The gathering storm

I think this could turn out to be one of the most contentious national public policy issues in Canada over the next 20 years.  Whenever I discuss it, Equalization and transfers, the comments range from agreement with the West and outright dismissal as a non issue. I think it could be a defining issue.

Here are a few select lines from a Don Martin editorial in the National Post this week.

Alberta fed up with the Robin Hood routine
National Post
March 12

When the billions flowed as a hefty budget surplus, Albertans didn’t mind subsidizing a better life for poorer provinces.

Petro-dollars helped Nova Scotia become the national leader in physicians per capita, gave Quebec students the lowest-anywhere tuitions, created unrivaled regulated daycare space in Prince Edward Island and gave New Brunswick the bucks to hire plentiful nurses.

So lucrative has the transfer of wealth become that, according to an excellent new analysis by the Frontier Centre for Public Policy, the less fortunate provinces now outperform almighty Alberta in delivering almost all services, including health care and the cost of post-secondary education.

For the hands-out, have-not provinces, the easy money will continue to flow from west to east. But they’re being put on notice the Robin Hood era of stealing from the rich to enhance the poor may be coming to an end.

As you probably know, Iraq is now grappling with how to effectively and fairly share its oil revenue across the country.  In fact, it is said that without a deal that all areas of the country can agree on, it could lead to a civil war.  From a recent report on the subject:

The Iraq Study Group recommended that oil revenue accrue to the central government and not to regions (Recommendation 28). This principle appears to have been included in the draft hydrocarbon framework and draft revenue sharing legislation, which would create central accounts for oil and gas revenues. Under the drafts, revenue sharing would reflect a population-based system for revenue allocation, with automatic monthly distributions to regional and governorate authorities.

Imagine if, in Canada, the federal government accrued the oil revenue and distributed it per capita.  Can anyone say NEP?

Of course, Alberta and actually all the oil and gas provinces would never let that happen and, in fact, there are constitutional grounds for this view.  As Bernard Lord pointed out, however, there is also a constitutional grounds for Equalization and transfers.

The truth is that the federal government is a level of government and it taxes citizens and doles out the money as it sees fit.  It doesn’t tax ‘Albertans’ or ‘New Brunswickers’.  It taxes Canadians and is in charge of national objectives.  And as for the argument of Alberta subsidizing PEI nurses, Calgarians also subsidize highway maintenance to Hinton, Alberta.  Cross-subsidization (to borrow the business term) is what governments do – it is the main thing that governments do.  They take from the rich and give to the poor.  They take taxes from the old and fund education for the young.  They take taxes from the young and fund health care for the old.  You get my point. 

The bulk of what government does is take a wide swath of dollars from the private economy to fund public services and shared public objectives.  Otherwise, you would hardly need government at all.   A strict minimalist would say the government should be in the business of law and order and national defence.  But in Canada and the rest of the world, government has become more of a leveller and an arbiter of ‘fairness’ than just a provider of public goods that have zero private market.

But, and there is always a but, defining what a ‘comparable level of public services’ in each province (the goal of Equalization) is trickly.  Ted Morton in Alberta has a whole raft of statistics suggesting that Equalization and transfers are leading to higher levels of public services in New Brunswick at the expense of Albertans.  He is enlisting Ontario and BC in his fight and if they get on side, this will become a politically powerful issue.  Remember Daulton McGuinty’s ‘fair deal’ fight with the Feds.  How many of you think that as the Feds tighten the fiscal belt over the next few years this won’t be a huge issue?

That’s why I come back to economic development. There is no way we will ever have an Iraqi approach to natural resource revenue sharing.  So places like New Brunswick will need more own-source revenue – at least to a point. 

We need to embed the concept of economic development in the Equalization model.  The idea that funds flowing from the Feds because of a weak provincial economy should be tied to some longer term fiscal gap goals like in the European Union.  The EU had a specific and targeted goal of getting Ireland up to benchmark economic objectives and predicated its financial assistance on these goals.

I think we need that approach in Canada.  I think that Alberta – once they think about it – would sign on to this idea.  Their idea, bleed New Brunswick dry so they can pay for ever more lucrative R&D programs at the U of Calgary or beef up the Heritage Fund with more billions, will lead to regional unrest and fracture Confederation over a generation.  If places like NB can address their fiscal challenges through a strong economic development effort, Alberta would see less transfers out and both areas would win.

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11 Responses to The gathering storm

  1. richard says:

    ” As Bernard Lord pointed out, however, there is also a constitutional grounds for Equalization and transfers.”

    But, as has been noted before, the amounts to be transferred is subject to negotiation. Reductions in transfers to a province already in dire fiscal straights will have major impacts on GNB’s ability to provide services. Some very hard decisions will have to be made. As was noted earlier, hopefully, as NBers we can find a way to discuss these issues in a transparent rational manner.

    I would guess that the pressure to reduce transfer payments will depend upon two things: the state of the economy in the resource-rich and wealthy provinces (the better off they are, the less political pressure to demand reduced transfers) and the possibility that the ‘reduce equalization’ mantra will become embedded in the national psyche – much like ‘get tough on crime'(and thus proceed regardless of the overall state the national economy).

    “If places like NB can address their fiscal challenges through a strong economic development effort”

    Again, it really comes to us. Regardless of the fiscal transfer issue, we need some reality-based plans to move forward. We need to focus on a few sectors and get all our ducks in line. After all, even with the current level of fiscal transfer, we still have a significant debt problem; one that will impact GNBs ability to deliver services.

  2. I moved from Alberta to New Brunswick and would say from personal experience that the level of services in NB is about half what it is in Alberta.

    To make the point, first visit the beautiful University Hospital in Edmonton, then run down to the Dumont or Moncton General. Night and day! I mentioned walk-in clinics in another comment – in Alberta they are plentiful and no appointments are required. In Alberta there are no debates about the cost of policing – it is excellent and the cities are safe.

    There has been a lot of messaging around transfer payments over the years, from the very name of the program – “equalization” – to the idea that it’s a subsidy, to the idea that it mostly just finds Quebec (ironically, Quebec and Alberta are allied on just about every other issue, and should Quebec ever become a ‘have’ province, which it could easily, watch out).

    It’s easy enough to say, “make the focus of equalization economic development”, but through some lenses (including mine) that’s just code for saying “direct the money to businesses instead of to public services”. It’s also in certain ways futile – no amount of economic development is going to put pool of oil under the province.

    In any event, unless Quebec becomes a ‘have’ province, this may never materialize as an issue. Ontario is slipping into ‘have not’ status and may remain there fore some time, as its natural resource base, with depressed commodity prices, is not likely to support its faltering services and manufacturing base.

    That’s not to discount economic development – I wouldn’t be reading this blog if I didn’t think it was important. But we can’t start saying that transfer payments support Cadillac public services in New Brunswick. That’s just not so, and far from the truth. NB public services are terrible, and a major source of economic disadvantage.

  3. Bill says:

    I agree this issue is coming and will be as hot a topic as any we’ve seen. I also agree with your point about economic development needing to be included in the concept of equalization.

    However, I think before any rational discussion begins Canadians have to understand what equalization and transfers are and what their purpose is. I think most people think of it as simply handouts from the rich to the poor because as a country we’re “nice guys.” As with charities that work in impoverished areas around the world, development with a view to self-sustaining has to be a key goal.

    Another aspect that no one ever discusses is what it actually means to be a nation. What is the point of a nation if it’s simply a collection of areas that look out only for themselves? As a nation, we have obligations to one another. The question is, to what extent? Also, the obligations don’t just go one way. If wealthier provinces are providing monies to less wealthy areas, those less wealthy areas of an obligation to improve their status. That’s why I agree economic development has to be a goal in equalization payments.

  4. Bill says:

    I came from Alberta to New Brunswick as well and I agree with Stephen that the differences in services are night and day. I think that is largely due to the wealth Alberta currently has and its ability to attract people in the medical field — some related to its wealth, some for its facilities and research opportunities. However, if you read the Jan/Feb issue of AlbertaViews concerning suicide rates, you’ll see there are some huge gaps in the services Alberta offers.

  5. Samonymous says:

    So lucrative has the transfer of wealth become that, according to an excellent new analysis by the Frontier Centre for Public Policy, the less fortunate provinces now outperform almighty Alberta in delivering almost all services, including health care and the cost of post-secondary education.

    That’s not a surprise considering many minister within the old Klein government, not to mention the typical Albertan in general, held the ethos that less government is better government. I mean, Klein was such a penny pincher that as mayor of Calgary he would insist on delaying snow removal because the sun would eventually melt it. Not exactly a service friendly guy.

  6. Anonymous says:

    @Stephen Downes

    “I moved from Alberta to New Brunswick and would say from personal experience that the level of services in NB is about half what it is in Alberta.”

    Try to explain that to people in, let’s say, Medicine Hat or Grande Prairie…

  7. Anonymous says:

    I wonder what David and this blog’s readers think about this WSJ article: http://online.wsj.com/article/SB123758895999200083.html

    It’s hard to ignore the parallels between foreign aid to poor African countries and federal transfers to ‘have-not’ provinces (remember that we all are part of this big community called humankind)

  8. mikel says:

    Those are two separate issues. There shouldn’t be much doubt about transfers, big cuts were made in as little as 15 years ago. But cuts to provinces has FAR more to do with the economic condition of the federal government than whines from various provinces.
    That ‘may’ be different if there were a majority government, we can thank Quebec that its still a minority. And again, its an old ruse, you just cut taxes until the government becomes unstable, then claim, as Richard does about NBP, that ‘the sky is falling’ and everybody is going to perish in a reign of hellfire if public assets aren’t sold and public services aren’t privatized. So far I’ve noticed this has far less public support than it did in the eighties and nineties, probably because people still remember those times, and know WHO is to blame for the current financial crisis.

    It’s good reason that people and parties fear another election. Because as has been pointed out, much of Canada’s economic situation could have been avoided simply if it hadn’t lowered the GST. And unlike the tax rebates for home improvement, there is little evidence that that lowering in any way stimulated the economy. However, the OTHER parties know that, but trying to sell a tax increase during an election is political suicide, particularly in a country where close to half the people don’t bother voting anymore.

    As for equalization and services, it all depends on the point of view. More easterners have family doctors than other places in Canada, but I’ve always found GP’s fairly useless and the doctor at the local clinic knows me almost as well as my family doctor out east did. The big difference would be in service, because at a clinic you can’t make appointments so there CAN be quite a waiting list, particularly at one next to a university, but if you pick your times carefully its not much of an issue anymore. My last experience with a doctor had them show up with a laptop and use internet search engines when I explained what was wrong-I could do that at home.

    I can’t remember, but I wonder if the website Bernard Lord put up (and took down) about wait times in various locations is still around. I know most of the provinces now have such ‘public sites’, but I can remember when they suddenly disappeared in NB. I suspect IF or WHEN the numbers look good it will be up.

  9. anonymous says:

    As I see it, many well meaning “fixes” (such as Equalization) have inadvertently mutated into a structural welfare system that has taken away any real incentive to make dramatic progress in economic development. It is a zero sum game – the better your economy does, the less equalization you get. As a result there has been lots of lip service over the years about economic development, but at the end of the day politicians have found it much easier and certainly less “messy” to go to Ottawa to beg for more money than to try to grow the economy and get the money through that much more “risky” source.  I recognize that the situation is much more complicated than that but that is the essence of it.
     
    While this may be overstated the situation, a result of this “masking” of the New Brunswick economy by such measures as Equalization has desensitized the political level, the civil service and the general public to the true role and importance of economic /business growth.  The average person doesn’t stop to consider where the money comes from to pay for healthcare, education, etc. – it just comes from the bottomless pit of resources of “government” through our very high taxation rates (thus the sense of entitlement that you find here). 
     
    In the US, the states are under much tighter financial constraints than provinces in Canada – especially with respect to debt and deficits. Because of this and because their system of support from the federal government to the states is different from our Equalization program (and much less generous), there is a very clear linkage between the performance of the state’s economy and the level/quality of public services. The downturn of a state’s economy very literally results in the trimming of various public services immediately (often including the firing/laying off of civil servants) to balance the budget. Because of this structure, economic development and business growth is always a front burner issue with everyone from the Governor right on down through the civil service and on to the general public. Business is seen for what it is; the foundation of the entire economy, not an afterthought. Like it or not, this system focuses everyone’s attention on the real issues. This also why there is not the sense of entitlement there that there is here. In fact, the US public expects their state governments to balance their budget by cutting rather than bringing in higher taxes, etc. (which is politically dangerous there).
     
    While we can debate the merits of the two systems at length, the bottom line is that the strength of this US system is that there is constant pressure on state governments (both the elected level and the bureaucratic level) to implement real cost savings in the delivery of services while at the same time, by necessity, being extremely aggressive in economic development (the key revenue source). There is no such pressure here and without it, the business sector has not grown and flourished while the bureaucracy for public service delivery has grown relatively unchecked for years (and is extremely top-heavy). Further, it has also caused the civil service to become an employer of choice here as opposed to the private sector – a situation that you rarely find in the US (by design) and one that is not healthy for our economic growth.
     
    (LONGTERM: This province needs to lobby the Federal government for changes in the Equalization formula such that it does not penalize economic growth but rather encourages it. Simply put, there has to be rewards for lowering dependence on Ottawa and there should be penalties for not doing so. This won’t be popular but it is unrealistic to think that the current equalization system is sustainable -nor should it be. This is not likely to happen soon but it needs to be on the table as the real “stick” to force change here and elsewhere. One option is to rejig the system to contribute to specific economic development initiatives on a 1 for 3 basis i.e. for every 3 dollars in reduction in transfer payments to a province as a direct result of improvement in a province’s economy, the Feds commit 1 dollar to an economic development project of the province’s choice – and no wiggle room on the Feds side.)
     
     
    WHAT CAN BE DONE NOW?
     
    Without changing the political system here to match the US system, the provincial government can put in proxy measures to somewhat mirror the economic pressures that drive efficiency and innovation in the state structure in the US and it can benchmark itself against states, and not provinces, in service deliver and other measurables. While far from perfect it would be much better than what we have. The following are areas that are glaring examples for change and could use this measurement/benchmarking process suggested. They deal with both where to find new funds from savings etc. and where to best spend this money;
     
    1)      As a general rule, when a state government saves money in one area of government, it “invests” it in growing its private sector such that it creates new wealth (and tax revenue). Here, a saving in one area or department simply moves over to some other department to spend on some program – not helping the private sector grow thus not generating new revenues.
     

  10. I am very hesitant to draw parallels between aid to Africa and federal government spending within Canada. As I said, cross-subsidization is what governments do. Government will spend upwards of $250,000 (conservative estimate) of public money on every child before he or she ever pays a single tax dollar. That is meaningful to our discussion here because over decades New Brunswick taxpayers have paid for tens of thousands of young workers for the Ontario and Alberta workforces. We pay for them right up until the point they are productive – in a taxpaying sense – and then we ship them off to Alberta to start generating taxes.

    The underlying issue is whether or not the Feds have some shared responsibility related to economic development. It is crystal clear they think that health care, education, employment insurance, etc. are areas that the Feds should cross-subsidize. It is not clear at all that they think economic development is a shared responsibility.

  11. Don Dennison says:

    You are right to draw attention to the equalization debate. As I observed recently to a colleague influential in Liberal circles, the attacks on the equalization concept are coming again, and we need to have a defensive strategy in play where big ideas take shape, e.g. this month’s Liberal Thinkers Conference.
    The only federation that doesn’t have a formal equalization program in place is the US. Otherwise federations ’just do it’ for the simple reason that if they weren’t federations, were they unitary states, social services such as education and health would be financed and delivered on a roughly equal basis without consideration to geography. It’s not that hard a concept, but pointy heads get bent all out of shape because they don’t step back and look at it simply.
    There have been some perceptive people in the Canda West Foundation that thought about the growing gulf between Alberta and the ‘Rest of Canada’ and realized it isn’t in Alberta’s interest and actually pondered some resource revenue sharing schemes

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