Equalization and the Regional Politics of Fiscal Federalism
Federalism and the centralization of nationalizing programs like Equalization.
The division of power between central and regional governments in federalist countries defines their political landscape. In Canada, the nature of this relationship is premised on the principle of “peace, order, and good government,” constitutionalized in s. 91. This principle codifies Parliament’s good faith in legislating matters under exclusive federal and undefined jurisdiction.
In other words, good governance guides the division of powers between the federal and provincial levels of government in the interest of the nation. This includes federal fiscal responsibility, or the federal government's financial obligations to the provinces, where it subsidizes provincial public institutions in matters of shared jurisdiction, such as healthcare. This concept is referred to as vertical fiscality, which aims to address horizontal fiscal imbalances among provinces that struggle to offer comparable services nationwide due to low fiscal capacity (revenue through taxation), limited natural resource revenue, or high population density.
One of the most prominent exercises of vertical fiscality is the Equalization program, codified in s. 36(2) of the Constitution Act. Through the Equalization program, the federal government subsidizes provinces whose fiscal capacity is below the national average. This helps provinces afford welfare at comparable levels of taxation, thereby restoring horizontal fiscal balance.
While Equalization payments are unconditional, meaning their use is at the discretion of the provinces, the program itself is under federal jurisdiction. This means that the Parliament can unilaterally amend the Equalization formula without the provinces, politicizing the program. The federal government does consult with the provinces prior to formula amendments, but it is important to note that it does not require unanimity.
In January, the Liberal government extended the Equalization formula without reform until 2029; however, as federal elections neared, Western provinces reasserted their reform preferences, hoping that a new government would redress their grievances. Considering Prime Minister Carney has not introduced any changes in the formula, and since the new government remains Liberal, discontent remains. While many provinces have criticized Equalization since its inception, social identity—where one identifies as a member of an in-group as a "have not" province or out-group as a "have" province—seems to fuel regional criticisms of federal good governance surrounding the program.
Furthermore, the Equalization formula determines both eligible provinces and the amounts to be transferred. This is calculated by measuring the difference between provincial fiscal capacity and the average fiscal capacity of all Canadian provinces. The difference is then neutralized through federal transfers to provinces that are below the national average.
One of the main determinants of average fiscal capacity is natural resource revenues. This resulted from the 2007 amendment, where, prior to them, Alberta’s resource revenue was excluded from Equalization calculations. It is worth noting that even if the Equalization formula did not include this revenue, Alberta would still not qualify for payments due to its fiscal capacity exceeding the national average. According to a study, Alberta’s criticisms “over the last few years have been the most serious.” This includes Alberta’s 2021 referendum to amend the Equalization program. In the referendum, Alberta framed itself and other “have” provinces as an in-group compared to the out-group “have not” provinces and the federal government. This is known as an ideational framing, where identity is used to categorize insiders versus outsiders, exemplified by ideas of Western solidarity versus Western alienation.
Considering “have” provinces are rich in natural resources and are located in the West, their social identity is geographically defined. This is known as place-based resentment, where regionalism interferes with federal programs intended to promote national unity. Resentment rooted in geographic identity further enables Western provinces to form a united front against federal centralization. Moreover, Western solidarity against Equalization exemplifies ideational policy feedback, where ideas shape policy and policy reshapes ideas. Grounded in liberal commitments to a just society and aiming to reduce fiscal gaps between provinces, the Equalization program has fueled Western alienation rhetoric used to press for reform, as seen in Alberta’s referendum.
This issue is not exclusive to Alberta, as a study found that the social identity of all “have” provinces disproportionately shapes their opinions of Quebec. Quebec is one of the largest Equalization beneficiaries, receiving over 50% of payments from 2024 to 2025, a figure that is relevant considering the program was created after Quebec was the only province to withdraw from the tax rental system.
Equalization highlights a vertical distribution of federal power, politicizing pre-existing tensions between federal and provincial values. This centralization of decision-making raises questions regarding the effectiveness of fiscal federalism. To start, the system promotes regionalism between “have” provinces, such as Alberta, Saskatchewan, and British Columbia, which do not receive Equalization payments, and “have not” provinces, such as Quebec, Ontario, Manitoba, Newfoundland and Labrador, and the Maritimes, which do receive them. This distinction makes the Equalization program inherently redistributive, meaning that some provinces will gain while others will not. The redistributive nature of Equalization, combined with the formula's unilateral amendment process, creates controversy around the program as the federal government is vulnerable to political bias.
Generally, “have” provinces generate revenue from raw materials. Due to this, Western provinces (excluding Manitoba) often do not qualify for Equalization payments. This emphasis on natural resource revenue presents a problem in that it may deter the development of natural resources by provinces looking to continue receiving payments. The formula assumes that provinces use all of their available energy reserves to increase revenues. Alberta argues Quebec does not do this by choosing to develop its hydroelectricity over gas. This further leads to regional or place-based resentment against the federal government and "have not” provinces.
Alberta has used the policy feedback loop to reform federal policy in the past. In 1980, the federal government implemented the National Energy Program (NEP) to mitigate rising oil prices. This was implemented through a series of reforms, including taxes on exported oil, the relocation of oil firms out of the province, and the reduction of provincial royalties exempt from federal tax, which nationalized Alberta's oil. Alberta implemented a protectionist response by reducing its oil production and filed a legal case against the federal government. In this way, Alberta asserted its provincial values over federal national interests. This resulted in the codification of exclusive provincial authority over its natural resources in s. 92A of the Constitution. Newfoundland and Labrador launched their own case against the federal government last year, supported by Western provinces wishing to reform the Equalization formula. This demonstrates that it is not just the Western provinces that have grievances against this unilateral nature of the amendment process.
Ultimately, the Equalization program defines concerns regarding both federal responsiveness to provincial needs and the extent to which the principle of good governance is upheld. Ideology is a salient factor in informing public policy decisions, often pitting provincial values against federal ones, as seen in the rise in Western solidarity. This regional solidarity is consistent with the ideational dimension of policy feedback theory, where regional concerns are rooted in social identity. This questions the federal government’s effectiveness in policy-making. By attacking the program’s legitimacy, provinces challenge the federal government's legitimacy and the fulfillment of its good governance responsibilities. These considerations are salient for maintaining federal-provincial cooperation—especially under the new Carney government—over shared jurisdictions involved in maintaining the welfare state, while avoiding provincial separatist discourse against the legitimacy of fiscal redistribution.