Mention the word “equalization” to the average person on the street and you will generally draw a blank.
Somehow, in a touchy-feely kind of way, it sounds like a positive thing. Most people like the idea of equality. However, the average schmo really has no clue equalization is a huge inter-governmental welfare program begun in 1957 that shifts money from the richer to poorer provinces.
Most will like the program’s goals — the provision of equalization grants to “ensure all Canadians receive reasonably comparable levels of public services at reasonably comparable levels of taxation”.
It provides unconditional grants to provinces with a below average tax capacity. These are the so-called “have-not” provinces that receive and the “have” provinces, like Alberta, that give.
That is an admirable goal, but as it usually turns out, well-intentioned government programs have negative consequences. It has made the public sectors in the “have-not” provinces fat and rich.
Earlier this year, the Ontario Chamber of Commerce released a study that looked at the effects of equalization. It discovered the program pays so much into recipient provinces that the public sectors in those provinces grow very large. Total government spending as a share of gross domestic product, in fact, is above average in all have-not provinces. Ben Eisen, a senior policy analyst at the Frontier Centre, noted this can “politicize local economies and dampen private sector-led economic growth.”
With padded public sectors, “have-not” provinces like Manitoba are trapped in a cycle of dependency and economic under-performance. The compensation payments from the “have” to the “have-not” provinces have layered a huge public sector on top of a private sector that can’t afford it.
To make things worse, the formula used to calculate how much equalization a province like Manitoba gets perversely rewards higher tax rates. This is one reason Manitobans end up paying the highest tax rates in Western Canada, and why the level of private investment in our economy is among the lowest in Canada.
Of course, this system is a marvellous one for politicians, and in Manitoba’s case the NDP has ridden a crazy boom in transfer payments in recent years. It’s nice to have outsiders pay the province’s bills. It makes things look more prosperous than they really are.
And a big fat public sector pays tons of union dues, which are now being used to advertise to all and sundry what a great system of public services we really have in Manitoba.
To show how nuts the system has become, we need to compare two relatively similar provinces and how they have fared under the equalization system. Between 1999 and 2011, Manitoba politicians received $21.6 billion in payments, whereas Saskatchewan’s received $2.4 billion over the same period.
Relatively speaking, it’s not hard to see which politicians have to work a little harder at good public policy. Saskatchewan’s services aren’t any worse than ours.
Ironically, it was the Saskatchewan NDP that pushed through major tax cuts that leave Manitoba’s rates embarrassingly uncompetitive. Expect this easy street system for the Manitoba public sector and the Manitoba NDP to be reformed in the future.