Equalization punishes taxpayers of all paying provinces

April 13, 2010

By Mark Milke
Research Director
and
Ben Eisen
Policy Analyst
Frontier Centre for Public Policy

TORONTO, ON and, CALGARY, AB, Apr. 13, 2010/ — In their op-ed article, (Alberta’s equalization concerns off target), that criticized our study, Luc Turgeon and Jennifer Wallner try to convince readers that concern over equalization is simply an “Alberta” issue. This distracts from the reality that equalization unfairly punishes taxpayers of all the paying provinces.

Equalization is meant to allow all provinces to “provide their residents with public services that are reasonably comparable to those in other provinces.” Our study shows that equalization does not achieve this objective. Instead, across a broad range of indicators, government services tend to be more generous and better-staffed in those provinces that receive large-scale equalization payments.

A pattern of big government

Turgeon and Wallner criticize our inclusion of regulated child-care spaces in each province as a proportion of child population. They name several factors – aside from equalization – that they argue contributes to the higher number of child-care spaces in have-not provinces.

Two points must be made in response. First, our paper generally examined straightforward per-capita metrics. For any single indicator, it is possible to object that one or another exogenous factor is driving the high level of government services in the have-nots. But taken together, our list of indicators shows a pattern of big government and generous services –from child care to post-secondary education, to health care, to public sector employment levels — in the recipient provinces that can’t be explained away.

Second, on a specific point, Wallner and Turgeon neglect relevant facts that suggest equalization is an important cause of the higher number of regulated child-care spaces in the have-nots. For example, they point out that public child-care spending per child is comparable in the Atlantic provinces, Ontario and British Columbia. However, statistics for other provinces that contradict their argument are left out.

For example, Manitoba spends 47 per cent more per child on child-care grants and subsidies than does neighbouring Saskatchewan.

That’s why there is a regulated child-care space for 20.6 per cent of children under age five in Manitoba, compared to just 9.1 per cent in Saskatchewan.

The $2 billion flowing to Manitoba’s coffers each year through equalization enables this big spending.

Furthermore, if public child-care spending per child is similar in the Atlantic provinces, B.C. and Ontario, we should expect higher service levels in the Maritimes, because it is less expensive to deliver government services there. That’s exactly what happens in child care, where there are 13 per cent more regulated spaces as a proportion of child population in Nova Scotia than in Ontario, despite comparable spending levels.

This is one of the major problems with Canada’s equalization formula: It makes no allowances for the cost of delivering services in one province or another.

Turgeon and Wallner assert lower levels of social services in Alberta are actually caused by the province’s low tax rates. But per capita, Alberta’s economy is the largest in Canada, partly because of these low tax rates. The Alberta government generates the second highest level of own-source revenue in Canada, about 20 per cent more than in high-tax Quebec.

Even though it is expensive to deliver services in Alberta, this high level of revenue should be enough to provide comparable services in the two provinces. But it isn’t, because billions flow out of Alberta each year for equalization and other transfers.

The trend toward lower levels of government services applies to all three of the major historical contributors to equalization — B.C., Ontario and Alberta. A more recent entrant to the “have” group, Saskatchewan, displays a similar pattern.

Hardly just an Alberta concern

Thus, equalization is hardly just an “Alberta” concern. Polls show a high level of dissatisfaction with the program in Ontario, and its Liberal Premier Dalton McGuinty has been publicly critical over the years. Equalization even harms the recipient provinces by enabling undisciplined spending while creating a disincentive for governments to enact pro-growth reforms. That’s why the Frontier Centre, based in Winnipeg, is critical of the program although Manitoba is one of the program’s biggest “beneficiaries.”

Despite Turgeon and Wallner’s objections, the reality remains that huge wealth transfers among provinces create perverse incentives and make it more difficult for the paying provinces to fund government services. That’s why we recommend reforming fiscal federalism in ways that would reward productivity gains and enable provinces to raise their own revenues.

This would help restore accountability between taxpayers and governments, eliminate equalization’s distortion of incentives, and ultimately lead to better public policy.

Channels: The Saskatoon Star-Phoenix, April 13, 2010

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