How Canada over-equalizes and
why the Expert Panel’s recommendations
will make it worse.
Anyone trying to buy a house in Vancouver compared to buying one in Regina or St. John’s, quickly realises that a dollar goes a lot farther in some parts of the country than others. Ditto for an employer trying to hire workers in Fort McMurray compared to hiring that same worker in, say rural Manitoba or Nova Scotia.
Yet Canada’s equalization program, and the recent Expert Panel’s report that recommended enriching that program, both wrongly assume that a dollar is a dollar is a dollar anywhere in the country, at least in terms of its purchasing power. The Atlantic Institute for Market Studies (AIMS) examines how this flawed assumption produces perverse results for the country, unfairness for taxpayers and unequal access to public services that favours equalization-receiving provinces. This is the first Commentary in a Special Equalization Series produced by AIMS in the wake of the Expert Panel’s report.
Equalization in Canada is supposed to ensure people across the country have access to reasonably comparable public services at reasonably comparable levels of taxation. However, an analysis of public services across the country shows that of the six provinces that spend more than the national average on public services, four are equalization-receiving provinces.
This Commentary by the Atlantic Institute for Market Studies (AIMS), “Why some provinces are more equal than others” looks at equalization not as only dollars and cents, but goes much deeper by looking at the actual public services those dollars and cents can provide.
Canada’s equalization program assumes that a dollar spent in an equalization-receiving province buys the same amount of public services as a dollar spent in a wealthier province.
But simply put, the cost of providing these services is different across the country. AIMS’ analysis indicates that when you adjust for the different purchasing power of dollars in different parts of the country, public services costing $1,073 to deliver in Ontario only cost $940 in Manitoba or $946 in Newfoundland and Labrador.
Once revenues are adjusted for cost differences, Ontario has less fiscal capacity than five of the six equalization receiving provinces. In essence that means equalization has brought these provinces to a level of effective revenues that is in excess of the country’s largest province.
Based on such data, the AIMS’ analysis indicates that Canada over-equalizes to a considerable degree, endangering both the equity argument underpinning the program and the political support it has enjoyed over the years from provinces that are net contributors to equalization.
Using the recommendations of the Expert Panel on Equalization makes the inequity even worse. Based on the formula outlined in the panel’s report, two of the three richest provinces before equalization become two of the three poorest after equalization and the difference in the cost of providing services is factored in.
“This analysis suggests there needs to be a realistic evaluation of the difference in the cost of providing public services across the country,” says Brian Lee Crowley, president of AIMS. “We need to be comparing apples to apples to ensure that taxpayers are not being asked to over-compensate provinces for the real cost of delivery of comparable public services.”
To read the complete analysis, click here.