As anyone who has ever watched puppies tussle over a bone knows, nothing will lead to acrimony quicker than competition for an object everyone wants. Keep the puppy image in mind. Replace it with provincial governments, many of whom now have a stake in the federal transfer program, equalization.
Equalization is the federal government program ostensibly designed to help provinces provide roughly equal government services. Last year, Ottawa transferred $15.4 billion in equalization payments to six “poor” provinces, known as “have-nots.”
Ontario’s entry into the equalization program back in 2009/10 —think of a big sumo wrestler at a soup kitchen—resulted in a massive shift in dependency in Canada, and that portends future divisive debates.
In 2008/09, the year before Ontario first received equalization money from the federal government, “have-not” provinces represented 32 per cent of the 10-province population, or about 10.8 million people.
However, in 2009/10, Ontario became eligible for equalization partly because of its relatively weakened economic state. Now, 24.7 million people, or 71 per cent of the population live in a province that receives an equalization cheque from the federal government (Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Manitoba and Ontario).
This is a problem.
Equalization has long been defended by some as akin to a federal government “Robin Hood” scheme to help out “poor” provinces.
But any program that counts six of 10 provinces with 71 per cent of the population as relatively “poor” is an arrangement that should provoke a re-think.
Part of the re-think should take place in Ontario, where provincial policy has contributed to its relative economic weakness, with expensive green energy schemes that drove up the cost of power and drove out business; add to that a regulatory approach and labour legislation that has further made Ontario an uneconomical place to invest.
And then there is the Ontario government’s chronic budget deficits and weak public finances. People can look ahead and figure out that higher deficits equal higher debt interest payments, and then pressure for higher taxes, even less investment, higher unemployment and eventually an exodus of wealth creators and others. (See Quebec as the most notable example of such folly in practice.)
The entry of Ontario into relative poor-province territory also sets up a potential for inter-provincial conflict.
Ontario has taken up an increasing share of the equalization cash available from Ottawa. In 2009/10, it received $347 million or 2.4 per cent of the $14.2 billion equalization pie; last year, Ontario garnered almost $3.3 billion or 21 per cent of the $15.4 billion available.
That might result in the have-not provinces demanding Ottawa increase the equalization payouts.
Another problem might arise and for resource-rich provinces. The current equalization program calculates equalization eligibility and then payouts based on what’s known as “fiscal capacity,” basically the ability of a province to raise revenues.
The factors that go into such a calculation are not above the machinations of politics. In the past, there have been efforts to include 100 per cent of resource revenues in that formula, this as opposed to 50 per cent at present. The justification has been “more sharing,” to use the words from a 2006 report presented to Canada’s premiers.
Problematically, including all resource revenues would mean even more federal tax dollars (which on a net basis originate more in resource-rich provinces) transferred to have-nots—the explicit aim of those who back this idea.
Why does this matter? Because all the resource-rich provinces— British Columbia, Alberta, Saskatchewan, and Newfoundland & Labrador—are now lined up on one side of the equalization divide. Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Manitoba—and now Ontario, are on the other.
That potential face-off means the resource-rich provinces should expect to see attempts made by the equalization-receiving provinces to get at their resource revenues via the federal government, either through dramatically higher equalization payouts, or through some other federal program. It has happened before.