Imagine you are from a family of ten. You and your nine siblings grow up and leave home. Then the three or four who are most industrious have to send money home each month so Mom can give it to the three or four least industrious. Mom calls it “equalization.”
Those who get up early and work the longest never enjoy the fruit of their own labour. Rather than having cash available to build a new house, start a small business, or otherwise invest, they find their money drained off by the “equalization.” The less disciplined of the ten can sleep longer in the mornings, work less, and still get by quite well. It’s easier to get by when someone else buys the groceries, pays the utilities, and covers part of the rent.
This is a pretty fair analogy of Ottawa’s equalization policy, which requires taxpayers in the more industrious and financially aggressive provinces to pay billions in taxes to Ottawa every year so the money can be transferred to the governments of the so-called “have-not” provinces. Over the years, some provinces have collected a quarter or a third of their annual budgetary revenues from equalization.
For decades, Saskatchewan and Manitoba emphasized Crown corporations over the private sector, thereby encouraging private businesses, people, and investment to leave. In Saskatchewan, for a number of years, it was illegal under certain circumstances for non-residents to even invest in the province. Yet both provincial governments consistently collected fat equalization payments from Ottawa, insisting they had a right to the money.
Due to recent reforms, Saskatchewan is economically thriving and no longer drinking at the equalization stream, but Manitoba, PEI, New Brunswick, and Nova Scotia each have their lips firmly locked on the money spout.
Then there’s Quebec. Over the past fifty years (in 2011 inflation adjusted dollars), Quebec has collected a quarter of a trillion dollars from the rest of Canada through equalization. It has never at any time been a net contributor. Ironically, the Institut Économique de Montréal (IEDM) reports that a quarter of a trillion dollars is also the same amount of money Quebec has racked up in debt—$253 billion, to be exact. The highly respected research group also reports that if Quebec were an independent country, its existing debt-to-GDP ratio would make it one of the five most indebted nations on the planet. Others in that group would include Greece, Italy, Iceland, and Japan.
As a formal policy, equalization is a bust. If it were scaled back or eliminated, every province on the receiving end of these payments would be forced to shift their focus from milking Ottawa to implementing their own wealth creating agendas. As equalization now stands, it’s nothing more than a reward system for failing fiscal policy.
At FreedomTalk.ca, we bring this issue up today not to criticize any province or region of the country, but to point out what equalization is and how it works.
In 2013-2014, the terms of equalization will be renegotiated. It means elected officials and taxpayers in Alberta will be forced to make some important decisions on how the policy will work in the days ahead.
For more information about equalization, see:
Ontario and Public Sector Padding in Manitoba
The provincial government of Manitoba receives close to 40% of its revenue from federal transfer programs. Despite the intent of equalizing the ability of provinces to care for Canadian citizens, the program has had the unintended result of leaving recipient (have-not) provinces with many more public sector staff than those provinces that support them. “Have-not” Manitoba, for example, has more public sector staff per capita in every sector except local government compared to “have” Ontario “. For Manitoba to have the same ratios as Ontario, it would have to let go 40,927 public sector staff. Read the entire article. (Frontier Centre for Public Policy)
Robbing Peter to Pay…Peter? Equalization Inequalities
The [equalization] program introduces a deliberate distortion into the national fiscal equation— residents of recipient provinces receive a larger basket of public goods for their tax contributions than do those in other provinces. It also deliberately serves to induce individuals to remain in the least-favoured location. Read the entire article. (Atlantic Institute for Market Studies)
How to encourage Quebec to end 55 years of relying on equalization
Tuesday, May 29, 2012 – Quebec has been receiving equalization payments since the program was set up back in 1957. This year, $15 billion will be transferred to Canada’s poorer provinces. In an Economic Note published today, Youri Chassin, economist at the Montreal Economic Institute (MEI), explains how receiving provinces could be further encouraged to enrich themselves and to stop relying on these transfers. The author is particularly interested in how natural resources are treated in the calculation of equalization payments. Read the entire article. (Montreal Economic Institute)
Euro Zone Lessons for Canada
By Gregory Thomas & Derek Fildebrandt:
As we watched TV images of rioting students trashing downtown Montreal, one of our colleagues quipped: “I always wanted to go to Greece. I never expected Greece to come here.”
She wasn’t far off the mark. Unless Canadians get a handle on the provinces’ runaway spending, their growing mountain of debt, and the resulting tidal wave of interest charges, we can expect lots more home-grown social unrest, as have-not provincial governments fall short of voters’ outsized expectations.
Perhaps it’s time we learned a lesson from the Europeans. As leaders on that continent brace for the next round of bailouts, they’re tightening restrictions on the power of EU members to run annual deficits. Canada would benefit from similar restrictions — such as a constitutional cap on debt and deficits, to prevent profligate federal and provincial governments from borrowing on the credit rating of more responsible jurisdictions. Read the entire article. (National Post)
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