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Equalization program is dividing, not uniting, Canada

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Manitoba qualifies as a 'have-not' province.


Manitoba qualifies as a 'have-not' province. Photo Store

CALGARY -- As anyone who has ever watched puppies tussle over a bone knows, nothing leads to acrimony more quickly than competition for an object everyone wants.

Keep that image in mind, but replace puppies with provincial governments, six of which are now beneficiaries of the federal transfer program called equalization.

Equalization -- ostensibly designed to help provinces provide roughly equal government services -- has long been defended by some as akin to a federal government Robin Hood scheme to help out "poor" provinces. Last year, Ottawa transferred $15.4 billion in equalization payments to six "poor" provinces, known as "have-nots."

In 2008/09 -- the year before Ontario became eligible to receive equalization payments -- "have-not" provinces represented 32 per cent of the 10-province population, or about 10.8 million people. But with Ontario's entry into the club in 2009/10 (think of a big sumo wrestler at a soup kitchen), 71 per cent of the population, or 24.7 million people, now live in a province that receives an equalization cheque from the federal government. (The others are Prince Edward Island, Nova Scotia, New Brunswick, Quebec and Manitoba.)

The entry of Ontario into relative poor-province territory has resulted in a massive shift in dependency in Canada, one that portends future inter-provincial conflict.

Any program that counts six of 10 provinces with 71 per cent of the population as relatively "poor" is an arrangement that needs a rethink.

Maybe that rethink should begin in Ontario. After all, its own policies -- including expensive green-energy schemes that drove up the cost of power and drove out business, a regulatory approach and labour legislation that have further made Ontario an uneconomical place to invest, and chronic budget deficits and weak public finances -- have contributed to its relative economic weakness.

Ontarians can now look ahead to a future of higher deficits, higher debt-interest payments and increased pressure for higher taxes, which will lead to even less investment, higher unemployment and eventually an exodus of wealth-creators and others. (Quebec is the most notable example of such folly in practice.)

Furthermore, Ontario has been receiving an ever-increasing share of the equalization cash available from Ottawa, which might result in the have-not provinces demanding Ottawa increase its equalization payouts.

In 2009/10, Ontario received $347 million, or 2.4 per cent of the $14.2-billion equalization pie; last year, it received almost $3.3 billion, or 21 per cent of the $15.4 billion available.

This presents a problem for "have" provinces. You see, under the current equalization program, calculations for equalization eligibility and payouts are based on what's known as "fiscal capacity," that is, the ability of a province to raise revenues.

Unfortunately, the factors that go into such a calculation are not above political machinations. There have been efforts in the past to include 100 per cent of resource revenues -- as opposed to the current 50 per cent -- in the calculations, under the justification of "more sharing," to use the words from a 2006 report presented to the Council of the Federation, made up of Canada's premiers.

Problematically, including all resource revenues would mean even more federal tax dollars (which on a net basis originate more in resource-rich provinces) transferred to "have-nots" -- the explicit aim of those who back this idea.

Why does this matter? Because all the resource-rich provinces -- British Columbia, Alberta, Saskatchewan and Newfoundland and Labrador -- are now lined up on one side of the equalization divide while Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Manitoba and now Ontario, are on the other.

That potential for conflict means the resource-rich provinces should expect to see attempts made by the equalization-receiving provinces to get at their resource revenues via the federal government, either through dramatically higher equalization payouts, or through some other federal program.

It has happened before.


Mark Milke is a senior fellow at the Fraser Institute and author of Equalization, Ontario, and the Politics of Division.



Republished from the Winnipeg Free Press print edition January 27, 2014 0

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