Equalization Reform Required

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

Monday’s announcement by federal Finance Minister Jim Flaherty that Ontario is a have-not province for the purposes of equalization and will receive a cheque for $374 million in the next fiscal year, should be a wake-up call. When seven out of 10 provinces are net takers from the federal honey pot, it should be obvious the program is unbalanced.

Defenders of equalization in its current form argue the program allows for roughly comparable levels of services in all provinces. Actually, it does not, which is why Ontario Premier Dalton McGuinty has long and justifiably complained about federal transfer programs. New equalization payments to Ontario will not change that.

The reason is not complex: equalization payments are not the only federal transfer. Once all federal taxes and programs are taken into account, Ontario is still a net contributor to federal coffers, as are Alberta and British Columbia (while Saskatchewan is still a net recipient despite being a “have” province for the purposes of equalization). It is why Ontario Finance Minister Dwight Duncan said of Ottawa’s new equalization payment, “we’re paying ourselves, effectively.”

In most years, federal tax dollars flow on a net basis from Ontario and the two western-most provinces to the other provinces and territories as net recipients, courtesy of federal income tax payments. The recipient governments then provide anything but an equal provision of services compared to taxpayers in the provinces who ultimately foot the bill.

As an example of unequal services, Quebec offers unjustifiable day-care subsidies to all parents regardless of income.

That means a millionaire dual-income couple in Montreal’s posh Mount Royal neighbourhood pay the same as a single mother with one income — $7 per day per child. No other province does that and no other province can afford to; Quebec only can because of equalization dollars from elsewhere.

Similarly, the province of Manitoba receives more than $2 billion in equalization and transfer payments each year, but sells its hydro-electric power to consumers for an estimated $1.2 billion less than market rates.

That’s fiscally backward and environmentally unfriendly. However, federal equalization and transfer payments allow counterproductive policy choices because someone else — not local taxpayers in each of the recipient provinces — foot much of the bill.

There are long term remedies to such inanities, including the transfer of significant tax room from the feds to the provinces in exchange for a provincially agreed-upon end to federal transfers. But given that Ottawa would need to give up significantly more dollars than it currently pays out (this to avoid short-changing any province in such an exchange) that action is unlikely in the current fiscal environment where surpluses are about to become scarce.

A more short-term solution is for Ottawa to insist that in exchange for federal cash, the provinces stop indefensible practices as mentioned above and means-test all their programs.

That won’t remove all the inequities where taxpayers in Ontario, Alberta and B.C. send money on a net basis elsewhere to give “have nots” programs they can’t afford themselves. But it would be a start. So, too, would action from the Alberta government to at least understand and then publicize the problem with federal transfers, starting with next week’s first ministers’ conference on the economy.