Due to a design flaw in Canada's equalization program, "have not" provinces have received $10.5 billion in higher payments since 2018/19, finds a new study released by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

"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.

The study shows that the 2009 reform, referred to as the Fixed Growth Rate rule, requires total equalization payments to continue growing in line with Canada's economic growth. The rule was originally introduced to control program costs as the fiscal gap between have and have-not provinces increased. But following convergence in provincial fiscal capacity beginning around 2015, the rule now requires upward adjustments rather than downward ones, functioning as a floor rather than a ceiling.

The result of this design flaw has been $10.5 billion in higher payments between 2018/19 and 2026/27 that would not have been made in the absence of the rule.

In fact, in three separate years since 2018/19 over 10 per cent of the equalization program costs were higher payments as a result of the flaw.

"There are a lot of interesting ideas for making equalization fairer and more responsive to changing fiscal and economic conditions, but as long as the program is required to keep growing, there are real limits to their potential effectiveness," Eisen said.

"In order to make real equalization reforms possible, policymakers will first have to fix the growth requirement flaw."

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