Equalization a Raw Deal for Ontario, Experts Say

Worth A Look, Equalization, Frontier Centre

The Ontario economy is too fragile to absorb an enriched equalization program, top economists have concluded after a thorough examination of various federal funding proposals and the province’s economic prospects.

Canada’s largest province is still struggling to find its footing in the post-free-trade world, where the auto pact and other trade barriers can no longer protect Ontario’s manufacturing base from stiff competition, Don Drummond, chief economist for the Toronto-Dominion Bank, said in an interview.

Add to that the strong dollar, expensive energy, problems sending goods over the border to the United States, an insufficient supply of electricity and growing competition from emerging economies, and enriching the equalization program would be like “attaching a ball and chain around Ontario’s ankle,” he said.

To Ontario, a more generous equalization program “would be adding insult to injury,” added economist Finn Poschmann, associate director of research at the C. D. Howe Institute.

While Mr. Drummond said he was not initially convinced by Ontario Premier Dalton McGuinty’s arguments that his province was being shortchanged by federal transfers, he has since taken a closer look at the numbers.

He now feels that Ontario is stretched too thin.

An enriched equalization program — as is proposed by two key advisory reports, advocated by the have-not provinces, and likely to form the core of federal-provincial political discourse for the months to come — would push Ontario too far, he said.

The premiers met last week in Edmonton to attempt to form a common front on equalization reform, but left the meeting more divided than when they started.

Mr. McGuinty has been campaigning hard to find allies in his opposition to any expansion of the $11-billion-a-year program, and who will instead side with his argument that Ottawa should increase per capita transfers to the provinces.

Ontario benefits from such transfers, but does not receive anything in equalization. Rather, its taxpayers essentially help to underwrite the program for poorer provinces through federal taxes.

Ontario’s population makes up 39 per cent of Canada, but 43 per cent of Ottawa’s tax revenue comes from the province.

Ottawa gives much of that money back to Ontario residents in the form of services and transfers, but the returned money amounts to only 34 per cent of Ottawa’s total spending, Mr. Drummond said.

Ontario ranks 10th out of 10 provinces in transfers from Ottawa.

The drag on Ontario’s economy amounts to about 3.7 per cent of the province’s gross domestic product. And as a result, the provincial government’s total spending per capita ranks 10th among provinces, too.

“It’s the bottom of the pile,” Mr. Drummond said. “Where’s the justice in that?”

While Ottawa has occasionally argued that Ontario’s spending shortfalls are of its own making, Mr. Drummond disagrees. Ontario is running a small deficit, but its debt payments are far below the provincial median, he said.

Plus, since it is running a deficit, the province is actually spending more per capita than it otherwise would if its budget were in balance.

Ontario would have a hard time raising taxes to collect more revenue for improved services, Mr. Drummond argued, because its economy is struggling and higher taxes would hurt its competitiveness. Plus, as a commodity-poor province, it cannot tap into the resource-based royalties to which other provinces have access.

“You’re stuck on the revenues side,” the economist said.

Much of the debate around equalization has been about how much to enrich it and how, Mr. Drummond pointed out, and little attention has been focused on the question of whether it should be enriched at all.

“It’s a zero-sum game. As you aid Ontario, you weaken the others. But if you compromise Ontario’s ability as an economic powerhouse, you hurt the ability of the province to back up equalization.”

Paying more in equalization would mean Ottawa would have to forgo either federal tax cuts or increases in spending that would benefit Ontario, added Mr. Poschmann of C. D. Howe.

With the challenges Ontario already faces, the province has good reason to be upset when it sees proposals that would result in more federal payments to other provinces that are already near or above Ontario’s fiscal capacity, he said.

Prime Minister Stephen Harper has promised to resolve the fiscal-imbalance issues that have pitted the provinces against Ottawa almost perpetually for years.

He has said that equalization needs major reform, in time for next winter’s budget. But he has not yet decided how.