From the Fraser Institute

By Tegan Hill and Joel Emes

As the Alberta Next Panel continues discussions on how to assert the province’s role in the federation, equalization remains a key issue. Among separatists in the province, a striking 88 per cent support ending equalization despite it being a constitutional requirement. But all Canadians should demand equalization reform. The program conceptually and practically creates real disincentives for economic growth, which is key to improving living standards.

First, a bit of background.

The goal of equalization is to ensure that each province can deliver reasonably comparable public services at reasonably comparable tax rates. To determine which provinces receive equalization payments, the equalization formula applies a hypothetical national average tax rate to different sources of revenue (e.g. personal income and business income) to calculate how much revenue a province could generate. In theory, provinces that would raise less revenue than the national average (on a per-person basis) receive equalization, while province’s that would raise more than the national average do not. Ottawa collects taxes from Canadians across the country then redistributes money to these “have not” provinces through equalization.

This year, Ontario, Quebec, Manitoba and all of Atlantic Canada will receive a share of the $26.2 billion in equalization spending. Alberta, British Columbia and Saskatchewan—calculated to have a higher-than-average ability to raise revenue—will not receive payments.

Of course, equalization has long been a contentious issue for contributing provinces including Alberta. But the program also causes problems for recipient or “have not” provinces that may fall into a welfare trap. Again, according to the principle of equalization, as a province’s economic fortunes improve and its ability to raise revenues increases, its equalization payments should decline or even end.

Consequently, the program may disincentivize provinces from improving their economies. Take, for example, natural resource development. In addition to applying a hypothetical national average tax rate to different sources of provincial revenue, the equalization formula measures actual real-world natural resource revenues. That means that what any provincial government receives in natural resource revenue (e.g. oil and hydro royalties) directly affects whether or not it will receive equalization—and how much it will receive.

According to a 2020 study, if a province receiving equalization chose to increase its natural resource revenues by 10 per cent, up to 97 per cent of that new revenue could be offset by reductions in equalization.

This has real implications. In 2018, for instance, the Quebec government banned shale gas fracking and tightened rules for oil and gas drilling, despite the existence of up to 36 trillion cubic feet of recoverable natural gas in the Saint Lawrence Valley, with an estimated worth of between $68 billion and $186 billion. Then in 2022, the Quebec government banned new oil and gas development. While many factors likely played into this decision, equalization “claw-backs” create a disincentive for resource development in recipient provinces. At the same time, provinces that generally develop their resources—including Alberta—are effectively punished and do not receive equalization.

The current formula also encourages recipient provinces to raise tax rates. Recall, the formula calculates how much money each province could hypothetically generate if they all applied a national average tax structure. Raising personal or business tax rates would raise the national average used in the formula, that “have not” provinces are topped up to, which can lead to a higher equalization payment. At the same time, higher tax rates can cause a decline in a province’s tax base (i.e. the amount of income subject to taxes) as some taxpayers work or invest less within that jurisdiction, or engage in more tax planning to reduce their tax bills. A lower tax base reduces the amount of revenue that provincial governments can raise, which can again lead to higher equalization payments. This incentive problem is economically damaging for provinces as high tax rates reduce incentives for work, savings, investment and entrepreneurship.

It’s conceivable that a province may be no better off with equalization because of the program’s negative economic incentives. Put simply, equalization creates problems for provinces across the country—even recipient provinces—and it’s time Canadians demand reform.

Tegan Hill

Director, Alberta Policy, Fraser Institute

Joel Emes

Senior Economist, Fraser Institute

From the Fraser Institute

By Tegan Hill and Elmira Aliakbari

The Carney government has promised to make Canada the world’s leading “energy superpower,” but so far, the government has failed to reduce regulatory hurdles and uncertainty in energy development. It’s time to reverse the damaging federal policies that have held back Canada’s energy industry for more than a decade.

The long list of Trudeau-era policies includes Bill C-69 (the “no pipelines act”), which introduced subjective criteria including “gender implications” into the evaluation of major energy projects, an oil tanker ban on the west coast that limits energy exports to Asian markets, an arbitrary cap on oil and gas GHG emissions that will require production cuts while most of our international peers ramp up production, and major new regulations for methane emissions in the oil and gas sector, which will increase costs for the industry.

These policies stifle Canada’s energy sector. Investment in the oil and gas sector plummeted over the last decade, from $84.0 billion in 2014 to $37.2 billion in 2023 (inflation adjusted)—a 56 per cent drop.

And that should come as no surprise. According to a 2023 survey of oil and gas investors, 68 per cent of respondents said uncertainty over environmental regulations deters investment in Canada compared to only 41 per cent of respondents for the United States. Moreover, 59 per cent said the cost of regulatory compliance deters investment compared to 42 per cent in the U.S., and 54 per cent said Canada’s regulatory duplication and inconsistencies deter investment compared to only 34 per cent for the U.S. This divergence between Canada and the U.S. in the eyes of investors has likely widened following President Trump’s re-election and his administration’s massive regulatory reforms to strengthen U.S. energy development.

Perhaps it’s also unsurprising, then, that business investment (measured on a per-worker basis, a key indicator of productivity) in Canada has dropped from $18,600 in 2014 to about $14,000 in 2024 (inflation-adjusted) while its continued to increase in the U.S.

Again, these Trudeau-era policies diminish Canada’s competitiveness, deter investment and ultimately hurt the economic wellbeing of Canadians. According to a Deloitte report commissioned by the Alberta government, the federal emissions cap alone may cost the Canadian economy more than $280 billion from 2030 to 2040 resulting in lower wages, job losses and a decline in tax revenue.

The Carney government pledged to turn things around. But rather than reduce regulatory hurdles and uncertainty in energy development, it’s introduced new legislation (which became law in June) that grants the federal cabinet the authority to prioritize and expedite projects it deems to be in the “national interest.” Put differently, the government chose to grant cabinet the power to pick winners and losers based on vague criteria and priorities rather than undoing damaging regulations that would give all businesses the chance to succeed.

It’s been four months since Mark Carney and the Liberal Party won the election. With Parliament set to reconvene this month, it’s time to set a new course and finally undo Trudeau’s damaging energy policies.