by Robert Gibbens , Financial Post

MONTREAL – James Buchanan, 1986 Nobel Prize laureate and pioneer of the “public choice” school of economics, said yesterday the East Coast energy boom has given Canada a golden opportunity to reduce the distortions caused by equalization payments.

The government’s equalization system may have brought benefits over the past 40 years, he said, but “it’s time to wean the Atlantic area off transfer payments and make the receiving provinces and their taxpayers face their full responsibilities and spend less of the richer provinces’ money.”

The present system, with its tax burden on higher-income regions, is inefficient with its bloc grants and stifles mobility by encouraging people to stay in the poorer areas, he said. But the burgeoning wealth from the oil and gas projects off Newfoundland and Nova Scotia should act as a catalyst for change.

Mr. Buchanan, 81, said his early writings influenced Canada’s equalization system, but he later realized transfers can be captured by political coalitions in receiving provinces for programs benefiting their supporters only. Equalization only works if the benefits flow to everyone in those provinces.

“There are incentives for them to engage in imprudent behaviour in order to maximize their equalization entitlements,” he said.

Mr. Buchanan, of Virginia’s George Mason University, was speaking after addressing a seminar “Equalization: Welfare Trap or Helping Hand?” sponsored by the Montreal Economic Institute, the Atlantic Institute for Market Studies, the Frontier Centre for Public Policy and the Conseil des relations internationales de Montréal.

“In a federation, you must approach equalization with pragmatism and avoid the perverse shifts of resources and the lack of mobility it causes,” he told the seminar. “The original intent may have been undermined by constant political tinkering as well as by poor design, such as the handling of resource revenue.”