If It’s Broke, Don’t Fix It

Worth A Look, Equalization, Frontier Centre

It’s still summer, so that means keeping things bright and breezy. Nothing too heavy — maybe a lightly minted julep on Canada’s trade options following the WTO ruling that seems to contradict the NAFTA panel in the 30-year softwood lumber war. Or how about a refreshing splash into the federal-provincial equalization pool and the debate over whether Ontario has a fiscal transfer gap that Alberta should help fill.

Let’s try the pool. It means getting into the water with Tom Courchene, the Ontario Chamber of Commerce, a crowd of paranoid and self-satisfied Albertans, scheming feds and assorted greedy premiers. A bit messy, to be sure, but don’t worry. The showers are just off the cabana, past the bar.

The last to make waves in the equalization pool is Mr. Courchene. The Queen’s University professor, in an interview with CanWest’s Lee Greenberg, warned over the weekend that if Alberta doesn’t share some of its mounting oil wealth with the rest of Canada, “the Confederation is gone.”

To support his theme, Mr. Courchene outlined the economic domino effect that would precipitate federal-provincial conflagration. Alberta spends oil money on gold-plated infrastructure, offering “Cadillac” standards of health care, education, transportation and other goodies. Or it might slash income and corporate taxes to low levels, all far below what other province’s could offer. This produces a crisis. “Who’s about to live in Saskatchewan in those scenarios? You could just go to Alberta and be unemployed and probably get welfare that’s a bit more than you could earn in Saskatchewan.”

To fix this supposedly intolerable situation, Mr. Courchene hinted at a possible federal power grab. “Ottawa’s going to step in. I don’t think Ottawa can tolerate $7-billion a year” in Alberta oil surpluses. As he explains in a commentary on this page today, Mr. Courchene isn’t quite calling for a new Ottawa lunge at Alberta’s energy wealth. What he proposes is a “voluntary” equalization plan whereby Alberta would, in a charitable spirit, share some of its oil money with the rest of Canada.

Well, voluntary equalization craziness is better than another National Energy Program fiasco, but not by much. Contrary to Mr. Courchene’s belief, there is little evidence equalization is the glue that holds Canada together. Indeed, the first thing to know about the federal-provincial cash-redistribution system is that it is a massive economic and fiscal boondoggle. The principle is this: Politicians tax Canadians to the hilt and then redistribute the money to one another through a vast incoherent system of spending mechanisms that fail to achieve their alleged objectives.

Some glue. Equalization as giant failure is in fact the main message in last week’s report from the Ontario Chamber of Commerce. While dismissed by many critics, even ridiculed as rich-province whining, the chamber’s report is a scathing critique of a system that takes billions from one or two regions of Canada and sends the money off into black holes in other regions.

Have any of the billions been effective in raising service and economic standards in recipient provinces? The short answer: “Nobody knows,” says the chamber report, since nobody measures the results, no standards exist and no economic model has ever been applied to determine whether the schemes produce benefits. Ontario claims to have delivered $520-billion over the years to the rest of Canada, Alberta claims $250-billion. For what?

The result, in the chamber’s not illogical view, is that the wealth taken from Ontario has undermined Ontario’s economy while doing little to raise standards elsewhere. Worse, the schemes hurt development in regions getting the billions. “The evidence suggests that the large flows of money from Ontario, Alberta, and to a more limited extent other provinces, to disadvantaged regions across Canada is having a negative impact on the economic prospects of those receiving jurisdictions.”

In other parts of the world, where equalization madness doesn’t exist, underdeveloped regions come to prosper more than Canada’s low-growth provinces. “The contrasting performance of Ireland and several U.S. states, including Massachusetts, which use very different [non-equalization] strategies, is dramatic. We have learned very little from their success.”

If these massive inter-provincial transfers don’t work, why are we now planning to keep them going? Mr. Courchene raises the spectre of people in Saskatchewan moving to Alberta for better incomes, as if that would be a political calamity and precipitate the end of Confederation. But allowing Canadians to follow the job and money markets is good, sound economics. Taking money from Alberta, where the jobs are, and moving it to New Brunswick, where the jobs aren’t, cannot possibly produce sustainable economic benefits.

The idea that massive interregional transfers is bad economic policy isn’t likely to fly in the current environment. The smug complacency of Albertans and their how-dare-you-think-of-taking-our-money attitude won’t do much to help other Canadians understand that the system is a giant failure. East-West and other regional tensions are likely to rise.

A final thought for smug Albertans: The provincial government is rolling in billion-dollar surpluses from taxes imposed on energy production — money that should belong to investors and shareholders from all over Canada and abroad, money that could be reinvested in all kinds of productive activity all over Canada and abroad. Instead, it builds in Alberta government coffers or is being spent by politicians on who knows what unproductive projects.

Equalization should not be a political issue that pits region against region. It should be a national economic issue that pits Canadians against their governments.

© National Post 2005