March 23, 2010
by Mark Milke
Mark Milke, research director for the Frontier Centre for Public Policy.
While subsidizing provinces is as old as Confederation, those subsidies don’t exist because Canada’s founding fathers wanted it that way. Instead, the Dominion government only agreed to a limited set of provincial transfers, with some conditions attached.
The founding fathers agreed to the subsidies to prevent the provinces from both levying tariffs on each other’s goods (their main source of revenue) and from introducing an income tax. At the time, the settlements were seen as “full and final” – that is, making theme more generous was not expected.
This year, Ottawa will send the provinces $65 billion to subsidize their budgets. And while provincial governments don’t levy tariffs, they have implemented other interprovincial barriers to trade. They’ve also introduced provincial income taxes.
And that brings us to equalization, which is one-third more expensive now than it was five years ago. Anyone with a basic understanding of math understands the bizarre policies and programs that result from equalization. The traditional “have” provinces of Ontario, Alberta and BC get the short end of the fiscal stick, with net outflows of money from their taxpayers being sent (in the form of federal tax dollars) to “have not” provinces through federal transfer programs.
For the record, Ontario received equalization in the now-ending budget year and will also receive cash next year; but that’s an anomaly. As well, when you add all transfers together on a net basis, Ontario’s residents still send more money to the federal government than is sent back to Ontario.
The result of equalization, unfortunately, is policy: for example, Quebec and Manitoba both charge below-market hydro rates; Quebec offer cheap, universal daycare, including to those who can afford to pay the full cost; and the Atlantic provinces over-staff its public service, which is offered above market wage rates.
There are exceptions, of course. New Brunswick’s Liberal government, under Premier Shawn Graham, has done some smart work on tax policy to make the province more attractive to business and personal investment. It’s a laudable step in the direction toward eventual self-sufficiency.
Recently, the Frontier Centre for Public Policy released a report on the effects of equalization on both “have” and “have not” provinces.
Here are a few objections I’ve received to our thesis:
“Everyone pays for equalization because people in every province pay federal taxes.” True but irrelevant. If 10 people throw money into a poker game and six people leave with the winnings, four people have lost money. That’s how equalization works.
“Higher income taxes explain the more generous service in the have-nots.” Wrong. Own-source provincial revenues are part of any provincial budget, but some provinces are much more dependent on Ottawa than others. Dependency ranges from a high of 35% of the budget in PEI to a low of 7% in Alberta.
Let’s put this in personal terms. If some kid earns $65 and her allowance is $35, it’s not difficult to see the potential for extra spending.
“Equalization is constitutional.” Correct, but the Constitution doesn’t mandate any particular level of support nor a specific design. Besides, as a Fraser Institute study noted several years ago, “this debate over the specific requirements of the Constitution’s equalization commitment ignores a more fundamental issue: equalization uses federal revenues to fund spending in areas of provincial jurisdiction. As a result, its legality can’t be resolved without considering the larger question of the federal government’s spending power.”
Constitutional quibbling about equalization aside, no federal government will risk losing votes in “have-not” provinces by dumping equalization even if, as the Fraser Institute asserts, equalization’s constitutional status is unenforceable.
That leaves politics. A sensible reform to equalization, and perhaps to other federal transfer programs, is to swap federal payments for tax room by as much as is necessary to cut the apron strings between Ottawa and the provinces, without revenue loss to the latter, otherwise they’d never agree.
In the meantime, and to make that deal more likely, Ottawa should freeze equalization spending. That way, it is providing a stick (no increases in transfers) with a carrot (provincial control over more tax room) to the provinces to reach a deal.
Ottawa has historically more than kept its word on transfer payments, some would say absurdly so. But the provinces, with their multiple non-tariff barriers and income tax collections, never kept theirs.
Mark Milke is the research director for the Frontier Centre for Public Policy, a conservative/libertarian, non-profit think tank with offices in Calgary, Regina and Winnipeg. Distributed by Troy Media.