Equalization and Canada’s Fiscal Constitution: The Tie That Binds?

Abstract

Canada has had a fiscal equalization system since 1957, and equalization was formally embedded in the constitution in 1982. However, the rationale for equalization, how the concept is defined and applied, and what its effects are or should be are all issues that continue to be vigorously debated in both political and expert circles. This paper reviews some of these issues and concludes that on the whole equalization has played a useful role in helping Canada to get through the last half century as well as it did. However, such changes as fixing the amount to be distributed at (say) the present share of the federal budget (instead of indexing it to a moving average of nominal GDP growth) and making the distributional formula less overtly political by establishing a quasi-independent board to examine the allocation formula from time to time and make recommendations for change would make the equalization system more transparent than now and hence make governments at both federal and provincial levels more accountable for their actions, as they should be in a democracy.