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The Equalization Program

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    The Equalization Program

    Given that this has been one of the "hotter" issues during the provincial Tory leadership race, and cowman's post in another thread, I thought it might be prodent to post the following article, written by Todd Hirsh of the Canada West Foundation:


    Equalization must be made fair


    The Brandon Sun
    August 16, 2005

    By Todd Hirsch

    The word “fight” actually appeared in the title of a recent press release from the government of Saskatchewan and that says a lot.

    The issue of the day, at least for the Saskatchewan government, is the equalization program and Premier Lorne Calvert is quoted in the press release as saying:

    “Treatment of Saskatchewan's non-renewable resources continues to be a problem under equalization. It punishes development in the energy sector and exports the financial benefits from our energy resources to other provinces…”

    He’s right, of course. The problems plaguing our national system of sharing between provinces — in other words, the equalization program — do result in unfair treatment. Ask enough provinces, however, and the system is thought to be unfair by someone.

    The equalization program was set up in the 1950s by the federal government with the laudable goal of attempting to create a system that would ensure the poorer provinces are brought up to some average level of financial resource. The idea is that regardless of the province in which they live, all Canadians should be entitled to roughly equal levels of social services, health care and education for roughly equal levels of taxes paid.

    But as with a lot of government programs, what started out as a good idea has resulted in a national pillow fight. It’s certainly not that the concept of sharing between provinces has soured — in fact, Canadians in general support the idea. But what is increasingly seen as unwise is the execution of the program itself.

    There are dozens of problems and disagreements surrounding the current program. Should natural resources be included in the formula? Should provinces face clawbacks? Do payments provide a disincentive for a have-not province to develop economically?

    These issues are currently being debated before the Expert Panel on Equalization, set up by the federal government, in hearings across the country. The panel is to present its final report to the finance minister by December.

    I won’t get into the intricacies of the problems and debate here: they are too numerous to address. But three points in particular bear mentioning:

    The first point is a myth that needs to be debunked, the myth that the “have” provinces (usually Alberta and Ontario, but now also Saskatchewan) pay into the equalization pot and the “have not” provinces draw out of it. This isn’t the way it works.

    In fact, provinces don’t pay into the equalization pot at all — individuals do. All taxpayers finance the program and Ottawa dishes out cash directly to the governments of the “have not” provinces.

    True, the Alberta and Ontario governments do not receive any payments from Ottawa. But it is just plain wrong to believe that these two provinces pay in while the other provinces take out. It may seem like a minor point, but it is an important one to understand as it can powerfully shape the debate.

    The second point is that much of the current battle over equalization stems not from the concept of sharing itself but from the numerous side deals that have been struck. This is a political problem, not an economic one.

    Too often, the equalization program has become an ace card for the federal government to play in order to appease some particular province.

    The equalization formula itself is not all that complex; what makes it complex are all of the side deals, exceptions, amendments, and special concessions that have been tacked on over the years.

    The final point is that there is a real danger of the equalization program becoming yet another lightning rod for regional alienation. Alberta is already a “have” province, Saskatchewan became one this year and if recent economic trends are any indication, British Columbia will re-join the rich provinces club soon.

    That means three of the four “have” provinces are in the West. If the system is not changed to address some of its more glaring shortcomings — especially around the unfair side deals — it will become increasingly difficult for the “have” provinces in the West to convince themselves that Confederation is a good idea.

    The Expert Panel on Equalization has a huge task ahead of it. How do we take an existing program that is based on a good concept and make it workable?

    How can we keep it from pitting province against province, region against region?

    Let us hope that the panel’s recommendations are bold and — more importantly — that the federal government follows through with some changes.

    #2
    ... i made this point on friday cause this is exactly what dinning was talking about...i don't remember the breakdown but i think its like twothirds of the tax goes to the feds and the other third stays in the province ...all the feds really want to do is increase the tax...does this really help the ordinary joe...i don't think so...

    Comment


      #3
      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.

      Comment


        #4
        ivBINconned: Ask your friend "Stevie" to cancel equalization if you think it is not working properly.

        I am sure that it is skewed and has been skewed for years to solicit votes from the have-nots.

        Comment


          #5
          Wilagro: Who benifits from equalization? Is it the Alberta family that loses $15 billion in transfer payments?
          Or is it the Quebec family that benifits from $15 billion in transfer payments....and make no mistake here...it is for the main part, Quebec who gains that $15 billion!
          $15 billion...what is that? Well if Alberta has 3 million people(mothers, babies, grandparents)? ....works out to $5000/person? So...a family of four...$20,000? Are you following?
          Now of course this is basically income tax...so how does that relate to us?...The fact is this: If Alberta collected that "tax" and sent the country their "fair share", instead of this ripoff....we would not have to send those eastern BASTARDS every damned cent we get from our oil royalties!
          You dumb buggers think we don't "deserve" out own money? Every bloody barrel of oil under Alberta belongs to YOU! You deserve to get your share! Unfortunately you are so damned dumb...you just don't get it!

          Comment


            #6
            willy it is time for you to become free of the mental bondage you have been under. Humble yourself and admit that the free enterprize capitalist system...even with all its faults...is far better than any alternative.

            Time for you to become a friend a Stephen, Ted Morton, etc and help us keep their feet to the fire.

            You will find it oh so liberating and you will be free of all that bitterness.

            Comment


              #7
              What are you guys talking about? I said that if equalization is not working, then get it killed.

              I don't think that it is working properly from what I have read.

              IvBINconned and will again be conned in the future: Bitter you say? Support rightards like Morton and Harper? Never...that would not sweeten my disposition one bit.

              I will vote for centrist or left of center parties (not necessarily the existing ones), rather than the PCs as they now exist.

              Comment


                #8
                wilagro: The problem is this: How do we kill equalization payments?
                Equalization is like this...You have $100 dollars...you worked hard for it,you scrimped and saved and did without so you could get it? The rest of us were a bunch of spendthrifts who lived the life of Riley! Then one day we took a vote and decided you would have to give us your $100 because we needed it to keep up our extravagant lifestyle!
                That is equalization! But because we are a "democracy"...well sucks to be you! This is patently unfair?

                Comment


                  #9
                  Let me get this straight. You agree Wilagrow that equalization is a big vote buying scheme and you support ending it. Yet you reject the only voices that have been been exposing the scam for what it is???

                  This is a very inconsistant position!!

                  The fact that you would support parties that believe in strong central government that love the redistributoion of wealth show me that you, Willy, are more confused than I thought you were.

                  Left of center governments are dangerous, maybe more dangerous that dictatorships, in that over time they erode the public's sense of responsability and appreciation for freedom. Hence we see the masses often trading their freedom for government provided security...the examples are endless.

                  Many have never had to fight for their freedom or have any appreciation for those who have. They have only been good at, enjoying it!!

                  Comment

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