Today, the Atlantic Institute for Market Studies (AIMS) and the Frontier Centre for Public Policy (FCPP) released a new paper documenting a recent decline in equalization payments (relative to provincial GDP) to Manitoba, New Brunswick, Nova Scotia, and Prince Edward Island. In “Declining Equalization Payments and Fiscal Challenges in the Small ‘Have-not’ Provinces,” authors Ben Eisen, David Murrell, and Shaun Fantauzzo show that equalization payments as a share of provincial GDP have declined markedly in recent years in these four provinces, particularly since Ontario began receiving payments in 2009/10.
The three Maritime Provinces and Manitoba are grouped together for analysis in this paper because they share several important attributes. Of particular importance, these are the four small provinces that continue to rely on equalization grants as a source of revenue.
Specific findings include:
• In fiscal year 2004/05, Quebec consumed approximately 37 percent of all equalization payments, and Ontario was still a have-province. In the following years, Quebec’s share of equalization increased significantly, leaving less for the other provinces. In 2009-2010, Ontario began to receive equalization payments, which squeezed out the smaller provinces further. In 2014-2015, Quebec and Ontario taken together received 67 percent of all equalization payments.
• The paper pays particular attention to changes in equalization payments to the small recipient provinces that have occurred since Ontario became a have-not province. Since 2009-2010, equalization payments as a share of GDP have declined in all four provinces. In Nova Scotia, this decrease has been relatively small. Equalization as a share of GDP has declined in that province by 3 percent since 2009-2010. In the other provinces the drop has been much larger. PEI’s equalization payments as a share of GDP have decreased by 11 percent in this time period. In New Brunswick, the decrease is 12 percent. In Manitoba, equalization payments as a share of GDP have dropped by 24 percent.
• Overall, federal transfers to the provinces are at historically high levels. These drops in equalization payments to the small have-nots are not the result of reduced federal spending on transfers, but are instead the result of increased payments to Quebec and Ontario.
• All four small have-not provinces currently face significant budget deficits and high levels of net debt. This is a challenging fiscal context in which to face reduced equalization payments as a share of GDP.
“The problem with relying heavily on equalization grants is that a province loses some measure of control over its fiscal health. Economic weakness in Ontario and Quebec are having a real impact on the bottom line for the small have-not provinces,” said Mr. Eisen. “It would be risky to depend on an economic turnaround in Ontario and Quebec to solve our fiscal problems, so the prudent course of action for these four provinces is to assume that help is not on the way. Each province will have to address its own fiscal challenges through disciplined fiscal management and spending restraint.”