The Fraser Institute

The Fraser Institute

November 04, 2013 06:15 ET

The Fraser Institute-Poor is the New Rich: Canada's Equalization Payments Encourage Bureaucratic Bloat in the Least-Productive Provinces

CALGARY, ALBERTA--(Marketwired - Nov. 4, 2013) - Canada's poorest provinces are on a government-services spending spree thanks to equalization payments from the "richer" provinces, according to a new study published today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

More professors, more doctors, more nurses, lower tuition fees and smaller class sizes can all be enjoyed in the provinces which do not have to pay for these services by themselves, says Mark Milke, Fraser Institute senior fellow and author of Super-Sized Fiscal Federalism: How Equalization Over-serves Have-not Provinces.

With a look at equalization, offshore accords and 'Transfer Payment Protection,' the study notes the three programs together cost $16.6 billion in 2012/13, up 50 per cent from $11.1 billion in 2005/06. When averaged since 2005/06, Alberta is the only province to receive zero dollars over those years. British Columbia, Saskatchewan and Ontario received very little-and those four provinces are thus labelled "haves" (despite Ontario's recent entry into equalization) with the other provinces as have-nots.

Milke points out that instead of providing "reasonably comparable levels of public services at reasonably comparable levels of taxation," as the constitution sets out, equalization results in "have-not" provinces buying more expensive government goodies than the spending-responsible "have" provinces.

"A university student in Vancouver pays substantially more for tuition than her counterpart in Quebec or Manitoba; a patient in Nova Scotia has easier access to a doctor than a patient in Alberta. Yet in both cases the tax dollars of the British Columbian and Albertan are used to provide those better services," Milke said.

"Not only are the services unequal at the provincial level - missing the point of the payments entirely -- but individuals in B.C., Alberta, Saskatchewan and Ontario are forced to pay for substantially larger government spending elsewhere."

The study on equalization and other "equalization-plus" transfers examines 19 areas of provincial government service, from 2005/06 to 2012/13, to determine whether "have" or "have-not" provinces were advantaged by equalization. In 13 service areas, the dependent provinces-the ostensible have-nots-doled out more to their residents than did their more productive neighbours. In just three areas were the "have" provinces advantaged. (Three indicators were ranked neutral.)

For example, students in the recipient province of Quebec pay $2,774 per year in highly-subsidized tuition, while "have" provinces such as British Columbia charge students $5,015, Saskatchewan students pay $6,017 and Ontario students pay $7,180.

Class sizes in public elementary and secondary schools are between 13 and 24 per cent smaller in "taking" provinces than in provinces that do not receive equalization payments.

Equalization's recipient provinces have higher staffing ratios of public health and social service workers per 1,000 population that range from 68 per cent more to 109 per cent than, for example, Alberta.

On the flipside, the have provinces do have an advantage with slightly shorter health care wait times and higher annual expenditures on post-secondary institutions.

In real-people numbers, the federal government spent more than $5,000 per person, per year on average from 2000 to 2009, in Nova Scotia, Prince Edward Island, and Newfoundland. But it took $3,852 on average each year away from each Albertan; $1,548 from each Ontarian; and $666 from each British Columbian over the same period.

The study proposes two partial remedies to the unfairness inherent in equalization. First, equalization payments might simply be cut, as they were under former prime minister Jean Chretien. Overall federal transfers decreased under his leadership to 2.3 per cent of GDP in 1997/98 from 3.8 per cent in 1992/93. Second, a new equalization formula may be calculated that would take into account the lower cost of delivering services in "have-not" provinces. This formula would likely have the same effect: lower equalization transfers and more responsible spending on the part of the receiving provinces.

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 86 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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