THE BLOG

Equalization: A Lousy Deal for Ontario and the West

11/16/2013 06:25 EST | Updated 01/23/2014 06:58 EST

In a recent drive from Saint John to St. Andrews, New Brunswick, I marvelled at the mostly four-lane highway that connected the two points on the map -- and how empty it was on a Friday evening on a long weekend. I compared it with much of the TransCanada highway in British Columbia, four-laned in portions where it should be six, and often only two-laned where it should be four, as well as to the regularly packed four-lane highway between Edmonton and Calgary.

The contrast was symbolic of how the federal equalization program allows recipient provinces to provide above-average benefits at the expense of taxpayers elsewhere, even to "over-equalize" in some cases.

For those not familiar with equalization, here's the simple explanation: Tax dollars flow into the federal treasury from taxpayers in all provinces; equalization then flows from Ottawa to provincial governments.

A province is deemed to need equalization if its ability to raise revenues, its "fiscal capacity," is below the average of all 10 provinces.

In a recent look at equalization, I added together its numbers over the past eight years, threw some quasi-equalization add-ons such as offshore accords and transfer payment protection into the mix, averaged out the dollars, and then figured out which province ended up as a "have" or "have-not."

Here are the results: In current dollars, Prince Edward Island received the most equalization dollars, at $2,229 per person on average in each of the last eight years.

Among the other five provinces that normally receive equalization payments -- New Brunswick, Nova Scotia , Manitoba, Quebec, and Newfoundland & Labrador (which received equalization payments until 2008 and received offshore accord payments until 2012) -- Quebec received the least per capita at $933 annually, averaged over those eight years.

On the other side of the equalization divide, Ontario still counts as a "have" province for my purposes despite its recent status as an equalization recipient. That is because it received an annual average of just $63 per person in equalization money since 2005/06. So it is much closer to a "have" province most years. Meanwhile, Saskatchewan's equalization take was $41 per person, while the figure was $31 for British Columbia (Alberta received nil).

Problematically, by design, the equalization program is currently designed to produce bigger governments and/or charge less for some service.

For example, provincial government program spending in Atlantic Canada ranges between 21 per cent (Newfoundland) and 29 per cent (PEI) of the economy. That compares to a range of just 13 per cent (Alberta) to 17 per cent (Ontario) of GDP in the have provinces.

Equalization largesse thus allows for have-nots to have "advantages" over the have provinces of British Columbia, Alberta, Saskatchewan and Ontario. (By "advantage," I merely mean a preponderance of some item. While more doctors is an actual advantage, it is not helpful to have a big, expensive provincial bureaucracy that squeezes out private entrepreneurs.)

Overall, out of 19 categories which account for two-thirds of provincial program spending, it turns out the six have-not provinces have an "advantage" in 13 categories. For example, if you live in a have-not province, you are likely to have cheaper average university tuition: $2,774 in Quebec and $3,729 in Manitoba. That compares to tuition in British Columbia at $5,015, Alberta at $5,883, Saskatchewan at $6,017 and Ontario at $7,180.

Have-not provinces also have many more government sector employees at the provincial level. For example, Manitoba and Quebec have 30 per cent and 15 per cent more such employees per 1,000 people when compared with Alberta. Have-nots also have more nurses and doctors, hospital beds, and CT scanners per capita when compared to "have" provinces.

The advantages in have-not provinces are helped along by federal tax collections in richer provinces where residents see less of such taxpayer-financed cornucopia, for good or ill. Thus, B.C., Alberta, Saskatchewan and Ontario possess the advantage in just three categories (three measurements ended up neutral).

Equalization is meant to be about roughly equal services, not about over-equalization. So one option for reform is to determine equalization eligibility and payments based not only on revenue capacity, the current approach, but also on the various costs of providing services in one province when compared with another.

After all, it is much cheaper to live in Halifax, Montreal and Winnipeg than in Toronto, Calgary and Vancouver. That would not solve all of the problems in equalization -- and there are many, but it would be a useful start.