Stealth Equalization: How Federal Government Employment Acts as a Regional Economic Subsidy in Canada

In a 2010 study, Frontier Centre analysts, including the author of this paper, outlined some of the negative unintended consequences of Canada’s equalization program. In particular, the study showed that equalization transfers have become so large that they result in the subsidization of relatively high levels of provincial spending on government programs in the have-not provinces. This has contributed to the development of disproportionately large public sectors in recipient provinces, and created disincentives for rational public policy that could increase ownsource revenues.

The official equalization program is, however, merely the tip of a much larger iceberg. There are a number of other ways that public policy in Canada extracts disproportionate amounts of tax revenues from residents of the most productive provinces and transfers that money to the large, inefficient public sectors that exist in the recipient provinces. The effect of these additional transfers is to exacerbate the problems caused by equalization- subsidizing disproportionately large and inefficient government in recipient provinces while burdening taxpayers in paying provinces with higher taxes.

Other components of public policy that create significant transfers of money from taxpayers in more productive provinces to governments in less productive provinces constitute a form of “stealth equalization,” which exists alongside Canada’s official equalization program.

This paper examines a major component of this system of stealth equalization: regionally unbalanced federal government employment. Using Statistics Canada data, this paper shows that the federal government employs dramatically more public servants, as a proportion of the population, in the major equalization recipient provinces of Nova Scotia, Prince Edward Island, New Brunswick and Manitoba, than in other parts of the country.