Equalization Only Promotes Lazy Spending Habits

Commentary, Equalization, Frontier Centre

Equalization doesn't just reward failure. It encourages it. Seven Canadian provinces were chronic recipients of the program from the very beginning and all have been economic and financial underperformers that bleed ambitious young people to more dynamic parts of the country. Newfoundland and Saskatchewan are no longer recipients of equalization and are struggling to reverse economic and demographic decline, but Quebec, Manitoba and the other three Atlantic provinces are still stuck in it.

Stuck is the right word. Equalization rewards failure because governments, and voters, who consistently make bad policy decisions get money. But it also causes failure, because it insulates governments, and voters, from the painful consequences of taking the soft option.

Fiscal discipline is like any other kind. At first it just hurts. If you're out of shape and decide to start working out you need to get off the couch, buy gear and perhaps a gym membership, spend time getting ready, then lurch and sweat and gasp for air and look bad doing it before staggering home sore and hungry, resisting the urge to sweep everything off the fridge shelf straight into your mouth.

Only after weeks of this misery do you begin to start to see results, and it takes months before you really look and feel better. Now suppose a government program existed that turned down the numbers on your scale and even gave you a free corset and helped you put it on if, but only if, you didn't actually lose weight.

Tempting, isn't it? Except you know you wouldn't actually look better and, in the long run, you'd feel worse. Equalization has exactly that effect on government budgets.

P.E.I., for instance, is expecting a deficit of $75 million this year. Without that province's net gain of $284 million from equalization, though, the number would more than quadruple, and jump from 1.3% of GDP to more than 6%. At which point everyone, starting with voters, would demand the politicians stop coasting and do something.

The figures are worse elsewhere: Without equalization, Nova Scotia's $211-million deficit would increase five-fold, to $1.1 billion, New Brunswick's would increase more than seven times, from $183 million to $1.4 billion and Quebec's $1.5 billion would surge to $6 billion. Manitoba's $460 million would just more than triple, to $1.7 billion.

It is somehow taken for granted that the Atlantic region is a have-not part of Canada. But it's not some act of God that created a sluggish economy there: It's high taxes, wasteful spending and overregulation. And as long as someone else picks up the tab, it's easy to stumble on down that route and call it compassion.

Money isn't everything, of course. There's also opportunity. And as Canadians vote with their feet for places better at rewarding hard work, those provinces that have relied on big government plus subsidies have seen a steady decline in their population share.

Quebec famously went from housing 28% of Canada's population as recently as 1971 to barely 23% today. Like Quebec, Atlantic Canada's population declined relative to the rest of the country, with Newfoundland's share plunging 40%. In 1971, one in 40 Canadians was a Newfoundlander; today it's one in 66.

Some might dismiss the young, ambitious and mobile as sellouts. But even in the coin that seems to matter most to politicians – political clout – the result of the decline is increasingly painful. When equalization was introduced Quebec, Manitoba and the Atlantic provinces between them held nearly half the seats in Parliament (122 of 265, or 46%).

After the next redistribution that share will be down to around 37%, barely a third. And already Stephen Harper's Tories won a majority with only 5 seats in Quebec and 30 in all the equalization-receiving provinces besides Ontario.

Whether you measure it in wealth, political leverage or individual opportunity, provinces that receive equalization have lost ground since the program was introduced. Anyone can have a lousy decade, but a lousy half century down east is not coincidence. It's the result of bad choices that are not only rewarded by equalization but encouraged by it.

We are all poorer as a result.