A Legacy Project for the New Parliament: An opportunity to restore the federation

Commentary, Equalization, David MacKinnon

The most distinctive feature of Canadian federalism is the extent to which we support whole regions through a massive regional subsidy system.

While federal political leaders have often justified this system by saying that sharing contributes to the whole, the likelihood is that this system means a shadowed future for all Canadians.
Neither the federal nor provincial governments have ever studied the economic impact of this system in quantitative terms. They have also failed to study the impact of regional subsidies on everyday life. There is no government system to compare the accessibility of provincial programming in different provinces.
There are other major issues associated with regional subsidies.
The citizens of Ontario, the principal funding jurisdiction, have the least access to provincial services. Alberta is also near the bottom.
The federal government and governments of recipient provinces have been misrepresenting the nature of the constitutional clause relating to equalization. It does not guarantee equalization payments: it guarantees a commitment to the principle of equalization that can be met at different levels of funding.
The scale of federal subsidies also ensures that most recipient provinces have little hope of competing successfully in future. Extravagant federal subsidies have produced recipient jurisdictions that are largely dominated by massive public institutions and public services with relatively insubstantial market sectors. This will not work in a market driven world.
Finally, there is reason to believe that regional subsidies are the root cause of Canada’s impaired productivity, a serious national problem.
The new group of federal legislators could change all this. Alternative policies exist which would benefit every part of Canada.
The first change could be to shift GST revenues to the provinces in return for an end to transfer payment programs. The shift could be made with some adjustments in other areas. This change should be reviewed after five years to ensure it is working.
The second change would be strengthening the national standards system to ensure that Canadians live by common standards. Common standards define what a community is all about and improved standards will be needed to support the elimination of transfer payments.
The third change is to realign current federal and provincial programming to reduce the extensive overlap that exists. The Mowat Center at the University of Toronto has suggested a road map for this project.
Finally, federal legislators need to live within the jurisdictional areas assigned to them in the constitution. During the recent election, it seemed as if each federal leader was campaigning to be a premier because they often talked about areas of provincial jurisdiction. They seldom even acknowledged the provincial role. Canada is a federation, not a unitary state. The federal government has ample core businesses that need attention.
A strategy with these four elements would respond to long standing concern in Quebec about the extent to which the federal government interferes, often without expertise or commitment, in areas of provincial responsibility. Canadian federalism as it is practiced is not what Quebec bought into when they joined Confederation.
Manitobans and Atlantic Canadians would be able to pursue economic strategies that do not depend on undignified trips to Ottawa searching for funds and would have the financial flexibility to restructure their oversized public sectors.
This strategy would also mean less strain on Western Canada and Ontario.
Ontario’s situation in relation to regional subsidies is simply desperate. The burden of the regional subsidy system for Ontario is as great as the burden of defence for the people of the United States even as they fight two wars.
Albertans and Ontarians together contribute between $40 and $50 billion to the regional subsidy system, one of the world’s largest such systems.
There are other benefits to the new strategy. It would end the fighting over funding that has been a corrosive element in our national life. It would also restore accountability because the political leaders responsible for particular activities would also be responsible for raising the taxes to support them.
In summary, the new parliament has a great opportunity. It can renew the fiscal basis of Confederation to produce a better economic result, reduce internal tensions and deal with the fundamental productivity problem that threatens our future. This is one of those rare moments in time when fundamental change for the better is both desirable and achievable.
Canadians of all regions need to work together to ensure that the moment of opportunity is not lost.

Joseph Cordiano is a former minister of Economic Development and Trade in Ontario. David MacKinnon is Chairman of the Ontario Institute for Public Policy and Senior Fellow with the Frontier Centre