Time to reform Canada’s unprincipled equalization system

February 25, 2010

By David MacKinnon
Senior Fellow
Frontier Centre for Public Policy

TORONTO, ON, Feb.  25, 2010/ — In its new report on the federal equalization program – The Real Have-nots in Confederation: Ontario, Alberta and British Columbia – the Winnipeg-based Frontier Centre for Public Policy has released a policy paper certain to be controversial.

That’s because the authors have demonstrated conclusively that citizens of provinces that are the major contributors to federal equalization programs have less access to most vital public services than those provinces that are historically the recipients of these payments: Quebec, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland.

More nurses and doctors in “have-not” provinces

For example, there are more nurses and doctors per capita and many more nursing home beds in recipient provinces than in contributing jurisdictions. Post-secondary tuition is also lower, classroom sizes are generally smaller and childcare spaces are more accessible in the so-called “have-not” provinces.

The combined fiscal deficit of both major paying provinces is about $41-billion. Each man, woman and child in Alberta and Ontario is providing about $2,500 to support government programming in other provinces with better services. More worrying, the report demonstrates that much of this transfer money is being absorbed by extra-large provincial bureaucracies in recipient provinces.

Some striking issues are raised by this study. One is that much of what the federal and recipient governments have said for years about equalization and other regional subsidies is either ill-informed or disingenuous.

For five decades, Canadians have been told that people from richer provinces, principally Ontario and Alberta, need to subsidize other Canadians to bring public services in those provinces up to national standards, thus the term “equalization.”

Yet, thanks to the work of the Frontier Centre and others, we now know that public services are actually much more accessible elsewhere than they are in Toronto, Ottawa, Edmonton, Calgary and Vancouver, home of the majority of taxpayers who are digging deep to pay for these programs.

The second is that we can no longer be blind to the impact of regional subsidies if we care about our collective future as Canadians.

Unbelievably, the federal government has never studied the economic consequences of shifting $40-billion to $50-billion each year from high-productivity jurisdictions to those with low productivity, where economies are dominated by massive inefficiency in their public sectors.

Let me put this in different words: The federal government has supported, directly and indirectly, a thriving industry in Ottawa and recipient jurisdictions whose main purpose is to divide up the subsidy pot, but never talks about the adverse impact of these subsidies in terms of investment, consumer spending, saving or productivity. There are serious ethical issues with all this.

We are taxing the citizens in provinces with the lowest real per capita provincial government income to support others, such as Quebec and P.E.I., which actually have higher levels of real per capita provincial government income — and better public services to boot.

We are also disproportionately taxing the new, the immigrants and the entrepreneurial to support long-established jurisdictions with populations that are largely of north European backgrounds and economies that are driven more by the state rather than by entrepreneurial activity.

It is deeply troubling that one of the principal pillars of Canadian federalism is so unprincipled in its design and impact.

I’d like you to consider the impact of these problems on the lives of citizens:

It matters to frail 80-year-old Ontarians that accessibility to nursing home beds in Ontario is far below the levels of other recipient jurisdictions.

The lives of nurses in Alberta — and their patients — are greatly affected by the fact that there are fewer nurses than in all subsidy-receiving jurisdictions.

The future of 18-year-olds in Ontario contemplating university or college is shadowed by the fact that funding for universities and colleges in Ontario falls far short of standards in other provinces and is nearly at the bottom of all North American jurisdictions.

All this happens because the federal taxation take is too large, its reinvestment too small. Every provincial activity in Alberta and Ontario is squeezed, because the money flows elsewhere.

Some might argue that this is irrelevant because equalization is entrenched in the constitution and it is something that can’t be changed.

This is nonsense. The constitution says that “Parliament and the Government of Canada are committed to the principle of making equalization payments.” This commitment can be fulfilled by a much smaller program than the current one.

Also, the commitment is linked to a goal of ensuring comparability of programs across Canada, something the federal government doesn’t even bother to measure.

Without a system to measure comparability, equalization is a cheque-writing machine, nothing more, and that is how the terrible situation described by the Frontier Centre developed.

Quebec is the largest recipient of transfers in nominal terms (although not on a per-capita basis) and we must be careful that in finding a solution, we do not set off a debate that gets spun into a national unity crisis by many whose objectives would suit such a turn of events.

A simple solution

One solution would likely be eminently acceptable to Quebec and many current recipients: The federal government could simply give all provinces the equivalent tax room in return for an end to transfer programs.

This would restore clarity to the division of federal and provincial powers that is in our written constitution and to the basic principle of pushing spending accountability back to where the money is raised.

It would also allow jurisdictions such as Ontario, Alberta and British Columbia to promote tax and regulatory environments that encourage the massive investment required to restore historic productivity and competitiveness.

Channels: The National Post, February 25, the Waterloo Region Record, the Guelph Mercury, the New Glasgow Evening News, February 27, the Hamilton Spectator, March 5, 2010

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