Balancing affordability with principles: Policy alternatives to the cap on Canada’s Equalization program

The GDP cap placed on Canada’s Equalization program in 2009 ties the program’s size to economic growth. This limits Equalization’s ability to address disparities in fiscal capacities among the provinces. This paper relies on the literature, key-informant interviews, and data analysis to propose options aimed at balancing the program’s affordability with its principles. It is recommended that the Fluctuating Cap option be adopted. This option allows the federal government to stay within its budget for the program while still allowing the program to fluctuate in size as needed to realize its objectives. As well, it is also recommended that the resource revenue inclusion rate increase to 70%, that the fiscal capacity cap is eliminated, and that hydroelectric rent is included in the RTS.