On Equalization, Part 176

If you were to boil down the major themes of this blog and its over 1,800 posts over the past four years, they would be things like the need for more international business investment here, the need for higher wage employment, the need for more R&D, the lack of media support for economic development, the bias towards fostering small business development, etc.

Of course, one of the major themes would be Equalization and my view that the very structure of the program is problematic – specifically that it rewards economic failure – the more an economy cannot generate enough of its own source revenues, the Equalization program steps in to make up the gap and the minute a poor economy starts to move in the right direction Equalization funding drops. I have called for a more rational approach that would see Equalization fixed for 10 year increments which would allow poor provinces to start to right size their economies, support strong economic development and then have a reassessment of the program funding based on its contribution to the successful re-economic development of a province.

That opinion has not been majority view and when I have floated it publicly in the media, a U de M economics professor called the idea ridiculous and I am paraphrasing here but not by much said that the Equalization program had nothing to do with economic development.

‘Nuff said.

But increasingly, in say the past 8-10 years, my concern with Equalization has added another dimension. The original brand of Equalization was that it was supposed to help poor provinces provide their citizens with ‘equivalent’ public services. A noble mandate – that no Canadian would be penalized in their health care, education and other public services – because they lived in a poor region of the country.

But recently, starting with Mike Harris/Jim Flaherty and migrating to McGuinty, Equalization has been systematically rebranded as a major source of the economic problems of Ontario. McGuinty must have hired the top marketing gurus for this job. His first spectacular rebranding effort involved blaming Equalization for the declining funding for education in Ontario. That had the effect of stirring up anti-Equalization sentiment among the rank and file but even the elites – university and media types started to panic. The Toronto Star ran fairly nasty columns about Equalization. And, now, of course, that Ontario is close to being a ‘have not’ province itself, McGuinty is blaming the Equalization program itself and calling for it to be scrapped completely (remember when you read this article and when you read McGuinty calling Equalization ‘perverse’ that it is NB, QC, PEI and MAN that stand to hurt from changes not Newfoundland, Sask, or BC).

So, Equalization not only is hurting education in Ontario and hurting Ontario’s productivity – it is now responsible for Ontario’s overall economic decline.

Now, some dismiss this outright but that would be unwise. One third of Canada’s population lives in Ontario and politically this rebrand matters. And while newfoundland and Nova Scotia are dropping their need for Equalization, New Brunswick, Quebec and Manitoba are increasing their need so any fundamental changes are likely to hurt those three more than the rest.

Ontario’s hypocrisy on this is stunning – I have talked about this before at great length. Ontario gets far more than its share (population based) of federal goverment jobs, federal government R&D spending, etc. Almost all of the major economic development programs ranging from Technology Partnerships Canada to the Auto partnership are biased towards Ontario. Over 90% of the billion dollar federal government program to fund sustainable technologies development occurs in the GTA. And that is without mentioning NSERC, the Canada Innovation Foundation, etc. – all the broader R&D programs which are decidedly biased towards Ontario.

And of course let us not forget all the federal government agencies involved in promoting Canada abroad. Ontario, to a lesser extent Quebec and BC are widely promoted by the Feds, poor old New Brunswick hardly mentioned.

I have called in the past for a switcharoo. Ontario can have the Equalization, and we will take more of the economic development funding. That, again, is considered by most to be a laughable proposition.

But, this matters. Over a decade ago I would raise this will folks in the federal gov. system and was told time and time again – in a nice way – you get your Equalization, use that for economic development if you want but there is no way a Federal Cabinet is going to authorize more economic development spending while Equalization is increasing. And that has come to pass. Federal spending on economic development in Atl. Canada as a percentage of the federal budget has been steadily declining every year since the early 1990s. In fact, in the case of New Brunswick, Equalization is up by hundreds of millions, and federal spending on economic development is down dramatically.

So, this weird high stakes poker game continues. More Equalization, less interest in economic development and the former on shakier and shakier ground.

So, “what is to be done”?

I don’t know. I think a new fed/prov partnership that involves new economic development funding, bringing up R&D investments by the feds to at least the national average (we are now dead last in Canada for federal R&D), deliberate use of Canada’s international economic development efforts (DFAIT, Invest in Canada, etc.) to promote New Brunswick, the PM’s personal support in attracting economic anchors (large multinational firms) to New Brunswick, etc. in exchange for New Brunswick’s sincere effort to reduce its dependency on Equalization as a result of the taxes generated from the economic development partially supported by the feds.

So we need to get out of this downward cycle of more Equalization and less economic development, reverse the polarity on that and hopefully see New Brunswick with a reinvigorated economy and a place that attracts more people than it repels. A place where private sector wages are growing faster than public sector wages. A place where the universities are incubators of talent and and ideas for New Brunswick and not incubators for Ontario’s workforce. A place where international companies stop and take a look when considering their North American operations. A place where people are optimistic about the future. A place where our rural communities are models for economic development not inevitable places of decline.

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12 Responses to On Equalization, Part 176

  1. richard says:

    “A place where the universities are incubators of talent and ideas for New Brunswick and not incubators for Ontario’s workforce”

    Well, not that I want to get crabby about UNB again, but…..yes we need universities that see themselves as ED players first, not as an afterthought. That means science research dollars, and it means cutting other programs to get those research dollars. Instead we see UNB constructing new sports venues and plans for a medical school in SJ. Good grief!

    I spent a couple of decades in Ontario before returning to NB, and I can say that the anti-equalization talk from McSquinty is really a reflection of perceptions that are widespread in ON. As you say, it is just that now it is acceptable for the elites to say those things. That means equalization is on the way out, or at least due for some major downsizing. I hope NB is paying attention, but I don’t sense that is the case.

  2. Anonymous says:

    We will be continually disappointed if we expect universities to drive ED. This is the job of business.

    The job of universities is to educate. Ideally, educated graduates enter the workforce and apply their knowledge to help business. Occasionally, these graduates will spin off and start their own business.

    The expectation that universities should be producing a wealth of companies like HP or RIM is a heartwarming thought but a rare occurrence in NB, Canada and the world. Yes, it happens, but that that should not detract from our universities’ main purpose; providing excellent education. This flawed strategy originates from a flawed federal r&d strategy that flows most of Canada’s research funding to universities and government institutions while virtually ignoring industry (okay, they provide SRED credits). The universities are playing along as it has been a windfall of funding in an otherwise sparse funding environment, however, research is now suggesting that the billions injected into university research is having negligible commercial impact. Imagine if a portion of these billions were available to industries for applied research; industries such as New Brunswick’s forestry sector might be in a different situation.

    In New Brunswick, we have a special problem. We cannot provide challenging work for university graduates; supply greatly exceeds demand. How many university graduates do you think are working at contact centers or otherwise unemployed? Answer: most of the ones that choose not to to move to Ontario or Alberta (exceptions include applied university degrees such as engineering and nursing).

    As has been blogged here before, NB needs some serious anchor employers. Employers that will hire our graduates. Employers that will generate opportunities through their supply chain. Employers that will incubate spin off companies. A focus on developing and attracting these businesses, rather than unfairly placing unreasonable ED expectations on our universities, will be worthwhile ED investment.

  3. mikel says:

    One thing people should realize is that RIM was NOT a university project. Lazaridis and his friend were both finished at U of Waterloo and their funding was from the federal government.

    It is NOT as if university administrators are in the business of making business decisions. Whta they DID do was lower the royalties for any prof who wanted to start a company. We are talking about science and technology here, and at the university level, universities only provide SPACE for researchers-it is up to researchers to provide their own money via NSERC grants.

    If universities in NB DON”T do that, and are just ‘hiring science teachers’ then you have a serious problem, Richard can no doubt answer that (hopefully nicely).

    But again, a ‘specialized’ university has another name-a community college. Virtually NO universities are ‘trimming down’ in order to put more resources elsewhere.

    It is WAY overdue for NB to have a medical school, for so many other reasons besides economic development. It was COSTING NB an arm and a leg to attempt to bring in doctors, sometimes economic development just means cutting back on your bills. In Sudbury, the city teamed up with the university to build a medical school and has combined it with a cancer research center. And the ‘value’ of those institutions goes even beyond the research dollars.

    The fact that the city of Saint John will jump off its feet to give an LNG tax break, yet seems to be playing NO part in whether a medical school gets set up there, is frankly an embarassment. The city of sudbury teamed up with the university, who then went to the province and then the feds to finally get all this together. Here in Waterloo there are FOUR levels of government that get together to bend over for new investment.

    From what I’ve seen from the past two years, essentially economic development means:

    if its corporate run they’ll hand you a cheque.

    if its a small or medium business it depends who you know (which party is in power).

    if its a new plan it comes from the Premier.

    if it comes from a municipality or local enterprise then the government tells them to *&^% themselves.

    That may be too extreme, but its certainly how it LOOKS, and I can give half a dozen examples of each category. And again, that’s NOT an economic problem, but a political one. And one that I doubt few New brunswickers actually support.

  4. Anonymous says:

    Just to clarify a couple of items in your post.

    1. New Brunswick has more federal employees per capita than Ontario – at the end of 2007 (link below) NB had roughly 16,800 federal employees, which equates to 22 federal government employees per 1,000 NBers. Ontario had 198,000 federal employees, which equates to 16 federal government jobs per 1,000 Ontarians.

    http://www40.statcan.ca/l01/cst01/govt62a.htm

    2. As for federal funding, the specific programs that you talk about, I can’t find detailed regional breakdowns, so I can’t comment on it. But venture capitalist and long-time BDC (Business Development Bank of Canada) critic Mark McQueen does a regional breakdown of the BDC lending, which showed that New Brunswick has the second highest per capita funding from the BDC.

    http://www.wellingtonfund.com/blog/2007/12/07/bdc-fact-7/

    3. What McGuinty is saying is that equalization is a good and noble program, but what doesn’t make sense is that Ontario, which currently a) spends less per capita on those services and b) has much lower service coverage ratios (nurses per capita, hospital beds per capita, teachers per capita, etc) than EVERY other province, is sending funds for social services that are far superior then its own. That absolutely defeats the purpose of equalization.

    http://www.taxpayer.com/pdf/Per_Capita_Spending-by-Province_2007.pdf

    http://www.aims.ca/library/GoldenGoose.pdf

    I think a lot of misconceptions still surround the current state of Ontario.

  5. David Campbell says:

    Just to reclarify your points. Regarding federal employment, It does get murky because the National Capital Region includes a chunk of Quebec. Regarding Federal funding, I haven’t seen anyone disagree with my position on this because I have gone through program after program line by line. As for R&D, that is published by Stats Canada and the amount of Federal funding in the NCR is so large, they have to split it out in the tables (i.e. Ontario without the NCR and the NCR separately). Ontario -without the national capital region still gets more federal R&D funding per capita/percentage of GDP than New Brunswick. As for the BDC, that one makes most NBers chuckle. The big five banks have virtually none of their capital invested in NB compared to Ontario. The BDC is a rather pathetic attempt to level the playing field.

    Now, your last point is the one we are in full agreement on. In fact, I go further and will say that at the current expenditure growth rate and population decline rate within 15 years or so it will be more than twice as expensive to offer health care in New Brunswick than in Ontario.

    My position on Ontario is scattered throughout this blog. Canada needs a strong Ontario. Witout a strong Ontario, the country is in trouble. But I will always believe that a place like New Brunswick needs its own economic development – not transfers from Ontario. But if you cut Equalization without a real economic development plan you will just empty out NB even faster and create a serious problem. McGuinty should be the first one up linking Equalization to economic development.

  6. richard says:

    “We will be continually disappointed if we expect universities to drive ED.”

    Is anyone expecting that? Not me. However, universities can be innovation engines; these lead to jobs and many of them are high-paying. Many of these innovators become businessmen.

    As to the driver of “ED”; well the driver, pal, is opportunity, not business. What is business but the application of opportunity? And most of those using those opportunities are not ‘business’ persons when they start. The last ‘drivers’ I would depend upon are existing businessmen (or, god help us, the hapless boobs churned out by business schools). Most business persons are relying on the last opportunity, not the new ones.

    UNB is well-placed to develop much more research into value-added forestry products, for example. The feds are there, the province is there and the forestry school is there. In fact we have the pieces of the entire chain from basic to applied reearch to industrial applications. All that’s needed is direction; one that de-emphasizes enrollment for undergrads and pumps up natural science research. NB’s natural resources plus uni research can provide huge opportunities for business. Doing that means changing UNB’s model and changing the model means changing the people in charge.

    As to RIM and Waterloo, I don’t really give a rat’s ass. There are many many unis in the US for example that have many spinoff industries that resulted directly from innovation. Whether those come directly from uni patents or not does not really matter

    I am not suggesting the uni research is NB’s only path. Certainly I support the use of cheap industry to attract high-paying sustainable jobs. Whatever the industry, however, you will find that where economies are strong there are mutually-symbiotic relationships between those industries and uni research programs.

  7. richard says:

    “the use of cheap industry “

    Sorry; make that ‘cheap energy’.

    BTW Mikel, I expect its far far cheaper and beneficial re supply of doctors to give Dal more money than to build our own med school. Not to mention the reduction in available specialists in SJ as they start devoting more time to training and less time to patients.

  8. mikel says:

    It MAY be cheaper and it depends what is meant by efficiency. There is a reason why the fledgling bit of medical research done in NB is done in Moncton where the “medical school” is.

    Part of that reasoning is the RIM issue, the fact that NO knowledge based/backed industry is going to think twice about investing/operating in a province that gives education and knowledge based industry as little support as NB. A good part of the reason RIM went to Nova Scotia is they were impressed by their six universities within easy driving range.

    The same goes for any industry down the line. By not having a veterinary school the province misses all kinds of opportunities as well, there are at least six companies directly associated with UPEI’s school that I know of.

    Having no architecture school also means a lack of investment. So a medical school is the very basic first step in opening up the medical research field. That’s why I say its worth more than just the price of the education.

    However, that depends on the details, a medical school doens’t ‘necessary’ cost an arm and a leg. Nowadays, computers can provide most of the theory, and the practical comes from the hospitals-not the school.

    A medical school doesn’t necessarily mean a reduction in specialist’s time with patients. That depends on the program. A student can be trained in the art of doing surgery by linking the school with another school anywhere in the world. Surgeries are increasingly being done remotely.

    Back to equalization, I was actually quite surprised by the amount of investment that BDC invested, and there was a couple of banks that stood out as well.

    The question is WHERE that money goes. If Irving is getting loans from the province, how much investment are they getting from the central banks or even the BDC?

    And again, that’s not government that is making forestry policy, that is crystal clear. There are FAR more small woodlot owners than there are workers for leaseholders, yet policies continually favour the big five.

    Even three years ago when the industry was tanking the Minister was talking about how to get more students into forestry.

    But equalization is not going anywhere. We’ve done those numbers before. THe only reason ontario pays more into equalization is because the people are there. A New Brunswicker pays as much into equalization as ontario, and probably gets a lot less out of it.

    And just to mention that statistic again, the Perimeter Institute for Theoretical Physics got more federal money than ALL the researchers in New Brunswick combined. And thats just ONE think tank.

    A better example is simply to look southwest. Maine doesn’t get ‘equalization’, but its industrial economy is kept on life support by the US government’s manufacture of several of its naval vessels there.

    So the feds COULD do that, instead we saw them buy cheap old british ships, pay off Irving, close down the entire shipyard, only to see the tories start investing in ships which new brunswick can no longer benefit from-although interestingly enough Irving still does shipbuilding in Nova Scotia and PEI.

  9. mikel says:

    That may not have been clear so I’ll quickly restate it so I don’t have to explain it later.

    It MAY be cheaper and more efficient to shut down every educational institution in the province and have students get trained elsewhere.

    Had an animation school not been set up in Miramichi then Fatkat and most of the animation industry wouldn’t exist. It would probably have been more efficient and cheaper though to NOT have an animation school.

    In fact a medical school is sort of along the same lines as Richard has been talking about-stop ‘investing’ in arts schools and invest in places where there are actually some industries setting up.

    So to ask a rhetorical question, would people here guess that more ‘future investment’ is more likely in the medical field or in the sociology field? I’ll just remind everybody that when the paper ran an article on medical research in moncton, they raised MORE private investment money than they were actually looking for. If THAT isn’t a point for a medical school I don’t know what is.

  10. Anonymous says:

    Yes, medical research has everyone opening up their wallets from the feds through to the guy answering the door to the Cancer Society collector.

    However, one has to ask if we should be chasing after this hot trend or the sectors where New Brunswick has an established capability.

    Medical research is expensive. It takes a long time to get to market. It is capital intensive. We are half a century behind our nearest competition. Sure there is lots of funding available (for now).

    Not discounting medical research; just suggesting we should have a strategy and consider research investments in energy, forestry, aquaculture, mining and other sectors native to NB. We are small and must get the best bang for our buck. Let’s say we decide to apply the $100M RDC money for research rather than regional vote buying; should we start from zero and invest in medical research or think about forestry investments? Don’t know the answer but do know appreciate it is a strategic decision requiring some careful thought.

  11. mikel says:

    The areas with established credibility already exist. The cancer research going on at Beausejour Medical Facility is no different than cancer research going on anywhere else.

    In the past two years four more researchers who were doing work elsewhere have ‘come home’ to NB where they do cancer research. Like I said, this group in Moncton has been getting funding from PRIVATE investment. And they generally bring their own funding.

    So thats the opportunity, nobody should believe these guys are ‘centuries behind’, nothing could be further from the truth. That it is expensive is not exactly true either, compared to starting up a factory its dirt cheap, but of course there aren’t as many employees-although having only ten full time employees didn’t stop them from writing off hundreds of millions in property tax from irving.

    As for the examples above, I’m not expert but certainly what I’ve read and seen about forestry does not have NB with any special credits, in fact the WAY they do forestry is very much a century behind other areas. If you go look at research papers you don’t find NB names popping up more often than anybody else.

    For aquaculture, as little as four years ago when I was researching it they were having serious trouble as they really did not know much about what they were doing. Fish cages were being overcrowded and there was little in the way of ‘research’ being done.

    However, the value of a medical school goes beyond the possibility of investment, although it includes that. It’s well known that doctors tend to stay close to where they go to school and where they do their residency. They also like to stay in areas where they can continue their education.

    Most importantly, they have LOTS of options. So without that, the province ends up either having to pay a lot more than the competition, or else ends up with the worst doctors.

    And again, the investment WOULD be minimal if the regions worked together. The city could provide the building, or at least the lot. Private investment could help build in exchange for naming rights or just publicity (hell, get habitat for humanity to help).

    The university contributes X amount of teachers, workers, facilities,etc., (like Richard says, its frankly embarassing that UNB and STU have been using a lot of their recent resources to build sports facilities).

    And once that is seen to be getting momentum-especially when people get involved, then the province and even the feds start putting cash in. That’s ALMOST literally how Sudbury did it, but in that case, like here in Waterloo, Inco and Falconbridge, the local billionaires, put lots of money into it.

  12. Anonymous says:

    I agree. There is a huge amount of money available for medical research and we should act to pull our share into NB. It will attract doctors and provide an in flow of money.

    However, there is a second type of research that is important and should be pursued. Research that will lead to new products, new processes, and new businesses (medical research has the potential to do this but it is a very long term investment). This research will help us be productive and globally competitive and significant impact our economy. It will help save stalled industries such as forestry.

    Just pointing out that it is fine to chase the money but is is important to have a plan so we know where we are going.

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