Equalization tensions could ‘destroy unity’ in Canada: Ex-Bank of Canada Chief David Dodge

Posted on August 11, 2012 in Governance Policy Context

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Nationalpost.Com – news/Canada/CanadianPolitics
1 August 2012.   Peter O’Neil

OTTAWA — Tensions over wealth-sharing between rich and poor provinces could ultimately “destroy” national unity, former Bank of Canada governor David Dodge argues in an essay published Tuesday by a prominent national think-tank.

Dodge was the co-author of one of two essays published by the Montreal-based Institute for Research on Public Policy underlining concerns about growing wealth disparity as Ottawa and the provinces head into negotiations to renew the current equalization formula agreement, which expires in 2014.

Fiscal transfers have long acted as a sort of glue to preserve the integrity of the Canadian economic union by promoting stability, equality of opportunity and basic services for all, Dodge and his two co-authors wrote in the IRPP publication Policy Options.

But wealth-sharing, enshrined in the 1982 Constitution Act, can cause a variety of problems as the rise of China and ongoing U.S. economic weakness cause Western Canada’s resource-based economies to boom while Central Canada’s manufacturing-based economy struggles.

Transfers can play a “counterproductive role if they act to mask inexorable structural change, delay necessary adaptation and create the illusion that the unsustainable can somehow be sustained indefinitely,” they write.

“Ultimately they can destroy unity by creating resentment, disrespect and distrust.”

The Dodge essay was one of two in the August issue of Policy Options that painted a grim picture of federal-provincial fiscal relations over the next eight years.

Roger Gibbins, former head of the Canada West Foundation, wrote that New Democratic Party leader Tom Mulcair has only scratched the surface of potential east-west tensions with his recent criticism of the oil sands.

Gibbins suggested that by 2020 Canada could be governed by a party with minimal representation from the West, setting the stage for a federal carbon pricing scheme intended to reduce natural resource exports and consequently drive down the dollar, helping Central Canada’s manufacturers.

“If national carbon pricing is little more than a green-wash for policies designed to redistribute wealth, then the reaction in Western Canada could be ferocious,” wrote Gibbins, a retired academic who splits time between Calgary and Vancouver.

Mulcair, who has complained that oil exports have fuelled an artificially high dollar that is killing manufacturing jobs, “has only lifted the corner on what could be a very acrimonious debate about Canada’s future,” Gibbins wrote.

Gibbins also wrote that the future of the equalization program “is cast into doubt” when Ontario, which along with Alberta has historically been a pillar of Canadian fiscal federalism, is a net recipient of a program funded by “relatively small” western provinces.

Quebec currently gets the largest slice of the equalization pie, raking in $7.4 billion of the $15.4 billion program in 2012-13. Ontario is a distant second, getting just under $3.3 billion.

Dodge and two other financial experts noted in their paper that Ontario, one of six provinces now getting transfers (only resource-rich B.C., Alberta, Saskatchewan and Newfoundland don’t tap into the fund), will take an increasingly larger share of that pie.

Ontario’s share will rise to $6.4 billion under the current formula by 2020, a growth rate triple that of other recipients.

“It therefore remains to be seen how the traditional have-not provinces will respond to a call to make more room in the equalization boat for a struggling Ontario with large and growing needs,” wrote Dodge, Peter Burn and Richard Dion, who all work for the law firm Bennett Jones.

Their paper considers various proposals to re-jig the formula but concludes Canada ultimately must reconsider the principles behind the equalization concept.

Ottawa and the provinces should focus less on trying to create equality or comparability of social programs, and more on the “reasonable quality” of public services.

The federal government should also invest more aggressively to build the economic growth potential of have-not provinces.

“Canada’s economic prosperity and political equilibrium ultimately depend on the economic strength of all provinces, especially populous Ontario.”

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