Sound like a bad deal? It is and we should demand that Ottawa stop

by Brian Lee Crowley and Bruce Winchester 

Ontario, long-suffering milch cow of Confederation, has recently awakened to the hard reality that the wealth Ontarians work so hard to create is being cavalierly seized by Ottawa in amounts that no one could describe as fair or equitable. When Ontarians finally realize that their economy is being so looted to finance programs that actually harm the regions of the country they’re supposed to help, they’ll demand change.

That day is not too far away, as evidenced, for example, by yesterday’s interim report on the impact of the federal transfer system on Ontario published by the Ontario Chamber of Commerce.

Author David MacKinnon is the latest in a growing number of analysts to draw on our institute’s work to demonstrate how massive federal transfers like equalization harm those, like Ontario, who pay the bills, while retarding real economic development in places like Newfoundland, New Brunswick and Manitoba.

Recent events have got Ontarians’ attention, particularly the hard-nosed negotiations by Newfoundland Premier Danny Williams on offshore petroleum royalties.

Then there was Ottawa’s plan to use gasoline taxes to help pay for municipal transit and green projects, with money going to a lot of places with few cars but lots of votes. Ontario’s voters began to suspect that they were being taken for a ride.

Earlier this year, Premier Dalton McGuinty pointed out that Ontario pays a lot more every year into the federal pot than it gets out. In response, a shamefaced Ottawa promised Ontario an additional $5.75 billion in federal transfers.

McGuinty rightly took the money, but refused to abandon his campaign against a federal transfer system that clearly regards Ontario as a convenient pocket to pick.

Does the federal transfer system call for such stern words? Judge for yourself.

There are lots of federal transfers that take money earned by Ontarians and give it to individuals and governments in other provinces. The total impact can be calculated using StatsCan’s Provincial Economic Accounts. It’s not hard to see the magnitude of dollars taken from Ontario.

Ontario businesses and taxpayers provide more than $81 billion in federal tax revenue, but only get $60 billion in federal spending. For every dollar of federal taxes raised in Ontario, only 74 cents are spent by Ottawa on services enjoyed by Ontarians.

That’s in stark contrast to what we see in, say, Atlantic Canada, where a dollar of federal taxes raised will be matched by between $2.14 and $2.88 in federal spending. Ontario thus sees a net loss of more than $20 billion.

That might be acceptable to Ontarians if the result were a successful transfer system that closed the prosperity gap with the poorer provinces and allowed them to reach self-sufficiency and escape dependence on transfers. After all, that’s an objective we should all share. But that’s not at all what is happening.

There is a consensus among economists that lagging economies catch up with leading economies naturally, by a process known as “convergence.” For example, high unemployment normally causes wage demands to be moderated, thus attracting new investment.

Similarly, under the shock of economic decline, governments may improve their tax and regulatory policies to make their jurisdiction more attractive to business. This convergence would normally have closed the disparity gap between Ontario and Atlantic Canada by about 2 per cent a year without the need for any subsidies or transfers.

And, as the superstar of convergence, Ireland, demonstrates, all this need not imply population loss nor rising poverty. On the contrary.

We’ve engaged in a massive wealth transfer that has undermined these natural adjustment processes, leaving poorer parts of the country dependent and underdeveloped.

The transfers have indeed been huge. If we had invested the net transfers from Ottawa into Atlantic Canada in U.S. 90-day T-bills since the 1960s, we’d have more than $1 trillion in the account today, enough to pay off the national debt – twice.

For that huge expenditure, we have purchased a rate of convergence that is less than half of what we would have expected to see if we’d done nothing at all. America, which has no equalization program, has been better than we have at closing the gap between wealthy and less-developed states.

Change will only come when Ontarians stop being so timid and apologetic about demanding real reform of Canada’s regional transfers.

The issue is not more transfers for Ontario. Federal transfers taken as a whole are poor policy with perverse results. There are many better ways to ensure provinces can pay for their programs, including federal tax cuts.

When Ottawa retorts that transfers are the price of helping poorer parts of the country, Ontarians must demand to see the evidence that transfers actually do help.

Ottawa’s look of mute panic will remind you of the last pickpocket you caught with his hand in your pocket.

Brian Lee Crowley is the president and Bruce Winchester is director of research services at the Atlantic Institute for Market Studies, an independent public policy think-tank based in Halifax.