The Coming Equalization Clash

Commentary, Energy, Frontier Centre

Imagine that for years you’ve given $2,000 annually to a relative ostensibly to help pay the bills, put food on the table and provide for the children. But imagine your surprise if you discovered that instead of buying his children textbooks, providing decent clothes and getting them involved in recreational programs, your kin instead used a large chunk of that money to buy a big-screen TV — say, one that cost $1,200.

This is akin to what happens in the interprovincial subsidy game, otherwise known as equalization payments and it’s only going to worsen with the new federal budget.

For those unfamiliar with how it works, taxpayers across Canada send money to the federal government. Ottawa then transfers money to the provinces, including for equalization payments.

As of now, B.C., Alberta, Saskatchewan and Ontario are all considered “have” provinces for the purposes of the equalization program. Every other province and territory is a have-not.

But it’s what happens to such cash once it reaches the recipients that should cause concern among Albertans and anyone else interested in sensible government policy. For example, Manitoba will receive over $2 billion in equalization payments in the new fiscal year. That’s up from $1.8 billion in 2007-08. It will spend $1.2 billion of that to subsidize the provincially owned Manitoba Hydro and thus provincial electricity rates.

That’s unwise for at least two reasons. First, make something cheap through subsidies and people will use more of it. Subsidize power rates as the Manitoba government does and people are less likely to conserve and cut down on usage; that’s environmentally unfriendly.

Second, the point of equalization is to ensure roughly equal social services across the country, regardless of an individual province’s wealth-creation capacity. It is not to give cut-rate deals on products that should be priced at market value. The only subsidies that make sense are ones that go to the poor to ensure they are not faced with a burdensome electricity bill.

But the counterproductive nature of the federal equalization scheme is also demonstrated by Quebec. That province will receive $8 billion in equalization this year, up from $7.2 billion. If its past spending patterns are any guide, Quebec will dole out $5 billion on business subsidies, better known as corporate welfare.

Quebec’s use of some of its federal transfers means that the have province next door, Ontario, is actually helping to finance Quebec’s attempt to lure business from other jurisdictions. At the very least, Quebec uses Ontario money (along with that from B.C., Alberta and Saskatchewan) to prop up Quebec business in competition with those in other provinces. Given Ontario’s location, it’s the one most likely to be affected by such efforts.

It’s hard to think of a more inappropriate use of transferred cash and this practice may soon ignite some interprovincial fireworks. That’s because Ontario may soon tip into the “have-not” category due to its softening economy. If that happens, one might theorize that Ontario’s provincial government will defend the equalization program instead of calling for its reform as its premier, Dalton McGuinty, has done for years.

Except that Ontario is not likely to be in the have-not category for long. Additionally, while for equalization purposes — and this gets confusing but bear with me — Ontario may be a have-not province, it will still likely be a net contributor to other provinces because of other federal transfer programs to which it, along with B.C. and Alberta, are net payers. That means Canada’s largest province will still subsidize many other provinces while struggling with its own bills. That might make for some interesting interprovincial premiers’ meetings.

To be clear, and to counter the critics in advance, equalization and transfer payments are paid out of federal tax dollars. No provincial government pays other provincial governments’ money. And every taxpayer in every province pays tax dollars that are later used by the federal government to cut equalization cheques.

But when it comes to equalization payments, the federal government is only a middleman between families who initially pay (in the have provinces) and families who theoretically receive the money (in the have-nots), though in reality the recipients are the provincial governments.

That everyone in every province pays federal tax is irrelevant. The very justification for equalization is the transfer of wealth between have provinces and have-nots. That means the have provinces are by definition net losers.

This is especially true when the receiving provincial governments spend money on indefensible subsidies such as cheap power and on corporate welfare.