Halifax-based think tank is preparing three papers on fiscal imbalance

By Rob Linke

OTTAWA – Ontario – home to bank skyscrapers, car plants and Fortune 500 branch offices – is actually hard done by when it comes to public spending, says a new study by the Atlantic Institute for Market Studies, a Halifax think tank that favours free-enterprise solutions. (To read the AIMS Commentary “Why Some are More Equal than Others”, click here.)

This is because equalization fails to take into account how much it costs different provincial governments to provide roughly comparable public services, says the study.

Admitting that no reliable information is available on comparative costs of providing public services from province to province, AIMS adapted a private-sector cost comparison from KPMG for its study.

AIMS calculated New Brunswick only has to pay $921 per capita to provide the same bundle of public services that cost $1,073 in Ontario.

The upshot of the study is that Canada “over-equalizes to a considerable degree” when Ottawa transfers money to “have-not” provinces like New Brunswick – a finding in line with Ontario Premier Dalton McGuinty’s objections to boosting equalization.

“I didn’t write it because Dalton McGuinty would welcome it, but the equalization program has become enormously controversial in a way it wasn’t before,” said Brian Lee Crowley, AIMS president.

“I don’t think it’s going to be sustainable if you can show Ontarians that the people in equalization-receiving provinces have actually got more to spend on public services if you factor in local costs than Ontario itself does.

“That’s a healthy debate to have.”

Some recipient provinces in effect end up with higher per-capita revenue to spend on public services than the average province and more than one of the wealthiest two provinces – Ontario, says the study.

The paper also compares local government and provincial government spending by province, after adjusting it by the cost factors. By this method, AIMS found that four provinces that receive equalization actually spend more than the national average. New Brunswick spends less than average – but so does Ontario, which has roughly 40 per cent of the country’s population and economic output.

The data supports an approach to equalization that is based on a province’s needs, rather than absolute revenues, the study concludes.

Mr. Crowley said AIMS supports equalization in principle, but it must be reformed “so the money comes in such a way that it’s not damaging to the incentives to for us to build our own economy and become as self-reliant as we can.”

He defended his study’s methodology, arguing public-sector costs are similar enough to private-sector costs to make AIMS’s calculations valid.

“It’s reasonable to think this is offering us some good rule of thumb in providing differences in costs between jurisdictions,” he said.

The seven-page commentary is the first of three papers AIMS plans to release as the premiers are battling for public opinion over equalization, which Prime Minister Stephen Harper has pledged to reform.

The next paper will look at what the provinces that receive equalization spend it on.

AIMS argues equalization is to blame for increasing conflict on the national stage and that it produces perverse effects in the recipient provinces. For example, the program is a disincentive to growth because it claws back transfers when economic growth occurs but the formula rewards higher taxation by increasing transfers, said Mr. Crowley.

Two expert panels – one appointed by the Council of the Federation, or premiers; the other by the federal government – have issued reports this spring on equalization.

Equalization contributes about $1.4 billion a year to New Brunswick’s coffers, or about 23 per cent.