University of Calgary economist Trevor Tombe has proposed a fundamental shift in Canada's equalization program, advocating for payments tied directly to provincial GDP rather than the current revenue-based formula. In a new report for the Macdonald-Laurier Institute, Tombe argues that a simpler macro-based approach could reduce interprovincial tensions and eliminate incentives for provinces to manipulate their fiscal capacity.
Current system creates resentment
The existing equalization formula calculates payments based on each province's ability to raise revenue, which Tombe says fosters resentment between richer and poorer provinces. Poorer provinces may avoid growing revenues to maintain higher transfers. "You don't just sit around a cabinet table and decide that GDP will be higher or lower this year, whereas you can do that with a lot of other policies that are part of the (equalization) program," Tombe told the National Post.
Equalization was introduced in 1957 to ensure all provinces can provide comparable public services, and the principle was enshrined in Canada's Constitution in 1982. However, the system has long been a source of friction, particularly between resource-rich provinces like Alberta and Saskatchewan and recipient provinces like Quebec.
GDP-based formula would end resource revenue disputes
Tombe's proposed formula would tie equalization to provincial GDP per capita, with adjustments for age demographics, regional price differences, and other factors. This would shut down polarizing debates over natural resource development, which often pit oil-and-gas-producing provinces against Quebec. "Moving to a macro-based formula means we can move away from all these discussions around how to treat resource revenues," Tombe said.
Quebec has faced criticism from Alberta and Saskatchewan for receiving equalization payments funded partly by resource revenues while opposing pipelines and other fossil fuel infrastructure. In 2022, Quebec imposed a provincial ban on oil and gas exploration despite holding significant untapped natural gas reserves.
Alberta's opposition to equalization
Albertans voted overwhelmingly in a 2021 provincial referendum to remove equalization from the Constitution, with more than six in 10 voters supporting the move. Tombe noted that Quebec's practice of heavily subsidizing consumer electricity prices lowers its assessed fiscal capacity, allowing it to claim artificially high equalization payments from Ottawa.
The report also calls for reversing the growth escalator introduced by the Harper government in 2009, which requires aggregate equalization payments to increase annually in line with recent national economic growth. Tombe argues that this escalator has contributed to unsustainable growth in the program's cost.
Implications for federal-provincial relations
If adopted, GDP-based equalization could reshape federal-provincial fiscal relations by removing perverse incentives and reducing regional animosity. The Macdonald-Laurier Institute report urges Ottawa to "re-balance" equalization and other federal-provincial transfers to improve efficiency and fairness across Canada.
