Brian Lee Crowley

The provinces are back in Ottawa again with their hand out. Only in Canada, eh?

The current catch-phrase which supposedly justifies Ottawa handing more of its cash over to the provinces is the “fiscal imbalance”. What does this ugly phrase mean? Basically that Ottawa has too much cash relative to its responsibilities, and the provinces too little, and that the excess of cash at the federal level is the cause of fiscal shortfalls at the provincial level.

But if that’s the case for the fiscal imbalance, Ottawa should turn a deaf ear. The provinces have adequate resources at their disposal; Ottawa’s surpluses are the proper reward to the federal government of its fiscal rectitude; and Ottawa’s improved fiscal position is in no way at the expense of the provinces. And while it is certainly the case that Ottawa taxes us too heavily, that is an argument for Ottawa to cut taxes, not to transfer its excess tax take to the provinces. If provinces want more money from taxpayers, they should have to raise it through taxation and be democratically accountable for that decision.

Ottawa’s better fiscal position is due to more budgetary discipline than you find in the provinces, and not because Ottawa somehow snatches the bread from the mouths of the provinces. Consider, for example, that Ottawa has retired some $60-billion worth of debt since it first balanced the budget. That frees up $6-billion that used to go to debt service. Ottawa can now spend it, sustainably, on new programs, tax reductions or more debt retirement without taxes having to be raised. That means the bulk of Ottawa’s surplus comes from it having less debt than it had before.

The provinces, on the other hand, with the honourable exception of Alberta, have been much slower than Ottawa to eliminate their debt. And with the exception of a couple of debt junkies, like Newfoundland, Nova Scotia and Quebec, almost all the provincial governments have debt burdens significantly less than Ottawa’s even after all the progress there. How Ottawa’s fiscal discipline entitles the provinces to that money when they have been less willing to bite the fiscal bullet is a mystery that passes all understanding.

In fact, the province making the biggest noise about the fiscal imbalance is the one that has done the least to bring its spending under control. Over the past decade, Quebec has consistently spent more money on provincial government than any other province, and they spent just as big a share of their provincial economy on those services last year as they did a decade ago. The only province with a worse performance is Nova Scotia, which spent a full percentage point of GDP more on provincial government last year than it did a decade ago. Every other province is spending at least one to two percentage points less. Quebeckers may have a larger appetite for provincial government services than other provincial taxpayers. But Quebeckers should expect to pay the costs of those choices, and not try to pass the bill to others.

What about revenue growth? If there really were a fiscal imbalance that favoured Ottawa, then you’d expect to see federal revenue growth consistently outpace provincial revenue growth. In fact, over the past decade, three provinces have seen their own sources of revenue grow faster than Ottawa’s. Ottawa is well within the pack on revenue growth. And many of the provinces have been busy cutting taxes – a strange activity for governments that now claim they can’t afford to pay their own way.

And as for the hoary old cry that Ottawa solved its budget problems by downloading to the provinces – that is so nineties! When the feds got serious about deficit fighting in 1995, they cut federal transfers for health and social spending to $14-billion. Total federal health and social transfers to the provinces will rise from $27 billion per year next year to almost $32 billion in 2009.  Equalization payments will increase by $2 billion over that same period. Ottawa, in other words, has more than made up for a very brief period of downloading.

Push the apologist for fiscal imbalance a little harder and it becomes clear that their real complaint is that they don’t like what Ottawa does with the fruits of its fiscal discipline. I’d be the last one to argue that Ottawa gets good value out of all its spending. But the provinces are no less wasteful, and political disagreement over how Ottawa spends its money is hardly an argument for transferring that money to the provinces. The solution to Ottawa’s waste is to demand that they give more money back to taxpayers. The provinces have the means to fix their fiscal problems; there’s no reason Ottawa should do the job for them.


Brian Lee Crowley is president of the Atlantic Institute for Market Studies (www.aims.ca), a public policy think tank in Halifax. E-mail: brianleecrowley@aims.ca.