Equalization payments do nobody any favours

Commentary, Equalization, Ben Eisen, Peter Holle

Source: Barry Cooper, The Calgary Herald, 12 Nov 2013

Legislation governing Canada’s equalization program, which supports most intergovernmental transfers, is scheduled to expire next March. Bureaucrats have been negotiating over new terms for at least a year.

In February 2012, when Ron Liepert delivered the Alberta budget, he said: “If you qualify for equalization, you should have to show some results based on performance.”

In fact, we know the results. This is a program so riddled with perverse incentives, inconsistencies and defects that the entire country would be better off if it were scrapped.

Because Section 36 (2) of the 1982 Constitution Act declares that the program aims to provide “reasonably comparable levels of public services at reasonably comparable levels of taxation,” even when it does nothing of the kind, some people, mostly lawyers, have said nothing can be done. This is wrong. Equalization payments are a convention, nothing more, and cannot be enforced anyhow.

It’s all about politics and how and what went wrong, not constitutional subtleties.

Equalization payments begin as federal taxes paid by Canadians across the country. The formula that governs what provinces get has changed over the years. It is so complex that Peter Holle of the Frontier Centre said only 30 people in the world understand it. Economist Paul Boothe added that no one can predict what the actual transfers will be.

The commonsensical version of the program is clear enough. It transfers income from individual taxpayers in “have” provinces, the givers, to provincial “have-not” governments, the takers.

The pattern of givers and takers has not changed much in half a century. Taxpayers in Alberta, B.C. and Ontario contribute more to federal revenue than their governments receive in federal spending. They have recently been joined by taxpayers in Saskatchewan.

The consequences are awful. Interestingly enough, they have been noticed chiefly by think-tanks, not by politicians and certainly not by bureaucrats.

Finn Poschmann of the C.D. Howe Institute pointed out several years ago that poorer taxpayers in donor provinces subsidize richer taxpayers in taker provinces. Peter, as usual, was robbed to pay Paul; but Paul ended up better off than Peter. A couple of years later, Fred McMahon, then of the Atlantic Institute for Market Studies, showed that transfer payments led to increased spending in recipient provinces.

Then Ben Eisen and Mark Milke at Frontier showed that the “real have-nots in Confederation” were the donor provinces because they had no “free” money to pay for health-care. More recently still, Milke, now at the Fraser Institute, looked at 19 indicators of provincial spending. In 13 cases, the takers spent more per capita than the givers.

This explains why there are more doctors and MRI machines per capita in P.E.I. than Alberta, or why Quebec subsidizes university tuition so that it is less than half of what it is in Alberta. That was not how it was supposed to be.

Nobel laureate James Buchanan, the “father of equalization,” argued in his 1948 PhD thesis that a sensible program would ensure individuals in richer provinces would bribe those in poor provinces to stay home rather than move and becomes a burden on the local welfare system. He did not advocate government-to-government transfers because, as has happened, bureaucrats who administered such transfers would cultivate an interest in continuing the program, whatever its results.

If no individual were encouraged to leave New Brunswick to find work in Fort McMurray, they would happily stay at home and collect pogey. This explains why a chocolate manufacturer in New Brunswick imported workers from Romania despite a local unemployment rate above 11 per cent.

The result is increased provincial disparities. The only beneficiaries are the bureaucrats, who shuffle paper and cut cheques. Both the provinces that receive the money and the taxpayers who supply it are worse off. The takers fall into a welfare trap and become increasingly dependent on the federal government. Individual taxpayers receive inferior government services, as the latest Fraser Institute study showed. It would be reassuring to learn that the Redford government still adheres to the Liepert principle. By repeating it from today until next March, perhaps we can begin to wind down this worse than useless fiasco.