manner. Although Liberal MPs contributed to the increase of partisanship during the 39th Parliament (doubling their partisan statements from 13.5% to 24.9%) Conservative MPs were still twice as likely to deliver a political punch.

Similarly, a more recent analysis of Statements by Members from 1994 to 2012 by Eric Grenier produced similar findings:

An analysis of almost 1,000 speeches made during the Statements by Members period between 1994 and 2012 over the first three normal sitting days after the summer indicates that the number of partisan statements have almost doubled since the Conservatives were first elected. (…)

About 24 per cent of Statements by Members on the sampled days since 2006 were of a partisan nature, compared to 14 per cent in the period between 1994 and 2005 when the Liberals were in power. Four of the five years where more than 1 in 5 statements were partisan took place under the Conservatives. The lone exception is 1995, when the debate over the then-upcoming Quebec referendum was especially nasty.

In response to Grenier’s piece, a former senior adviser to Conservative Prime Minister Stephen Harper, Keith Beardsley wrote a very telling blog post explaining how the Conservatives started using Members’ Statements more strategically. Beardsley explains:

While in opposition from 2003 to 2006, we found that quite often our very last MP’s statement (the one just before Question Period started) was quoted in the media the next day.  Simply put the media had arrived in the House for Question Period and they were paying attention to comments from the MPs.  SO 31s delivered earlier in the sequence were largely ignored by the press.

Opposition parties are always looking for ways to get into the media and this became one way to do it. The added bonus was that the then Liberal Prime Minister had no way to respond to what was said. By putting a slight edge to the attack in the SO 31, you could unsettle the PM and distract him just before the Leader of the Opposition stood to ask the first of a series of 3 to 5 questions. Over time we began to use the last of our SO 31s as the equivalent to a question in Question Period especially when it was delivered by one of our attack dogs. The SO 31 allowed one minute of time to stand, while a question only allowed 34 seconds. That one minute statement also allowed more time to drive home our message than any question could. The added advantage for us was the Prime Minister had no way to reply but had to sit and take it.

There have been repeated calls – from MPs and from political observers – for something to be done about this misuse of Statements by Members. MPs have called on the Speaker to clamp down on these ultra-partisan attacks. Former Speaker Milliken attempted to do so – cutting off any MP who started in attacking another MP, but MPs simply changed their tactics by making virulent attacks on an unidentified politician, and identifying the individual in question (usually the Leader of the Opposition) only at the very end of their statement. By then it was too late for the Speaker to do anything about it.

Many political columnists have called for Members’ Statements to be done away with; however, as Mr. Beardsley points out in his blog piece, backbench MPs have few opportunities to speak about matters of concern to them and their constituents. The UK House of Commons has addressed this with the introduction of Backbench Business debates which allow backbenchers to bring forward issues of interest to them for debate in the main Chamber or in Westminster Hall. It has to be said that these debates are much more interesting and even useful than are Members’ Statements. Others have suggested moving them to a different part of the day. Members’ Statements currently garner attention because they precede Question Period, which is really the only part of sitting day to which the media and the general public pay any attention. If Statements by Members were moved to later in the day, the unfortunate reality is that no one would be around to hear them and there would be little motivation for MPs to use them to carry out attacks on their opponents.

Of course, if MPs are as distressed by the tone of these Statements as they claim to be, they could simply choose to stop misusing them.

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E-petitions with 10,000 signatures will now get a response

In a written ministerial statement, Leader of the House, the Rt. Hon. Andrew Lansley announced that any e-petition which received 10,000 or more signatures would receive a response from the Government:

Once an e-petition has passed 10 000 signatures, departments will provide a  response  that will appear on the website and  be e-mailed to all signatories who opted-in to receive updates on that petition.  Responses will include a statement of the Government’s policy on the issue, and details of any relevant Parliamentary processes that are ongoing.

All e-petitions currently open for signature on the site, which  have more than 10 000 signatures, will receive a response from departments; we expect most of these to be published before the House returns from the Conference recess. Responses to e-petitions that subsequently pass the 10 000 signature threshold will  be published on a rolling basis on the relevant page of http://epetitions.direct.gov.uk

Until now, there has been no formal obligation on government departments to respond directly to e-petitions (or paper petitions for that matter). Petitions which garnered 100,000 or more signatures were referred to the Backbench Business Committee for consideration for debate, but they represented a fraction of the e-petitions on the site.

In the House of Commons, during questions on House Business, the chair of the Backbench Business Committee, Natascha Engel, asked Mr. Lansley if he would work with the Committee to ensure that eventually, every single petition receives some sort of feedback. Lansley replied:

I intend to work with the hon. Lady and Members across the House, including my colleagues in the Government, to ensure that those who give their time and energy to bringing issues before the House feel that they are responded to properly and timeously.

To summarize then, any petition (digital or otherwise) which receives 100,000 signatures or more will be automatically referred to the Backbench Business Committee and eligible for consideration for debate, either in the House of Commons or in Westminster Hall. This does not mean that said petition is guaranteed a debate. The Committee itself cannot schedule such a debate unless the petition is brought forward by an MP as a topic for a Backbench Business debate. Even if this happens, the proposal must meet the criteria for debate, and there is still no guarantee that such a debate will occur. Similarly, an MP can propose having a debate on any petition – regardless of the number of signatures the petition may have received, if he or she believes the subject of the petition is an issue which merits a debate.

As well, any petition which receives 10,000 or more signatures is now guaranteed to receive a response from the relevant government department.

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Why Maher is wrong on Senate Reform

A recent column by Postmedia’s Stephen Maher argues that recent scandals involving senators might spur forward attempts to reform the Upper Chamber. Unfortunately, the arguments he makes rather miss the point.

Maher acknowledges that the Senate does good and important work, and that their committee work in particular is often better than the work of the House of Commons’ committees. He then goes on to say that this doesn’t change the fact that the Senate is an anachronism, unrepresentative and lacks legitimacy “to fulfill their proper functions, as a check on the government of the day” because they are appointed.

The Senate and senators do not lack legitimacy because they are appointed – their legitimacy stems from the Constitution. Judges are also appointed and act as checks on the government of the day, and no one questions their legitimacy. One might prefer that senators (and perhaps even judges) be elected, but that won’t make them more legitimate. It is the Constitution that establishes the legitimacy of the Upper House.

Maher points out that there are no NDP or Bloc Quebecois senators, and therefore that isn’t democratic. True – but that reality is largely because both the NDP and BQ would like to see the Senate abolished and have no interest in having senators appointed from their ranks. Because they oppose the very existence of the Senate, one would have to ask if they’d even bother running candidates if we ever moved to an elected Senate. If the NDP opted to not run candidates in Senate elections because it would rather see the Upper House abolished, wouldn’t that make an elected Senate equally undemocratic?

Maher then writes:

Electing senators to a single nine-year term — as the government has proposed — would give them democratic legitimacy and some degree of independence from the party machine.

I have written previously about my objections to limiting senators (and in the UK, Lords) to serving a single term in office if elected. This may perhaps make them more “legitimate” in the eyes of some, but it certainly does not make them more accountable, which is a big part of democratic legitimacy. It is one thing to elect someone to office, but without the possibility of judging how that person performed by having the opportunity to either re-elect them or kick them out, how is that any better than having them appointed? I think Maher confuses the concepts of “accountability” and “legitimacy” – as I’ve stated at the outset, the Senate’s legitimacy stems from the Constitution. Electing senators doesn’t make them more legitimate. It could, however, make them more accountable – but only if they are allowed to seek re-election. Limiting them to a single term in office fails on that front.

I also don’t understand how Maher can think that elected senators would somehow be more independent of the party machine. They would be running as representatives of a given political party. They, like MPs, would depend on the party for their nomination. They would be, if anything, more beholden to toeing the party line.

Maher then suggests that:

And the prospect of elections might prevent embarrassments, in part because only professional politicians would get elected.

Conservative Patrick Brazeau, who called a reporter a bitch on Twitter, would never get elected.

Neither would Liberal Rod Zimmer, and his odd marriage would have remained a private matter.

Again, these arguments are somewhat baffling. Is Maher suggesting that no embarrassing MP has ever been elected? I certainly can think of a few. And do we really need more professional politicians? Maher suggests that Senator Brazeau would never get elected – I think there are very good chances that Senator Brazeau would indeed do quite well at the polls. He’s young, attractive, and the party could always stick him in a very safe riding, which would guarantee his election. Maher then uses the example of Senator Zimmer and his much younger wife, suggesting that voters would never elect a man married to a much younger woman. My reply to that is: Pierre Elliot Trudeau.

All of the problems Maher mentions could be eliminated simply by changing how senators are appointed. The logical solution is simply to remove the power to appoint senators from the hands of the Prime Minister and turn that over to an independent Selection Commission. Criteria could be drawn up as to what background and characteristics senators should have. Anyone could submit names of persons they would like to nominate as a potential senator. This would have the added benefit of ensuring that people from specific professional backgrounds which are currently under-represented in the House of Commons – such as experts in certain fields such as finance, all things digital, medicine, etc., were appointed.

A Senate filled with persons appointed by an independent commission would also avoid the other problem Maher identifies – that of the regional imbalance. Maher is right to note that this would be far more problematic if we moved to electing Senators. He is also right to point out that it would be virtually impossible to get the Constitutional change necessary to remedy that imbalance. In short, we are pretty much stuck with that regional representation, which only strengthens the argument for the creation of an independent selection committee to deal with appointments to the Senate.

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E-petitions prove to be popular in their first year

A year after the launch of its e-petition site, the UK Government has released some interesting data which gives some idea of the popularity of e-petitions.

Over the past twelve months, 36,000 petitions have been launched, attracting 6.4 million signatures. This of course doesn’t meant that 6.4 million different people have signed them – some people have probably signed multiple petitions. According to the Government, that averages out to 12 people signing a petition every minute. The e-petitions website averages 46,500 visits a day, for a total of over 17 million visits over the course of its first year.

While those numbers are impressive, they are also a bit misleading. It seems that the popularity (or at least, the novelty) of e-petitions is wearing off. The site was at its most popular immediately after it launched, with the highest number of people visiting the site occurring last August. Indeed, a petition on the London riots reached the fabled 100,000 signature threshold within days. Since then, visitation to the site has varied, and visits reached a low in May of this year. Ten petitions surpassed the 100,000 signature mark, and six of these managed that in the site’s first 100 days.

Earlier this year, the Hansard Society released a briefing paper, What’s Next for E-Petitions, which identified four key problems with the Government’s e-petitions:

  1. Ownership and responsibility: The system is controlled by government but the onus to respond is largely placed on the House of Commons.
  2. There is no agreement about the purpose of e-petitions: Are they ‘an easy way to influence government policy’, a ‘fire alarm’ about issues of national concern, a ‘finger in the wind’ to determine the depth of public feeling on a range of issues? Or should they be used to empower the public through greater engagement in the political and parliamentary process, providing for deliberation on the issues of concern?
  3. Public and media expectations of the system are consequently confused: People expect an automatic debate once the signature threshold is passed and react negatively when this does not happen.
  4. There is minimal public engagement with Parliament or government: Beyond the possibility of a debate for those e-petitions that pass the 100,000 signature threshold, little or nothing currently happens with them. And if an e-petition does not achieve the signature threshold but still attracts considerable support (e.g. 99,999 signatures) there is no guarantee of any kind of response at all.

I agree with most of the concerns the Hansard Society has identified. One of the main problems with the e-petitions system as it currently exists is that these are petitions to Government, whereas traditionally, one petitions Parliament. Because they are petitions to a Government department, there is no easy way to link them to an MP, who would normally be the person to bring the matter before Parliament. Yet, as the Hansard Society points out, the onus is on the House of Commons to respond to the petitions.

Points two and three are also spot on. I have in fact previously blogged many times about the degree of confusion which exists over how the e-petitions scheme works and the expectations that a debate is guaranteed to happen if a petition surpasses the 100,000 signature threshold. This is in large part due to very sloppy reporting in the media when the scheme was launched, and unfortunately, has not improved.

I quibble a bit with regards to point 4. First of all, just as attaining 100,000 signatures will not necessarily guarantee that an e-petition will be debated, it is entirely possible for a petition which has received fewer than 100,000 signatures to be debated if an MP presents such a request to the Backbench Business Committee. The BBBCom has made this very clear on their website. As for the issue of responses, it is true that there is no guarantee of a response, but some petitions do indeed receive responses, even though they have fallen short of the mystical 100,000 signature mark. The main problem is that there doesn’t seem to be any coherent or consistent policy across government departments which would oblige them to respond to all petitions – regardless of the number of signatures received.

I do fully agree with the key recommendations put forward by the Hansard Society, however:

  • Ownership of and responsibility for the e-petitions system should rest with the House of Commons and not the executive.
  • The House of Commons should create a Petitions Committee, supported by staff in a Petitions Office, to engage with petitioners, moderate the process and provide a single route for consideration of both paper and online petitions.
  • Members of the Petitions Committee should be elected and have the power to refer petitions to a relevant Select Committee, to commission their own inquiries into specific petitions, to question ministers on the issues and to invite petitioners and others to give evidence at public hearings.

I believe that adopting those recommendations would improve the process significantly.

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Quebec 2012 Political Party Platform Comparisons

As was the case during last year’s federal election in Canada, and the many provincial elections held since, many people are now looking for a site comparing the platforms of the political parties contesting the upcoming Quebec provincial election (4 September 2012).

This blog cannot engage in a discussion of the policies of political parties, either at the provincial or federal level. However, as was the case this spring, it can refer you to other sites that can do that. I will update this list as needed.

Quebec Political Party Platform comparisons/Comparaisons des plateformes électorales des partis politiques du Québec:

Vote Compass – Quebec votes 2012: Vote Compass is an educational tool developed by political scientists. Answer a short series of questions to discover how you fit in the Quebec political landscape.

Boussole électorale Québec 2012: Vote Compass en français.

Other resources/autres ressources:

Petit guide de l’électeur (Voters’ guide – in French only)

Quebec parties and social media (en anglais)

20 affirmations vérifiées (French only)

Twitter hashtags (these appear to be the most common hashtags currently being used): #qc2012, #polqc, #PQ, #PLQ, #QS, #CAQ, #ON,#PV

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A closer look at federal revenues and expenditures by province

Given the keyword search activity on this blog, it is clear that many people are trying to determine how much a given province pays into the federal equalization program and if certain provinces pay more in federal tax than they receive in equalization.

As I explained in my earlier post exploring certain myths and misconceptions about the equalization program, it is close to impossible to determine what percentage of equalization was funded by tax and other revenue from a given province. The reasons for that are primarily twofold.

First of all, as I explained in that other post, the most important thing to remember is that equalization is not funded by the provinces. It is a federal program, paid for out of the Government of Canada’s general revenues. The Government of Canada collects revenues from many sources including, but not limited to: personal income tax, corporate income tax, non-resident income tax, other taxes and duties (e.g. GST), and contributions to social insurance plans, investment income, to name but some.

Second, it is important to understand that the Government of Canada collects these taxes and other sources of revenue in the provinces, not from the provinces. This is a very subtle, but crucial difference. To the Government of Canada, it doesn’t matter where someone lives in Canada – we all pay the same rate of GST, the rate of personal federal income tax we pay depends on our taxable income, not on what province we live in, etc. Someone earning $46,000 a year will pay the same rate of federal income tax whether they live in PEI or Alberta. Someone who buys a new TV costing $899 will pay the same amount of GST whether they live in Winnipeg or St. John’s. The point here is that it isn’t the provinces sending this money to Ottawa, but individuals and businesses.

It is possible to know roughly how much money Ottawa collects from these various sources of revenue by province thanks to the Provincial Economic Accounts (PEA) data produced by Statistics Canada. PEA data are considered to be a comprehensive summary of all federal revenues (taxes and social insurance contributions) and expenditures (direct spending, transfer payments and interest payments on the federal debt) in each province. The one problem with the PEA data reports is that they are produced irregularly, therefore the data is never current. The most recent data available is for 2009. However, what this data does reveal is that the Government of Canada collects more revenues in each equalization-receiving province than that province receives in the form of equalization. Therefore, if one is going to insist that it is the provinces that pay for equalization, then each equalization-receiving province is simply getting some of its own money collected by the federal government refunded to them in the form of equalization.

The sources of revenue used in the PEA data include: direct personal income taxes, corporate and government business taxes, taxes from non-residents, contributions to social insurance plans, taxes on production and imports, other transfers from persons, investment income, and transfers from provincial governments.

Here is the breakdown showing how much total revenue the federal government collected in each province in 2009, as well as the amount of equalization received in fiscal 2008-09 by those provinces which qualified for equalization.

Federal Government Revenues Collected and Equalization Received
by Province 2009 – in $millions

Province

Federal Revenues Collected
$mn

Total Equalization 2008-09
$mn
NL 3,811 0
PEI 739 322
NS 5,034 1,495
NB  3,693 1,584
QC  39,677 8,028
ON  85,239 0
MB  6,453 2,063
SK  7,074 0
AB  35,990 0
BC  27,221 0

As much as many like to complain about the amount of money Quebec (in particular) receives in the form of equalization payments, what we see here is that in 2009, the federal government collected close to $40-billion in revenues in the province of Quebec, and Quebec received $8-billion in equalization. In other words, Quebecers paid $31.6 billion more to the federal government than they received in the form of equalization.

Of course, as many will be quick to point out, equalization is only a small part of the overall transfers from Ottawa to the provinces. If one looks at all federal government expenditures in each province compared to revenue collected, we get much different results. The expenditures included here are: net expenditure on goods and services, transfers to persons (e.g. tax credits, employment insurance, etc.), transfers to business (tax credits, etc.), transfers to provincial governments (which would include equalization, as well as the other federal transfers all the provinces receive), transfers to local governments, interest on public debt.

Federal Government Revenues and Expenditures by Province 2009

Province Federal Revenues Collected $mn Federal Expenditures $mn Difference $mn
NL 3,811 6,393 -2,582
PEI 739 1,942 -1,203
NS 5,034 12,200 -7,166
NB 3,693 8,662 -4,969
QC 39,677 53,318 -13,641
ON 85239 86,300 -1,061
MB 6,453 12,911 -6,458
SK 7,074 8,374 -1,300
AB 35,990 19,997 15,993
BC 27,221 27,232 -11

This table clearly shows that, in 2009 at least, Alberta was the only province in which the revenues collected by the federal government were greater than its expenditures. In all the other provinces, including the other non equalization-receiving provinces (which in 2009 were Newfoundland and Labrador, Ontario, Saskatchewan and BC), the federal government spent more than it collected in revenues in those provinces. What is important to understand when we talk about expenditures is that we are including everything from equalization to the money Ottawa spends on National Defence in the provinces which have military bases, to infrastructure projects, to funding for festivals and other events. These expenditures are not simply handouts and tax credits. Another important point to remember when you look at the above figures – you also need to consider what this represents for each province on a per capita basis. People tend to focus on the overall amount a province receives, but many of these transfers from Ottawa to the provinces are determined on a per capita basis. Equalization is a good example of this – while Quebec gets the most equalization overall, if you look at how that breaks down on a per capita basis, PEI actually ends up with more money from equalization than does Quebec.

The big plus for Alberta, of course, is its oil industry.  The federal government does not explicitly report on non-renewable revenues, partly because it does not receive direct revenues from natural resources but only through general tax revenues, therefore, it is more difficult to identify the percentage of its revenues which are directly attributable to the oil industry. However, it is safe to say that without the oil patch, Alberta would probably be in the same position as all of the other provinces – receiving more money from Ottawa than Ottawa collects in the province.

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Fiscal Federalism: Federal Transfers to Provinces

(See this post for a closer look at federal revenues and expenditures by province.)

When discussing the issue of federal transfers to provinces, most Canadians immediately think of equalization. However, it is important to remember that the Government of Canada provides significant financial support to all provincial and territorial governments on an ongoing basis to assist them in the provision of programs and services. There are four main transfer programs: The Canada Health Transfer (CHT), the Canada Social Transfer (CST), Equalization and Territorial Formula Financing (TFF).

The CHT and CST are federal transfers which support specific policy areas such as health care, post-secondary education, social assistance and social services, early childhood development and childcare. While the CHT and CST are the major federal transfer to the provinces, the equalization program is perhaps the more contentious of the two. This is largely due to the fact that while all provinces receive the CHT and the CST, only some provinces receive equalization, which helps foster a have and have-not status amongst the provinces.

I have discussed the equalization program in some detail here, here and here. What follows is an overview of the CHT and the CST.

The Canada Health Transfer

The Canada Health Transfer (CHT) is the largest major transfer to provinces and territories.  It provides long-term predictable funding for health care, and supports the principles of the Canada Health Act which are: universality; comprehensiveness; portability; accessibility; and, public administration. The transfer will reach $29 billion in 2012-13 and will reach at least $38 billion in 2018-19. Unlike equalization, which is unconditional, the CHT is a block transfer; the funds must be used by provinces and territories for the purposes of “maintaining the national criteria” for publicly provided health care in Canada (as set out in the Canada Health Act). However, there is no way for the federal government to ensure that a province uses the funds for the intended purpose.

CHT transfer payments are made on an equal per capita basis, and include both cash and tax point transfers. Starting in 2014-15, provincial and territorial CHT transfers will be allocated on an equal per capita cash basis only.

Total CHT cash levels are set in legislation up to 2013-14 and grow by 6 per cent annually as a result of the automatic escalator. The Government announced in December 2011 that total CHT cash would keep growing at 6 per cent until 2016-17. Starting in 2017-18, total CHT cash will grow in line with a three-year moving average of nominal Gross Domestic Product, with funding guaranteed to increase by at least 3 per cent per year.

The move to an equal capita cash allocation is part of a long-term plan announced by the Government in Budget 2007 to provide comparable treatment for all Canadians, regardless of where they live. The Government will ensure that the transition is fiscally responsible by implementing a by-province and territory protection that will ensure that no province or territory will receive less than its 2013-14 CHT cash allocation in future years as a result of the move to equal per capita cash.

The Canada Social Transfer

The CST is a federal block transfer to provinces and territories in support of post-secondary education, social assistance and social services, and early childhood development and early learning and childcare. However, as is the case with the CHT, there is no way for the federal government to ensure that a province uses the funds for the intended purpose. The CST cash transfer will be about $11.9 billion in 2012-13.

The CST is calculated on an equal per capita cash basis to reflect the Government’s commitment to ensure that conditional transfers provide equal support for all Canadians. The CST base increased by $687 million in 2007-08 to support the move to equal per capita cash.  In 2008-09, the CST increased by $800 million for post-secondary education and an additional $250 million to support the development of child care spaces.

CST cash levels are currently set in legislation up to 2013-14 and have grown by three per cent annually as a result of an automatic escalator applied since 2009-10. In December 2011, the Government announced that the CST will continue to grow at three per cent annually in 2014-15 and beyond.

Direct Targeted Support

Provinces and territories also benefit from significant investments in targeted areas such as labour market training and wait times reduction.

Download a table showing Federal Support to Provinces and Territories from 2005-06 to 2012-13.

Download a table showing Total Federal Transfers to each province for 2012-13.

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A Short History of Equalization, Part 2

As discussed in Part 1, the equalization program was significantly overhauled in 2007. This was largely because it had become, in the minds of many critics, an overly-complex mishmash of special deals and formulae that benefited some more than others and pleased no one. From 1982 to 2004, in general terms, the program used a complex but consistent formula of an equalization standard that was based on the average of the fiscal capacities of five provinces (British Columbia, Saskatchewan, Manitoba, Ontario and Quebec), using 33 different tax bases (including 100% of natural resource revenue). In 2004, the Fixed Framework was adopted, which replaced that formula with a fixed pool of funds that was set in legislation (at a minimum of $10 billion for 2004–05), which would grow by 3.5% each year. As well, each province was guaranteed that its equalization entitlements would not be lower than the amount announced for 2004–05.

However, many provinces believed the 5-province standard didn’t provide for a realistic national benchmark since not included in that calculation was Alberta and its oil-rich economy. There was growing demand for a return to the 10-province standard that had been used before 1982.

Also, the 2005 Atlantic Accords signed by Nova Scotia and Newfoundland and Labrador, which essentially protected their equalization entitlements from clawback due to rising revenue from their offshore oil and gas industries upset other resource-rich provinces such as Saskatchewan. Neither the federal government nor the provinces were satisfied with the equalization program. The federal government gave the provinces a year to try to reach some sort of consensus on how the program should be improved, but despite many first ministers meetings held throughout 2006, the provinces were unable to achieve any sort of agreement, leaving the federal government free to modify the program, which it did in 2007.

Budget 2007 (tabled in the House of Commons on 19 March 2007) included a new equalization program that was principle-based and formula-driven. Following on the recommendations of the Expert Panel on Equalization in Achieving a National Purpose: Putting Equalization Back on Track, commonly known as the O’Brien Report, the new program includes the re-establishment of a ten-province standard, simplified measures of capacity through a reduction in the number of equalization bases in the formula from 33 to 5, and a more predictable and stable payment system. Equalization payments are also constrained by a fiscal cap so that the total fiscal capacity of a receiving province cannot rise higher than that of the lowest non-receiving province.

Complicating matters somewhat was that the new program included special provisions for Newfoundland and Labrador and Nova Scotia, the two provinces covered by the equalization offset programs under the Atlantic Accords, which compensate for reductions in equalization payments associated with oil and gas revenues. Both provinces were given the option of remaining under the previous Fixed Framework, with an opportunity to permanently opt into the new Equalization program at a future date. However, if either province opted to switch to the new equalization formula, that choice was to be permanent.

What follows is an overview of the major changes to the program.

1. The Equalization Standard

The equalization standard is the level to which equalization payments raise the fiscal capacity of receiving provinces. From 1982 to 2004, the standard was based on the average of the fiscal capacities of five provinces: Ontario, British Columbia, Quebec, Saskatchewan and Manitoba. Alberta’s oil-rich economy and the poorer Atlantic Canada provinces were not included in the calculation.

The equalization standard in the new program reflects the recommendation in Achieving a National Purpose: Putting Equalization Back on Track (the O’Brien report) and is based on the fiscal capacity of all 10 provinces. The overall program cost will be determined by the application of a complex formula, which is detailed in the Budget Implementation Act. Annual volatility associated with a 10-province standard will be addressed through the use of a weighted three-year moving average calculation for payments.

2. Natural Resources Revenue

The treatment of natural resources has long been one of the most contentious issues in the equalization program. This is due in part to the uneven distribution of natural resource wealth across provinces. Debate about natural resources has focused on two key issues—the appropriate inclusion rate and how to measure fiscal capacity. Under the system used from 1982 to 2004, 100% of resource revenue was included. However, provincial resource royalty regimes are quite specific to each province and industry, given the varying amount of economic rent different natural resources will generate. This made it a challenge to use the Representative Tax System (RTS) approach that is used for other tax bases, which simulates how much revenue a province could raise if it levied the national average tax rate using a typical tax system. Often, when average tax rates were applied to these bases, without taking into account differences in the economic rent generated by a given dollar or volume of production, the result is a measure of capacity that is very different from what the provinces can actually collect.

The new program adopted the O’Brien report’s recommendation to exclude 50% of provincial natural resource revenues, and provides provinces with the benefit of full exclusion without reducing payments to any province. The use of actual revenues also permits an important program simplification, as the 14 separate bases used previously can be consolidated into a single natural resource revenue base.

3. The Fiscal Capacity Cap

The new program includes a fiscal capacity cap, as recommended by the O’Brien report, to ensure that equalization payments do not raise a province’s total fiscal capacity above that of any non-receiving province. The definition of total fiscal capacity for the purpose of the cap will include fiscal capacity for non-resource revenue sources, 100% of natural resource revenues and equalization offset payments made pursuant to the Offshore Accords with Newfoundland and Labrador and Nova Scotia.

4. Simplified Measurement of Fiscal Capacity

The measurement of provincial fiscal capacity is simplified based on the recommendation of the O’Brien report. Instead of 33 tax bases, provincial fiscal capacity will be measured using 5 tax bases — personal income tax, business income tax, consumption tax, property tax and natural resource revenues.

5. The Commitment to Exclude Non-Renewable Resource Revenue

The new program allows provinces to receive the greater of their equalization payments under the new formula using 50% resource exclusion and the amounts they would receive under the same formula with full exclusion of natural resource revenues.

6. Nova Scotia and Newfoundland and Labrador

Newfoundland and Labrador and Nova Scotia were given the option of opting into the new program, or remaining with the Fixed Framework and the Atlantic Accord. If they opted for the new program, they forfeited the benefits of the Atlantic Accord. However, even if they opted to remain in the old system, the Atlantic Accord was still compromised because the fiscal cap introduced in the new program applies to all provinces, including Newfoundland and Labrador and Nova Scotia even if they aren’t part of the new system (section S.3.4. of the Budget Implementation Act).

Summary

Provincial equalization payments are now calculated using a 10-province standard based on 5 tax bases. A province receives the greater amount using 50% resource exclusion or full exclusion. A fiscal capacity cap ensures that equalization payments will not raise a province’s total fiscal capacity above that of the lowest non-receiving province. Nova Scotia and Newfoundland and Labrador were given the option of remaining with the old Fixed Framework system and retaining most of the benefits of the Atlantic Accords, or opting into the new system and losing the Atlantic Accords. Nova Scotia opted for the new system. Newfoundland and Labrador no longer receives equalization payments.

The new equalization program, while addressing some of the issues and problems that had arisen over the years, also introduced a new round of issues and complaints, which will be discussed in a future post.

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A Short History of Equalization, part 1: 1930-2006

The Rowell-Sirois Commission

In the 1930s, after several provinces had gone bankrupt trying to cope with effects of the Great Depression, the federal government established a Royal Commission on Dominion-Provincial relations (the Rowell-Sirois Commission). In its 1940 report, the Commission concluded that the Constitution did not give the provinces sufficient taxing power to meet their constitutional responsibilities across the social policy areas for which they were responsible (outlined in sections 92 and 93 of the Constitution Act, 1867). The Report of the Rowell-Sirois Commission concluded that while the Depression certainly did make matters worse for the provinces fiscally-speaking, the difficulties the provinces and territories faced were inherently systemic in nature. When they established the Canadian federation, the founding fathers could not have anticipated how costs in these areas would skyrocket. For example, between 1874 and 1937, the costs associated with running education and public welfare systems rose from $4 billion to $360 billion (Royal Commission on Dominion-Provincial Relations, pp. 244-245, in Equalization: Its Contribution to Canada’s Economic and Fiscal Progress, p. 180).

In exploring the notion of making fundamental changes that would better position the provinces and territories vis-à-vis their funding commitments as outlined in the Constitution Act, the Rowell-Sirois report considered and rejected any constitutional changes that would alter the division of powers, or give the provinces greater fiscal capacity. Instead, the Commission recommended centralizing taxation powers with the federal government, and the provision of a guaranteed annual income to the provinces and territories by the federal government.

The Commission’s report included three key recommendations:

  • The federal government take over control of unemployment insurance and old age pensions;
  • The federal government take over the collection of all major taxes, including personal income tax and succession duties (taxes placed on property or assets of an individual following their death, generally paid by the heirs to the estate); and,
  • The federal government should compensate the provinces for the lost tax revenue (and the removal of previous subsidies), by paying annual “National Administration Grants.” These Grants would help provinces “provide adequate services (at the average Canadian standard) without excessive taxation (on the average Canadian basis).” Essentially, these were the foundations of what we now know today as equalization.

Tax Rental Agreements

In 1940, the provinces agreed to a constitutional amendment giving the federal government control of unemployment insurance. The federal government did not, however, adopt the other principal recommendations of the Rowell-Sirois Commission. The fact is that provincial governments refused to give up their taxation powers, even with the promise of extra funding from the federal government. This resulted in a new course of action, with the federal government entering into ‘tax rental agreements’ with the provinces. These agreements meant that each province ‘rented out’ its right to collect taxes to the federal government. Under this arrangement:

  • The federal government took over the collection of personal income taxes, corporate income taxes, and succession duties from participating provinces;
  • The federal government paid annual compensation to the provinces to make up for the income each province lost by not collecting these taxes;
  • The terms of the tax rental agreements were renegotiated every five years; and,
  • Federal compensation was unconditional, meaning that provinces could spend the money as they saw fit.

First implemented during World War II, the tax rental agreement arrangement between the two levels of government ran until 1956. Throughout this period, several provinces remained uncomfortable with the idea of ceding taxation powers to the federal government, even as part of a temporary rental agreement. Ontario did not participate until 1952, when the federal government changed the way payments were calculated, and Quebec never participated in the tax rental agreements.

Initially, the principle of equalization was not found in the tax rental agreements. Indeed, the arrangements were designed solely to compensate a province for lost tax revenues, not to increase the revenue of the provinces to a higher level based on a national norm. In 1957, however, poorer provinces whose per capita tax revenues fell below a national standard found themselves eligible for additional federal compensation. This marked the beginnings of ‘equalization’ and its implementation. In 1967, provinces resumed collecting their own taxes.

The Birth of Equalization

In 1957 the equalization program included only three revenue sources: personal income taxes, corporate income taxes, and succession duties. These revenue sources were equalized to a high standard, namely, the weighted average of the per capita revenue of the two richest provinces (at the time Ontario and British Columbia), based on tax rates determined by the federal government.

In 1962, 50% of natural resource revenues were added to the list of revenues to be equalized; the same year, the standard was changed to the average of the ten provinces. The inclusion of natural resource revenues disqualified Alberta and British Columbia from receiving equalization payments. After the 1963 federal election, the incoming Liberal government changed the formula and returned to the weighted average of the top two provinces. Resource revenues were no longer included. However, 50% of natural resource revenues were deducted from the equalization payments, once again eliminating Alberta and British Columbia as recipient provinces.

The formula for determining equalization payments was overhauled yet again in 1967 when the fiscal arrangements were renewed for another five years. First, there was a major expansion, from four to sixteen, in the number of revenue sources included in the formula. Second, the revenues to be equalized were the actual revenues collected by each province. Third, the standard was changed once again from the average of Ontario and British Columbia to the average of the ten provinces.

Between 1972 and 1981, a number of ad hoc adjustments to the formula were introduced, largely for the purpose of dealing with volatile oil revenues. For example, soaring energy prices from 1973 put enormous pressure on the cost of equalization and placed Ontario as a recipient province from 1977-82. In 1973 and 1974 some ad hoc measures were taken to dampen the impact of energy on equalization.Then in 1977 only 50 per cent of resource revenues were made eligible.  But still Ontario qualified. Ontario’s economy was extremely hard hit by the recession of the early 1980s brought on in good part in the wake of the energy price boom. Ontario was only retroactively excluded from receiving payments through the “personal income override” whereby no province could be eligible if its per capita income exceeded the national average. With increasing oil prices raising equalization payments, this was creating a fiscal problem for the federal government. It was time to rethink the program, and the time for action came in 1982, when the fiscal arrangements were renegotiated.

The revisions to the equalization formula followed the format already employed in 1967. First, the list of revenues to be equalized was substantially expanded to thirty. Through this broad coverage of provincial revenues, the equalization formula was based on a “representative tax system” (RTS). Second, since it was based strictly on relative revenue capacity, the equalization formula implicitly assumed that the per capita provincial and local government expenditures financed by these federal transfers were equal across the country. Third, the standard was further modified by equalizing the per capita yields of the provincial revenues to the average of five provinces: Ontario, British Columbia, Saskatchewan, Quebec, and Manitoba, what became known as the five-province standard. The exclusion of Alberta from the standard eliminated the problem created by the inclusion of natural resources. The Atlantic provinces, which had no oil revenue at that time, were excluded as a counterbalance to the exclusion of Alberta; a wealthy province was offset by a less affluent region with a – at the time – comparable population. This formula, with some adjustments made over time, served as the foundation for equalization payments from 1982 until the 2005-06 fiscal year.

It should be noted that also in 1982, on March 2, the Government of Canada and the Government of Nova Scotia signed the Agreement on Offshore Oil and Gas Resource Management and Revenue Sharing. While the Agreement as such is not part of the equalization program, it is still important to mention it at this point since it would eventually have implications for the equalization program. The Agreement stemmed from the discovery of a large deposit of natural gas, known as the Venture well, near Sable Island offshore of Nova Scotia. The agreement provided that Nova Scotia’s share of the offshore revenues “shall equal 100 per cent, provided in that year the Nova Scotia government’s per capita fiscal capacity, including its share of off­shore revenues, does not exceed 110 per cent of the national average per capita fis­cal capacity plus 2 percentage points for every percentage point by which Nova Scotia’s average annual unemployment rate exceeds the national average annual unemployment rate.” What this meant was simply that the province would keep all the revenue it received from the development of this offshore resource until such time as its economy exceeded the national provincial average.

Most notably, however, in 1982, Canada enshrined the principle of equalization in the Constitution. The commitment to equalization is found in Section 36 (2) of the Constitution Act, 1982, which states:

Parliament and the Government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public service at reasonably comparable levels of taxation.

1982 to present

The Atlantic Accords

As mentioned briefly above, in March 1982, the governments of Canada and Nova Scotia signed the Agreement on Offshore Oil and Gas Resource Management and Revenue Sharing which was drafted to allow Nova Scotia to keep 100% of its revenue from expected offshore natural gas developments following their discovery in 1979. Oil had also been discovered off the coast of Newfoundland in 1979 – the Hibernia field. In 1984, the Supreme Court of Canada declared that the oil and gas resources off the Newfoundland coast belong to the jurisdiction of the federal government. In the wake of the decision, the federal government initiated discussions with Newfoundland and Labrador and Nova Scotia in an effort to develop some guidelines to govern the development of the offshore petroleum industry. Taken together, these guidelines or agreements are loosely referred to as the Atlantic Accords. The purpose of the Accords, as they were developed, was to protect the two provinces from losing any revenues gained from petroleum revenues at the expense of equalization payments, until each of the provinces was sufficiently able to establish its respective offshore petroleum industries.

The reason for this protection was because one of the key issues that arose in the context of factoring revenues from natural resources into the equalization equation. When an equalization-receiving province realized big gains in natural resource revenues, it was then penalized through a reduction of its equalization payments, commonly referred to as equalization clawback. As a province’s revenue from natural resources (or any other source) increased, that province saw a comparable reduction in the amount of equalization it received. The Atlantic Accords provided for time-limited, partial compensation for any reductions in equalization payments to these two provinces as a result of increasing revenues from offshore developments. In effect, the Accords meant that the two provinces would receive separate offsetting payments from the federal government if increasing revenues from offshore developments led to decreases in their equalization payments. However, this was not what occurred, as will be discussed further on.

1992 Charlottetown Accord

Constitutional experts have argued that Section 36 of the Constitution Act, 1982, does not clearly spell out the federal government’s responsibilities regarding equalization; in fact, it has been suggested that the stipulation in the Act would be unlikely to survive a legal challenge.

Interestingly enough the proposed 1992 constitutional amendment (better known as the Charlottetown Accord), would have resulted in an altered Section 36, one that would have clearly committed the federal government to equalization – not only in principle but in practise. Further to this, the Charlottetown Accord committed the federal government to consulting with provincial governments on a meaningful basis before making any alterations to the legislation governing equalization payments. The Charlottetown Accord, however, died after 54 percent of Canadians voted it down in a national referendum that same year.

The Generic Solution

The generic solution, introduced in 1994, has been applied to the provinces of Newfoundland and Labrador (offshore revenues), Nova Scotia (offshore revenues), Quebec (asbestos), and Saskatchewan (potash). Under the generic solution, provinces lose only 70% of a major increase in fiscal capacity resulting from the development of non-renewable natural resources. Previously, for every $1.00 increase in a province’s fiscal capacity, its equalization payments decrease by $1.00. Under the generic solution, in very specific circumstances, for every $1.00 increase in a province’s fiscal capacity, its equalization payments are reduced by only 70 cents. This, of course, completely undermined the intent of the Atlantic Accords.

The Fixed Framework

Before 2004, equalization payments were driven by a complex but consistent formula. The formula determined both the overall amount the equalization program would pay out to receiving provinces and the amount each province would receive.

The formula measured the per capita fiscal capacity of provinces using the Representative Tax System (RTS). The RTS measured the amount of money provinces could raise from 33 different tax bases if they taxed those bases at national average tax rates. A province’s fiscal capacity on each of the 33 bases was then summed up and compared to a five-province average standard. If the formula determined that a province’s overall fiscal capacity across all of the tax bases combined was below the standard, that province received an equalization grant to bring it up to the common standard.

With the formula still in place, equalization payments had started to decline from their highest peak of $10.9 billion in 2000–01 to $8.9 billion in 2004–05. This was due to the combined impact of a slow-down in Ontario’s economy and tax reductions in several provinces. As well, since economic performance data on each province was updated constantly – several times a year, and since Ottawa used population estimates rather than actual population figures when doing its long-range planning, provinces occasionally either received adjustments (more money than previously announced) or had to repay over-payments. This uncertainty sometimes played havoc with a province’s fiscal planning, since money for which  it had budgeted sometimes did not materialise, or it found itself having to repay the federal government for a previous over-payment.

At the same time, the financial position of the federal government had improved dramatically and resulted not only in balanced budgets but also significant surpluses. A number of federal transfer programs had been reduced by a substantial amount in the mid 1990s and the provinces were demanding that Ottawa increase equalization as well as other transfers, particularly in the case of health care.

In response to that pressure, a new framework for both equalization and territorial funding was announced at a First Ministers’ Meeting in October 2004. Called the Fixed Framework, it featured the following elements:

  • The formula was no longer used to determine the overall amount of funding to be allocated for equalization and territorial funding. Instead, a fixed pool of funds was set in legislation.
  • The pool of funds to be available for equalization was set at a minimum of $10 billion for 2004–05, effectively stopping the decline in equalization payments.
  • Each province was guaranteed that its equalization entitlements would not be lower than the amount announced for 2004–05 and included in the 2004 federal budget.
  • A guaranteed growth rate of 3.5 percent per year was set in legislation, ensuring that the overall pool of funds available for equalization would continue to increase over 10 years.
  • Fixed shares for receiving provinces were set out in advance for the first two years of the Fixed Framework, replacing the normal operation of the equalization formula with a negotiated allocation.
  • The allocation in the Fixed Framework was legislated on an interim basis pending the outcomes of the work of a special Panel set up to review the equalization program and the development of a new allocation method.
  • On November 8, 2005, the federal government announced that the same approach would be extended to determine equalization entitlements for 2006–07.

There were some important implications of this new framework.

The interim allocation did not have a common standard to which all provinces were compared and raised. Instead, the standard varied for individual provinces depending on their former shares (over the last three years) of total equalization funding, regardless of changes in their relative fiscal capacity. As a result, some receiving provinces received more and others less than they would have if the previous equalization formula had been applied.

  • For example, in 2005–06, with the exception of Quebec, the per capita fiscal capacities of the receiving provinces were higher under the Fixed Framework than they would have been under the former five-province standard.
  • The Fixed Framework resulted in Newfoundland and Labrador having a higher fiscal capacity after equalization than Ontario (even without the Offshore Accords being taken into account).
  • Because the total equalization pool was fixed in advance, changes in one province’s fiscal capacity, up or down, would have a direct impact on the amounts other provinces received.
  • The Fixed Framework guaranteed a known and growing amount of funds for equalization. In this way, it improved stability and predictability, particularly for the federal government. On the other hand, the shares each province received under the Fixed Framework were not necessarily any more stable or predictable than they were in the past.

The 2005 Atlantic Accords

In February 2005, new Offshore Accords (Arrangement between the Government of Canada and the Government of Newfoundland and Labrador on Offshore Revenues, 2005 and Arrangement between the Government of Canada and the Government of Nova Scotia on Offshore Revenues, 2005) were signed with the two provinces. Those Accords extended protection to 2012 and provided full compensation for any reductions in equalization payments as a result of increased revenues from offshore developments. Generally speaking, in order to qualify for the full offset payments (made outside of the equalization program) and a potential extension to 2020, the two provinces would have to continue to qualify for equalization and continue to have a higher-than-average per capita net debt burden. Both provinces received guaranteed advance payments of a part of the benefits they were expected to receive over the first eight-year term of the 2005 Accords.

The impact of these Accords on the equalization program was controversial. Both Newfoundland and Labrador and Nova Scotia contend that the Accords have nothing to do with equalization and are intended to support economic development and debt reduction in the two provinces. On the other hand, others have argued that these so-called “side deals” have broken the fundamental, underlying nature of the equalization program and opened the door to calls for similar deals with other provinces.

It was against this backdrop that the federal government set out to reorganize the federal equalization program, as will be discussed in Part 2.

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