Peter Holle in the National Post, outlining the economic distortions of federal equalization payments in the recipient provinces:
Equalization, viewed critically, does no favours to either the funding or recipient provinces. After 50 years, outside transfers constitute an ever larger portion of the economies in have-not provinces. In an otherwise globally-oriented, market-driven world, Canada’s equalization program has encouraged the development of locally-oriented, public-sector driven economies.
Here are just a few ways that equalization provides incentives to harmful policy, stunting economic growth in the jurisdictions the policy means to help.
- Inflating the public sector: Equalization has allowed recipient jurisdictions to create disproportionately larger public sectors because someone else is paying the bill. Manitoba’s public sector, for instance, employs 103 people per 1,000 residents, compared to a Canadian average of 84.
- Politicizing spending. The external funding from equalization has allowed local politicians to build up vote-buying infrastructure with little political cost, by disconnecting taxation from benefit. Quebec’s $7-a-day daycare, and university tuition at less than half the Canadian average, would be unworkable without $7.4-billion in annual equalization subsidies from the rest of Canada.
- Incentives for higher taxes. A path-breaking study by the Atlantic Institute for Market Studies showed that equalization rewards recipient provinces for imposing high and damaging tax rates, which deter private-sector investment and job creation. Manitoba, the only have-not province in Western Canada, has the highest income taxes in the region, and also has the lowest rate of private-sector investment.
- Artificially inexpensive hydro power. By excluding the true value of renewable hydro energy revenues from the calculation of revenue capacity, the equalization formula rewards Manitoba and Quebec for charging artificially low domestic electricity prices. Below-market prices, in turn, encourage consumers to use more resources that otherwise would be conserved in response to accurate price signals.
