Tuesday, May 29, 2012 – Quebec has been receiving equalization payments since the program was set up back in 1957. This year, $15 billion will be transferred to Canada’s poorer provinces. In an Economic Note published today, Youri Chassin, economist at the Montreal Economic Institute (MEI), explains how receiving provinces could be further encouraged to enrich themselves and to stop relying on these transfers. The author is particularly interested in how natural resources are treated in the calculation of equalization payments.
As soon as a receiving province expands its exploitation of natural resources, it is penalized by a decrease in equalization payments. Currently, 50% of provincial government revenues from natural resources are “clawed back” in the form of reduced equalization payments. To get out of this “poverty trap,” Mr. Chassin proposes the addition of a transition period of a few years during which the province could keep both the revenue it draws from its natural resources and its full equalization payments.
“The opportunity to increase its revenues from natural resources without having an impact on the amount received in equalization payments would be temporary,” stipulates the author. “It would allow Quebec, among others, to bring in independent revenue in order to lift itself out of the club of receiving provinces.”
“The proposition put forward today aims to give a boost to provinces that might be hesitant to develop their natural resources out of a fear of seeing their equalization payments shrink. In addition, this proposal would entail no extra costs for the system as compared to what is paid out now and would remove certain obstacles to development,” explains Michel Kelly-Gagnon, president and CEO of the MEI. “Quebec has everything it needs to rank among the wealthiest regions of the country.”
The Economic Note entitled Equalization: Towards a Formula that Promotes Further Resource Development was prepared by Youri Chassin, economist at the MEI. It can be consulted free of charge on our website.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its publications and conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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