Wealth redistribution that threatens the entire country

Extrait : Ontario: From have to have not, By Emily Senger , CB On Line, March 21, 2011

Even though Ontario now receives transfer payments, a new report says the province still gets a raw deal out of equalization.

Ontario has always fancied itself the economic engine room of Confederation, but in 2009 it became a have–not province. As the Canadian dollar rose, the manufacturing sector slumped, the world spiralled into recession, and Canada's most populous province received an equalization transfer payment of $347 million, or about $29 per person, from the federal government.

The equalization program is supposed to ensure roughly comparable provincial services across the country, yet the 2009 payout was a thoroughly inadequate drop in the bucket for the province. According to a report released in February by the Ontario Chamber of Commerce, compared to other provinces, Ontario has some of the highest post–secondary tuition rates, fewer registered nurses per capita and diminished access to residential care beds for seniors. In the report, Dollars and Sense: A Case for Modernizing Canada's Transfer Agreements, the bottom line is clear:

Ontario is suffering under an ineffective system of wealth redistribution
that threatens the economic well–being of the entire country.

Report author David MacKinnon, who is an economist and chair of the Ontario Institute for Public Policy, is pessimistic about what the current transfer agreements system could mean for the province. "I think Ontario's future, with the fiscal architecture in Canada as it is, is quite dark," says MacKinnon. "It really can't sustain the burden that federal governments have carelessly imposed on it."

One of the biggest problems, in MacKinnon's eyes, is that the current system acts as a tax on productivity. Canada's productivity already lags behind other industrialized nations and, as economies become more globalized, governments should be doing all they can to encourage and reward it. "We're entering an entirely different competitive world, and punishing our more productive economies is going to ensure that we never compete in it," says MacKinnon.

Another problem is that the transfer program leads to labour immobility, encouraging people to remain where the jobs aren't. Labour–force mobility will become a major issue for businesses as Canada continues to move out of the recession, says Brian Lee Crowley, managing director of the MacDonald–Laurier Institute, an Ottawa public–policy think–tank. Some provinces, like Alberta, are set to experience severe labour shortages in the near future, while unemployment remains high in other provinces. "It's totally mysterious to me why we should want to continue to pay people to stay put in places with limited economic opportunities when, elsewhere in the country, there are opportunities going vacant," Crowley says.

Évidemment, il a raison, en maintenant la péréquation, ils maintiennent certaines provinces à se comporter de façon irresponsable, au lieu de prendre de véritables décisions pour améliorer leurs fiscalités et leurs productivités.

The time is right for change, says the report.

In 2015, the federal government is due to discuss and renegotiate its principal fiscal arrangements, which includes transfer payments. Ideally, the Ontario Chamber of Commerce would like to see a national public debate on transfer payments, a proposal that Crowley also agrees with.

Devant les déficits perpétuels de certaines provinces, tel que l’Ontario, la péréquation risque d’être un sérieux débat, dans les années à venir, ce que le Québec pense pour acquis est loin de l’être.

But even chamber president and CEO Len Crispino sees the difficulty in engaging Canadians in a debate on the topic. "When people start talking about equalization and transfer payments and taxation, etc., there is a tendency for people's eyes to glaze over," he says. Crispino hopes that by drawing attention to inequities in education, health care and infrastructure, this report will help Ontarians, and Canadians, see how important the issue is. "This is just not some academic exercise around fiscal transfers. This actually does have a impact on my family, my children, my neighbours down the road and the quality of care that we get.

Péréquation - Dollar and Sense


A Case for Modernizing Canada ’s Transfer Agreements

Quelques extraits:

Many provincial governments see equalization payments as entitlements and their demands for “more equalization” are now permanent features of their relations with the federal government and the rest of the country. Unfortunately, they are often rewarded for making ever-escalating demands – even though they may have no evidence to back up their claims that more equalization is needed.

The funds to satisfy these demands do not magically grow on trees. They come from the general tax base of the federal government and

Ontarians pay a disproportionately large share of that bill.

The fact that Ontario has received a small equalization cheque in the past two years doesn’t change the fact that Ontarians still pick up the tab for the lion’s share of inter-regional redistribution in Canada, even at a time when the Ontario economy and many Ontario businesses face real challenges.

Péréquation - Dollar and Sense - 1

Péréquation - Dollar and Sense - 2

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The politicization of the program by many governments outside Ontario is tragic. The commitment of equalization speaks to what is best within Canadians and expresses our desire to share good fortune across the country; the politicization of the program speaks to what is worst about our regional politics and has compromised a key principle of our social contract.

We need to return in Canada to principle-based federal fiscal transfers that ensure that all provincial governments are able to offer their residents good quality public services at comparable levels of taxation. That means that the way federal fiscal transfers are calculated needs to adjust to the changing economic capabilities of various provinces, David MacKinnon.

·         The federal government did place a cap on the program, after double digit increases had been incurred over several years. In one recent four year period, for example, equalization for Quebec increased by 68 percent at a time when Ontario’s economy, the principal funder, grew by less than 10 percent. The growth of the Ontario economy is the determinant of the ability of its taxpayers to support transfers to other provinces. From this point of view, such contributions are not sustainable if the rate of growth in transfer payments exceeds the rate of economic growth of contributing jurisdictions.

·         Unfortunately the study as released is so heavily redacted that it is difficult to understand. However, the reluctance to release the study seemingly confirms that equalization is coming from the people least able to afford it, going to regions that have much more accessible services than Ontario

Preventing Growth in Recipient Provinces

Successive Ontario governments and the people of Ontario generally think they are being helpful to the citizens of receiving jurisdictions by enabling regional subsidies. In the medium and long term, the evidence is that they have done and continue to do great harm. In words often used by the Atlantic Institute for Market Studies on the subject of equalization and federal transfers, this is the “help that hurts.”

Over the years, a substantial body of research has demonstrated that massive federal regional subsidies have greatly hindered economic growth in recipient provinces.

The argument is that the transfers have encouraged the growth of large and inefficient public sectors which dominate recipient economies, have discouraged labour mobility, an essential feature of efficient labour markets and have elevated wage rates to levels that cannot be supported in the market component of the economy.

In 2000, Fred McMahon described this in a seminal book on the endemic growth problems of Atlantic Canada. He noted that: “Regional development policies in Atlantic Canada inflated wages, dampened investment, politicized the economy, weakened business activity, discouraged educational achievement and froze in place declining economic activities. It also likely had an effect on the regional psyche. People came to expect government to support them.” The same policies are in place in Manitoba and Quebec. The relatively slow growth of both provinces and their static position relative to Ontario, British Columbia and Alberta over several decades indicates that to some degree, regional subsidies have the same dampening effects on their economic performances as in Atlantic Canada.

At present, the economic performance of all recipient provinces is very troubling. After 50 years of massive subsidies, their performance in Canadian rankings of relative income performance has changed little, except for Newfoundland and Labrador as a result of offshore oil. While rankings have not changed, personal income gaps among provinces have narrowed, in significant measure due to the scale of regional subsidies provided to the people of traditional receiving provinces.

To a remarkable degree, traditional recipient jurisdictions are public sector driven. Most have public sectors that are about 50 percent of economic output and in one it is nearly 70 percent. In several of them, one in four labour market participants are employed in the public sector.

Regional Subsidies are a Principal Cause of Canada ’s Poor Productivity

From this perspective, the origins of the Canadian productivity problem can be readily explained. One of the principal causes is the federal practice of actively punishing

productivity and rewarding inefficiency and doing so on a large scale through regional subsidies. The problem is as much the permanent nature of Canada’s regional subsidies as their absolute amount in any given time period.

Equalization has been in place for 52 years and the other three methods Canada uses to subsidize regions have been in place for several decades as well.

The result is that in every year for the past 50 years, the federal government has engaged in massive transfers from high productivity jurisdictions (currently between $40 billion and $50 billion annually) to jurisdictions with lower productivity, with Ontario, British Columbia and Alberta being the principal funding provinces.


For all these reasons, the Chamber recommends that the next generation of transfer agreements incorporate a strategy to replace current regional subsidy arrangements with agreements that raise the level of accountability, so ideally the level of government that raises tax revenues is the level of government that spends those tax dollars.

Lecture complémentaire : Fix the transfer system