[Makarov]

Originally Posted by SebC

Or maybe Quebec can do things at lower cost because the government doesn't have to compete for labour with oil. I'm not 100% against equalization, but when when the equalizee can afford things the equalizer can't, there's a problem. The formula needs to account for the fact that a government just can't get as much bang for its bucks when it has to compete with a stronger private sector.

Fair point. I agree (and have argued this for some time.) However, this is a relatively minor improvement that could be made to the program. Failure to account for the specifics of local labour markets hardly justifies (a) dissolution of the equalization regime; or (b) the constant demands that Quebec allocate its provincial budget according to the whims of certain Albertans.

Originally Posted by SebC

Furthermore, paying for growth is more expensive than simply maintaining a status-quo (due to having capital costs on top of operating costs).

Those figures are per capita, and so, at least for the most part, should account for spending on new residents. Also, Alberta's government obviously reaps both the costs and the many benefits of a growing population.

Originally Posted by SebC

And then you have the possibility of excessive equalization making the country as a whole poorer due to being a disincentive to efficient allocation of labour.

Inuitively, one might think so. However, it looks like the opposite may be true:

Although not as well recognized, Equalization also provides efficiency benefits. Interest in the efficiency implications has largely been left to economists but the potential gains from Equalization have been a focus of their research. A notable contribution in that area is Flatters and Boadway (1982). The efficiency issue that equalization is seen to address is fiscally induced migration. Fiscally induced migration refers to mobile factors of production (i.e., labour and capital) locating in jurisdictions where they are less productive in order to take advantage of low taxes for the level of services and/or high public services for the taxes levied on those factors. That is, fiscal considerations such as a low tax rate high service combination in one jurisdiction which others cannot match, can induce efficiency diminishing factor migration. Or more simply, differences in fiscal capacities can distort labour and capital markets and reduce national output. Inefficiency inducing fiscal capacity differences may arise from differences in the characteristics of the tax base or, more obviously in Canada, natural resource ownership. It is an advantage for society to have its factors of production located where they are most productive and not induced by distorting fiscal considerations to locate elsewhere. Well designed equalization programs offer a means to correct or offset distorting features of the fiscal landscape and enhance economic efficiency and national productivity.

Fiscally induced migration is not a trivial concept to employ ivory-tower academics. Certainly, at levels experienced, it is not the main driver of factor location but it exists and its effects on migration are cumulative over time.19 Wilson calculates the benefits of reduced fiscally induced migration due to changes made in the Equalization program from 1971 to 1977 and compares those to the change in costs (Wilson, 2003).20 He estimated gains of $1.61 for each dollar of cost.21 The economic benefits and costs of an equalization program depend upon the design and the fiscal environment in which it operates. Just what the benefit to cost ratio of the current Equalization program might be has not been estimated but Wilson’s analysis demonstrates the potential economic benefits. Those economic benefits augment the equity benefits which Canadians already clearly value.

There is another aspect of interprovincial migration that deserves mention. This aspect also has to do with recognizing fully who benefits from Equalization. Clearly, the residents of Equalization recipient provinces benefit from Equalization because those transfers enable better services and/or lower taxes. Residents of other provinces may gain economically as well. Above, we noted the national efficiency improvements resulting from reducing the distorting effects of fiscally induced migration. But, even in the absence of fiscal distortions, Equalization can provide economic benefits to non-recipient provinces. Interprovincial migration is significant in Canada as Canadians pursue their most attractive opportunities. Normally, we expect net out migration from Equalization recipient provinces. Those migrants carry with them a bundle of human capital – human capital that largely represents the investments of the provincial governments from which they come. Education is the most obvious factor but healthcare is another consideration. To the extent that Equalization improves provincial public services, and so education and healthcare, migrants bring with them more human capital than they would otherwise. That improvement in human capital benefits those provinces with a net inflow of interprovincial migrants. Greater productivity and higher tax revenues are economic benefits.

SOURCE: Alberta and Equalization: Separating Fact from Fiction (an excellent read for anyone interested in the Equalization program btw.)

Originally Posted by SebC

And oil money isn't exactly free, it comes with things like environmental liabilities and requires investment to achieve and sustain (e.g. Highway 63 doubling, paying off BC for Northern Gateway, etc.). It is made stronger by a business-friendly tax environment.

No, that's true. But neither is revenue from Quebec's hydro-electric resources or revenue derived from Ontario's manufacturing or transportation industries. And there is no doubt that the returns on investment in the energy industry far exceed those in any other industry.