Canada has own debt crisis

Most Canadians tend to believe we have been less affected by the global financial crisis that struck in 2008 than other comparable countries.

And if we look at federal debt alone, that's true.

But if we add the federal debt to provincial debt, unfunded liabilities for health care and some other programs -- in the vicinity of $2 trillion -- Canada today faces a debt problem comparable to those of the U.S. and the nations of Western Europe. By any standard, that is a crisis.

One unique dimension to Canada's financial crisis, however, differentiates us from other countries.

Canada's huge expenditures on regional subsidies, including equalization, have severely damaged our national and provincial economies and prevent the growth needed to exit the debt and entitlement path on which we are embarked.

And if there is one lesson to be learned from the European debt crisis, it is that there is little likelihood of managing massive debt without growth.

Regional subsidies have reduced growth in all regions and gravely damaged our ability to attain the productivity increases needed for both growth and to succeed in global markets.

Of course, there are those who would question this assessment. How can a system that is such a "defining feature" of Canadian federalism (on par with our health-care system), they ask, be so damaging that it becomes a central part of the effort needed to manage our national financial crisis?

For the answer, let's take a look at the provinces that receive regional subsidies:

-- Five have economies with problems that are deeper than those of modern Greece.

-- All of these have public sectors and associated entitlements that are between 20 and 30 per cent larger than those of Greece in relation to population.

-- Their private sectors are small, crowded out by the public sectors that dominate their economic structures.

-- They are public-sector-driven economies, enabled by massive federal subsidies, in a private-sector, market-driven world.

Ultimately, these dependent provinces are uncompetitive and doomed to stay that way because of the subsidies and as long as the Government of Canada continues with its present policies.

The problems experienced by Ontario, by far the largest contributor to regional subsidy programs over the years, are just as serious.

Ontario's contribution to support programs for other provinces, roughly equivalent to what the United States has devoted to defence over most of the past 20 years and almost certainly nearly 50, has left it with the least-accessible provincial programs in Canada. You might say that Ontario is another casualty of Canada's regional subsidies.

Canada, therefore, cannot achieve the growth necessary to manage its debt and entitlement crisis until major changes to the regional subsidy system, which inhibits growth in regions with 75 per cent of our population, are made.

The changes could include the following:

-- Equalization funding should be made contingent on a downsizing of the public sector in recipient provinces to bring the scale of their public sectors in line with the rest of the developed world and contributing Canadian jurisdictions.

-- Equalization should be devoted solely to this purpose and to encouraging labour mobility for five years.

-- After the five-year transitional period is over, the GST should be transferred to the provinces in return for an end to some or all transfer payment programs.

-- Alberta, Saskatchewan and Newfoundland should be encouraged to place a serious portion of their resource revenues into market-driven vehicles to substantially increase investment in all regions of Canada and to assist Canadian expansion into global markets.

It is important to begin making these changes now, particularly in relation to equalization, in order to ensure we are not engulfed by the same problems currently plaguing western Europe.

David Mackinnon is a senior fellow at the Frontier Centre, www.fcpp.org .

Republished from the Winnipeg Free Press print edition November 2, 2012 A15