The Post editorial board on equalization: Canada’s albatross

by Marni Soupcoff

Frankly, we’re surprised — and more than a little impressed — by Ontario Premier Dalton McGuinty’s suggestion that Canada’s federal-provincial equalization scheme has outlived its usefulness and should be scrapped. In a speech to the Ottawa Chamber of Commerce last Thursday, Mr. McGuinty said, rightly, that “to speak of ‘have’ and ‘have-not’ provinces in 2008 makes no sense. We’re a nation of haves these days.” We couldn’t agree more. The arguments for keeping the equalization scheme are now purely political — the setup is popular in Quebec and Atlantic Canada. Yet the transfer of tens of billions of dollars annually from so-called rich provinces to allegedly poor ones no longer makes economic sense, if it ever did.

When equalization began 50 years ago, the Atlantic provinces had per capita incomes around two-thirds that of the national average, while Ontario had income about one-quarter above — a gap of nearly 50 points. Today, Newfoundland and Nova Scotia have incomes approaching 95% of the national average, while Ontario has slipped to closer to 100%.

While there are practical obstacles to getting rid of equalization — it’s entrenched in the Constitution, for one thing — the arguments that have-not provinces need the money to provide comparable levels of service at comparable levels of provincial taxation have all but evaporated.

Not only are the people in have-not provinces far better off than they were 50 years ago, their governments have far stronger revenue sources, too. Have-not governments have much greater “fiscal capacity” of their own than they did when equalization was launched.

Albertans are the largest per capita contributors to equalization, giving the equivalent of more than $3,000 per man, woman and child in the province every year. But Ontario, whose net per capita contribution is close to $1,800 per year, in some ways receives the rawest deal.

According to calculations by the Atlantic Institute for Market Studies, Ontario is the third-richest province before equalization, behind only Alberta and British Columbia. But when the relative cost of paying for public services in each province is accounted for, after equalization Ontario’s provincial government is the least able to afford health, education, welfare and other public programs.

The Newfoundland and Labrador government’s per capita revenues, equalization included, are more than $7,000; Ontario’s are around $6,600. Ontario has 2.7 hospital beds per 1,000 population while PEI has 3.4, Nova Scotia 4.0 and New Brunswick 5.3. Ontario has 30% fewer nurses per capita than the Atlantic province average, and significantly fewer doctors, too.

The comparability of services at comparable levels of provincial taxation has been reached. Indeed, so equal are our provinces these days that, as the Toronto Dominion Bank noted last week, Ontario may slip into have-not status in the next couple of years. If this happens, it will be mostly an accounting coincidence — the result of other provinces getting rich faster than Ontario, rather than of Ontario slipping into poverty. Still, it will be an important psychological change if it happens.

It’s likely the practical concerns could be circumvented. Even though the Constitution protects equalization, it does not guarantee the scheme will be anywhere near as generous as it is today — about $20-billion is transferred each year. Payments could be scaled back by 70% or more without causing disparate levels of public service around the country, which would likely fend off any legal challenge of such cutbacks.

The tougher fight, though, will be political. Quebec receives nearly half of all equalization and always has, despite being the richest have-not for most of the past half-century. And Atlantic premiers view equalization as their birthright, as has been demonstrated in the past year by their haranguing and whineing when the federal government has threatened to cut back their payments by a few tens of millions should they ever rise to “have” status.

On the political front, the Harper and McGuinty governments should be natural allies against equalization. But the two are locked in a bitter personality fight and — disappointingly — the Harper government seems to have drunk deep of the equalization-is-the-Canadian-way bath-water since taking office two-and-a-half years ago, so much so that getting it onside with Ontario for a wholesale reform of the system seems unlikely.

Too bad. Equalization is a huge albatross around the country’s neck, discouraging sound economic policy in the so-called have-not poorer provinces and holding back have provinces through heavy tax burdens. Severely reducing equalization — as Premier McGuinty is advocating — would be one of the best public policy moves in a generation.