Equalization, which was once such a hot political topic that I wrote a book about it, ended a long absence from the public discourse, making a brief appearance in the news cycle a couple of weeks back.

The news, as alluded to in a recent post, concerns the decision by the Liberal government of Newfoundland and Labrador to take the federal Liberal government to court over the way it distributes equalization payments to the less wealthy provinces. 

Newfoundland and Labrador, which has received equalization only once in the last 15 years, argues that the formula in place since 2008 is unconstitutional. It claims that contrary to section 36(2) of the Constitution Act the current formula does not ensure “provincial governments have sufficient revenues to provide comparable levels of public services at comparable levels of taxation.”

The province is basing its case on two things. It argues that with a relatively large landmass and a small population, it costs the provincial government more to provide those “comparable level of public services.” Secondly, it wants removal of a fiscal capacity cap first imposed by the Harper Conservatives in 2008. The province claims that move has cost it $3.2 billion in federal transfers over the last five years alone. 

The case was to be put before the Supreme Court of Newfoundland and Labrador but based on legal opinion that has been the conventional wisdom for years, the chances of success through the courts don’t appear strong. The cited Section 36(2) merely states that federal and provincial governments commit to the principle of equalization payments. As University of Ottawa political studies professor André LeCours told the CBC:

“It’s hard to say that the federal government is not committed to making equalization payments, because it makes equalization payments …So the qualms, really, of Newfoundland Labrador are really about the structure of the program, the design [and] the implementation, and I just don’t think that has anything to do with the constitution.”

But if the legal case is weak, the political case has something going for it. Some in Newfoundland speculated that going to court is merely a political gesture, designed to put further distance between Justin Trudeau’s and Andrew Furey’s Liberals, with the latter facing a provincial election soon. But Furey also has a strong fairness argument to support his case. 

There’s the claim that in the last five years the fiscal cap has cost the province $3.2 billion. There is also the contrast with the Maritime provinces which, according to Furey have collected $45 billion in equalization over the last ten years while Newfoundland and Labrador has, until the current fiscal year, received nothing because its royalties from offshore oil, combined with the cap, have made it ineligible. And then there’s the astonishing fact, discussed here, that while overall federal transfers to provincial governments increased by nearly 80 percent between 2006 and 2022, Newfoundland’s increase over those 16 years was a microscopic 1.7 percent.  

The bigger picture

There is a further political dimension to the story that could prove beneficial to equalization-receiving provinces, such as the Maritimes. Readers of this blog may recall that over the years complaints about equalization were coming from the west, mainly from Alberta. Critics maintained that payments were too generous and needed to be scaled back. Newfoundland and Labrador’s claim throws new light on the issue. Instead of eliminating or reducing equalization, Newfoundland and Labrador’s move has introduced the notion of increasing it by removing the cap and taking the cost of service into account.

That added dimension is important as we face the prospect of a Poilievre government in Ottawa. Five years ago reducing or eliminating equalization was of such great concern to right-wing politicians and their followers that Jason Kenney made a referendum on the subject a key commitment in his drive to create and take over Alberta’s United Conservative Party. Subsequently in October of 2021 the 39 percent of eligible voters who cast a ballot supported by a margin of 62 to 38 the removal of section 36 (2) from the Constitution.

Kenney chose to interpret this less-than-overwhelming result as notice to the federal government to negotiate a constitutional change, change that would require the consent of Ottawa and seven provinces with at least 50 percent of the population. Negotiations never happened and Kenney was soon driven from office by his own party, stepping down as Premier in the autumn of 2022. The new Premier, Danielle Smith, continued with the rhetoric, putting out a paper calling for changes to the equalization “gravy train.”

But then a funny thing happened. As part of the 2023 federal budget bill, Parliament quietly renewed equalization for five years to 2029, with only minor changes. One of those changes led to Newfoundland and Labrador receiving a small amount of equalization this fiscal year, the Province’s first since 2008. But a change sought by critics like Jason Kenney – an end to fixed-growth in the amount the feds spend on equalization – was nowhere to be seen. 

Ironically, the cap that was introduced to put a lid on equalization evolved over the years into a fixed-growth floor, guaranteeing annual increases in the equalization envelope in line with increases in GDP. When the drop in oil prices reduced the amount needed to equalize for resource revenues, critics called for removal of the fixed-growth provision to reduce the amount spent on equalization. But their demands have not had much impact in Ottawa, on either the government or the official opposition.

Conservatives silent

Poilievre’s Conservatives kept the 2023 budget implementation bill with its five-year equalization renewal in committee for over 20 hours. But instead of debating changes to equalization, they engaged in a bizarre filibuster on a motion inviting the Finance Minister to make an appearance. At one point the Conservatives did table an amendment calling for reassessment of the equalization formula in response to a provincial referendum. But that was defeated – and like the rest of the fiscal arrangements included in the budget bill attracted little attention. 

As expected the Conservatives voted against the 2023 budget, as they will with this year’s budget, but their criticism was focused on inflation, taxation and spending, not equalization. This could be further evidence that debating equalization is not a political winner for a national party. As I noted back in 2018: 

“Equalization, despite a few flaws, is broadly accepted by Canadians because it works reasonably well to achieve its goals. No national party wants to go into an election year with an equalization platform that will win them a few votes in one part of the country and lose them a lot in another. That’s especially true of the Conservatives. They have most of the seats in Alberta and Saskatchewan so there’s nothing to gain from making a fuss about equalization. But there’s a lot to lose from attacking equalization if they hope to pick up seats in Quebec and Atlantic Canada. So Jason Kenney and Scott Moe are free for now to roam the Prairies, bad-mouthing equalization, but will be expected to clam up once the writ is dropped for the 2019 federal election campaign.”

The fact that for now mum’s the word on equalization is no reason for complacency. Poilievre comes from the party’s western Reform roots, source of much of the anti-equalization rhetoric –  and he’s committed to “fixing the budget.”  A five-year renewal notwithstanding, Harper’s government changed the formula in mid-stream, as it did by imposing the fiscal capacity cap – and that was a formula to which the Conservatives had agreed. 

No doubt the Poilievre Conservatives would prefer to keep quiet about equalization between now and the election.But the fact Newfoundland and Labrador is challenging the adequacy and fairness of the existing formula will make silence more difficult to maintain. That’s a good thing because those of us in the less wealthy provinces need to see the Conservative position on equalization on the record now.