Equalization payment

Equalization payment
See also

Equalization payment is a payment made by the Government of a country to its provincial governments in order to ensure that they have the resources needed to provide services at a reasonable level and cost (tax rates). Being a part of an equalization program, its goal is to promote poorer regions and increase their prosperity to be at the national level[1].

Policy motivation for equalization programs

The motivation for the equalization programs is to[2]:

  • create equal chances and opportunities for all citizens no matter where they live,
  • provide essential public services at equally good level to all citizens,
  • drive down disparity in opportunities between provinces by ensuring economic development of those poorer ones.

Equalization payment effect

There are actually no studies or evidence proving that the equalization program is meeting its goals, at least not in the way it is structured at the moment. On the other hand, there are some concerns[3][4].

  • First of all massive money transfers led to creating a bigger public sector, pushing out the private sector activity. That results in slowing down the economic growth of those provinces and increasing their dependency on the program.
  • Secondly, it appears that the equalization system has a negative impact on the labor market as well, again not helping the economy to grow in those regions. According to the studies from Canada, after the extended employment insurance benefits were introduced to three old Maritime Provinces, the unemployment rate went up to four percentage points over the national level in the whole region. Prior to the program introduction those rates were lower that the national level for at least one out of last three years.
  • The other negative effect can be the creation of a "welfare trap". The idea of a "welfare trap" is that the equalization payments are giving the incentive to provinces to concentrate their efforts and decisions on maximizing the transfer receipts rather than long-run growth. This situation only strengthens the province's dependency on the program. The effect is that the region becomes even less attractive for both investors and residents.

Equalization payment mechanisms at the international level

There are a few examples of the equalization program on an international level[5]:

  • European Social Fund was created to balance and provide opportunities in the fields such as education and services for unemployed in poor regions or countries in Europe.
  • Universal Postal Union was founded in 1847. The idea is to regulate the financial requirements of the postal services when sending a letter to another country. According to the agreement between the national postal authorities the fee charged for the service should include and cover the cost of services needed to be provide in the receiving country.

References

Footnotes

  1. Clemens J., Veldhuis N., (2007), p. 108
  2. Clemens J., Veldhuis N., (2007), p. 108
  3. Clemens J., Veldhuis N., (2007), p. 112-113
  4. Beland D. and others, (2017), p. 64
  5. Coggon J., Gola S., (2011)

Author: Kamil Juszczuk