The equalization formula tries to address fiscal disparity among the provinces but its unwillingness to look at what the ERPs actually do with the money means that the effects of the program are seriously misrepresented and widely misunderstood. The analysis in this report would seem to indicate that the equalization-receiving provinces have larger than average public service employment, higher than average public sector wages, and higher than average levels of debt. Simply arriving at national average levels of these performance indicators would release two provinces, Manitoba and Quebec, entirely from reliance on equalization, and reduce the dependence of the others to a very significant degree. Add to this new virtuous circle a more intelligent treatment of non-renewable natural resource revenue for ERPs and Canada would arrive at a powerful strategy for reducing the cost of equalization while putting the ERPs on the path to self-reliance and strong public finances. Such an approach to non-renewable natural resource revenue will be the subject of a future paper in this continuing series on equalization.
So instead of providing reasonably comparable services at reasonably comparable levels of taxation, the recipients of equalization appear to be providing inflated levels of public service costs. Put another way, the costs of fiscal laxity are masked by equalization, which gives large amounts of money to politicians vulnerable to pressure from well-organized interest groups such as public sector workers. While the provinces are free to determine their own spending policies, it is clear that the levels of equalization being provided in the country today are far in excess of what is needed by provincial governments with average levels of fiscal discipline to deliver a reasonable package of provincial public services. In other words, the current level of equalization payments appears to be contrary to the principles of the equalization program as stated in the Constitution, and contrary to the principles of political prudence and fiscal discipline.
In the words of the “father of equalization”, James Buchanan, “You have politicians in these provinces who are recipient provinces of these grants who are able to spend money without being responsible to taxpayers. So you have no cost side. There is a benefit side, but not a cost side. If you have a situation of benefits not offsetting costs, then you’re likely to get irresponsible behaviour.”