A Better Way to Help the Have-Nots

Equalization, Frontier Centre, Media Appearances, Public Sector, Uncategorized

Has the Finance Minister finally seen the light? Or has he succumbed to the spirit of the season … or an overindulgence in eggnog? Whichever it is, we are heartened by news Paul Martin is considering what could prove to be dramatic and beneficial changes to the method by which the poorer provinces are subsidized by the rest of Canada.

Speaking before the Metropolitan Halifax Chamber of Commerce last week on the subject of his recent budget, Mr. Martin was asked whether he would consider replacing the billions of dollars in annual federal spending on job creation and economic development in have-not regions — and in particular the $700-million Atlantic Investment Partnership — with lower federal corporate taxes for poorer regions. Mr. Martin stunned the audience when he said he not only liked the idea, but had already explored it with some premiers and found significant support. He added that such a proposal might be tried as an experiment for a period of 10 years and that “it’s not something the federal government would do unilaterally.”

Mr. Martin’s words are encouraging. Such programs as the $700-million AIP are maintained for political reasons — as they help secure Liberal support in poor areas. But if the goal of federal policy is to improve the economic performance of poorer regions and not merely the performance of the federal Liberals, then we need fewer government bureaucrats scrutinizing application forms and doling out money (the jobs grants disaster of last year was proof enough of that) and greater incentives for people and businesses in those regions to work harder and for new businesses to locate there. Lowering corporate taxes would begin such a process.

In the light of what appears to be an important change in Mr. Martin’s thinking, three market-oriented think-tanks from have-not provinces — the Frontier Centre for Public Policy in Manitoba, the Montreal Economic Institute of Quebec and the Atlantic Institute for Market Studies in Nova Scotia — have suggested similar reforms to other federal programs. Following Mr. Martin’s speech, Peter Holle, Michel Kelly-Gagnon and Brian Lee Crowley, the heads of the three institutes respectively, repeated an argument they initially made in a National Post article last month: that equalization should be converted from a transfer system to one that delivers lowers tax rates to poorer provinces.

As equalization now functions, Ottawa siphons $10.8-billion a year from have into have-not provinces. This creates provincial-scale welfare traps. Recall that earlier this year John Hamm, Premier of Nova Scotia, claimed he deserved a greater share of federal resource royalties from offshore oil and gas reserves on top of his existing equalization entitlements. Whatever one may think of the request — Premier Mike Harris of Ontario summoned the image of a welfare recipient winning $1-million in the lottery and still wanting to stay on the dole — there is little doubt that the equalization system discourages provinces from developing their natural resources. Converting equalization into a tax-reduction program that delivers lower taxes for poorer regions would help eliminate Nova Scotia-style welfare traps.

In his off-the-cuff remarks in Halifax, Mr. Martin discussed some excellent ideas for reforming the way the rest of the country subsidizes poor provinces. Not only should he make good on these suggestions, but he should follow the lead of Messrs. Holle, Kelly-Gagnon and Crowley, and apply similar logic to other programs.