Kill equalization

Posted on November 8, 2008 in Debates, Equality Debates, Governance Debates – Opinion/Editorial – Kill equalization
Published: Saturday, November 08, 2008

No one is ever going to be arrested for shouting “equalization” in a crowded theatre. Discussing Canada’s complex system of interprovincial wealth redistribution is more likely to cure insomnia than elicit panic in most Canadians. Still the 50-year-old plan, designed to transfer cash from so-called “have” provinces to “have-nots,” is perhaps the biggest single drag on our economy. So at a time of slowing growth, it should be troubling to all Canadians when Ontario — a province with nearly 40% of our national population and once the “economic engine of Confederation” — slips into pauper status, even if only temporarily.

Technically, this is not Ontario’s first time in have-not territory. As Queen’s University economist Thomas Courchene pointed out in a recent issue of Policy Options, it qualified for that dubious distinction each and every year between 1977 and 1982. Then, as now, the reason was not that Ontario had suddenly become poor, but rather that the resource-based provinces, particularly Alberta, had become relatively richer.

However, unlike during that earlier energy boom, Ontario is no longer “too proud” to put its hand out for the actual cash. According to Professor Courchene, in the late 1970s, Ontario Premier Bill Davis turned down equalization because he reasoned “that if Ontario qualified for equalization this must mean that there was something seriously awry with the equalization formula,” not something wrong with Ontario.

It’s too bad current Ontario Premier Dalton McGuinty does not share Mr. Davis’s principled attitude.

Despite its current slow growth, for instance, Ontario still has per capita provincial GDP above the national average. It’s true much of the rest of the country has come close to catching up. But again, this is not a measure of how Ontario has fallen, but how far and fast the rest have risen.

When equalization started in the 1950s, Ontario had per capita GDP 120% that of the national average. Newfoundland and the Maritime provinces were all around 55% to 65%. As recently as 1990, Ontario was at 112% of the national average for per capita provincial GDP. And it remains today at about 103%.

Since 1990, have-not provinces have grown — rapidly. Eighteen years ago, for instance, Newfoundland’s per capital GDP was still just 65% of the national level. Today, it is closer to 97%.

Rather then Ontario now qualifying for federal handouts extracted from taxpayers in B. C., Alberta, Saskatchewan and Newfoundland and Labrador, all the remaining have-nots should simply be cut off. There is no longer any need for the program. Confederation’s once-poor cousins are now capable of standing on their own. Like Bill Davis, the premiers of those provinces — though still technically in the have-not column — should refuse to accept the money. If nearly every province qualifies for equalization, then the problem is with the formula, not with provincial economies.

As on so many issues, Quebec is the fly in the ointment. Ontario qualifies because the equalization formulas are jury-rigged to ensure the Quebec always qualifies. From the start, Quebec has nearly always been the richest have-not. Its per capita GDP has always been around 90% of the national average, which should always have meant it qualified for little or nothing. But as successive federal governments — Conservative, as well as Liberal — have attempted to cozy up to Quebec to win votes, they have also fiddled with the equalization calculations to ensure Quebec receives $1,000 or more per year per man, woman and child.

Equalization has never made sense, at least not on the mammoth scale on which it is practised in Canada. At one point, more than 40% of the budgets of Atlantic provinces came from Ottawa in the form of transfers and equalization. No other Western nation redistributes so much wealth.

Equalization is also like fly paper — very hard to escape. Since the very early days when Alberta left the have-not rolls, only Saskatchewan and Newfoundland have graduated from their ranks, and both of them only in the last year.

This reliance on handouts makes governments and voters too dependent on other people’s money and less willing to make innovative policy decisions to spark job creation. The fact that our largest province has now become eligible for the program should serve as a wake-up call: It is time to end equalization.

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This entry was posted on Saturday, November 8th, 2008 at 11:36 am and is filed under Debates, Equality Debates, Governance Debates. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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