Deplorably, the federal government recently announced it was renewing the current equalization system in Canada. I say “deplorably” because the evidence is mounting that equalization is a millstone around the neck of the less-developed provinces seeking to escape dependence on Ottawa by paying their own way out of their own tax revenues.
Of course the only way to escape dependence on Ottawa is to make the local economy grow. But equalization, intended to help out the poorer provinces, has the perverse effect of making it more politically attractive to cry poor and play the victim than to pursue genuine and sustainable economic growth.
While equalization’s many defects are becoming better understood and more widely debated than ever before (witness the excellent series by the Frontier Centre for Public Policy’s Peter Holle in the mid-April National Post), there is a general defeatism in the air about ever changing the system for the better.
Equalization’s intentions are good, and good intentions are often enough to make many people embrace a policy with evangelical fervour. Equalization’s intention is to ensure that Canadians, wherever they live, have access to reasonable levels of public services, like health care and schools and roads, without having to endure ruinous levels of taxation to pay for them. But the unintended consequence is that equalization catches recipient provinces in a welfare trap where growth is penalized and dependence rewarded.
For those willing to look past good intentions, the next big stumbling block to reform can appear to be the constitution. Equalization is constitutionally entrenched, say the defeatists, so we just have to live with it.
Hang on. Let’s take a look at exactly what the constitution says: “Parliament and the government of Canada are committed to the principle of making equalization payment to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.”
Let’s see. The constitution doesn’t say equalization payments must be made, or that Ottawa has an obligation to make them. It doesn’t even say Ottawa is committed to making such payments. It merely says Ottawa is “committed to the principle” of making them. It does not say those payments must go to provinces; a case could be made that payments made to individuals in the equalization-receiving provinces would be sufficient, since those provinces could capture the payments via taxes if they wished. Nobel Laureate James Buchanan, the “father of equalization”, has long argued equalization payments should be made to individuals and not governments.
Nor does the constitution say how much equalization should be paid. It doesn’t say Prince Edward Island should have the same per capita revenues as Ontario, or as the national average, or as the “five province standard” used today. It uses weasel words wherever possible. Revenues have to be “sufficient” (one man’s sufficiency is another’s penury) to provide “reasonably comparable” levels of public services at “reasonably comparable” levels of taxation.
In fact the equalization provision of the constitution bears the marks of its birth. It is not the constitutional embodiment of some high principle. It is the product of sordid political horse-trading. When Pierre Trudeau was desperately seeking provincial support for his constitutional reform package in 1981, New Brunswick and Nova Scotia demanded that equalization be put in the constitution as part of the price for their backing.
Ottawa was horrified. The constitution is no place for spending programs. Despite the fact most Canadians would rank spending on health care and education far above equalization, for example, the constitution is silent on what kind of programs we should have in those areas. That’s a job for politicians, and the politicians should be free, subject to elections and other forms of democratic accountability, to tailor spending and programs according to changing circumstances and priorities.
So Ottawa bargained hard and got the mealy-mouthed language that now “constitutionalizes” equalization. The country’s leading constitutional commentator, Peter Hogg, says this provision is “probably too vague, and too political” to take it to court and have any hope judges would find it committed Ottawa to much of anything.
Thus, despite much huffing and puffing about Ottawa not “living up to its constitutional obligations”, the equalization-receiving provinces have never taken the feds to court to make them cough up what the recipient provinces think is their due. Ottawa has changed the equalization standard many times, and put limits on the total payout, without any province daring to challenge that decision before the courts.
There are many equalization reform proposals on the table that aim to achieve the laudable goals of equalization, but that lessen the perverse incentives of the current approach. Based on history, present practice, and the weak language entrenching equalization, it is hard to see why the constitution should be a serious bar to a cleverly designed equalization reform.