Study says equalization discourages natural resource development in “have-not” provinces

A new study by the Fraser Institute says Canada’s equalization program discourages natural resource development in have-not provinces.

“Many problems exist within Canada’s equalization program, including how it actually discourages natural resource development in have-not provinces,” said Ben Eisen, senior fellow at the Fraser Institute and co-author of Measuring the Equalization Clawback on Natural Resource Revenue in Have-Not Provinces.

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These clawbacks, according to the institute, refer to the loss of equalization dollars for have-not provinces as a result of increasing natural resource revenues. As a province receives more revenue from natural resource developments, it receives less money from the federal government in equalization transfers.

Consequently, governments in have-not provinces that receive equalization are discouraged by the clawbacks from developing natural resources — while natural resources can be lucrative, equalization payments are less risky than revenues from natural resources.

And the clawbacks on natural resource revenues are significant, the institute says.

For example, in 2018-19, the clawback rate from a 10 per cent increase in natural resource revenue ranged from 44 per cent in Prince Edward Island to 97 per cent in New Brunswick. For every 10 dollars of increased natural resource revenue a government received, the Fraser Institute says it lost $4.40 to $9.70 in equalization money.

In 2020-21, the clawbacks from a 10 per cent increase in natural resource revenue ranged from a low of 3.2 per cent in Quebec to 47.4 per cent in Prince Edward Island.

“By discouraging natural resource development, Canada’s equalization program—with its clawbacks on resource revenues—is actually preventing have-not provinces from prospering,” said Alex Whalen, policy analyst at the Fraser Institute and study co-author.



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