Read the tea leaves, folks

I didn’t get a chance to visit either the Tory or Liberal meetings this weekend (actually I’ve never been to one but I am curious..). However, I would be interested to know if either party discussed this very real, looming issue about ‘fiscal rebalancing’ and ‘Equalization’ in Canada.

While the two main parties in NB were serving up rousing speeches and kissing babies, the Institute for Competitiveness & Prosperity (an Ontario-based think tank partially funded by the Ontario government) was issuing a scathing report that concludes “federal policies that transfer money from rich provinces to poor are ineffective and bleeding the entire country.”

This report recieved very significant coverage in both the Globe & Mail and the National Post (I didn’t see anything in the T&T and TJ but there were lots of photos of smiling Lords and Grahams).

Other highlights of the report include:

  • Federal transfers to have-not provinces are acting as a welfare trap for them and limiting the economic potential of richer provinces — and the country as a whole.
  • The Institute for Competitiveness and Prosperity says the federal government should offer not transfers but tax relief to stimulate business investment in those regions to make them more productive.
  • Federal transfers do not promote Canada’s competitiveness and prosperity but simply annually transfer $1,400 per person from high-productivity uses to low-productivity uses, lowering Canada’s absolute level of productivity.
  • The institute’s report acknowledges that transfers, such as equalization payments and Employment Insurance, raise the disposable income in have-not provinces, but says they do not boost growth or productivity in those economies.
  • Private sector per-capita investment in machinery, equipment and software is 25% lower in have-not provinces than the have provinces — unchanged from 20 years ago.
  • Another important part of the fiscal federalism problem is EI, which accounts for nearly a quarter of the $23-billion that flows out of Ontario. It calls for EI to be operated as a real insurance program, with higher premiums for frequent users and the establishment of an explicit interprovincial transfer program, so that any transfer of funds to the have-not regions is visible and accounted for.

Now, please recall that just last week the Conservative Premier of New Brunswick was strenously calling for more Equalization.

The New Brunswick government gets its revenue from basically two sources: taxation of New Brunswickers (individuals and companies) and Equalization from Ottawa. Premier Lord is going across Canada touting his small business tax cuts (reducing the revenue from NB taxation) and asking for more Equalization (increasing the revenue from other Canadians’ taxes). Simultaneously, there is a systematic effort in Ontario at the think tank and political level to decrease the amount of Equalization flowing to have not provinces.

What is going on here?