Selinger’s Focus on Handouts

Equalization, Frontier Centre, Media Appearances, Role of Government, Uncategorized

FINANCE Minister Greg Selinger will use his upcoming budget to push a new formula for calculating equalization transfers from Ottawa to the provinces. It’s not what Manitoba needs, certainly not what Manitobans should be demanding, which is a strategy to wean Manitoba of its dependence on federal transfer like equalization payments, but a new formula is not a bad idea in any event.

Since 1957, Canada has helped poorer provinces provide services comparable with those richer provinces can afford by taking some of the money it collects from the rich and transferring it to the poor. The formula for so doing has changed repeatedly, usually depending on the extent to which Ottawa needs money for its own purposes. In recent times, the formula has been based on the fiscal capacity of five middle-income provinces — excluding Alberta, which is well above average and the Maritime provinces, which are below. But two years ago, then prime minister Paul Martin started tinkering, first by increasing transfers beyond what the formula called for and then further confusing the issue by tacking on an automatic escalator. Why transfers should go up even if economic performance is going down was never clear, but the provinces, understandably, didn’t complain. Or rather, they didn’t complain until Mr. Martin started writing side deals that essentially allowed Newfoundland and Nova Scotia to collect not only new revenues from offshore oil but traditional levels of equalization in defiance of the rationale for the program. That in turn sparked jealousy in Saskatchewan and British Columbia, and led then opposition leader Stephen Harper to signal that he might give them what the Maritime provinces had won. The instrument for achieving this sleight of hand was to remove “non-renewable resources” from the calculation of fiscal capacity. Which might make sense if the goal is to placate provinces like Saskatchewan, but it doesn’t make sense otherwise — how can the measure of a province’s fiscal capacity be meaningful if the main contributors of revenue are not counted? Alberta under this scenario would become — on paper — a poor cousin. Should it happen, however, Manitoba would lose about $200 million a year, Quebec about $400 million and more side deals would be required to keep the peace.

Better is Mr. Selinger’s plan to bring all the provinces into the formula and continue to count 33 sources of revenue to find an average. In other words, base the formula on the true fiscal capacity of the entire country and make transfers accordingly. Bringing rich Alberta into the equation would drive up the average beyond what it is now, even with the dampening effect of adding the Maritime provinces. The total equalization program would expand by about $2 billion to $13 billion. Manitoba would gain an estimated $120 million a year, pushing its take of the equalization pie to about $1.72 billion a year. It would be wrong, however, to conclude that what Mr. Selinger proposes is simply self-serving. That’s because the new formula would actually benefit other provinces more than it would Manitoba. Saskatchewan, for example, would gain about $420 million a year, up from $83 million, and British Columbia would gain about $1.1 billion, up from about $560 million. Manitoba’s share of this bigger pie would fall from 14.7 per cent to 13.2 per cent.

The benefit here is that the program would be back on a principled basis that actually compensates all provinces according to their relative needs. Mr. Harper, who has made clear that he thinks Ottawa collects too much money, relative to the provinces, might be persuaded that this is a means to address the fiscal imbalance.

There are downsides, however, especially for Manitoba. Making the transfer pie ever larger has not transformed have-not provinces into have provinces. Rather, it has created pockets of dependence and kept federal tax levels prohibitively high at the expense of economic expansion. Manitoba has been slipping further and further behind other Western provinces in terms of competitiveness. The 10-province formula, for all its merits, would mean that Saskatchewan would be positioned to lower its tax rates even further to become competitive with Alberta and British Columbia. Manitoba could find itself a high-tax province surrounded by competitors that are increasingly low-tax environments.

Manitoba already is losing population to interprovincial migration and increasingly is suffering skills shortages despite an aggressive and largely successful campaign to attract immigrants. Losing fiscal capacity to other provinces, if only in relative terms, will make Manitoba even more dependent on transfers to pay its bills. (Manitoba currently relies on Ottawa for 34 cents of every dollar it spends — $3 billion of $8 billion).

Past dependence has been no friend to Manitoba. Despite a diversified economy and a wealth of hydro resources, Manitoba continues to fall back and government, fuelled with federal dollars, increasingly dominates the economy. A study last year by the Frontier Centre for Public Policy found that Manitoba has the biggest government sector of Western provinces, consuming 47.5 per cent of GDP compared to a national average of 38 per cent.

So, yes, what Mr. Selinger proposes is worth discussing, But what Manitoba needs is a strategy to reduce dependence on transfers, not increase it.