Euro-Zone Lessons for Canada

Commentary, Equalization, Frontier Centre

As we watched TV images of rioting students trashing downtown Montreal, one of our colleagues quipped: “I always wanted to go to Greece. I never expected Greece to come here.”

She wasn’t far off the mark. Unless Canadians get a handle on the provinces’ runaway spending, their growing mountain of debt, and the resulting tidal wave of interest charges, we can expect lots more home-grown social unrest, as have-not provincial governments fall short of voters’ outsized expectations.

Perhaps it’s time we learned a lesson from the Europeans. As leaders on that continent brace for the next round of bailouts, they’re tightening restrictions on the power of EU members to run annual deficits. Canada would benefit from similar restrictions — such as a constitutional cap on debt and deficits, to prevent profligate federal and provincial governments from borrowing on the credit rating of more responsible jurisdictions.

In March, leaders from 25 of 27 EU member states signed off on a fiscal compact, to go into effect in 2013. Once ratified by 12 of the 25 signatories, the agreement will require EU members, all of them sovereign states, to enact a constitutional ban on deficit spending.

Europe’s heavy-handed approach to the debt crisis is to be enforced with severe sanctions: Member nations that refuse to curb their borrowing will be denied access to the trillion dollars of bailout money in the European Stability Mechanism and the European Financial Stability Fund. The European Court of Justice will be required to impose massive financial penalties on governments that refuse to comply.

This tough-love approach to balanced budgets, enacted at the behest of taxpayers in Germany and other lower-debt nations, follows more than a decade of cheating by Greece and others on reasonable debt limits included in Maastricht — the treaty that created the common Euro currency. (Before the free-spending Europeans inserted some wiggle room for themselves, Maastricht even capped EU member debt at 60% of GDP and annual deficits at 3% of GDP.) Greece fudged its books and infamously engaged in a currency swap with investment dealer Goldman Sachs to get around Maastricht’s borrowing rules.

As Canadians, we should ask ourselves why we’re allowing the Ontario government to run a deficit potentially larger this year than the federal deficit, and larger than those of all other provinces put together. We should ask ourselves how 25 formerly warring European nations, speaking 23 different languages, can agree to force balanced budgets on one another, while we’re powerless to rein in the borrowing of Prince Edward Island and Nova Scotia.

When you compare the actual debts owed by Manitoba, Ontario, Quebec and the Maritime provinces to their ability to pay, as if they were independent nations, the rest of Canada would be hard pressed to want to pick up the tab. Despite sharing a common currency and sending transfer payments eastward, by the billions, year-after-year, donor provinces have no recourse against have-not provinces that choose to spend and to borrow to such an extent that they threaten the entire Canadian economy.

Canada’s federal debt alone sits at a somewhat manageable level: 34% of GDP at the end of 2011. But add in the obligations of provincial and city governments, and Canada’s gross general government debt balloons to 85% of economic output, according to the International Monetary Fund. That puts us in worse shape than the U.K., Germany, France and only three percentage points better than the eurozone, taken as a whole.

When you add Quebec’s $143-billion share of the federal debt to the $159-billion it owes as a province, its combined debts are a staggering 94% of GDP, in the same league as euro basket cases such as Ireland and Portugal. The Maritime provinces’ debt ratios, in the high 70s and mid-80s, are also approaching eurozone territory. Ontario, with $239-billion of federal debt and $214-billion of its own (forecast to grow to $260-billion by the April 2013), would also owe more than 70% of its GDP.

Compared to the sovereign nations of the eurozone, Canadian provinces enjoy free rein on their finances: They can spend what they want, borrow what they want and run up as much debt as they want, all while enjoying all the benefits of a common Canadian currency, federal transfers and a continental free trade agreement.

All the while, we provide the have-not provinces with annual bailouts — in the form of an elaborate and byzantine system of transfer payments (health transfers, equalization, infrastructure subsidies and the list goes on). Ottawa sent $15.4-billion in direct transfers to the Quebec government last year, providing nearly one-quarter of Quebec’s total revenue. Ontario got $23-billion, or 21% of the province’s budget. Alberta, meanwhile, took in just under $5-billion in federal transfers, accounting for 14% of its total revenue.

Alberta’s finance department calculated in 2010 that Alberta taxpayers provided $14.1-billion more in annual revenue to the Canadian government than they received in services and transfers. Yet, this contribution goes largely unrecognized in the rest of Canada. It manifests itself in many forms, such as extra tuition surcharges for Alberta residents at McGill University in Montreal, where Quebecers pay $2,492 per year and Albertans pay $6,183. Of course, at the University of Calgary, every Canadian pays $6,264, making McGill a bit of a bargain for Albertans.

In April, Ontario was placed on credit watch by Standard and Poor’s, and its credit rating was lowered by Moody’s, after a spending spree that pushed its net debt from $140-billion in 2004 to $237-billion in 2011, even with the federal government pumping $135-billion of direct transfer payments into the province’s coffers. Quebec’s debt has soared from $99-billion to $159-billion since 2004, despite annual transfer bailouts totalling $88-billion from the Canadian government.

And so it is obvious that all this bailout money in the form of transfers isn’t helping Ontario, Quebec and the Maritimes balance their budgets, pay off their debts, raise their productivity and boost their self-sufficiency. Ontario’s minority government is raising its top tax rate to 49.97%. Quebec has outlawed shale gas production — the same activity that, carried out in Alberta, Saskatchewan and B.C., generates transfer payments to Quebec. Maritime provinces continue to import foreign temporary workers because many of their own residents would rather collect EI benefits 35 weeks a year than work.

Ottawa’s costly interprovincial welfare system has saddled productive parts of the country with unnecessarily high taxes, and pushed the rest of the country into a dependency trap, so irresponsible provincial politicians can fund expensive give-aways at election time. We need to turn off the tap on transfer payments, follow the European example and dedicate ourselves to building a debt-free, self-sufficient Canada.

Gregory Thomas is the Federal and Ontario Director of the Canadian Taxpayers Federation. Derek Fildebrandt is the National Research Director of the Canadian Taxpayers Federation.