A Flawed Formula: In allotting equalization, no thought is given to how much it actually costs to provide basic public services

Worth A Look, Equalization, Frontier Centre

Ottawa’s equalization scheme, under which the federal government gives money to “havenot” provinces so that they can provide roughly comparable levels of public services as found in “have” provinces at roughly comparable levels of taxation, is a little more than 50 years old.

Here’s the one thing every Canadian truly needs to know about the program: Since equalization began in the late 1950s, every province has grown so much richer than it was then that only one province — Prince Edward Island — would still qualify for subsidies under the original rules. Yet, because successive federal governments have lacked the political fortitude to reform equalization, no fewer than six provinces — P.E.I., Nova Scotia, New Brunswick, Quebec, Ontario and Manitoba — still receive payments totalling nearly $16-billion a year.

But even accepting all the changes that have been made over the decades to how equalization payments are calculated so that Ottawa doesn’t have to risk the political damage of cutting any province off the dole, the system has one huge additional flaw: According to a new study released this month by the Mowat Centre for Policy Innovation at the University of Toronto, no consideration is given to how much it costs to provide services in different provinces. It’s cheaper to hire a nurse in the Maritimes than in Alberta, yet that is never taken into account. A greater percentage of the population in Atlantic Canada is older and lives in remote communities than in Ontario, but the cost of providing public services is much higher in Ontario because of the cost of living.

Our equalization system is good at calculating how much a province should receive relative to its “fiscal capacity” — its ability to raise revenues from income, sales and corporate taxes — but fails to take into account at all each province’s “expenditure needs.” No consideration is given to how much it actually costs to provide basic public services.

The big winner under the current arrangement is — not surprisingly — Quebec. It receives $7.6-billion annually from Ottawa — nearly half (48%) of all equalization payments made. Were “expenditure needs” taken into account, Quebec would qualify for just $4.5-billion. The extra $3.1-billion comprises a two-thirds bonus.

The big loser is Ontario. In 2010, Ontario received equalization payments of $3.7-billion. Had the higher cost of providing services there been factored in, it would have received $4.5 billion — the same as Quebec would qualify for.

What these flawed equalization calculations have led to historically is not better service in have-not provinces, but bloated public-sector payrolls. Because have-not provinces have received over-rich subsidies for so many decades, the Atlantic provinces, for instance, now have 50% more nurses than Ontario (on a per-capita basis) because Ontario only recently became a have-not province and only recently began to receive equalization.

Until recently, the Manitoba government liked to boast that it spent more per capita on health care than any other province. Recently, spend-happy Alberta surpassed Manitoba. But the old boast was a phony one, anyhow: Manitoba wasn’t spending more because it cared more or provided more services. It was outspending the other provinces because it was able to take equalization dollars it didn’t need and pump them into inflated wages for health care workers.

The Mowat Centre study uncovers — albeit in polite academic-speak — the main fraud in equalization: Most of the provinces that receive it don’t truly need it. “Most of the provinces that qualify for payments under the existing equalization system due to their low fiscal capacity, pay less than average for the goods and services they must buy (P.E.I., Nova Scotia, New Brunswick, Quebec, and Manitoba) … This lower need may offset, in whole or in part, the below average fiscal capacity that currently qualifies those same provinces for equalization.”

Not mentioned in the Mowat study, yet still very troubling, is the fact that Ontario has allowed itself to fall into such economic mediocrity. The high-tax, highspending, big-deficit, economy-smothering heavy-regulation policies of the Liberal Mcguinty government have caused Ontario to fall from a per-capita provincial GDP of 115% of the national average to 97%. A province that was once the economic engine of the country is now behind Alberta, Saskatchewan and Newfoundland and Labrador, and only just slightly ahead of Manitoba and B.C.

Yet for reasons that are hard to explain, Ontario voters keep electing a government that seems bound and determine to strangle the last ounce of economic life out of their province.