It's The Economy, Stupid

Lots of chatter over the federal government plan to move health transfer payment increases to the rate of overall growth.  Most of the pundits – looking back at history – are saying the provinces are looking a gift horse in the mouth.  Under Cretien, transfer payments were cut – now we gripe about a minimum of 3 percent growth?

However, the landscape has changed.   The underlying main cost driver of health care – boomers – were not a factor in the early 1990s.  They are now.  They are moving full force into the years they will need health care and they will not stand for a weakening of the system (and they will fight tooth and nail against any effort to means test health care).

The other thing that is somewhat worrisome is the feds posture towards the provinces during a time of structural change in the economic base of the country.  When Ontario was in an immediate crisis – Ottawa came in like the Knights of the Roundtable with billion dollar bailouts, a new ACOA in southern Ontario, etc. but the slow burn – they are signalling less interest in doing anything.

I know that Harper railed against ‘side deals’ with provinces while in opposition but I think he will have to revisit that idea.  Each province has different issues – weaknesses – challenges – opportunities – and a passive and disinterested federal government is not the right posture now.  The vision of the federal government doling out per capita cash like an ATM – is not the best way to strengthen the federation.

I’m a ‘states rights’ kind of guy – because of the big differences in regional economies.  Quebec is in many ways fundamentally different than Alberta.  But there are national issues – health care is one of them.  We want a national system that is more or less robust – more or less equivalent, etc.

Hold your nose, but equalization is also one of those national issues.    Thank the great Budda Stephen Harper didn’t make good on his promise to take non-renewable resource revenue out of the equalization formula.  Every province east of Manitoba would have been hit hard by that (except NL).

Other countries go to war over the equitable sharing of natural resource revenue (think Sudan, Iraq) – in Canada we have equalization.

I’m not the great champion of equalization – as I have said many times I think it has been a hindrance to long term economic growth and prosperity in the Maritimes – I think it should be viewed as a transitionary program as governments work to renew their economic base – but I don’t seem much wisdom in cracking down on it now – when we are in the midst of this new economic reality.

We are already seeing the impacts.  The feds cut their portion of the HST and Nova Scotia feels it has to take those two points.

The ‘have nots’ will have only so much wiggle room on the tax revenue side and on the expense management side.  If the feds through action or inaction foster even deeper gaps between rich and poor provinces – it will not end well.

Of course as has been pointed out a million times in the past few days, Ontario is now in the have not club.  That changes everything.  Over 70 percent of the population – of the voters – are in have not provinces.  Eventually Ontario will wake up to this fact and then the sparks will fly.  We are not talking NEP again but you can bet the cream skimming will continue.

Look for equalization negotiations to pick up in 2012 before the 2014 deadline.