Think tank says federal transfers growing regardless of need, calls for urgent reform
Canada’s equalization program is increasingly out of sync with its intended purpose, with payments continuing to climb even as economic disparities between provinces narrow, according to a new Fraser Institute study and accompanying news release.
The report argues that a built-in feature of the formula is driving this disconnect, causing transfers to rise irrespective of underlying fiscal conditions.
Equalization is meant to help provinces with weaker revenue capacity provide comparable public services at similar tax levels. However, the institute says the current system is no longer functioning as designed.
“Canada’s equalization program should shrink when the ability of provinces to raise revenues—particularly between so-called have and have-not provinces— moves closer together, but instead, because of a design flaw, the program’s costs are required to grow every year,” said Ben Eisen, senior fellow at the Fraser Institute and co-author of Equalization Is Broken: How the Continuous Growth Requirement Inhibits Reform.
A central concern is the “fixed-growth rule,” introduced in 2009, which links the size of the overall equalization envelope to national economic growth rather than actual differences in provincial fiscal capacity.
According to the Fraser Institute, “the amount spent on equalization increases whether or not the gap between ‘have not’ and ‘have’ provinces increases or decreases.”
This has led to a situation where payments continue to expand even during periods of economic convergence. Research cited in the report shows that equalization transfers rose sharply over more than a decade despite a narrowing fiscal gap between provinces.
The institute’s news release underscores the same concern, warning that the program’s design now effectively guarantees growth in spending, regardless of whether disparities between provinces are widening or shrinking.
Critics of the system say the rule, originally intended to limit costs, has had the opposite effect. Instead of acting as a cap, it now functions more like a minimum spending floor, preventing payments from declining when economic conditions would otherwise warrant it.
Beyond rising costs, the report highlights broader structural issues. The formula can produce counterintuitive outcomes in determining which provinces qualify for payments, raising questions about fairness and consistency.
It also points to economic distortions created by the program. In particular, provinces that increase revenues—especially through natural resource development—can see their equalization payments reduced, dampening incentives for growth.
Previous Fraser Institute analysis found that such “clawback” effects can significantly offset gains from resource development, influencing policy decisions and potentially slowing economic expansion in recipient regions.
The think tank concludes that without reform, equalization will continue to expand in ways that are disconnected from its core objective.
It is calling on policymakers to revisit the formula and ensure that future payments more accurately reflect real differences in provincial fiscal capacity rather than automatic growth tied to the broader economy.
