Time to End Quebec’s ‘Welfaretrap,’ report says

Media Appearances, Equalization, Frontier Centre

Quebec may not be able to keep its gold-plated welfare state, but either way it is time to break the province's 55-year "welfare trap" dependence on equalization payments, according to an economic note by the Montreal Economic Institute.

"Quebecers are well aware that we're a have-not province, and there's no pride in this," said Yourri Chassin, an economist at the Institute.

The four-page note released Tuesday calls for Quebec to ramp up oil, shale and electricity development, while simultaneously calling on Ottawa to grant the province a five-to eight-year "grace period" before clawing back equalization payments.

"There's a bit of incentive needed to kick-start this process," Mr. Chassin said.

Under the current equalization regime, Quebec stands to lose 50¢ in equalization payments for every dollar it collects in resource revenues. Mr. Chassin argues that the formula is subtly hindering the province's willingness to approve mines and oil drilling projects.

Quebec is effectively stuck in a "welfare trap," according to the report, referring to an economic conundrum in which welfare recipients have no incentive to find work, since a minimum-wage job would pay just as much.

"Grace period" programs were implemented in Nova Scotia and Newfoundland and Labrador to entice the provinces into developing offshore oilfields without seeing immediate clawbacks in their equalization cheques. Thanks in part to the arrangement, Newfoundland and Labrador became a "have" province in 2008 for the first time in its history.

Sonya Gulati, a senior economist at Toronto-Dominion Bank, suspects that a Newfoundland-style program for Quebec would be a hard sell to the rest of Canada, particularly since Quebec already takes such a large share of federal dollars. Besides, she said, "we've already seen a lot of money and interest in [Quebec resource] development. It doesn't seem like they're taking equalization payments into account."

Quebec has received equalization payments consistently since the program was established in 1957, the only major province to do so.

The aim of equalization, as entrenched in the Canadian Constitution, is to "provide reasonably comparable levels of public services at reasonably comparable levels of taxation." When the rates are calculated, auditors focus on "fiscal capacity," Quebec's ability to raise revenues, and ignores the province's actual rates of tax revenue – which are among the highest in Canada.

Resource revenues are different, as the money is automatically counted toward fiscal capacity at a ratio of 50%. In the 2012-13 fiscal year, equalization payments constituted $7.4-billion of Quebec's $70.1-billion budget, roughly accounting for 11% of all government spending.

In 2010, a paper by the Frontier Centre for Public Policy advocated scrapping equalization entirely, arguing it allowed "have not" provinces to fund robust social programs at the expense of "have" provinces.