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MINISTER STÉPHANE DION ADVOCATES
THE PRACTICE OF EQUALIZATION IN FEDERAL COUNTRIES

ST. GALLEN, SWITZERLAND, August 29, 2002  –  Speaking at the International Conference on Federalism 2002, which follows up on the 1999 Conference held in Mont-Tremblant, Canada, the Honourable Stéphane Dion, President of the Privy Council and Minister of Intergovernmental Affairs, stated that equalization is useful in a federation, not only for considerations of equity, but also for reasons of efficiency. By way of illustration, Mr. Dion cited data comparing certain aspects of the practice of equalization in different federations, including Canada, Switzerland and Australia.

To be sure, the Minister stated, equalization "contributes to equity by ensuring citizens have access to reasonably comparable levels of public services at reasonably comparable levels of taxation, regardless of their region of residence." But Mr. Dion added that "equalization also contributes to economic efficiency – notably by reducing internal migration that may be motivated solely by fiscal differences and not by economic fundamentals."

According to the Minister, statements by some commentators to the effect that equalization creates a dependency that is harmful to the economic development of recipient provinces are not sustained by any empirical evidence. He pointed out that in Canada, "disparities in provinces’ fiscal capacity have diminished over the past 20 years, so that the less wealthy provinces have become less dependent on equalization. Similarly, disparities in per-capita real GDP among the provinces have decreased over the years."

By comparing different federations, the Minister showed how the need for equalization increases with the magnitude of responsibilities of federated entities and the size of the disparities among them. In a federation such as Canada, where the provinces have numerous constitutional jurisdictions and very unequal financial capacities, equalization is an especially necessary program, he noted.

Accordingly, the Minister is not surprised that in Canada, "equalization is strongly supported by the federal and provincial governments (including those that do not receive equalization payments) and the general public."

Mr. Dion also asked what kinds of disparities need to be equalized -- revenue disparities, expenditure disparities, or both? He noted that in Canada, because revenue disparities are undoubtedly much greater, our equalization system focusses solely on that aspect. Including provincial expenditures in the calculations would make an already very complex equalization formula even more so, he stated, noting that this opinion is shared by experts.

The Minister explained that equalization in Canada, which is financed entirely by the federal government, enables all provinces to have a fiscal capacity reaching 97% of the national average. While noting that a number of provinces would like that standard to be 100% rather than 97%, Mr. Dion pointed to the progress that has been achieved, considering that 20 years ago, the equalization standard was only 90%.

Mr. Dion concluded by stating that federations do well to gain a better understanding of their respective practices, on equalization and other areas alike, and therefore thanked the Swiss authorities for having organized this important conference, which has brought together over six hundred participants from some sixty countries. In closing, he highlighted the invaluable work of the Forum of Federations.

See presentation: The Practice of Equalization in Federal Countries

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