Equalization Is Indeed a Problem: Our recent critics are wrong

Ben Eisen, Commentary, Equalization, Uncategorized

In their recent column which criticized our study on equalization (“Alberta’s equalization concerns are off target” April 13, Saskatoon Star Phoenix), Luc Turgeon and Jennifer Wallner try and convince readers that concern over equalization is simply an “Alberta” issue. This distracts from the reality about equalization- that it unfairly punishes taxpayers in all of the paying provinces.
Equalization is meant to allow each province to “provide their residents with public services that are reasonably comparable to those in other provinces.” Our study shows that equalization does not achieve this objective. Instead, across a broad range of indicators, government services tend to be more generous and better-staffed in the provinces that receive large-scale equalization payments.
Turgeon and Wallner criticize our inclusion of regulated childcare spaces in each province as a proportion of child population. They name several factors- aside from equalization- that they argue contributes to the higher number of childcare spaces in the have-not provinces.
Two points must be made in response. First, generally, our paper generally examined straightforward per-capita metrics. For any single indicator, it is possible to object that one or another exogenous factor is driving the high level of government services in the have-nots. But taken together, our list of indicators shows a pattern—from childcare, to postsecondary education, to healthcare, to public sector employment levels—of big government and generous services in the recipient provinces that can’t be explained away.
Second, on a specific point, Wallner and Turgeon neglect relevant facts that suggest equalization is an important cause of the higher number of regulated childcare spaces in the have-nots. For example, they point out that public child-care spending per child is comparable in the Atlantic Provinces, Ontario and BC. However, statistics for other provinces that contradict their argument are left out. For example, Manitoba spends 47 per cent more per child on childcare grants and subsidies than neighbouring Saskatchewan. That’s why there is a regulated childcare space for 20.6 per cent of children under age five in Manitoba, compared to just 9.1 per cent in Saskatchewan. The $2 billion dollars flowing into Manitoba’s coffers each year through equalization enables this big spending.
Furthermore, if public child care spending per child is similar in the Atlantic Provinces, British Columbia and Ontario, we should expect higher service levels in the Maritimes because it is less expensive to deliver government services there. That’s exactly what happens in childcare, where there are 13 per cent more regulated spaces as a proportion of child population in Nova Scotia than Ontario despite comparable spending levels. This is one of the major problems with Canada’s equalization formula: it makes no allowances for the cost of delivering services in one province or another.
Turgeon and Wallner assert lower levels of social services in Alberta are actually caused by the province’s low tax rates. But per capita, the province’s economy is the largest in Canada, partly because of these low tax rates. The Alberta government generates the second highest level of own-source revenue in Canada, about 20 per cent more than high-tax Quebec. Even though it is expensive to deliver services in Alberta, this high level of revenue should be enough to provide comparable services in Alberta as are delivered in Quebec. But it isn’t, because billions flow out of Alberta each year for equalization and other transfers.
The trend towards lower levels of government services applies to all three of the major historical contributors to equalization- British Columbia, Ontario and Alberta. A more recent entrant to the “have” group Saskatchewan, displays a similar pattern.
Thus, equalization is hardly just an “Alberta” concern. Polls in Ontario show a high level of dissatisfaction with the program, and Ontario’s Liberal premier Dalton McGuinty has been publicly critical over the years. Equalization even harms the recipient provinces by enabling undisciplined spending while creating a disincentive for governments to enact pro-growth reforms. That’s why the Frontier Centre – a Winnipeg-based think tank – is critical of the program despite the fact that Manitoba is one of the program’s biggest “beneficiaries.”
Despite Turgeon and Wallner’s objections, the reality remains that huge wealth transfers between provinces create perverse incentives and make it more difficult for paying provinces to fund government services. That’s why we recommend reforming fiscal federalism in ways that would reward productivity gains and enable provinces to raise their own revenues. This would help restore accountability between taxpayers and governments, eliminate equalization’s distortion of incentives, and ultimately lead to better public policy.