How Equalization Punishes Canadians in High-Cost Provinces: Federal transfers are fundamentally unsound

-- (historic), Commentary, Equalization, Uncategorized

 

If a federal politician were to run on a platform demanding homeowners in Toronto or Vancouver subsidize those in Charlottetown, the result would likely be lost votes in Ontario and British Columbia. If a civil servant urged Manitobans use more water and electricity, she’d be accused (rightly) of being unfriendly to the environment. If a Quebec premier asserted it was the right of Quebecers to have cheap daycare at the expense of Ontario, chances are a verbal Plains of Abraham battle would ensue between Queen’s Park and Quebec City.
 
But these Alice-in-Wonderland scenarios actually occur due to the inter-provincial wealth redistribution game known as equalization. They’re just rarely the stuff of federal-provincial conferences or made explicit in campaign platforms.
 
Equalization is only one of many federal programs that transfers taxpayer cash to provincial governments. But in the current budget year, Ottawa plans to shower almost $14.2 billion on the provinces. That’s up from $10.9 billion when the federal Conservatives took office in 2006 and up from $8.7 billion in 2003.
 
As to where the money goes, Nova Scotia, New Brunswick and Prince Edward Island collectively take in $3.4 billion and  Manitoba garners almost $2.1 billion. Quebec takes in the largest share of the $14.2 billion federal honey pot at almost $8.4 billion (or 59 per cent of equalization).
 
The anomaly this year is Ontario. Because of how have and have-not status is determined, and because Ontario’s economic performance has lagged the West, Ontario is a have-not province this year for the purpose of equalization. It will receive $347 million. Normally, Ontario is a have province and will be again as its economy recovers. Thus, to keep a long-term perspective and because when all federal transfers are added together, Ontario still sends more money to Ottawa on a net basis, I’ll keep Ontario in the “have” column.
 
The normal justification for equalization is that it helps provide roughly equal services across the country. Wrong. In reality, equalization transfers cash from taxpayers in high-cost provinces to governments in lower-cost provinces. The program also allows for lavishly subsidized services where they ought not to exist and thus acts as an incentive to poor provincial policy. 
 
For example, on the environment, Manitoba can and does under-price its provincially-owned hydro-electricity by about $1.2 billion every year. That doesn’t help conservation. Also, without the $2-billion in equalization, Manitoba’s government would be forced to charge market rates. So it’s neither smart market policy nor smart green policy.
 
Another equalization-allowed subsidy exists in Quebec, where daycare costs just $7 for each child, and regardless of family income. Without federal transfers, which ultimately originate in the pockets of taxpayers outside of Quebec (that’s why Quebec is a net recipient of tax dollars in Canada—not a net payee), more sense on daycare costs might prevail, such as not subsidizing millionaires in Mount Royal.   
 
But the best example of why equalization is a bad deal is in home prices. For example, the average bungalow will set you back between $210,000 and $299,000 in Halifax, $160,000 in Prince Edward Island, $177,980 in Saint John, between $206,000 and $290,000 in Montreal, and between $220,000 and $280,000 in Winnipeg, this according to the most recent survey from Royal LePage.
 
When tax dollars are sent to provincial governments in those regions, the money comes from somewhere. Because equalization is ultimately a federal transfer of wealth from taxpayers in the “have” provinces to governments in the have-nots, that “somewhere” is individual taxpayers in have provinces, and where the cost of housing is often significantly higher than in the equalization-receiving provinces. 
 
Here are examples of average bungalow prices from the so-called have provinces: in greater Toronto, a range of $303,000 (in Burlington) to $725,000 (in Lawrence Park); $275,000 to $380,000 in Edmonton, $310,500 to $558,600 in Calgary, and a range of between $413,000 and $1,050,000 in greater Vancouver.
 
The federal equalization program creates the notion there are “have” and “have-not” provinces. It’s a fiction. A better description is expensive and cheaper provinces in which to live. And through federal tax and transfer programs such as equalization, it’s families in the former who subsidize governments in the latter—and their poor policy choices.