by Nigel Hannaford
The Calgary Herald

Funny thing about some of the have-not provinces. First they tell you to bring them your aircraft factory because it’s really cheap to do business there. Then, they tell you how tough it is delivering government services where they live, thank heavens for equalization.

Saw some of this first hand several months ago, when the four Atlantic premiers visited the Calgary Herald. I must say it was one of the more congenial gatherings I’ve attended here. I’ll take a day’s squid jigging with Danny Williams any time he offers.

But at the end of it all, I was wondering: if it’s as cheap for business in Halifax, as then-premier John Hamm said, why does it cost so much to meet the objectives of equalization — to make sure all provinces are adequately funded to provide roughly comparable government services, coast to coast?

After all, business and government do a lot of the same things. They have office space, vehicles, pay for heat, light, power, telephones, computers, printers, fax machines — all the things you need in a paperless office. And they pay people. Odd, right?

But there’s lots of holy mysteries that resist explanation: transubstantiation, the origin of the universe or why Quebec, which gets equalization, has $7 day care, while Alberta which gives it, doesn’t. So I moved on, as they say.

But Brian Lee Crowley of the Atlantic Institute for Market Studies e-mailed. AIMS is a Halifax think-tank, the Fraser Institute in sou’westers, if you like. Crowley is its chief thinker, and makes a modest living saying what some politicians think, but don’t want to say.

And, he’s been wondering, too. The equalization formula does well, he says, at ensuring all provinces have roughly equivalent per-capita dollars. But it takes no account of the cost of doing government.

Albertans should get this in a flash. If you earn $50,000 here, you’re almost working poor. In Summerside, Gimli or Sydney, you’d do nicely.

Same with governments where 75 cents still buys coffee. With their lower prices, what costs $1,000 to deliver in Alberta, and $1,073 in Ontario, costs only $940 to provide in Manitoba, and $892 in PEI.

So, once you account for local differences in costs, have-not Manitoba, for instance, effectively spends $1,800 more per Manitoban on provincial and local government than have-Ontario can spend on Ontarians.

You’d think it would be the other way around.

But once you factor in the Ontario government’s cost environment, (a ratio available from KPMG’s 2006 Competitive Alternatives report), Crowley concludes Queen’s Park actually has the least ability of any provincial government, in relative terms, to provide services.

And who has the most? Other than Alberta, which spends its own money, it’s P.E.I., and Newfoundland and Labrador — by a huge margin.

In other words, by ignoring their lower operating costs and funding them at the national average, Ottawa over-equalizes have-not provinces, according to Crowley.

What happens to the extra money?

“We call it the flypaper effect,” Crowley said. “Well-organized civil servants capture the money as it goes by.”

“Some provinces appear to inflate the wages of their public servants, others appear to be inflating the size of the public service.”

Take Saskatchewan. The average civil servant there earns a relatively modest 13 per cent more than the average Saskatchewan private-sector worker.

But everybody works for government: for every 1,000 of population, 109 are public servants. It’s the highest ratio in Canada. Statistics Canada says Ontario gets by with 67 per 1,000, Alberta with 73.

Quebec, meanwhile, pays its public servants a thumping 26 per cent over the comparable private wage, but gets by with fewer civil servants than Saskatchewan, or Manitoba, proportionately speaking.

Either way, though, free money seems to lead to bloated public-sector wages.

“This is not what equalization was supposed to do,” says Crowley. Uh-huh. You think?

It gets worse.

Suppose you were a have-not finance minister. If you work to develop the provincial economy, your reward is that Ottawa claws back 90 per cent of the increase in your tax revenues from your equalization payment.

But if you borrow money, then use equalization to pay the interest, you can spend all you borrowed. And if you hurt your economy, Ottawa sends more money.

Talk about perverse incentives. What would you do?

Think equalization’s objectives could be met for less money? Crowley does, and he has a case to answer. Whether anybody in Ottawa wants to is another matter.

One thing’s certain. No Conservative politician on his way to see Danny is going to be wishing he’d said it first.

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