Equal­ized dis­con­tent the one sure re­sult

Sys­tem hated by all, un­der­stood by al­most no one

Calgary Herald - - NEWS - AN­DREW COYNE

The tim­ing was ad­mit­tedly not the best. Shortly af­ter the pre­mier of Que­bec, Fran­cois Le­gault, de­clared his op­po­si­tion to re­viv­ing the moth­balled En­ergy East pipe­line, which would have trans­ported west­ern Cana­dian oil through Que­bec to re­finer­ies in New Brunswick — there was no “so­cial ac­cept­abil­ity” for such “dirty en­ergy” in Que­bec, Le­gault sniffed — the fed­eral Fi­nance De­part­ment re­leased the fig­ures for next year’s equal­iza­tion pay­ments. They showed Que­bec’s share ris­ing $1.4 bil­lion to $13.1 bil­lion — two-thirds of the $19.8-bil­lion cost of the pro­gram.

The re­sponse was about what you would ex­pect. Que­bec was only too happy to take Al­ber­tans’ money, Al­berta politi­cians fumed; it should be no less happy to take the oil that pro­duced it.

Al­berta Pre­mier Rachel Not­ley claimed Al­berta oil “funds the schools, the hos­pi­tals, the roads and po­ten­tially even some of the hy­dro­elec­tric­ity in­fra­struc­ture in Que­bec.”

But of course Que­bec’s hypocrisy is not the real is­sue here. What truly eats at Al­ber­tans and their lead­ers are the terms of equal­iza­tion it­self. Al­berta is run­ning large deficits, the ar­gu­ment runs; Que­bec is in sur­plus.

And yet Que­bec is el­i­gi­ble for equal­iza­tion pay­ments, while Al­berta is not. “Al­ber­tans are gen­er­ous,” Al­berta op­po­si­tion leader Ja­son Ken­ney tweeted. “But we shouldn’t be taken for suckers.”

Politi­cians on all sides in Al­berta are de­mand­ing a re­view of the equal­iza­tion pro­gram; Ken­ney is even call­ing for a ref­er­en­dum to back Al­berta’s de­mands. And the dis­con­tent is not lim­ited to Al­berta: Saskatchewan and On­tario are equally adamant that the pro­gram must change. By a co­in­ci­dence, all three are non-re­cip­i­ent prov­inces.

Fine: there’s lots wrong with the pro­gram, which has strayed far from its orig­i­nal in­tent af­ter re­peated re­work­ings over the years. Though for­ever jus­ti­fied in the lan­guage of lofty prin­ci­ple, “re­forms” to equal­iza­tion are typ­i­cally driven by pol­i­tics and the need to pla­cate which­ever part of the coun­try is an­gri­est at the mo­ment, the “prin­ci­ple” be­ing se­lected on the ba­sis of its abil­ity to gen­er­ate the de­sired out­come.

So in­stead of a sim­ple pro­gram to top up rev­enues in “have-not” prov­inces, that they might be able to pro­vide ser­vices to their ci­ti­zens that are “rea­son­ably com­pa­ra­ble” to those in other prov­inces, we have a com­plex, jury-rigged mess. To­tal pay­ments un­der the pro­gram do not vary with the de­gree of dis­par­ity be­tween the prov­inces’ “fis­cal ca­pac­i­ties,” for ex­am­ple, but must in­crease ev­ery year in line with the econ­omy — no faster but also no slower.

No one can agree on which rev­enue sources to in­clude in the def­i­ni­tion of fis­cal ca­pac­ity — in par­tic­u­lar, whether to in­clude 50 per cent of re­source rev­enues, as now, or zero, as Ken­ney and others de­mand. No mat­ter: prov­inces can choose be­tween 50 per cent and zero, de­pend­ing on which pays them more. And if this should re­sult in a “have-not” prov­ince hav­ing a greater fis­cal ca­pac­ity than the “haves”? Then part of the pay­ment is clawed back.

That doesn’t be­gin to de­scribe the com­plex­ity of the pro­gram. As a re­sult it is broadly mis­un­der­stood, no­tably in the per­sis­tent myth that some prov­inces “pay in” to the pro­gram while it “pays out” to others.

Not so: it is a fed­eral pro­gram, fi­nanced en­tirely by fed­eral taxes. When Al­berta lead­ers com­plain that the pro­gram is funded by Al­ber­tans, they mean that Al­ber­tans pay a dis­pro­por­tion­ate amount in fed­eral tax. Yes, they do: be­cause Al­ber­tans are, on av­er­age, richer than the av­er­age Cana­dian — yes, even to­day.

The same ex­plains why Al­berta does not re­ceive equal­iza­tion pay­ments: be­cause its own “fis­cal ca­pac­ity,” thanks to Al­berta’s oil wealth, is also much higher than the na­tional av­er­age.

And fis­cal ca­pac­ity is what it’s all about. Equal­iza­tion has noth­ing to do with whether a prov­ince is in deficit or sur­plus, since that is a re­sult of all sorts of po­lit­i­cal de­ci­sions un­re­lated to how rich its econ­omy is. Al­berta has a deficit, for ex­am­ple, largely be­cause it spends more on its ci­ti­zens than other prov­inces do.

Those lead­ing the charge for a “re­view” of equal­iza­tion there­fore have an obli­ga­tion to spell out what they mean. They can­not pos­si­bly mean it should be re­jigged in such a way as to make Al­berta el­i­gi­ble to re­ceive equal­iza­tion pay­ments: that would make the pro­gram even more non­sen­si­cal than it is now.

So the agenda must be, not to make the pro­gram more gen­er­ous to prov­inces that are not cur­rently el­i­gi­ble for it, but to make it less gen­er­ous to those who are.

There’s a good ar­gu­ment for do­ing just that, ac­tu­ally. At the least, one might ex­pect to­tal pay­ments to shrink as the dis­par­i­ties be­tween provin­cial economies nar­rowed.

A well-known eco­nomic the­ory, called “con­ver­gence,” pre­dicts those dis­par­i­ties should nar­row, over time: in­comes in poorer prov­inces, other things be­ing equal, should tend to catch up to their richer brethren.

That in fact they haven’t, af­ter six decades of equal­iza­tion, may not be co­in­ci­den­tal. There’s ev­i­dence to sup­port the the­sis that equal­iza­tion dis­cour­ages prov­inces from re­al­iz­ing the full po­ten­tial of their economies.

Would Que­bec be so hos­tile to tap­ping into the abun­dant re­serves of oil and gas un­der its soil if it had less ac­cess to fed­eral trans­fers? Would Man­i­toba have sold its hy­dro-elec­tric­ity at such a dis­count? Would the At­lantic prov­inces have re­mained such eco­nomic back­wa­ters?

Good luck with that, how­ever. What­ever the com­plaints of prov­inces that do not re­ceive equal­iza­tion, it is noth­ing be­side the rage of those that do, should any­one pro­pose to take even a penny of it away; the aim of fed­eral politi­cians is gen­er­ally to keep them in rough bal­ance. Equal­ized re­sent­ment may be equal­iza­tion’s most last­ing legacy.

STAN BEHAL / POST­MEDIA NEWS FILES

In Canada, noth­ing is cer­tain but death, taxes, and bick­er­ing about the fed­eral equal­iza­tion pay­ments.

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