ARE EQUALIZATION PAYMENTS REALLY TOO HIGH?



A few weeks ago, a report put out by the Frontier Centre made headlines across the country by claiming that equalization payments from rich to poor provinces are too high.


But a closer look at this report reveals some serious problems with its logic.


The authors look at various programs like child care, health care, and education and find that provinces receiving payments often have better services than those contributing to the system.


They list Alberta and Ontario as the major contributors and PEI, New Brunswick, Manitoba, Nova Scotia and Quebec as the main recipients.


What the report does not consider at all is the possibility that receiving provinces simply place a higher priority on those services and manage to provide them using better efficiency, higher taxes, and/or more deficit spending.


It simply jumps from the conclusion that the services are better in receiving provinces to the conclusion that transfer payments are too high.


Other data suggest that receiving provinces do both tax more heavily and use more deficit spending. TaxTips.ca has a table comparing average income tax paid on employment income by a single person across provinces, at different income levels.


For someone earning $200,000 per year, Alberta has the lowest tax rate among provinces. Quebec has the highest rate, followed by Nova Scotia, Prince Edward Island, and Manitoba. Ontario is somewhere in the middle.


At the $60,000 income level, B.C., Ontario, and Alberta have the lowest taxes. Quebec, Nova Scotia, and P.E.I. Have the highest.


When we look at per capita provincial government debt, we see a similar picture. Alberta has no debt, but considerable savings. Newfoundland, Quebec, and Nova Scotia have the highest debt levels. Ontario is around the middle (Statistics Canada).


So many of the have-not provinces actually pay a high price in both taxes and government debt levels for their good services. And it seems highly illogical to blame transfer payments for Alberta's low service levels.


If Alberta had tax rates and ran deficits like Quebec, for instance, it could clearly afford better services. It simply has different priorities.


I am not saying that Quebec's deficit spending is a good idea. The point is simply that we can't logically blame transfer payments for the difference in service levels.


Why do we have rich and poor provinces anyway? Are the people in Canada's poorest provinces somehow different? Are they less hard-working, less entrepreneurial, or something like that?


I don't believe it. We can understand the differences between provinces in terms of two things. The first is natural resources, like Alberta's and Newfoundland's oil wealth.


The second is industrial clustering. Many activities, including manufacturing, have a natural tendency to cluster together.


Manufacturing firms are strongly attracted to areas where there are already many such firms because of access to supplies, skilled labour, markets, good infrastructure, and other things.


So an area like Southern Ontario, where manufacturing got started early in its history, has a big tendency to keep attracting more and more.


This is the source of our wealth. We did not create it ourselves any more than Albertans created the oil in the ground. We are just very lucky to live in such a place.


The report advocates eliminating the equalization program entirely over time. What would that do?


It would not necessarily cause huge inequality, because people can move. Probably the main result would be even more migration from “have-not” to “have” provinces.


This might boost our per capita gross domestic product number a bit because more people would be working in high wage, high cost areas like southern Ontario.


But per capita GDP is a pretty poor measure of happiness. This sort of migration tears families and communities apart.


And some areas could become too depopulated to support the roads, hospitals, and other services already in place.


Is that really what we want?