Seeking Equalization Madness

Equalization, Frontier Centre, Uncategorized, Worth A Look

Dalton McGuinty is right.

Pundits, especially of the Ottawa variety, are having a fine time trashing the parochial premiers who are demanding side deals similar to those signed this week between the federal and Newfoundland and Nova Scotia governments.

The howls from New Brunswick, Saskatchewan and Ontario delight those nattering nabobs who accuse Paul Martin of wrecking the country by succumbing to the temptations of dreaded asymmetrical federalism, in which each province negotiates its own deals with Ottawa on social policy.

These critics have no idea of what is actually going on.

The federation has been under strain for as long as any of us can remember because, ever since the provinces surrendered most of their taxing power during and after the Second World War, there has been a massive imbalance between federal revenues and provincial responsibilities.

To strip the situation to its essence, Ottawa has become a mechanism for redistributing wealth. It does so vertically, by taxing the wealthy and providing programs for the poor; and horizontally, by siphoning funds from Alberta and Ontario — through taxes and Employment Insurance premiums — and using them to prop up the poorer regions.

As long as Canada’s economy was oriented east-west, Ontario was willing to put up with this imbalance, because the money ultimately came back to the province through purchased goods and services. But since free trade arrived in 1988, east-west links have steadily weakened. Canada’s economic engine is now enmeshed in the Great Lakes economy, making Michigan and Pennsylvania far more important to its well-being than Quebec or Manitoba. No wonder premiers from Bob Rae to Mike Harris to Dalton McGuinty have offered the same lament. Forget about Confederation not working for Quebec or Alberta; Confederation long ago ceased to work for Ontario.

Mr. McGuinty was initially determined to reforge old alliances between Queen’s Park and Parliament Hill. In particular, he wanted to conclude a labour market development agreement that would give the province responsibility for using EI funds to train workers. But agreement has proved impossible because other provinces already have signed more lucrative deals (and because Ontario Liberal MPs want to take the credit for labour-training programs in their ridings), leaving Ontario out in the cold. No wonder Mr. McGuinty has taken to berating his Liberal brothers up the road.

Mr. Martin is groping toward one version of a solution to the 60-year-old fiscal imbalance. He is allowing Newfoundland and Nova Scotia to make full use of their petroleum revenues, in hopes they can jump-start their economies and reverse a century of more-or-less relentless economic decline. This is a big gamble: If the two provinces fail to achieve self-sufficiency within a decade, the exodus of people from these lands will become a mass migration, and federal governments will be unwilling to waste any more money on a region that can now certifiably be written off as hopeless.

The ultimate solution is for Ottawa to transfer back to the provinces the taxing authority they once had and wash its hands of social policy, concentrating instead on defence, foreign affairs, criminal law and regulatory issues. In this model, equalization would be the one and only transfer program between rich and poor provinces. Otherwise, everyone would sink or swim based on market forces and the wisdom of local governments. Instead, the Liberals are trying to further expand the federal role through the national child-care program, which is madness.

That is why these arguments will continue ad infinitum — over something special for Quebec or for Prairie farmers or for seasonal fish-plant workers. This country, meanwhile, will continue to evolve into six or seven large urban agglomerations, the hinterlands that service them and vast empty wastes in between. Leaving the next generation to endure the endless wrangling over how to make a 19th-century Constitution fit a 21st-century reality.