Time to Rethink the Federal Transfers System

David MacKinnon, Equalization, Government

It is time for a fundamental course change by Atlantic Canadians respecting equalization and other regional subsidies.

Earlier this week I made a presentation to independent Senators in Ottawa on this subject, in which I advised them that Canada’s regional subsidies were ineffective.

We’ve had a half-century of remarkably large subsidies to Quebec and Atlantic Canada, recently amounting to several thousand dollars per citizen per year in each of the Atlantic Provinces. Yet Nova Scotia, New Brunswick and Prince Edward Island are still at the bottom of a list of Canadian provinces and international peers measured by economic output per person.

Quebec and Manitoba were only slightly better. Meanwhile, Newfoundland and Labrador faces a grave financial crisis.

At the same meeting of the Senate, the Mowat Centre, a research institute associated with the University of Toronto, described the unfairness of this system, particularly in relation to Ontario.

Mowat indicated that over the ten years from 2007 to 2016, the net financial benefit from the federation for Atlantic Canada was $120 billion. Ontario contributed $96 billion over this period, even though its manufacturing sector was encountering serious difficulties, including shrinking employment.

This indicated that “a good deal of this gap is attributable to unprincipled allocations of federal funding that do not benefit Ontarians.”

Many Ontario organizations have expressed concern over the years about the scale of these problems, including the Ontario government, the Drummond Commission on Reform of Ontario’s Public Services, the Ontario Chamber of Commerce, and others.

There is also substantial concern about the impact on Albertans of their disproportionate net contribution to transfers. This was a remarkable $228.6 billion between 2007 and 2016.

With rare exceptions, such as former New Brunswick premier Frank McKenna, there has been limited response to these concerns from political leaders in this part of the country.

They seem to hope these pressures will eventually go away. When they do defend the status quo, they usually appeal to historical events in the 19th century, such as Sir John A. Macdonald’s national policy, to justify current arrangements where Alberta and Ontario pay big for Atlantic Canada’s public sector largesse.

Or they sling to sentimentality, based on the idea huge and uninformed transfers from some Canadian pockets to others reflects a higher morality of sharing.

What has been lacking in all these responses is any recognition the transfer system is unsustainable, or that subsidies should never be in place forever.

Most importantly, provincial programming is less accessible in Ontario and in some cases Alberta than in equalization-receiving provinces, something Atlantic Canada’s leaders have also failed to recognize. This means there is no merit to the argument Atlantic Canada needs help to bring its services up to national standards.

So major changes are needed. What should they be?

The first change should be to recognize excessive provincial governments are the real barrier to growth in Atlantic Canada because they drive up taxes, lead to excessive infrastructure, crowd out the private sector and produce government-driven economies that are out of phase with a market-driven world.

Hospitals are a good indication of excessive infrastructure that drives up costs and leads to high taxes that negatively impact growth. Nova Scotia has a hospital for every 22,000 citizens compared with Ontario which has a hospital site for every 57,000 citizens. The patterns in Newfoundland and Labrador and P.E.I. are similar. New Brunswick has a hospital for every 30,000 people.

Similar excesses are evident throughout the public sector in Atlantic Canada. Government employment in Newfoundland and Labrador as a portion of the provincial labour force is 40-per-cent higher than the national average.

The second change should be to recognize that federal subsidies, including equalization but including many other arrangements, have failed to improve the fortunes of Atlantic Canada. They are ineffective.

The third change is to recognize there are solutions for these grave problems that have been developed by many different organizations. They are not easy solutions. The presentations to the senators described some of them, including a reformed equalization program that funds public sector restructuring, pilot projects on guaranteed income, improved methods of calculating equalization payments to provinces, and several others.

Above all, what is needed is regional leaders who are informed, brave and willing to take risks. If leadership with these qualities comes forward and engages the public in a realistic way on real issues, the problems noted earlier can be managed.

The future of Atlantic Canada will ultimately depend on whether good leaders emerge who can take the region on a better but different path.

David MacKinnon is a senior fellow with the Frontier Centre for Public Policy and the Atlantic Institute for Market Studies.