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The Federal Government Doesn't Owe Ontario More Money

04/22/2015 06:33 EDT | Updated 06/22/2015 05:59 EDT
Rene Johnston via Getty Images
TORONTO, ON - MARCH 20: Premier Kathleen Wynne gives speech at a major fundraiser for the Liberals. She gave the speech at the Metro Toronto Convention Center in Toronto, March 20, 2014. (Rene Johnston/Toronto Star via Getty Images)

In a year when two heavyweight provinces, Ontario and Alberta, which together constitute 55 per cent of Canada's GDP, are running substantial deficits, there are three ways to reduce the red ink.

Strategy one: cut (and reform) spending, something neither province has been serious about.

Strategy two: raise taxes (which both provinces have done), then hope you don't depress economic activity and tax revenues.

And finally, strategy three: blame Ottawa.

Alberta's premiers have mostly avoided this latter "strategy" (maybe because an easy federal response would be to point to out-of-control provincial spending).

Ontario's premiers, however, have shown no such rhetorical restraint. Former Ontario premier Dalton McGuinty routinely asserted that the federal government should do more to fund Ontario's provincial budget. Premier Kathleen Wynne continues the pattern.

The Ontario government claims that it's shortchanged because Ontarians send more federal tax dollars to Ottawa than what the federal government directly spends in Ontario, including transfers to the provincial government.

Ontario's claim is likely correct based on the most recent available provincial data. Statistics Canada produced a series of provincial economic data covering 2000 to 2009. It has some drawbacks and limitations but can be roughly used to proxy the state of fiscal flows between the federal government and governments, businesses and individuals in a province. The data shows that each Ontarian contributed $1,548 more into federal coffers on average every year than the federal government subsequently directly spent in, or transferred to, Ontario.

But does this prove that Ontario's government thus deserves more money from the federal government?

No. For one thing, British Columbians also sent more money to Ottawa than was directly spent in or transferred to B.C. -- $666 more on average, annually. And Albertans contributed a net $3,852 to the federal government on average annually in those years. (Every other province was a net recipient during this period.)

Here's the big picture. The federal government runs national programs, which are needed less or more depending on provincial conditions. So it stands to reason that taxpayers in relatively wealthier provinces pump more into the federal treasury than the federal government will spend in, or transfer into, such provinces.

To use one example, look at employment insurance. Ontario and Alberta record significantly lower unemployment than Nova Scotia and New Brunswick. So one would expect Ontario and Alberta workers to send more in employment insurance premiums to the federal treasury than the federal government will pay out in employment insurance in those two provinces.

That's how EI (flawed though it is, for other reasons) is designed to work, and that, insofar as federal taxes are concerned, creates a net loss in some provinces and net gains in others.

Moreover, the federal government has sent substantial extra cash to Ontario's government in the form of equalization payments. Since 2009-10, when Ontario first classified as a "have-not" province, and including the fiscal year just begun (2015-16), Ontario's government will have received $14.3 billion in equalization payments from the federal government.

True, it's odd that Ontario, a province considered a have-not for equalization remains a net contributor to federal coffers. But that's the equalization calculation. It doesn't mean that Ontario should receive more federal money.

For the record, transfers between governments are a poor idea. When one government taxes citizens but hands a portion to another government, the accountability lines between voters and the governments that tax them become blurred.

That's something Prime Minister Wilfrid Laurier understood. "It is a sound principle of finance and still sounder principle of government that those who have the duty of expending the revenue... should also be saddled with the responsibility of levying it," said Laurier in a 1905 speech.

Despite Laurier's sensible advice, premiers then and now invent excuses as to why their governments "deserve" federal tax dollars. But that doesn't mean Canadians -- in any province -- should accept the claims as valid.

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