Next year, federal equalization payments to the provinces are expected to decline anywhere from 10 to 15%. As a result, some premiers are demanding that the program be modified in order to keep payment levels artificially high. The Harper government should reject these expensive demands.
Specifically, some premiers are seeking a guaranteed floor on equalization payments at their current levels. Doing so would commit the federal treasury — which is to say, the taxpayer — to spending a minimum of $14.8 billion each year on Equalization, regardless of how provincial economies perform.
Giving in to such demands would require the Harper government to top up the program between $1.5 and $2.2 billion per year. This money, unbudgeted, of course, would have to be funded through assuming more debt, taking money from other programs or raising taxes. None of these is a wise choice.
Equalization payments are projected to decline because payments are based on a complicated formula driven in part by the revenues of strong provincial economies. So, when former powerhouses such as Alberta and Ontario falter, so too do equalization payments. The issue is particularly sensitive in Quebec, given that over 56% of all equalization money goes to that province.
The federal government is already running a deficit projected to be $56 billion this year and $34 billion next year. In five years, over $170 billion more will be added to the federal debt through such deficits. Over the next four years, an equalization bailout would add another $8 billion to this figure. The first step on the path to reversing this debt trend is to say no to new requests for funds.
Equalization isn’t like most other programs. Its size is designed to fluctuate based on relative performance of the provinces. When large, strong provinces do well economically, payments rise. And rise they have. Payments have grown from a total of $8.6 billion in 2003-04 to today’s high of $14.8 billion — a 72% increase in six years. Quebec alone gets $8.4 billion, up from $4.1 billion in 2003-04.
But by the same principle, when large, strong provinces don’t do well economically, payments should decline.
Despite premiers knowing this fact, recipient provinces have refused to prepare for a decline in payments. As a result, they are begging the federal government to modify the program. Taxpayers should not reward this poor provincial planning by running up more federal debt.
The seeds of a regional confrontation are being sown. British Columbia, Alberta and Saskatchewan don’t receive Equalization payments. Their premiers either will band together to oppose this program bailout or they will trade their acquiescence to a guaranteed floor on payments for some other expensive sop.
They reasonably could argue that a federal bailout would siphon even more federal general revenues east, especially to Quebec, whose $7-a-day daycare program is funded in part by revenues from other provinces.
With the Harper government craving more seats in Quebec, saying no to this demand will be difficult. However, no one ever said that leadership is easy.
Kevin Gaudet is federal and ontario director of the Canadian Taxpayers Federation.