Manitoba can’t — and shouldn’t — rely on equalization-boosted economy

Hey there, time traveller!
This article was published 28/12/2023 (950 days ago), so information in it may no longer be current.

As windfalls go, the $842-million equalization boost from the federal government is the largest in Manitoba’s recent history. The jackpot, announced last week, will go a long way towards erasing the province’s $1.6-billion deficit.

Naturally, the NDP government is downplaying it.

“Federal transfers certainly have a role to play, but federal transfers are not going to get us out of the problem that was left for us by the Stefanson government,” Premier Wab Kinew said.

Maybe not. But it will help a lot.

Kinew is sticking to the narrative that the Tories left behind a financial mess that the NDP now has to clean up. There’s some truth to that, although it’s being embellished for political purposes.

Part of Kinew’s agenda is to show Manitobans that his brand of NDP is a fiscally responsible one capable of rolling up its sleeves and controlling spending. What he doesn’t want is the perception that Manitoba is being bailed out by Ottawa, even though there’s some truth to that, too.

The extra equalization money is huge. To put it into perspective, the increase alone is enough to finance the entire Justice Department, which has a budget of $813 million in 2023-24.

All told, Manitoba will be getting $4.352 billion in equalization from the federal government in 2024-25, up from $3.51 billion this year. That’s a 24 per cent increase, the single largest increase in modern Manitoba history.

The second-biggest increase was this year’s $577-million boost, which the former Tory government used mostly to cut income and education property taxes.

The province was expecting an increase in equalization from Ottawa for the 2024-25 fiscal year, but nowhere near what it’s getting. Equalization payments to Manitoba have been growing steadilyafter falling in the early 2010s (when Ontario began temporarily receiving payments).

The transfers have more than doubled from just over $2 billion six years ago. Sadly, instead of that money going into front-line services such as health care, education and poverty reduction, and/or to reduce the province’s deficit, the cash — which comes with no strings attached — has been used largely to reduce taxes.

The extra money won’t affect this year’s projected deficit, but it will have an impact on next year’s finances. It will also make it easier for the NDP to deliver on its election pledge to balance the books within four years.

It’s not all good news. The windfall is a stark reminder of Manitoba’s relative economic weakness. Equalization payments are designed to reduce economic disparities between provinces. The money is distributed based on a province’s fiscal capacity compared with the national average. The poorer the province, the bigger the payout.

Total equalization payments in Canada will grow by $1.29 billion in 2024-25. Manitoba is getting about two-thirds of that increase. British Columbia, Alberta, Saskatchewan and Newfoundland don’t receive equalization because of their relative economic strength. Ontario will get a small amount ($576 million) for the second consecutive year after receiving no payments for four years.

New Brunswick, Nova Scotia and Prince Edward Island are getting increases next year, but nowhere near Manitoba’s windfall.

Quebec will see its equalization payments fall slightly in 2024-25, as its economy grows.

Manitoba is becoming more reliant on the federal government to pay the bills. It receives the highest per capita transfers from Ottawa west of New Brunswick. Only the three Maritime provinces receive more than Manitoba on a per capita basis (Nova Scotia has been closing that gap in recent years).

Contrary to the perception that Quebec benefits the most from federal transfers, it receives nowhere near the per capita allocation Manitoba does. In fact, Quebec’s per capita payout for all federal transfers combined (which includes the Canada Health Transfer and the Canada Social Transfer) will fall to $3,137 next year. Manitoba’s will increase from $4,063 to $4,577, by far the biggest jump in the country.

There is a downside to being that reliant on Ottawa: the transfers are not guaranteed over time and can fall unexpectedly, as they did in the early 2010s. That’s because equalization is based on an economic formula that measures relative fiscal capacity — the ability of a province to raise its own revenues based on average national tax levels.

When another province’s economy falters relative to Manitoba’s, its share of equalization grows and Manitoba’s falls. It’s a zero-sum game. That can make for challenging budgeting, especially when a government is cutting taxes while running deficits (as the former Tory government did and as the NDP continues to do).

In the short term, the equalization windfall will make budgeting a lot easier for the NDP in its first term in office. However, the long-term goal should be to strengthen Manitoba’s economy to make it less reliant on the federal government. Next year’s equalization windfall could disappear just as quickly as it arrived.

tom.brodbeck@freepress.mb.ca