by David MacKinnon
The past few years have seen fundamental change in Canada’s system of regional subsidies.
The federal government limited growth in equalization to the rate of growth in the national economy. Ontario began to collect equalization. Biases against Ontario and Alberta in the Canada Health Transfer were eliminated.
Think tanks in all parts of Canada demonstrated that subsidies for traditional receiving provinces were excessive because provincial programming in recipient provinces is much more accessible than in the funding jurisdictions, particularly Ontario. Some of these studies also demonstrated that federal funds are being spent on provincial public services that are much larger, in relation to population, than public services in funding jurisdictions.
These problems led to much adverse comment. A major chartered bank described how regional subsidies are “killing the golden goose”, referring to Ontario. Senior political leaders in Ontario and Alberta have described the system as absurd. Only a few days ago, the Premier of Saskatchewan expressed similar concerns.
The problems have also caused significant comment in Atlantic Canada. The Atlantic Institute for Market Studies described equalization and other regional subsidies as “the help that hurts.” The chancellor of the University of New Brunswick, talking about New Brunswick, referred to the province as a “failing province” because of its addiction to subsidy arrangements. Don Savoie, a prominent regional economist, described regional subsidies as being “like a drug” and leading to a most unfortunate dependency syndrome.
Most political leaders in the region have responded to these developments with arguments to maintain the status quo that have long since lost legitimacy, if indeed they ever had any.
Their first argument is that equalization payments and some other subsidy arrangements are required under the Constitution.
They are not. All that is required is a generally worded commitment to the principle of equalization, a commitment that can be demonstrated at funding levels much lower than the current program.
The second argument usually made is that because all Canadians pay for equalization, including taxpayers in recipient jurisdictions, the system is fair. This argument ignores the different situations of taxpayers in both types of jurisdictions.
Ontario taxpayers, even in current economic circumstances, contribute several billion more to the program than they receive while taxpayers in P.E.I, for example, receive tens of millions more than the very small amount they contribute. Supporting citizens of all recipient jurisdictions is a heavy burden on taxpayers in Ontario and Alberta while it is a major net benefit for taxpayers in recipient jurisdictions. The funding they receive greatly outweighs the costs they incur.
It is useful to step back and examine this problem over time.
Traditional recipients of regional subsidies have benefited from subsidies from other Canadians for over 50 years. During that time, their dependency has grown, their public services became grotesquely large relative to their economies and the sense of entitlement their governments feel has been expressed with greater and greater frequency.
Most importantly, all have become deeply uncompetitive in the market-driven world of the 21st century. For that reason, these provinces are likely to become an even bigger and more permanent burden on citizens across Canada unless something fundamental changes.
The choices that traditional recipient jurisdictions have can be framed very simply.
On the one hand, they can continue on the present path of always seeking more money from other Canadians in which case, sooner or later, they will face the same kind of problem Greece faces. Others will pull the plug on the combination of out-of-control finance and unlimited sense of entitlement that characterizes recipient governments. When this occurs, the adjustment will be neither pretty nor comfortable.
On the other hand, they can choose change. Academic and government researchers have identified many alternative policies relating to regional subsidies that could lead to a brighter future, even if some short-term dislocation is inevitable.
Recipient provinces can choose to be open to the new directions or they can continue to depend on eroding goodwill elsewhere until the day arrives when change is forced upon them.
Receptivity to change – real leadership – is clearly the better choice.
David MacKinnon grew up on Prince Edward Island and is chair of the West Park Healthcare Centre in Toronto, and is AIMS’ Senior Research Fellow in Fairness in Confederation and the Ontario Perspective.