Some provinces are more equal than others

While provincial finance ministers bickered endlessly about transfers last week, a heretical Maritime think tank was coolly undermining the pleas of the poorer provinces for more cash. In two separate reports, the Atlantic Institute for Market Studies scrutinized how much those supplicants collect in equalization payments compared to the cost of services provided. Then it explained how the eight poorer provinces actually spent a goodly chunk of their lolly on themselves. Such bracing conclusions may prompt those provinces to tar and feather the authors, AIMS president Brian Lee Crowley and policy analyst Bobby O’Keefe.

“The recipients of equalization appear to be providing inflated levels of public service costs,” one report, The Flypaper Effect, notes tartly. The other, Why Some Provinces Are More Equal Than Others, is even more lethal. “When one takes account of differences in costs of providing services, Ontario is not only not able to offer comparable services to those offered in equalization-receiving provinces, but lags well behind.” Good grief.

Far from under-equalizing the poorer provinces, the data appear to show that taxpayers are over-equalizing those eight poorer brethren. In 2006-07, Ottawa will send $11.5-billion in those transfers to every province with the exception of Alberta and Ontario. (Saskatchewan will receive a mere $13 million.) Such generosity is supposed to permit the poorer provinces to provide roughly similar levels of services for roughly similar levels of taxation. In theory, that is the generous Canadian way.

But what is actually happening? In the absence of federal data, which is interesting in itself, AIMS cobbled together an assessment of the costs of service delivery in different provinces using a consultants’ report. The authors conclude that it costs $1,073 to deliver a bundle of public services in Ontario while that same bundle should cost $946 in Newfoundland or $940 in Manitoba. Then they apply those adjustment factors to each province’s program spending in 2004-05. In other words, what can those provinces really buy with the money they collect?

Surprise. When those adjustments for the actual cost of service are made, it turns out that many provinces have spent more on a five-year average, between 2000 and 2004, than long-suffering Ontario whose taxpayers will foot $4.9-billion of this year’s equalization tab. Among the privileged provinces that spent more than the national per capita average are: Newfoundland, Prince Edward Island, Quebec, Manitoba, Saskatchewan and Alberta.

Ontario was the province that fell the furthest below that national average. “Two provinces typically thought of as the most economically disadvantaged, Newfoundland and PEI, each effectively spend $2,351 and $1,855, respectively, (adjusted) more per person on public services than Ontario, ” AIMS observes. You don’t have to be an economist to see the dynamite in these calculations.

It gets worse. The think tank examines the cost of public service in each province, counting both provincial and local government employees to take account of the differences in the distribution of responsibilities in each province. On face value, Ontario and Alberta pay wages that are above the national average to their employees. But then AIMS quite sensibly compares public sector wages in each province to its average industrial wage over that five-year period, 2000 to 2004. It turns out that Newfoundland, Prince Edward Island and Quebec pay well above the Ontario average and the national average.

As AIMS dourly recounts, other provinces have apparently inflated the size of their public service. Saskatchewan had 32 more public servants per 1,000 people than that national five-year average. Manitoba had 28 more. Strikingly, only Ontario and Alberta were below the national average, with Ontario actually having 10 fewer public servants per 1,000 people.

So what is the lesson here? Because the equalization formula must be overhauled, many poorer provinces have been advocating solutions that would add even more money to that transfer pot. Based on the evidence, that unsettling commonsense evidence, current levels are more than sufficient. Enough already.