What Do We Already Know About the Appropriate Design for a Fiscal Equalization Program in Canada and How Well are We Doing?

Abstract

In the Canadian federal system, equalizing transfers have been an important component of intergovernmental fiscal relations during the post-War period. Much is now known about the efficiency-promoting role of equalization in a federal system of government, largely as a result of developments in the area of local public finance during the past decade. There, the emphasis has been on promoting the efficient allocation of mobile factors of production within the federation.

There is also a strong case to be made for equalizing transfers in a federal system of government on grounds of horizontal equity, and this argument has figured significantly in the discussion of equalization in Canada. Horizontal equity dictates that the public sector, both federal and provincial, should not discriminate on the basis of the province of residence in its impact on individuals' well-being. Indeed, the traditional justification for fiscal qualization rests on equity principles.'

In recent years, both the Equalization program itself and the notion of equalization outside of Equalization have been challenged. The purpose of this paper is to assess these challenges in the context of both the theory and practice of equalization as applied to the Canadian federation.