The paper by Professor Paul Hobson of Acadia University begins by reviewing the equity and efficiency rationale for equalization based on a simple theoretical model with costless migration and provinces that differ only in their endowments of natural resources. Hobson shows how, in this static framework, equalization can be used both to attain horizontal fiscal equity — similar individuals receive similar net benefits from government regardless of where they live — and economic efficiency – the marginal product of labour is equalized across provinces. Interestingly, in the absence of equalization, provinces endowed with natural resources would have too many people while provinces without natural resources would have too few!

In contrast to Boessenkool’s view, Hobson argues that non-renewable natural resource revenue should be included in the calculation of equalization whenever that revenue is used to create net fiscal benefits for provincial residents – either through lower taxes, more government services, or the direct distribution of such to residents. It should not be included, in his view, when such revenue is saved is a ‘heritage’ fund of the type used in the past in both Alberta and Saskatchewan. Equalization consequences would continue to be felt if provinces created net fiscal benefits in the future using either the interest earnings from such funds or disposal of the principal.

Hobson recommends a return to the national standard rather than the current five-province standard. Further, he believes that only if they wish to set up ‘heritage funds’ to save their natural resource revenues, should Nova Scotia and Newfoundland be sheltered from the immediate equalization consequences of such a resource boom.

Read the full paper.