Provinces can’t blame Ottawa for red ink: Transfer payments have grown rapidly over past decade, Fraser Institute finds

Posted on in Governance Policy Context

NationalPost.com – Canadian Politics
January 12, 2016.   Ashley Csanady

The idea the federal government short-changes the provinces when it doles out transfer payments is so deep-rooted it dates back to the last time the Liberals controlled Ottawa.

See Chart: < http://wpmedia.news.nationalpost.com/2016/01/na0112_fraser_transfers_web.png?w=400&h=1101 >

Over a decade ago, when Justin Trudeau was a teacher and Ralph Goodale was finance minister, the provinces complained on the regular that Ottawa should be transferring them more money — even as a new federal health transfer was being worked out. In 2004, a federal-provincial meeting of finance ministers “ended badly” because some ministers felt Ottawa had stiffed them, according to media reports at the time.

Four elections and two governments later, not much has changed — except federal transfers, which have grown more than the population or inflation over the past decade. In fact, they’ve grown 62.3 per cent since 2005, a new study finds.

“Contrary to claims that federal transfers to the provinces are inadequate,” a new report out Tuesday from the Fraser Institute “finds that major federal transfers to the provinces and territories are currently higher on an inflation-adjusted per-capita basis than at any other point in Canadian history.”

The study goes on to note that program spending increases have increased 56.1 per cent across all provinces, “whereas spending would only have needed to increase by 31.6 percent to offset the effects of inflation and population growth.”

This debunks the myth that provinces are been short-changed by Ottawa — and highlights how provincial spending has outpaced demand for services.

“The narrative that inadequate fiscal transfer form Ottawa are partly responsible (for provincial deficits) doesn’t withstand scrutiny,” said Ben Eisen, one of the report’s co-authors.

In some provinces, like P.E.I, that means transfer payments now comprise 33.5 per cent of revenue. In others, like Ontario, the share is much lower, but has nonetheless increased as a shared of revenues in recent years, from 12 per cent in 2005 to 16.2 per cent of provincial revenue this fiscal year.

“In Ontario, the situation is actually more dramatic than any other jurisdiction,” Eisen said. “The overall transfer pie is growing” and so too is Ontario’s share.

“Federal transfers to Ontario increased by 87.8 percent between 2005/06, far faster than the rate of transfer growth for the country as a whole,” the report notes.

The narrative that inadequate fiscal transfer form Ottawa are partly responsible (for provincial deficits) doesn’t withstand scrutiny.
All this despite the fact Ontario — that fiscal problem child of confederation with its growing debt, struggling credit rating and aspirations of a return to black — has in recent years been extraordinarily vocal about the need for better federal involvement. Whether it’s the Ring of Fire (a potentially multi-billion mineral deposit in the province’s far north) or transportation and infrastructure, Premier Kathleen Wynne’s government has for years asked Ottawa to step up. The 2015 budget even included a whole section on the growing need for “national leadership” on several files. That document warned “This vertical fiscal imbalance is expected to worsen over time.”

But the Fraser report finds Ontario has in recent years been one of the largest recipients of federal monies, largely because the province fell to “have not” status and qualified for equalization for the first time in years following the 2008/09 recession.

“Ontario has received about $14 billion in equalization payments since it became a have-not province” following the recession, Eisen said. Yet the province still spends more than it takes in each year: current projections suggest the annual shortfall will be $7.5 billion this fiscal year.

Now those numbers only reflect what Ontario receives from the feds, not what it contributes to Confederation. As the largest province, its tax contributions are significant and many experts — including the Parliamentary Budget Officer and the Mowat Centre — have found Ontario’s net contribution to Canada is much larger than what it receives back.

“There is roughly an $11B structural gap between what Ontarians pay to the federal government and what they receive back from the federal government,” Noah Zon, a senior policy associate with Mowat, noted in a 2013 report.

Ontario Finance Minister Charles Sousa also pointed to that research in a statement responding to the Fraser report, noting the province’s growth is now expected to outpace the federal average. He repeated earlier concerns that under Stephen Harper, the Conservative government made changes to transfer payments that cut $641 million from Ontario’s take in 2014/15. But he also implied that there was more collaboration with the new federal government than the old.

“In 2015-16, Ontarians will contribute approximately $6.7 billion to the Equalization program while receiving roughly $2.4 billion in return, representing a net contribution of $4.4 billion – the highest of any province in Canada,” Sousa said.

Eisen said weighing province’s net contributions is beyond the scope of the report, which focused more on what provinces get from Ottawa versus their own expenditure growth as opposed to comparing more prosperous provinces to those with fewer revenue streams.

Regardless of whether Ontario contributes more to Confederation than it takes in, the Fraser report highlights the fact Ontario’s true fiscal imbalance is a result of provincial, not federal, policies. If the province had held-the-line on spending growth to match inflation, the report notes, “revenue growth would have exceeded spending and the province would therefore have a substantial budget surplus this year instead of a large budget deficit.”

< http://news.nationalpost.com/news/canada/provinces-cant-blame-ottawa-for-red-ink-transfer-payments-have-grown-rapidly-over-past-decade-fraser-institute-finds >

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