Department of Economics
University of Ottawa
The Canadian equalization program is intended to enable provincial governments to offer services of comparable quality while collecting revenues from their citizens that require approximately the same level of effort. In reality, it is the fiscal capacity (the capacity of the provinces to obtain revenues from certain sources) that is partially equalized; the provinces keep complete freedom regarding expenses.
Fiscal capacity is evaluated by applying the Representative Tax System, which is supposed to reflect the fiscal practices commonly adopted by the provinces. The federal government finances the equalization transfers out of the taxes it collects; consequently all Canadian citizens participate in it, even those from the receiving provinces. The natural resources sector is at the origin of most of the difficulties encountered since the establishment of this program in 1957. The differences in the endowments of the provinces and the instability of natural resource prices are the main causes.
The Canadian economy is in a phase in which the role of natural resources has increased; this will be a source of tension in the application of the equalization program, both between the federal government and the provinces and between the provinces themselves. The creation of sovereign natural resource funds by the provinces would be a mechanism to reduce the impact of raw material price instability while respecting the power of the provinces over natural resources on their territories.