‘Father of Equalization’ says programme can be destroyed by politics and design flaws

Equalization, Frontier Centre, Speech (historic), Uncategorized

MONTREAL – Professor James Buchanan, 1986 Nobel Laureate in Economics, says that equalization programmes can be captured and destroyed by politics and bad design. Known as one of the "fathers of equalization" because his early writings were highly influential in the design of equalization programmes such as Canada’s, Buchanan revisited his arguments of 50 years ago in Montreal today. He said that he didn’t take enough account of how political interference with the operations of such programmes can outweigh the good intentions behind them.

While not commenting directly on Canada’s equalization programme, Prof. Buchanan pointed out that a defensible programme must not be captured by political coalitions in equalization-receiving provinces and used for their narrow political purposes, such as enriching specific government programmes that benefit only their supporters. Equalisation only works if its benefits flow to all residents of recipient provinces. The keynote speaker at a conference in Montreal on "Equalization: Helping Hand or Welfare Trap?", Professor Buchanan also noted that a badly designed equalization programme can do more harm than good: for any of the desired results of equalization to be achieved "rather precise implementation" is required, without which "perverse resource shifts might occur."

A number of leading experts on Canada’s $10-billion-plus equalization regime also spoke at the Montreal conference, which was co-sponsored by three public policy institutes (the Atlantic Institute for Market Studies, the Montreal Economic Institute and the Frontier Centre for Public Policy) representing all of Canada’s equalization-receiving provinces. Several of those experts took up Prof. Buchanan’s challenge of examining the details of Canada’s equalization regime to see to what extent its original intent might have been distorted or undermined by constant political tinkering over the years, as well as by poor design, such as in the way natural resource revenues are handled, and perverse incentives for equalization-receiving provinces to engage in imprudent behaviour in order to maximize their equalization entitlement.

According to the heads of the three Institutes, equalization in Canada is in need of a serious and rigorous re-examination in light of the remarks made by Professor Buchanan and others.

Brian Lee Crowley, President of the Atlantic Institute for Market Studies, speaking on behalf of his colleagues, argued that it was time to look past the good intentions of the equalization programme, and to analyse objectively at how politics at both the federal and provincial levels may have taken Canada’s programme far from its original and laudable objectives. "When the father of equalization comes to Canada and says ‘I didn’t take enough account of how politics and poor design can make equalization go wrong’, and then some of Canada’s leading experts on equalization – such as Ken BoessenkoolFinance in Saskatchewan and Michel Boucher of the École nationale d’administration publique – all agree that there are major flaws in the way equalization operates in Canada, we think that the stage is set for a major re-think of all aspects of the programme. of the C.D. Howe Institute, Paul Boothe, former Deputy Minister of We are going to continue to work to draw the attention of opinion leaders and policy makers to the many ways in which equalization may in fact be a drag on economic growth in the country’s poorer regions, and the alternative approaches that would better serve what must be our ultimate objective: a Canada in which every region has achieved a level of prosperity and self-reliance such that equalization is unnecessary."

Copies of Professor Buchanan’s remarks are available on the two Institutes’ websites (www.aims.ca; www.iedm.org; www.fcpp.org). The other papers presented at the conference will be posted over the next few months. – /publications/speeches/hpg/oct252001/father_equalization.html

Equalization is the programme by which Ottawa ensures that each provincial government, regardless of the strength of its local tax base, receives sufficient revenues to provide adequate services, such as education, health care and transport, to its residents. It is currently one of Ottawa’s largest spending programmes, out of which payments are made to Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland.

For more information, please contact: On the day of the event, media co-ordinator Patrick Leblanc, 514-219-3224 (cell.)

At all other times: Peter Holle, President, or Dennis Owens, Senior Policy Analyst, Frontier Centre for Public Policy, 204 957-1567 Brian Lee Crowley, President, AIMS, 902-499-1998 Michel Kelly-Gagnon, Executive Director, Montreal Economic Institute, 514-273-0969