I have always thought that Equalization was holding back the economic development potential of New Brunswick. I believe the same thing about EI. It’s easier for the feds to cut a cheque than it is to work with the province on a long term vision for economic development in a place like New Brunswick. However, when I used to discuss this here and in columns I was told that my views were confused. One NB university economist directly rebuffed me saying that Equalization had “nothing to do with economic development”. The following is from a thoughtful paper by former BoC head David Dodge on Equalization and transfers:
However, transfers can also play a counterproductive role if they act to mask inexorable structural change, delay necessary adaptation and create the illusion that the unsustainable can somehow be sustained indefinitely. Ultimately, they can destroy unity by creating resentment, disrespect and distrust. In the long run, unions can be sustained only when all members are able and willing to fully participate and contribute to the union.
Equalization is a zero-sum game of income redistribution that increasingly generates more resentment than satisfaction. Adopting some or all of these technical changes to the equalization formula may mitigate the problem but will not be a sustainable solution to today’s unprecedented challenge – a challenge that is not cyclical and destined to quickly disappear, but structural and longer-term.
We believe the “solution” lies elsewhere: we need to focus less on the equality (or comparability) and more on the quality (or adequacy) of public services; less on federal transfers that redistribute income to “equalize” fiscal capacity, more on federal investments that will create more income and build the fiscal capacity of today’s lower-income provinces. We need policies that promote positive provincial convergence and the development of competitive manufacturing and service industries, and that also reflect the practical reality that Canada’s economic prosperity and political equilibrium ultimately depend on the economic strength of all provinces, especially populous Ontario.
In short, we need to think and look outside the equalization and transfers box, outside the narrow confines of subsection 36 (2) of the Constitution Act, 1982, and look to the broader economic objectives of subsection 36 (1).
Of course, Dodge inserts “especially populous Ontario” because just about no one cared about this stuff until Ontario joined the have-nots. Now it’s front page news.
It’s no secret that New Brunswick’s economy and society has sputtered along for far to many decades. It has become the poster child for transfers – Equalization and EI alone generate $2.6 billion worth of revenue for New Brunswick ($3,500 per person).
Unlike my economist colleague, I prefer to have bring economic development directly into the conversation about Equalization. I’d like to see long term strategies to reduce Equalization – joint fed/prov – with milestones, investment targets, immigration, etc. As Dodge says, “Canada’s economic prosperity and political equilibrium [key point] ultimately depend on the economic strength of all provinces”.
It’s long overdue.