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Encyclopedia > Equalization payments

Equalization payments are cash payments made in some federal systems of government from the federal government to state or provincial governments with the objective of offsetting differences in available revenue or in the cost of providing services.

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Canada

In Canada, the federal government makes payments to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity" — their ability to generate tax revenues. Ontario is the only province to have never received equalization payments. Canada's territories are not included in the Equalization program - the federal government addresses territorial fiscal needs through the Territorial Formula Financing (TFF) program. Canada consists of ten provinces and three territories. ... Motto: Ut Incepit Fidelis Sic Permanet (Latin: Loyal she began, loyal she remains) Capital Toronto Largest city Toronto Official languages English Government - Lieutenant-Governor James K. Bartleman - Premier Dalton McGuinty (Liberal) Federal representation in Canadian Parliament - House seats 106 - Senate seats 24 Confederation July 1, 1867 (1st) Area Ranked 4th... Territorial Formula Financing (TFF) is an annual unconditional transfer payment from Canadas federal government to the three territorial governments of Yukon, the Northwest Territories, and Nunavut to support the provision of public services. ...


Equalization payments are based on a formula that calculates the difference between the per capita revenue yield that a particular province would obtain using average tax rates and the national average per capita revenue yield at average tax rates. The current formula considers five major revenue sources (see below). The objective of the program is to ensure that all provinces have access to per capita revenues equal to the potential average of all ten provinces. The formula is based solely on revenues and does not consider the cost of providing services or the expenditure need of the provinces.


Equalization payments do not involve wealthy provinces making payments to poor provinces; rather, the funds for equalization payments come from the federal treasury. Thus a wealthy citizen in New Brunswick, a "have not" province, pays more into equalization than a poorer citizen in Ontario, a "have" province. Because of Ontario's greater population and wealth, however, the citizens of Ontario as a whole do pay more federal taxes and thus their total contribution to equalization is greater than that of New Brunswick.


Equalization payments are one example of what are often referred to in Canada as transfer payments, a term used in other jurisdictions to refer to cash payments to individuals (see transfer payments). Unlike conditional transfer payments such as the Canada Health Transfer or the Canada Social Transfer, the money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee "reasonably comparable levels" of health care, education, and welfare in all the provinces. The definition of "reasonably comparable levels", however, has been the subject of considerable debate. In political science and economics, a transfer payment is a payment of money from a government or any other organization to an individual, a group or another order of government for which no good or service is directly required in return. ... The Canada Health Transfer is the Canadian governments transfer payment programmme in support of the health systems of the provinces and territories of Canada. ... The Canada Social Transfer is the Canadian governments transfer payment programme in support of post-secondary education, social assistance and social services, including early childhood development and early learning and childcare. ... Health care or healthcare is the prevention, treatment, and management of illness and the preservation of mental and physical well-being through the services offered by the medical, nursing, and allied health professions. ... Welfare is financial assistance paid by taxpayers to groups of people who are unable to support themselves, and determined to be able to function more effectively with financial assistance. ...


In 2006-07, the total amount of the program was roughly 11.7 billion Canadian dollars. It has been suggested that this article or section be merged with Loonie. ...


Traditionally, the payments have been seen as a way of promoting national unity. Quebec, the most populous of the "have not" provinces, is by far the largest single recipient of the payments. When BC and Saskatchewan are removed, approximately 70% of the 10 million Canadians residing in "have not" provinces are in Quebec. However, recent negotiations surrounding the renewal of the program have created considerable tension among provinces. Due to the zero-sum nature of the formula, increases in entitlements for some provinces necessarily lead to decreases for others. Motto: Je me souviens (French: I remember) Capital Quebec City Largest city Montreal Official languages French Government - Lieutenant-Governor Lise Thibault - Premier Jean Charest (PLQ) Federal representation in Canadian Parliament - House seats 75 - Senate seats 24 Confederation July 1, 1867 (1st) Area Ranked 2nd - Total 1,542,056 km² - Water...


Regional fiscal disparities in Canada

There are significant differences in the provinces in terms of size, geography, population, and economic activity. While there has been considerable convergence in provincial Gross Domestic Product per person and personal incomes among the regions over the last fifty years, the gap between the most and the least well-off provinces continues to be a primary economic concern.



Gross Domestic Product per capita by province - 2005
($ per capita)

  NL PE NS NB QC ON MB SK AB BC Average
GDP per capita $41,802 $30,166 $33,484 $32,152 $36,009 $42,812 $35,500 $43,330 $66,644 $39,658 $42,374
Ratio to mean 98.6 71.2 79.0 75.9 85.0 101.0 83.8 102.3 157.3 93.6 100.0

Source: Statistics Canada Motto: Quaerite Prime Regnum Dei (Latin: Seek ye first the kingdom of God) Capital St. ... Motto: i lost P.E.I. again mom:well, look under the couch Capital Charlottetown Largest city Charlottetown Official languages English Government - Lieutenant-Governor Barbara Oliver Hagerman - Premier Pat Binns (PC) Federal representation in Canadian Parliament - House seats 4 - Senate seats 4 Confederation July 1, 1873 (7th) Area Ranked 13th... Motto: Munit Haec et Altera Vincit(Latin) One defends and the other conquers Capital Halifax Largest city Halifax Regional Municipality Official languages English Government - Lieutenant-Governor Mayann E. Francis - Premier Rodney MacDonald (PC) Federal representation in Canadian Parliament - House seats 11 - Senate seats 10 Confederation July 1, 1867 (1st) Area... Motto: Spem reduxit (Hope restored) Capital Fredericton Largest city Saint John Official languages English, French (the only constitutionally bilingual province in the country) Government - Lieutenant-Governor Herménégilde Chiasson - Premier Shawn Graham (Liberal) Federal representation in Canadian Parliament - House seats 10 - Senate seats 10 Confederation July 1, 1867 (1st... Motto: Je me souviens (French: I remember) Capital Quebec City Largest city Montreal Official languages French Government - Lieutenant-Governor Lise Thibault - Premier Jean Charest (PLQ) Federal representation in Canadian Parliament - House seats 75 - Senate seats 24 Confederation July 1, 1867 (1st) Area Ranked 2nd - Total 1,542,056 km² - Water... Motto: Ut Incepit Fidelis Sic Permanet (Latin: Loyal she began, loyal she remains) Capital Toronto Largest city Toronto Official languages English Government - Lieutenant-Governor James K. Bartleman - Premier Dalton McGuinty (Liberal) Federal representation in Canadian Parliament - House seats 106 - Senate seats 24 Confederation July 1, 1867 (1st) Area Ranked 4th... Motto: Gloriosus et Liber (Latin: Glorious and free) Capital Winnipeg Largest city Winnipeg Official languages English and French, per mandate of the Constitution Act 1982 Government - Lieutenant-Governor John Harvard - Premier Gary Doer (NDP) Federal representation in Canadian Parliament - House seats 14 - Senate seats 6 Confederation July 15, 1870 (5th... Motto: Multis E Gentibus Vires (Latin: The Strength of Many Peoples) Capital Regina Largest city Saskatoon Official languages English Government - Lieutenant-Governor Gordon Barnhart - Premier Lorne Calvert (NDP) Federal representation in Canadian Parliament - House seats 14 - Senate seats 6 Confederation September 1, 1905 (Split from NWT) (9th (province)) Area Ranked... Motto: Fortis et liber(Latin) Strong and free Capital Edmonton Largest city Calgary Official languages English (see below) Government - Lieutenant-Governor Norman Kwong - Premier Ed Stelmach (PC) Federal representation in Canadian Parliament - House seats 28 - Senate seats 6 Confederation September 1, 1905 (split from Northwest Territories) (8th [Province]) Area Ranked... Motto: Splendor Sine Occasu (Latin: Splendour without diminishment) Capital Victoria Largest city Vancouver Official languages English Government - Lieutenant-Governor Iona Campagnolo - Premier Gordon Campbell (BC Liberal) Federal representation in Canadian Parliament - House seats 36 - Senate seats 6 Confederation July 20, 1871 (6th province) Area Ranked 4th - Total 944,735 km...


Equalization payments in Canada – 2007-08

($ millions)

  NL PE NS NB QC MB SK BC Total
Equalization 477 294 1,465 1,477 7,160 1,826 226 - 12,925
Per capita $938 $2,118 $1,564 $1,968 $931 $1,543 $230 $0 -

Notes:


Totals may not add due to rounding.


Source: Finance Canada, accessed 19 March 2007


Sources of fiscal capacity

The fiscal capacity of the provinces is determined by measuring their revenue from five general sources. Those revenue categories are:

  • Personal income taxes
  • Business income taxes
  • Consumption taxes
  • Natural resources
  • Property taxes and miscellaneous

History

The basics of equalization payments have been around since Canadian Confederation when the federal government had most of the taxation powers. The federal government would make transfer payments to the provinces to cover their needs. There was no obligation that these transfer payments had to reflect the amount collected in each province and thus wealth was always redistributed. We dont have an article called Canadian-confederation Start this article Search for Canadian-confederation in. ... In political science and economics, a transfer payment is a payment of money from a government or any other organization to an individual, a group or another order of government for which no good or service is directly required in return. ...


A formal system of equalization payments was first introduced in 1957. The idea was based on the proposals of American economist James M. Buchanan and they were introduced mainly to help the struggling Atlantic provinces who were seeing low rates of growth and high rate of emigration to central Canada. 1957 (MCMLVII) was a common year starting on Tuesday of the Gregorian calendar. ... Alan Greenspan, former chairman, United States Federal Reserve. ... For other persons named James Buchanan, see James Buchanan (disambiguation). ... Atlantic Canada consists of the four Canadian provinces on the Atlantic Ocean: Newfoundland and Labrador, New Brunswick, Nova Scotia, and Prince Edward Island. ...


The original program had the goal of giving each province the same per capita revenue as the two wealthiest provinces, Ontario and British Columbia, in three tax bases: personal income taxes, corporate income taxes and succession duties (inheritance taxes). Five years later, 50 per cent of natural resource revenues were included as the fourth tax base. At the same time, however, the standard of the two wealthiest provinces was lowered to the national average. In 1967 the system was redesigned to work with every government revenue scheme with the exception of energy, this gave Canada by far the world's most generous system of equalization payments. 1967 (MCMLXVII) was a common year starting on Sunday of the Gregorian calendar (the link is to a full 1967 calendar). ...


The rise in energy prices and the resulting increase in provincial natural resource royalties in the late 1970s created several problems for the Equalization formula. The need for amendments to the formula became clear when the traditional "have" province of Ontario qualified for equalization payments in 1978. This result went against the spirit of the system and would have led to substantial costs for the federal government; it was agreed that Ontario should be excluded from receiving payments. In 1982, the equalization standard was shifted from the national average to the average of the five "representative" provinces: British Columbia, Saskatchewan, Manitoba, Ontario, and Quebec.


The Canada Act 1982, which amended the constitution, included the rights of the poorer provinces to equalization payments. Subsection 36(2) of the Constitution Act, 1982 states that "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 services at reasonably comparable levels of taxation." It is unlikely that this provision will be amended. Wikisource has original text related to this article: Canada Act 1982 The Canada Act 1982 (1982 c. ... The Constitution Act, 1982 (Schedule B of the Canada Act 1982 (U.K.)) is a part of the Constitution of Canada. ...


In 2004, the federal government and the provinces agreed to suspend the traditional formula that determined payment amounts and move to fixed funding levels, which were scheduled to grow at a fixed rate - regardless of the economic performance of the provinces. In 2007, based on the recommendations of a federal Expert Panel, the program was returned to formula-driven calculations and enhanced by moving to a standard based on the national average.


Criticisms

Equalization payments have mostly been criticized by leaders of the wealthy provinces. The Premiers of oil-rich Alberta and of Ontario, with its large manufacturing base, have criticized the drain on local finances. However, money is collected for equalization payments by federal taxation and is collected regardless of whether or not the province is a 'have' or 'have not' province. The difference is whether the provincial government receives money from the federal treasury. Thus, citizens in Alberta and Ontario are not necessarily taxed more, though their provincial governments do receive less. (However, 'the provincial governments receiving less' often results in the raising of provincial taxes. For example the Ontario Health Insurance Premium introduced during 2004 on account of the province 'receiving less' in federal transfers).


Normally, under the equalization scheme, equalization payments go down a dollar for every dollar increase in a province's treasury. However, if a province loses a dollar for every dollar it makes from the sale of its energy resources, there is less incentive to develop those reserves.


Australia

Australia is considered to be the first federation to introduce a formal system of equalisation. The system was implemented in 1933 based on the recommendations of the Commonwealth Grants Commission. In Australia horizontal fiscal equalisation operates to compensate States which, due to influences beyond their control (e.g. a small population spread over a large area) have a greater need for government spending or a lower capacity to raise revenue. Equalization payments are cash payments made in some federal systems of government from the federal government to state or provincial governments with the objective of offsetting differences in available revenue or in the cost of providing services. ... Australia, having a federal system of government, is divided into states and territories. ...


Belgium

The only mechanism designed to reduce fiscal disparities between the federated entities in Belgium is a program called the National Solidarity Intervention or Intervention de solidarité nationale (ISN). Under the program, those Regions in which the average per capita yield of personal income tax falls below the national average are entitled to an unconditional transfer from the federal government.


The amount paid to each Region reflects the gap in the yield of personal income tax in the Region in relation to the national average, weighted by an indexing factor and a factor pertaining to the amounts received by beneficiaries when the ISN was introduced. Due to their inferior fiscal capacity, the Brussels and Walloon regions are recipients of ISN transfers. The region of Flanders does not receive funding under this program as its fiscal capacity lies above the national average.


Germany

The German system of equalisation consists of three parts: (i) revenue-sharing of the Value Added Tax (VAT); (ii) Landerfinanzausgleich (LFA) or horizontal fiscal equalisation; and (iii) Bundeserganzungszuweisungen (BEZ).


Switzerland

The first elements of an equalization system in Switzerland were introduced in 1938 in the form of conditional grants, which varied according to the tax capacity of the cantons. In 1958, a constitutional article gave the federal government the authority to equalize fiscal disparities.


United States

Despite considerable differences in the abilities of states to generate revenues, there is no federal program in the United States that aims explicitly at reducing the disparities in state fiscal capacity. Certain federal-state transfers, however, do contain equalizing elements. For instance, some formula grants consider a state's personal income in determining levels of federal support.


Some grant programs are consistently equalizing, such as education programs aimed at the disadvantaged, food and nutrition programs and, for the most part, Medicaid. In aggregate, however, U.S. federal grants do little to reduce horizontal fiscal imbalances. With the responsibility for public goods and services scattered over three levels of government (federal, state, and local), the U.S. system of intergovernmental transfers responds foremost to the needs determined by the various grant programs. Medicaid is the US health insurance program for individuals and families with low incomes and resources. ...


External links

Canada

Australia

  • Commonwealth Grants Commission

  Results from FactBites:
 
Budget Plan, Annex 6 (Budget 2004) (3062 words)
The federal government makes equalization payments to less prosperous provinces to allow them to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation.
Equalization payments are determined by a formula that is established in legislation.
Equalization payments are made to the provinces with revenue-raising capacity below the standard to bring their total fiscal capacity, including equalization payments, fully up to the standard.
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