Equalization Is Broken And It Can’t Be Repaired

Equalization, Frontier Centre, Regulation, Role of Government, Uncategorized, Worth A Look

Dalton McGuinty says the federal equalization scheme is “perverse” but that’s not the half of it. No one has any idea whether it works the way it is supposed to but, meanwhile, it is acting as a brake on Ontario’s economy and fostering a culture of dependency among those who live off it.

The 40-year-old revenue-sharing scheme is broken and it can’t be repaired. It needs to be tossed out and a new way found to give the provinces equal fiscal footing.

The projection this week by the TD Bank Financial Group that Ontario is on the cusp of becoming for the first time a have-not province brought the inanities of the equalization scheme into focus.

The bank said that the province with Canada’s dominant economy – but no oil – stands to collect $400-million in equalization money in 2010-11, but it also noted that Ontario taxpayers contribute $21-billion more to federal coffers than is returned in federal spending.

“Were we to become a recipient, we would rescue ourselves with our own money,” Mr. McGuinty said yesterday. “That’s how perverse and nonsensical this financial arrangement is.”

The profound shortcomings of the scheme have been evident for a long time. Intended by its founders as a mechanism to ensure that all provinces had the fiscal capacity to provide comparable social programs, equalization has morphed into a program that allowed recipient provinces to run up their debt levels and provide gold-plated public services with the knowledge that they would be rescued by more affluent jurisdictions – primarily Ontario and Alberta.

Its rules have been tinkered with so many times that its intellectual credibility is in shreds. Its administrators did everything they could 25 years ago to keep Ontario – then, as now, going through a bad patch – from qualifying for payments. Now, the formula works against itself by harming Ontario’s ability to contribute to the scheme.

Ottawa now requires the scheme, valued at $13.6-billion, to grow at 3.5 per cent a year. Ontario’s economy will grow at perhaps 1 per cent this year but its taxpayers would still have to come up with nearly half the guaranteed annual increases. And every penny it sends to Ottawa that it doesn’t get back in services impairs its ability to grow.

There’s no such concern in, say Nova Scotia, which will get $1.4-billion in equalization this year. Spending in the budget tabled Tuesday went up $106-million. At the same time, federal revenues – including other transfers containing “stealth equalization” provisions – went up $137-million. No surprise, then, that it could balance its budget and cut corporate taxes.

It’s a similar story in other provinces that have been recipients. Newfoundland has lower school-class sizes, Manitoba has more nurses, while Saskatchewan is loaded with public-sector employees. Quebec remits about $8-billion in GST payments to Ottawa but gets the same amount back in equalization. Prince Edward Island gets nearly a quarter of its budget from equalization.

The result is that Ontario has far fewer resources available for public services, in relation to population, of all the provinces. Worse, it can no longer guarantee the other provinces will buy its goods and services – not since NAFTA emphasized north-south trade routes.

No one outside Ontario cares, of course. But the province owes it to its voters to stop being a doormat to the likes of Newfoundland’s Danny Williams, who smirked yesterday that he was there to help “our weaker sisters.”

The first thing Mr. McGuinty should do is get a legal opinion about whether the current scheme – as opposed to the concept of equalization – is protected by the Constitution. If it isn’t, he should push for a rethink of the rules because he can’t win the game he’s playing.