Have-Not Status Is All About Gaming The Rules

Worth A Look, Equalization, Frontier Centre

Should Ontario ever change the slogan on its licence plates, it might consider a variation on a certain bank tagline. “We’re richer than you think” would be a balm on the wounded self-esteem of Canada’s newest have-not province. It would also be an accurate description of the truth.

Finance Minister Jim Flaherty’s revelation that Ontario will pocket $347-million in federal equalization payments in 2009-10 – that is, about 2.4 per cent of the program’s $14.2-billion budget – was pure political melodrama. It no more demonstrates that Ontario has suddenly become a rust-belt charity case than its previous exclusion from the spread-the-wealth scheme was unimpeachable proof of the province’s economic prowess.

What Ontario’s “slide” does show is that the 2007 reform of the equalization system – the one Mr. Flaherty called a “solid foundation upon which to renew this program” – was a ticking time bomb that exploded almost as soon as Ottawa planted it. Including Alberta’s oil revenue in the equation used to measure the relative wealth of the provinces (a first since 1982) was bound to break the bank and turn Ontario into a have-not – sooner, it turned out, rather than later.

The measures adopted this week to cap annual growth in the equalization kitty will not fix a seriously flawed program that has neither clear objectives (unless you include placating whining premiers) nor documented results.

Equalization is, in principle, supposed to help poorer provinces provide comparable levels of public services at comparable levels of taxation. But the task force set up by the Martin government to come up with a new equalization formula recognized in its 2006 report that “because of the nature of Canada’s federation and the substantial amount of provincial autonomy, there are few consistent and comparable measures of public services across the country.”

The best measure the so-called O’Brien report could come up with for “comparable services” was per capita program spending by provincial and local governments. But the amount of money spent delivering services is hardly a good criterion for determining efficiency, much less quality. Quebec, for instance, pays its doctors and nurses much less than other provinces. Does that mean Quebeckers get worse health care than Ontarians?

Not that Ottawa even asks the question. Equalization payments, which account for more than half of all federal cash transfers to Quebec, come with no strings attached. A receiving province can spend the money as it likes.

That leaves billions more for Quebec to pursue a distinct policy agenda. In the 15 years prior to the 2007 reform, Quebec never pocketed more than half of the total equalization kitty. In fact, in 2004-05, its share dropped to 38 per cent of the $10.9-billion pie. This year and next, Quebec will take home 59 per cent of the much bigger pot.

How did that happen? Did Quebec suddenly get poorer? The equalization formula is a rotten instrument to use if you’re looking for the answer.

Take hydroelectric revenues. The Quebec government artificially reduces its “fiscal capacity” – thereby qualifying for higher equalization payments – by allowing provincially owned Hydro-Québec to charge consumers, especially large industrial ones, a price far below the market value. (Ontarians pay almost twice as much for their electricity.) The Quebec government thus shortchanges itself on the potential revenue, but it doesn’t mean Quebec is any poorer. Rather, there is just a transfer of wealth from the government to consumers in the province.

Alberta could achieve the same thing by subsidizing gas prices instead of slapping hefty royalties on oil companies. But because it doesn’t, its fiscal capacity for the purposes of calculating equalization has gone through the roof – and made provinces without oil eligible for much more cash from Ottawa.

The O’Brien task force conceded that the manipulation of hydroelectricity revenues (Manitoba and B.C. do it, too) constituted a sticky problem. Profits from Crown-owned hydro utilities are treated by their governments as business income rather than resource revenues. This, the report said, “minimizes the negative impact on equalization” payments. Still, the task force concluded that including the true value of the hydro resources in the equalization equation would be “controversial.” Touché.

Quebec was helped, too, with Mr. Flaherty’s inclusion of a market-value property tax base in the equalization formula. This makes no sense. Most municipalities raise similar revenues, regardless of property values. If house values are low, tax rates are simply higher, and vice versa. But Ottawa’s move to use market values to measure a province’s ability to raise property taxes favours Quebec, where house prices are low compared to those in B.C., Alberta or Ontario.

The result of all this is that Quebec will pocket $8.36-billion in equalization payments next year, or 24 times Ontario’s haul. Forget “Je me souviens.” Let’s put “We’re smarter than you” on the plates.