By Neil Reynolds
As appeared on page B2
OTTAWA — Finance Minister Jim Flaherty says he will limit the amount of money that Canada’s poor provinces can collect from the federal government in equalization payments. Poor provinces, he says, shouldn’t be permitted to get richer than the rich provinces — at least, he says, not by federal equalization payments alone. Oops. Too late.

In a report published last year by the Atlantic Institute for Market Studies (AIMS), Halifax economists Brian Lee Crowley and Bobby O’Keefe documented the relative impoverishment of Ontario and British Columbia by excessive equalization payments: “Two of the three richest provinces before equalization,” they said, “effectively become two of the three poorest provinces after equalization.” Mr. Flaherty is astute to limit equalization payments. Put a feather in his cap.

Mr. Crowley and Mr. O’Keefe were speaking of one specific kind of wealth, of course — the capacity of the provinces to provide public services.

Theoretically, equalization seeks to ensure only that, across the country, people have access to reasonably comparable public services at reasonably comparable levels of taxation. In practice, on a per capita basis, Ontario now spends $1,000 a year less on public services than the national average. When the actual cost of providing these services is taken into account, indeed, Ontario spends less than any other province.

“Six provinces spend more [to deliver public services, per capita] than the national average,” Mr. Crowley and Mr. O’Keefe noted, “and four spend less.” Of the six that spend more, four are provinces that receive equalization payments and a fifth (Saskatchewan) only recently stopped receiving them. All things considered, Newfoundland spends the most: $1,300 per capita more than the national average. Alberta spends $200 more; Quebec, $600 more.

Using Ontario’s per capita spending as a guideline (rather than the national average) and combining provincial and municipal services, Canada’s very poorest provinces emerge as the biggest spenders on public services. Newfoundland spends $2,350 a year more per capita than Ontario; Prince Edward Island spends $1,855 more. Quebec, the province that often appears more equal than all the others, spends $1,600 more.

This brings us back to Mr. Flaherty, who is not personally responsible for the surreal fact that Canada’s richest province, with 40 per cent of the country’s people and 40 per cent of its gross domestic product, spends less on public services than any other province. Yet has he not now made the mess worse? He has dispatched more billions to the poor provinces, after all, and mere millions to Ontario. What gives?

You have to look hard to find Mr. Flaherty’s conservative principles in this budget — and even then you might miss them. Yet they are there. The difficult question is whether they are there deliberately or inadvertently. We’ll assume design, however, not happenstance.

Firstly, Mr. Flaherty introduced genuine administrative reforms that should restore a minimal sense of dignity to the equalization program. For a minority Conservative government that seeks to end a century of Liberal hegemony, this was a principled action because it imposes limits on the government’s freedom to meddle arbitrarily — some would say corruptly — for momentary partisan advantage.

Secondly, Mr. Flaherty revised transfer payments programs to deliver more money to the provinces on a per capita basis — meaning essentially that Ontario will get 40 per cent of these funds, a very significant reform.

Thirdly, give the guy a break. With revenue flowing down around him like molten lava, Mr. Flaherty had to do something. He could have used the entire $14-billion federal surplus to cut federal taxes across the board. He could have plunked it on the national debt. He could have used it, in other words, for strictly federal purposes. He could also have spent it for bogus federal purposes, grabbing more provincial jurisdiction in the process, as his Liberal predecessors routinely did.

Mr. Flaherty channelled much of the surplus back to the provinces where it belongs. In this act of restraint, he proved himself a finance minister of stature. When the Conservatives took office, they promised to establish clear-cut lines of responsibility between federal and provincial governments. Mr. Flaherty demonstrated that he’s prepared to get on with it, to decentralize unilaterally.

Yes, Quebec gained the most, again. But this time, perhaps, the money will be spent more wisely — to finance tax cuts. At this rate, Quebec could become as rich as Ontario — except for the fact that, in public services at least, it already was.