Halifax – How many public servants does it take to provide the services Canadians have come to expect from their provincial governments? It appears the answer is quite different depending where you live, and that’s not the way equalization is supposed to work.

In the second part of a special Equalization Commentary series, the Atlantic Institute for Market Studies (AIMS) shows that provinces that receive equalization actually employ more people to provide public services than the national average and are more likely to pay their employees considerably more than the average wage in their province.

That means equalization receiving provinces end up spending money on inflating their public sector and acquiring imprudent levels of debt. Instead of balancing fiscal disparities among provinces, as equalization intended, it provides more public servants with higher wages and more provincial indebtedness. This is not at all the same thing as the “reasonably comparable services” envisaged in the Constitution.

AIMS’ latest Commentary, “The Flypaper Effect” indicates that the national average for the provincial public sector is 77 workers per 1,000 population. Only two provinces fall below that average, Ontario and Alberta. British Columbia hits the mark. They are Canada’s richest provinces.

All equalization receiving provinces employ more public servants per 1,000 population than the national average, with Manitoba and Saskatchewan topping the list at 105 and 108 respectively.

The Commentary also looks at how much provinces pay their public servants compared to the average wage in that province. On a national average, provincial public servants are paid 20% more than a worker in the private sector in the same province. Two of the four Atlantic provinces as well as Quebec provide a wage premium significantly above the national average. Prince Edward Island leads the way by paying its public servants 31.3% more than the average private sector worker in that province.

This phenomenon has been referred to as the ‘flypaper’ effect, whereby a government receiving subsidies chooses to spend excess amounts on their public service. As a recent Australian report on their equalization system argued, “Money ‘thrown’ at a State Government tends to stick, even though the welfare of the households would be better served if the money were passed on to them through lower taxes.”

Finally, the Commentary examines the extent to which equalization may have contributed to high debt in the recipient provinces by giving them the means to service much higher debt than they could otherwise carry. This may have encouraged high levels of public spending financed by borrowing, but the long term effect is that a lot of equalization money goes to service debt rather than to provide public services.

Since the stated objective of equalization is to provide reasonably comparable services at reasonably comparable levels of taxation, the provinces receiving equalization should be able to provide these services at comparable levels of debt.

In fact, the AIMS Commentary indicates that the equalization-receiving provinces have larger than average public employment, higher than average public sector wages, and higher than average levels of debt. This means that, contrary to popular opinion, equalization is not used primarily to pay for reasonable standards of public services in recipient provinces. Instead it provides incentives for well-organized interest groups to capture this money for themselves. Simply arriving at national average levels of these performance indicators would release three provinces (Quebec, Manitoba, and Saskatchewan) entirely from reliance on equalization, and reduce the dependence of the others to a very significant degree.

“While the provinces are free to determine their own spending policies,” says AIMS president Brian Lee Crowley, “it is clear that the levels of equalization being provided in the country today are far in excess of what is needed by provincial governments with average levels of fiscal discipline to deliver a reasonable package of provincial public services. In fact excessive levels of equalization may well be a cause of that lack of fiscal discipline.”

Click here to read the complete Commentary, “The Flypaper Effect”.

Click here to read the first Commentary in the series, “Some are More Equal than Others”.


For further information, contact:

Brian Lee Crowley, AIMS President