Is Ontario the Patsy Because of Equalization?

Commentary, Equalization, Frontier Centre, Media Appearances, Saskatchewan

From where Dwight Duncan is standing, the lights are beginning to dim.

The stupendous growth in the Ontario government’s revenues in recent years has slowed and the forecasts are for weak economic growth in the next couple of years.

The Finance Minister is putting on a brave face even as the U.S. mortgage crisis casts a shadow and Ontario’s auto industry endures a crisis that is killing thousands of well-paying jobs. He is promising no tax increases and perhaps even a modest surplus in the budget he will bring down next month.

But here’s the thing: Like other finance ministers before him, Mr. Duncan is effectively giving away money to the other provinces that he can ill afford because he has no other choice.

Consider just one fact: Ontario’s growth rate in 2008 is estimated to be 1.8 per cent, but the equalization program that is largely funded by Ontario taxpayers will grow at a mandated 3.5 per cent. The scheme, which is directed by Ottawa, has grown from $10.7-billion in 2004-5 to $12.9-billion this year and will continue to grow at 3.5 per cent no matter how well Ontario’s economy performs.

How smart is that? Not very, according to David MacKinnon, who believes that Canada’s most-populous province is the patsy of Confederation. He believes that the country’s “crazy quilt” of regional subsidies (not just equalization) is doing serious harm to Ontario and is also limiting the economic potential of the rest of the country. He believes many provinces have become addicted to Ontario’s money and that this addiction has allowed them to build up a level of services they can ill afford. Why, he asks, can Manitoba spend $1.2-billion to subsidize electricity prices while it collects $1.8-billion this year in equalization payments? How can Atlantic Canada, with a population of just two million, afford 15 universities? The answer, he says, is the “tidal wave” of funding it gets from Alberta and from Ontario, whose taxpayers provide 44 per cent of federal revenues.

“Ontario has for decades been the accommodating lightweight at federal-provincial financial gatherings,” he said in a provocative speech this week.

Before you ask, yes, Mr. MacKinnon does live in Ontario. But he’s a native of Prince Edward Island who has worked in Nova Scotia and in Saskatchewan. He said he twigged to the wonky nature of Confederation when he worked years ago in the federal government and he wrote a report two years ago on the federal equalization scheme for the Ontario Chamber of Commerce. Subsequent research has persuaded him that, despite its reputation as a fat cat, the Ontario government has the fewest resources available for public services. “The old and the very young in Ontario will find greater challenges in accessing hospitals and teachers than most Canadians in other provinces,” he said.

Ontario officials know all this. (Indeed, a deputy minister was at Mr. MacKinnon‘s speech to the Empire Club.) They argue that the architecture of regional subsidies is outdated, created in a time before places such as Newfoundland and Saskatchewan exploited their oil and gas resources.

Premier Dalton McGuinty made some headway in the past few years with his campaign on the fabled $23-billion fiscal gap, particularly in getting better funding for immigration resettlement. The gap is only marginally reduced but he’s been quiet lately – his website on fiscal fairness hasn’t been updated for a year – as he concentrates on other targets.

The Premier is fighting, for example, to improve employment insurance benefits in Ontario, which are $4,000 less than the national average. He is also trying to increase Ontario’s representation in the House of Commons, a crusade that earned him the sobriquet of “the small man of Confederation” from federal House Leader Peter van Loan.

Mr. MacKinnon says Ontario should “get real and get tough” by pushing for the end of regional subsidies, even challenging their constitutional legality. He says Mr. McGuinty should consider changing his mind and supporting Prime Minister Stephen Harper’s effort to constrain federal spending power because any new national programs would inevitably be biased against Ontario.

The government won’t go that far but officials say they will use the next federal election campaign to press their case. They say they heard Mr. MacKinnon loud and clear.