Scrap equalization and replace it with something better - Financial Post
For too long governments have had to rely on an unfair and distorting program that few Canadians understand
"Ironically, Newfoundland, with per capita personal income below the national average, does not get equalization due to royalties it collects from Hibernia. Yet, Quebec is able to collect equalization as half of its hydroelectric profits are excluded, while underpricing electricity to encourage businesses to locate there.
Nor does equalization do a good job of sharing risks. Given that payments are capped by three-year averages in GDP growth rates to provide stability, it is less responsive to major shifts in the economy such as those experienced since 2015. Further, those provinces that don’t get equalization receive no help if their economy turns sour (which is why recently stressed provinces like Alberta and Saskatchewan are pushing for a better stabilization program).
In principle, equalization should reduce the fiscal incentive for people and businesses to move to those jurisdictions that offer cheaper services (due to economies of scale) or have access to resource revenues that others don’t. However, it is so poorly designed, it instead undermines productivity by keeping people in slow-growth provinces.
Most harmful, though, is that the equalization program penalizes provinces that try to grow their economies either through resource development or better economic policies. When their per capita tax base gets larger (say by reducing corporate income tax rates or developing mineral deposits), they lose equalization payments. This also means that equalization becomes an incentive to recipient governments to raise taxes to spend on pet programs."