Exiting the Transfer Payment Game

Brian Lee Crowley, Commentary, Equalization, Taxation, Uncategorized

There are many ways in which one could design a scheme of easing Ottawa out of the inter-regional transfer and redistribution game. One idea that has received a great deal of currency in recent years is that of transferring to the provinces the sales tax field and allowing them to collect the GST and set the rate within their borders in exchange for an end to Ottawa’s transfers in many areas of social policy. Such a transfer would appeal to Quebec, which has always wanted more autonomy from Ottawa in taxation matters. If they wished to finance a higher degree of social provision than in other provinces, they could always set their GST rate higher than elsewhere in the country, and if their voters approved, who could object? They would then be facing the full costs and benefits of their choices and should be free to set the level of social programs they want and are willing to pay for.

In addition, in order to sweeten the pot for provinces that might find the withdrawal of programs like equalization too daunting, Ottawa might offer them a supplementary deal: a debt-for-equalization swap. Ottawa would take over some part of the provincial debt and thereby clean up government balance sheets in provinces with weaker economies, reducing interest payments, and giving them much more room to finance their own activities out of their own revenues (including the newly transferred GST). Such a swap would not create the danger of provinces simply running up new debt if Ottawa made it clear that this was a onetime arrangement and that poor policy choices in future would not be compensated by renewed transfers. Interestingly, this idea of cleaning up provincial finances as a way to allow them to assume fully their constitutional responsibilities has a respectable Canadian pedigree: it was a now-forgotten recommendation of the Rowell-Sirois Commission. According to Sean Speer, Alex Skelton, the commission’s able secretary, originally proposed just such debt relief to the commissioners, who were shocked by it but quickly came round to recommending it.

 

It became clear that the idea had merit for two primary reasons. First, debtservicing charges were, by 1937, consuming over one-fifth of provincial revenues. Without some relief, the high cost of servicing debt threatened to undermine the commission’s other provisions to place the provinces on a stable financial footing…. Skelton’s proposal was, in this sense, consistent with classical federalism, and the commission’s commitment to provincial autonomy. Second, the federal government was in a superior position to negotiate better repayment terms…. For these reasons—both Keynesian and provincialist—the commissioners endorsed Skelton’s plan. The commission could now justifiably argue that, under its fiscal plan, the financial position of every provincial government, with no exception, would be improved.*

 

We might need a ten-year transition period from the old system to the new, but at the end of the transition we would have created a situation where one of the major friction points between Ottawa and Quebec—Ottawa’s interference in social policy—would have been largely eliminated, and the incentives for every part of the country to put in place better policies that promote investment, growth, and productivity would have been vastly improved. Falling unemployment around the country would help to ease the transition politically. The existing constitutional provision regarding equalization certainly leaves huge latitude to Ottawa in how it works and what level of spending is required;15 those obligations could certainly be honoured by some vestigial program at a much lower level of spending, a return to equalization’s roots.

This is no scheme to emasculate Ottawa. On the contrary. One of the ironies of the last fifty years or so is that Ottawa has, in its headlong rush to compete with Quebec’s social justice state, actually neglected the key powers that underpin central power in every federation in the world. The reason that federalism is such an attractive system is that it allows ethnically and culturally diverse countries to marry local autonomy with national economic efficiency and security. In particular, one of the key justifications for a central government is the creation of a barrier-free national economic space, and so authority over trade and commerce is an almost universal feature of central governments. Ottawa, however, has been extremely reluctant to use its completely legitimate power to tear down barriers to Canadians’ right to live, work, invest, establish businesses, and buy and sell in every part of the country. Provinces, with Quebec at the head of the queue, have been eager to rush into this policy vacuum with barriers to the free movement of goods, services, people, and capital. Prodded by Ottawa, the provinces have made half-hearted attempts to develop an agreement on internal trade, but the results have been painfully slow to emerge and largely toothless in their effects.

* "From Fearful Symmetry: The Fall and Rise of Canada’s Founding Values by Brian Lee Crowley. Copyright © 2009 by Brian Lee Crowley. Published by arrangement with Key Porter Books