Equalization A Journey Into The Bizarre

Equalization, Frontier Centre, Role of Government, Uncategorized, Worth A Look (historic)

I’m not going to gloat about Ontario slipping into have-not status.

OK, maybe just for a minute.

For decades, Ontario politicians have upbraided their Alberta counterparts for suggesting the national equalization scheme was too rich. To our requests that interprovincial wealth transfers be scaled back, to our arguments that billions sent to so-called “have-not” provinces every year have blunted their desire to become self-sufficient, the Ontario response has been that opposition to equalization is un-Canadian and greedy.

So it’s kind of ironic watching the province that has long argued it is Albertans’ duty to pay in (and pay and pay) to now be standing in line at Confederation’s soup kitchen, waiting for its own bowl of gruel.

This week, federal Finance Minister Jim Flaherty announced that Ontario will receive a payment for the first time in equalization’s 50-year history. It will only be $347 million. That’s only $7 million more than Prince Edward Island will receive, and P.E.I. has just one per cent of Ontario’s population.

So Ontario’s handout will not be huge. Still, it is detrimental to Canada’s fiscal position and to national policy to have Ontario in the poorhouse. We cannot thrive as a nation if a province that makes up nearly 40 per cent of our population is in the have-not category for more than a year or two. Purely in pragmatic terms, it will be impossible for Ottawa to maintain this for long.

It’s simply impractical to think that the national account books can be kept in balance with Ontario as a have-not rather than a have. Equalization only works if the largest provinces (Quebec excluded) pay in and only the little ones draw out funds.

Imagine if the most productive member of your family suddenly stopped being a net contributor to household income and started mooching off everyone else. It’s not that bad yet with Ontario and equalization. Ontario remains a net contributor to Confederation despite now being paid out $347 million in equalization.

Ontario is only technically a have-not. It has not become suddenly or even actually poor. And that fact points out the absurdity of the entire equalization scheme. Ontario still has per capita provincial GDP above the national average. It is not nearly as far above the average as it was 50 years ago or even 20 years ago. But it is still at about 103 per cent of the all-Canada average. If equalization made any sense, Ontario would still not qualify for subsidies.

If equalization ever made sense, thanks to changes made by Paul Martin when he was prime minister in the spring of 2005, the program is now utter nonsense. If the original formulas were applied, no province would currently be a “have-not.”

For instance, when equalization began back in the late 1950s, Newfoundland had per capita provincial GDP of only about 55 per cent of the national average. The rest of the Maritimes had GDP somewhere around 60 to 70 per cent.

Now even the poorest province — P.E.I. — is at 78 per cent, a level of prosperity that would have got it cut off when the program was first conceived. Newfoundland and Labrador has per capita GDP at just under the national average (96 per cent) and both Nova Scotia and New Brunswick are over 80 per cent.

The other two have-nots — Quebec and Manitoba — are both at around 90 per cent.
But the equalization calculations are convoluted and the politics of it even more so. The formula is convoluted — it has 33 separate components — mostly so Quebec is sure to qualify each year, even though most years since the plan’s inception it shouldn’t have. And the politics are like tarpaper because once provinces qualify, even if their economies improve dramatically, they hate being cut off.

To give one more example of how absurd the plan is, Ontario remains its largest contributor despite now qualifying as one of its recipients.

In per capita terms, Ontario’s contribution lags well behind Alberta’s. Albertans contribute, collectively, about $3,500 per person more to Ottawa’s revenues than we or the provincial government receive back in federal expenditures. For Ontarians the net imbalance is about $1,800.

But because their population is 13 million to our 3.5 million, in total dollars Ontarians still contribute the most money to equalization, even as their province officially slipped into have-not status.

Welcome to the bizarre rationality of regional politics in Canada. Ontario doesn’t need equalization. It qualified for it once before (from 1977 to 1982) but wouldn’t take it, reasoning that if a province as rich as itself qualified, that was proof equalization was broken, not proof Ontario was desperate.

Times have changed. Ontario is going through a bit of a rough spell as manufacturing suffers in the shrinking world economy. But as I said above, it is hardly poor.

However, most of the provinces receiving equalization don’t need the money. The only reason they still receive it is that they have become dependent on it and every time someone suggests cutting them off, their politicians squawk until Ottawa backs down.

The justification for retaining equalization is entirely political. And that’s why it’s dangerous Ontario is now on the dole: it will now be almost impossible to remove them.