Killing Us Softly With Your Love

by: Don McIver

As so many new members of parliament take their places and begin familiarizing themselves with key economic and social issues, now is a good time to review some of the more perverse consequences of existing strategies.  The best of intentions notwithstanding, several policies that seem to classically define Canada have been shown to impede regional growth—federal-provincial transfers, industrial opportunity strategies and differential employment insurance benefits, among them.

The chief economic advantage that comes from being a united country is that labour and capital are free to move to where the opportunities are most profitable.  There are no immigration papers to apply for; no work permits to obtain; and no restrictions on financial transactions across jurisdictions—with no exchange rates to deal with.  Even without discussing the multitude of trade barriers mounted by narrow-minded provincial authorities, Canadian policies seem curiously intent on eroding the benefits of union.

Take equalization as a prime example.  It is highly ironic that even while creating resentment on the part of non-recipient provinces, the program simultaneously fails to deliver strategic benefits to recipients. 

Paradoxically, as the Ontario Chamber of Commerce has pointed out, some of the notionally less-advantaged provinces actually provide more generous public services.  In other words, rather than helping to provide for harmonized delivery standards, equalization payments have actually encouraged government over-spending.  At the same time, the underlying economic discrepancies that initially spawned the scheme have remained persistently incurable for more than 50 years.

It isn’t just equalization that is at fault—an argument can be made that the entire transfer scheme is flawed.  Provincial governments receiving federal funds—whether equalization or per capita health and social transfers—have little direct accountability to the taxpayer from whom those funds were raised.  In consequence, public wage bills have been inflated—to the detriment of productivity.  This is no minor issue. In Atlantic Canada, federal transfers account for almost 40 percent of provincial government revenue.  In other regions that figure can be in the low teens.

The periodic review of all the federal-provincial transfer programs will conclude in 2014—within the term of the current government.  In developing the replacement provisions, new members would do well to heed the advice of many market-oriented economists and “let the government that spends the money—raise the money”.  Better yet, they might wish to explore ways of returning health and education spending decisions back into the hands of the consumer.

Regional development funds represent another egregious abuse.  Hundreds of millions of dollars are funnelled into projects with questionable long-term benefits.  Some simply displace private activity.  Others “invest” in cultural amenities, which do little to stimulate employment beyond their immediate construction and operation—and moreover, add to future public spending. Still others attract matching funding that encourage the private sector and other levels of government to participate in developments that might not be viable if undertaken on their own merit.  All such projects vest decision making over “winners and losers” in the hands of bureaucrats—rather than the marketplace.  It is hard to “look the gift horse in the mouth”—but sometimes it is better to do so.

When economic times are hard, they are hardest in those regions that persistently underperform.  Elected members will always be keenly attuned to the demands of their constituents, and there can be few more pressing demands than those occasioned by the need to replace earnings resulting from job loss.  That compensation is what employment insurance was intended to provide.  However, by establishing differing conditions of entitlement across the country, the system undermines one of the essential benefits of nationhood.  Instead of encouraging individuals to migrate to regions where more vibrant economic opportunities are available, the current system promotes attachment to jobs and industries that are in decline.

The misplaced compassion of Canada’s regional policies has patently failed to stimulate economic convergence and has unconsciously served to isolate populations.  Atlantic Canada has the country’s oldest inhabitants, will face the emerging healthcare crisis first, remains unattractive to new immigrants and has persistently underperformed the rest of the country.  A little less love from Ottawa might be a good thing!

Don McIver is the Director of Research at the Atlantic Institute for Market Studies (AIMS), an independent economic and social policy think tank based in Halifax.