A Fiscal Need Approach to Equalization

Anwar Shah

Canadian Public Policy, 1996, vol. 22, issue 2, 99-115

Abstract: The existing fiscal equalization program in Canada attempts to equalize per capita tax burden alone and completely ignores the expenditure side. This paper examines the consequences of this neglect both conceptually as well as empirically. The paper concludes that a program of equalization that ignores the expenditure side cannot be defended on economic efficiency and equity grounds. Further, such a program might not be consistent with the constituional intent of equalization in Canada. The paper argues that the present system of equalization in Canada could be improved by explicitly recognizing relative expenditure needs of the Canadian provinces in the formula. The paper implements an objective methodology for measuring these needs and provides tentative calculations based on the proposed approach. The paper concludes that a fiscal needs based program of equalization would differ greatly from the present program in terms of its redistributive impact and further that under such a program the tota amount of equalization transfers made by the Federal Government might also be reduced.

Date: 1996
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