Not all equalization is created fairly

Payments have allowed other provinces to leapfrog Ontario in services

Heaven help the federal government if Ontario ever elects someone who can sound halfway sympathetic in making the case that the province gets a raw deal on equalization.

Its citizens, after all, have for decades ungrudgingly sent their taxes off to Ottawa to be redistributed in other provinces under the arrangement – the only province to have consistently been a net contributor. Over the years, the recipients used the cash to enlarge their spending to the point where “have not” jurisdictions offer superior social services than Ontario enjoys. Newfoundland has 50% more nurses per capita; the average public school classroom in Ontario is 10% bigger than in Manitoba; Quebec, which offers all parents, regardless of income, $7 a day daycare, has cashed equalization cheques since the day the system was developed 50 years ago, despite comparable geographic and demographic blessings as Ontario.

In Nova Scotia, 32 hospitals serve a population of just 800,000; P.E.I. has eight hospitals for 140,000 people. In all of Atlantic Canada – with a population about that of Greater Vancouver’s – there are 15 publicly funded universities, while Ontario competes with Alabama for the lowest per-capita post-secondary funding in North America.

“Equalization enables the building of gold-plated public services that are far in excess of any North American standard and all the costs associated with that,” said David MacKinnon, former head of Nova Scotia’s Department of Development and the Ontario Hospital Association.

Since the TD Bank reported recently that Ontario could soon qualify for equalization, Premier Dalton McGuinty has sought to highlight the absurdity of a situation that would see 23 million Canadians classified as have-nots, in a country of 32 million.

The system is so “perverse and nonsensical” Mr. McGuinty said, Ontarians would have to send money to Ottawa to subsidize its own economy. “To speak of ‘have’ and ‘have-not’ provinces in 2008 makes no sense. We’re a nation of haves these days,” he said.

The problem with these arguments, however, seems to be that they’re from Mr. McGuinty. At the best of times, Westerners and Easterners have trouble locating a soft spot for Ontario. And since this Premier has devoted much of his effort to seeking bailouts for his manufacturing base while suggesting other provinces (particularly Alberta) should shoulder bigger loads, he has failed to attract allies among his fellow premiers, most of whom profit from the arrangement anyway.

Mr. McGuinty’s habit of overtaxing business and giving labour big favours has provoked lectures from federal Finance Minister Jim Flaherty, who has suggested bluntly that until Ontario starts goosing its own post-globalization economy, it gets no pity points from him.

Nonetheless Ottawa probably sees Mr. McGuinty’s logic: the equalization formula, rejigged just over a year ago, is already broken again. The fiscal capacity of B.C., Alberta, Saskatchewan and Newfoundland has grown more than former Alberta deputy treasurer Al O’Brien’s commission, which recommended the new formula, ever envisioned. The expert panel modelled it on oil between $40 and $60 a barrel, says Robert Lacroix, who sat on the commission. At $120 and climbing, Ottawa may have to spend a fortune just to keep levelling the field. Since Ontario gets no royalties from the resources pushing up the national average, the burden comes disproportionately from Ontario pockets. At one time, Ontario could expect most of the money transferred to other provinces to eventually find its way home again. Today, says Mr. Lacroix, “When you send one dollar to Atlantic provinces, a lot of it goes to Europe or Asia or elsewhere instead of staying in Canada.”

While Ontario’s economy is far from collapse (6.3% unemployment; GDP growth just a hair below the national average) if it slips on the U.S. recession things will get worse. Already columnists and editorialists in the province’s newspapers grumble about Ontario’s unfair share, suggesting it’s only a matter of time before the federal government – eager to stay on central Canadian voters’ good side – has to listen. So more tinkering with the equalization formula is inevitable, predicts Mr. Lacroix. “With the intensity of competition, people will say, ‘I need all my resources just to be competitive in the global market,’ and that’s what Ontario is saying right now.”

For a program that at $13.6-billion only comprises about 6% of federal tax redistribution, equalization consumes a disproportionate amount of political energy.

“Every province thinks they’re getting screwed,” says Brian Lee Crowley, president of the Atlantic Institute for Market Studies. The have-nots never think they’re getting enough, while contributing provinces argue the money allows recipient provinces to run lousy fiscal policies. While equalization aims to ensure similar levels of government services in all provinces, it measures revenue, not expenditures, Mr. Lacroix notes.

Heavier spending by have-not provincial governments risks wiping out their one clear competitive advantage – the low cost of doing business – by driving up wages and costs in the public sector, saysMr. Mac-

Kinnon, which may explain why the United States, which has no equalization program, has managed to narrow the disparity between rich and poor states far more effectively.

For all these reasons, the prospect of regular readjustments to the arrangement is one no one relishes. Ottawa appears bound to the system, nervous that any move Quebecers perceive as threatening their $8-billion annual transfer would be political suicide. Meantime, says Calgary-based political strategist Ken Boessenkool, Western provinces are apt to see equalization as part of a political deal that ensures a decentralized federation that lets them keep their independence in provincial matters. Only the lonely Mr. McGuinty, it seems, is calling for equalization’s outright abolition.

Still, while Canada’s Constitution insists Ottawa is committed to the principle of equalization, how they do it is Parliament’s decision. Mr. Crowley’s organization suggests provincial debts could be assumed in exchange for no-deficit guarantees from the provinces (roughly 90% of equalization transfers go to service provincial liabilities). Mr. MacKinnon suggests calculating the arrangement based on need – that is, acknowledging that it’s costlier to provide services to Ontario’s population, widely dispersed and disproportionately immigrant, than in tiny, homogenous P.E.I. And James Buchanan, the Nobel Prize winning economist who fathered the equalization program in the first place, still stands by his original idea: to send money from the national government directly to individuals (potentially to be taxed back by the province), rather than to other governments, where it will only end up expanding public spending. In an interview with Winnipeg-based Frontier Centre for Public Policy a few years ago, Mr. Buchanan confessed his thinking has evolved since he helped design the idea in the 1940s.

“I now recognize it is much more difficult to get implemented politically what might be desirable economically,” he said.

The idea works well on paper. But you don’t have to be James Buchanan or Dalton McGuinty, to sense that when one of Canada’s richest provinces ends up with less funding for public services than any other province, and flirts with the prospect of receiving federal subsidies itself, the real world is no place for an equalization arrangement like this.