This column was provided to the Citizens Centre by two Halifax economic policy analysts. One them, Brian Lee Crowley, will address the Calgary Congress on this subject next weekend.
The Flypaper Effect
Does equalization really contribute to better public services,
or does it just "stick to" politicians and civil servants?
By Brian Lee Crowley, PhD,
and Bobby O’Keefe, MBA
According to Canada’s Constitution, equalization is intended to ensure “that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.” That seems reasonable enough. But is that what really results? Do recipient provinces actually provide “reasonably comparable” public services to those offered in richer provinces?
If we take a look at the public service in each province, and examine both how much provinces pay their public servants and how many public servants each province has, the answer to those two questions is a resounding no.
In looking at the question of how much, a simple comparison of the average wages for public servants in each province appears to indicate that the equalization receiving provinces, for the most part, pay their public servants less than the national average. Ontario and Alberta, our relatively richer provinces, pay their public servants wages above the national average.
If, however, we look at wage premiums that provincial and local governments pay their public servants over and above the average industrial wage in the province, which factors in the cost of living and other labour market conditions which vary from province to province, a different picture emerges. Equalization receivers PEI, Quebec, and Newfoundland provide a wage premium significantly above the national average.
Turning to the question of how many, it appears that the equalization receiving provinces also inflate the size of their public service. Comparing the number of public servants each province has per 1,000 residents, seven equalization receiving provinces all have significantly more public servants than the national average. Manitoba and Saskatchewan pay their public servants average or below average wages, but they make up for it by hiring significantly more public employees – 32 more public servants per 1,000 people in Saskatchewan and 28 more per thousand in Manitoba.
The findings here are consistent with what James Buchanan, Nobel Laureate and often considered the father of equalization, referred to as “rent seeking.” Essentially he states that given an incentive (equalization payments), rent seekers (civil servants) will organize and expend resources to capture that incentive, a phenomenon also known as the “flypaper effect.” As a recent Australian report on their equalization system argued, “Money ‘thrown’ at a State Government tends to stick, even though the welfare of the households would be better served if the money were passed on to them through lower taxes.”
A third major claim on equalization transfers, and again a claim that provides nothing in the way of improved public services, is debt service. Indeed, some equalization analysts have made the case that equalization encourages equalization-receiving provinces to acquire far more debt than they could sustain on their own.
This seems to be borne out in the facts. The highest levels of debt per capita are again found in the equalization-receiving provinces (ERPs) Newfoundland, Quebec, Manitoba, Nova Scotia, and Saskatchewan. By contrast, the superior debt performance of New Brunswick and PEI is a testament to the fact that being an equalization recipient is no excuse for disproportionate levels of debt. In other words, ERPs cannot claim that inadequate levels of equalization have forced them to accept higher levels of debt, since these two provinces have avoided this outcome.
If it is the case that a great deal of the equalization the ERPs receive does not actually go on “reasonably comparable services”, but instead is absorbed by high public sector wages, high levels of public sector employment and high levels of debt, then the actual objectives of equalization could be accomplished with much lower levels of equalization.
The equalization formula tries to address fiscal disparity among the provinces. Its unwillingness to look at what the equalization receiving provinces actually do with the money means that the effects of the program are seriously misrepresented and widely misunderstood. Instead of providing reasonably comparable services at reasonably comparable levels of taxation, the costs of fiscal laxity are masked by equalization, which gives large amounts of money to politicians vulnerable to pressure from well-organized interest groups such as public sector workers.
While the provinces are free to determine their own spending policies, it is clear that the levels of equalization being provided in the country today are far in excess of what is needed by provincial governments with average levels of fiscal discipline to deliver a reasonable package of provincial public services. In other words, the current level of equalization payments appears to be contrary to the principles of the equalization program as stated in the Constitution, and contrary to the principles of political prudence and fiscal discipline.
In the words of James Buchanan, who later changed his favorable view of equalization, “You have politicians in these provinces who are recipient provinces of these grants who are able to spend money without being responsible to taxpayers. So you have no cost side. There is a benefit side, but not a cost side. If you have a situation of benefits not offsetting costs, then you’re likely to get irresponsible behaviour.”
Brian Lee Crowley is founding President of the Atlantic Institute for Market Studies. Bobby O’Keefe is a policy analyst with the Institute.
The Flypaper Effect
Does equalization really contribute to better public services,
or does it just "stick to" politicians and civil servants?
By Brian Lee Crowley, PhD,
and Bobby O’Keefe, MBA
According to Canada’s Constitution, equalization is intended to ensure “that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.” That seems reasonable enough. But is that what really results? Do recipient provinces actually provide “reasonably comparable” public services to those offered in richer provinces?
If we take a look at the public service in each province, and examine both how much provinces pay their public servants and how many public servants each province has, the answer to those two questions is a resounding no.
In looking at the question of how much, a simple comparison of the average wages for public servants in each province appears to indicate that the equalization receiving provinces, for the most part, pay their public servants less than the national average. Ontario and Alberta, our relatively richer provinces, pay their public servants wages above the national average.
If, however, we look at wage premiums that provincial and local governments pay their public servants over and above the average industrial wage in the province, which factors in the cost of living and other labour market conditions which vary from province to province, a different picture emerges. Equalization receivers PEI, Quebec, and Newfoundland provide a wage premium significantly above the national average.
Turning to the question of how many, it appears that the equalization receiving provinces also inflate the size of their public service. Comparing the number of public servants each province has per 1,000 residents, seven equalization receiving provinces all have significantly more public servants than the national average. Manitoba and Saskatchewan pay their public servants average or below average wages, but they make up for it by hiring significantly more public employees – 32 more public servants per 1,000 people in Saskatchewan and 28 more per thousand in Manitoba.
The findings here are consistent with what James Buchanan, Nobel Laureate and often considered the father of equalization, referred to as “rent seeking.” Essentially he states that given an incentive (equalization payments), rent seekers (civil servants) will organize and expend resources to capture that incentive, a phenomenon also known as the “flypaper effect.” As a recent Australian report on their equalization system argued, “Money ‘thrown’ at a State Government tends to stick, even though the welfare of the households would be better served if the money were passed on to them through lower taxes.”
A third major claim on equalization transfers, and again a claim that provides nothing in the way of improved public services, is debt service. Indeed, some equalization analysts have made the case that equalization encourages equalization-receiving provinces to acquire far more debt than they could sustain on their own.
This seems to be borne out in the facts. The highest levels of debt per capita are again found in the equalization-receiving provinces (ERPs) Newfoundland, Quebec, Manitoba, Nova Scotia, and Saskatchewan. By contrast, the superior debt performance of New Brunswick and PEI is a testament to the fact that being an equalization recipient is no excuse for disproportionate levels of debt. In other words, ERPs cannot claim that inadequate levels of equalization have forced them to accept higher levels of debt, since these two provinces have avoided this outcome.
If it is the case that a great deal of the equalization the ERPs receive does not actually go on “reasonably comparable services”, but instead is absorbed by high public sector wages, high levels of public sector employment and high levels of debt, then the actual objectives of equalization could be accomplished with much lower levels of equalization.
The equalization formula tries to address fiscal disparity among the provinces. Its unwillingness to look at what the equalization receiving provinces actually do with the money means that the effects of the program are seriously misrepresented and widely misunderstood. Instead of providing reasonably comparable services at reasonably comparable levels of taxation, the costs of fiscal laxity are masked by equalization, which gives large amounts of money to politicians vulnerable to pressure from well-organized interest groups such as public sector workers.
While the provinces are free to determine their own spending policies, it is clear that the levels of equalization being provided in the country today are far in excess of what is needed by provincial governments with average levels of fiscal discipline to deliver a reasonable package of provincial public services. In other words, the current level of equalization payments appears to be contrary to the principles of the equalization program as stated in the Constitution, and contrary to the principles of political prudence and fiscal discipline.
In the words of James Buchanan, who later changed his favorable view of equalization, “You have politicians in these provinces who are recipient provinces of these grants who are able to spend money without being responsible to taxpayers. So you have no cost side. There is a benefit side, but not a cost side. If you have a situation of benefits not offsetting costs, then you’re likely to get irresponsible behaviour.”
Brian Lee Crowley is founding President of the Atlantic Institute for Market Studies. Bobby O’Keefe is a policy analyst with the Institute.
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