New Regional Policies are Urgently Needed

Commentary, David MacKinnon, Equalization, Uncategorized

 

In the 1960’s Canada’s regions were doing well.

Ontario was a leading North American jurisdiction, its leadership was vibrant and in the twenty years since the end of the Second World War, Ontario taxpayers had built highways, universities, community colleges and hospitals that were on par with those in other leading jurisdictions. The future seemed unlimited.

Quebec was emerging from a long sleep. It too was modernizing and considering new ways of encouraging economic growth. Expo 67 showed a dynamic and restless province that was different from the Quebec of 1957 and had much brighter prospects.

In Atlantic Canada, growth rates were converging toward the national average and regional leaders were focused on building a stronger economy. Nova Scotia’s Voluntary Economic Planning Agency was a pioneering vehicle to bring the public and private sectors together to achieve economic vibrancy.

Most of western Canada was growing rapidly as Alberta’s oil and natural gas industries became established, grew rapidly and created spinoffs for all four western provinces.

A fast forward fifty years shows that most regions have fallen short of the promise of fifty years ago.

Ontario has yet to find its competitive positioning in the new global economy, in part because it has been the largest net contributor to federal regional subsidies for over fifty years and has been unable to build a more globally competitive economy as a result.

 Public discussion of Ontario’s future is muted and sober.

Quebec is saddled by very heavy debt, is experiencing major structural problems and is a large net recipient of funding from other Canadians, probably between $10 and $15 billion annually in all the ways that the federal government subsidizes regions.

The situation of the Maritime Provinces is even more troubling. Their economies are dominated by extravagantly large public sectors enabled by federal subsidies. There is no real future for public sector driven economies in a market driven world.

Western Canada has prospered but not all of it. Manitoba’s problems are very similar to those of the eastern provinces and its future as difficult.

Fortunately, Newfoundland’s position has improved.

Canada is fortunate in the strength of its resource industries but their vibrancy obscures the startling fact that regions with two thirds of the Canadian population are not succeeding as had been hoped and expected.

The question is why.

Competition from India and China is certainly part of the problem as is the emergence of a new, ruthlessly competitive global economy.

However, ill informed subsidies were probably the single most important factor in diminished regional performances and expectations because they helped to create a major productivity problem. Performance in the global economy is directly related to productivity and our productivity has been an issue for the decades that we have been writing cheques to each other.

We are transferring  between $40 and $50 billion each year from high productivity jurisdictions to low productivity provinces and we have been doing this for fifty long years – without  any effort by the federal government to either assess the economic impact of this defining feature of Canadian federalism or discuss alternatives to it.

This policy weakens strong contributing provinces and traps the recipients.

Barbara Tuchman, an influential American historian, felt that to qualify as folly, policy must have been conceived as counterproductive in its own time, must have been pursued when reasonable alternatives were available and must have been pursued over a long period of time. Canadian regional subsidies qualify in all these respects.

There are alternatives.

Some have proposed transferring the GST to the provinces in return for the elimination of some or all transfer programs.

Others have suggested systems to report publicly on the comparability of provincial programming across Canada.

Yet others have suggested that we learn from Australia and factor population need into our transfer system. Remarkably, the needs of the populations of different provinces are not part of our system of calculating equalization.   

Over the years, many other ideas have been suggested to fairly deal with the regional subsidy problem.

In summary, we should not allow our current prosperity stemming from commodities to obscure the fact that serious regional economic problems affect the majority of Canadians.

Second, we should recognize that there are win-win solutions and that we are not stuck with  corrosive regional subsidies unless we choose to be stuck. Alternatives exist. Folly can be corrected.

Finally, we should recognize that modernizing our system of regional subsidies and intergovernmental transfers is the most important thing we can do to improve our prospects in the twenty first century.