Should Ontario Receive Equalization Payments

Business News

Professor Livio Di Matteo
Professor Livio Di Matteo

THUNDER BAY – Business – Independent Liberal Senate Leader James Cowan recently indicated he wants the Senate to investigate whether the present equalization formula affects the ability of Canadians living in different regions from obtaining standard public services without “facing significantly different levels of taxation.”

He’s asking the wrong question. Here is a better one. What are we to make of an equalization system that currently has Ontario as a recipient? Despite the indisputable rough patch that Ontario has gone through since the Great Recession, can we seriously argue that Ontario is having difficulty in providing its residents with nationally comparable levels of public services?

Equalization has operated since 1957 and according to the Federal Department of Finance “is the Government of Canada’s transfer program for addressing fiscal disparities among provinces. Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation.”

In 2013, equalization payments totalled $16.1 billion. Summing up the annual values of equalization, over the entire period 1957 to 2013, a total of $340.2 billion has been disbursed.  All of the provinces have at one point or another collected some equalization, with the largest total amount going to Quebec and the highest per capita amounts going to the Atlantic region. While Ontario has only been collecting equalization since 2009, it has already collected more than either Saskatchewan or Prince Edward Island ever did.

The argument that Ontario should get equalization because Ontario in the past supported other provinces via the tax-transfer system is missing an important point. Reciprocity payments are no way to manage a federal transfer system. If Ontario was paying more into the tax-transfer system, it was because it was a wealthy province and derived much of that wealth from its economic membership in the Canadian federation. For example, Ontario businesses in manufacturing intensive southern Ontario once benefitted immensely from the tariff. In addition, Ontario has always managed to obtain a large share of federal employment because the federal capital was located in Ontario.

Equalization and the federal transfer system should be reformed because it now considers Ontario a have not province. In 2013, only Alberta, Saskatchewan, British Columbia and Newfoundland and Labrador did not get equalization. How can the country’s equalization system be taken seriously if nearly 70 per cent of the population effectively lives in a have not province? Does it make any sense to be providing equalization to a province with 40 per cent of the country’s population and the fourth highest provincial per capita GDP?

The last time Ontario was about to get equalization was during the oil price spike of the late 1970s and the formula then included natural resource revenues as one of the revenues used to calculate the equalization entitlement. In 1981, Ontario also had the fourth highest per capita provincial GDP but was above the national average in GDP and the result was the passing of the “Ontario Override” that provinces with a per capita GDP above the national average would not get equalization. Shortly thereafter, the equalization formula was changed and dropped resource rich Alberta from the national average used to calculate entitlements to mitigate the effect of resource revenues – and Ontario getting equalization.

It is an excellent example of how short human memories are that the new equalization formula created after the 2006 Federal Expert Panel Report put natural resource revenues directly back into the equalization calculation at a time of rising resource prices. This time, as resource prices rose, the resource boom fueled per capita GDP in Alberta, Saskatchewan and Newfoundland so high that Ontario fell below the national average even while managing the fourth highest per capita GDP.

It is a stretch to view any province with a per capita GDP in the top half of provincial per capita GDP rankings as being “have not” and needing equalization payments.

Equalization should be provided for what it was meant for – assisting less prosperous provinces provide comparable levels of government services. Ontario is not in that boat yet.

Livio DiMatteo is Professor of Economics at Lakehead University.