It is Time for a Fundamental Course Change by Atlantic Canadians Respecting Equalization and other Regional Subsidies

Commentary, Equalization, David MacKinnon

Earlier this week, as a Senior Fellow with both the Atlantic Institute for Market Studies and the Frontier Centre for Public Policy, I made a presentation to independent Senators in Ottawa.

Senators were advised that Canada’s regional subsidies were ineffective.

The presentation noted that after 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 Province,  Nova Scotia, New Brunswick and PEI are at the bottom of a list of Canadian provinces and international peers measured by output per person. Quebec and Manitoba were only slightly better while Newfoundland and Labrador faces a grave financial crisis.

At the same meeting, the Mowat Centre, a research institute associated with the University of Toronto, described the unfairness of this system, particularly in relation to Ontario. The Centre 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 encountered serious difficulties, in terms of employment shrinking.

The Centre 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 on several occasions, the Ontario government, the Drummond Commission on Reform of Ontario’s Public Services, the Ontario Chamber of Commerce and others.

There is substantial concern about the impact on Albertans of the net contribution to Confederation by Albertans. Their contribution was a remarkable $228.6 billion between 2007 and 2016.

With rare exceptions from leaders such as former Premier Frank McKenna, there has been limited response to these concerns from political leaders in Atlantic Canada. The response has often been mute in the apparent hope that the pressures will go away. Sometimes, it has been an appeal to historical events in the nineteenth century, such as the National Policy, to justify current arrangements.

Frequently, the response has been cloying sentimentality such as the idea that huge and uninformed transfers from some Canadian pockets to other Canadian pockets reflects a higher morality of sharing.

What has been lacking in all these responses is any recognition that 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 receiving provinces — something Atlantic Canada’s leaders have also failed to recognize. This means there is no merit to the argument that 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 that excessive spending by provincial governments is the real barrier to growth in the region because they drive up taxes, lead to redundant infrastructure, crowd out the private sector and have produced 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 often 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 PEI are similar. New Brunswick has a hospital for every 30,000 people.

Similar bloat is evident throughout the public sector in Atlantic Canada. Public sector employment in Newfoundland as a portion of the provincial labor force is 50% higher than the national average.

The second change should be to recognize that federal subsidies, including equalization and many other subsidy arrangements, have failed to improve the fortunes of Atlantic Canada. As noted earlier, they are ineffective.

The third change is to recognize that 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.

Above all, what is needed is regional leaders who are informed, brave and willing to take risk. 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 – federal and provincial  – emerge who can take the region on a better but different path than the one currently being travelled.