One of the most important functions of an independent think tank is to inject controversial ideas and thinking into the public dialogue. Several years ago, the Frontier Centre for Public Policy, along with a handful of newer policy research organizations located in Canada’s so-called “have-not” provinces began to examine the adverse effects of federal transfer payments on the economic performance of the “have-nots.”
A starting point was an interview I did with the Nobel Prize winning economist James Buchanan in 2002. He had written a ground-breaking paper in 1948 which argued that governments should bribe people in slower growing regions to stay where they were. He observed that Canada, one of many countries in the world with a system of equalization transfers, had actually not followed his advice about how this should be done—which was to cut taxes for individuals in less affluent areas. Buchanan was nervous about government to government transfer systems on the grounds that they create a major source of inefficiency that would be fiercely defended by beneficiary politicians and bureaucracies. Indeed, during the last few years various think tanks, including Frontier, have revealed a perverse result where large federal transfers to Canada’s “have-not” provinces are supporting public spending levels that are substantially higher than those found in the paying “have” provinces. Where politicians get to spend money without being responsible for taxation, spending has increased.
A strong case can be made that Canada’s transfer payment system is harming the economic prospects of recipient have not provinces, particularly Manitoba in Western Canada. The problem is that the flow of transfer money from taxpayers elsewhere has artificially enlarged the size of the public sector in the recipient provinces. By reducing the need for recipient provinces to generate their own source tax revenues, transfers have lessened their need to have competitive tax rates. Higher taxes mean less investment and less job creation which, over time, has led to lower living standards.
Manitoba’s inflated public sector has also concentrated substantial resources in the hands of a comparatively few politicians who make decisions that impact the performance of entire sectors of the economy. What has emerged is a society that is politically driven and reliant on discretionary and unpredictable grants of largesse from government. It is a less dynamic society where individual choice, effort, creativity and initiative are suppressed. The following series of commentaries by University of Manitoba Law Professor Bryan Schwartz explores the debilitating politicization that Canada’s well intended equalization system has produced across various areas of public policy in Manitoba and offers some alternative paths forward. Professor Schwartz proposes ways in which by creating greater freedom in the governmental, business and non-profit sectors individuals and groups can better express themselves in distinctive ways and innovate to achieve their objectives. He argues that these reforms would produce a more democratic, diverse and dynamic Manitoba society, and enable the province to move towards self-sufficiency.