Growing equalization payments to Ontario threaten country: expert

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By Lee Greenberg TORONTO — In just three years, Ontario has become the second-largest recipient of equalization payments in the country, with $2.2-billion set to flow into its “have-not” coffers this year.
Only Quebec, which takes in $7.8-billion in such payments, receives more.
More ominously, Ontario’s burgeoning take threatens to destabilize Confederation, says one of the country’s leading academics, by creating problems for Quebec, Manitoba and the Atlantic provinces.
Tom Courchene, an economist at Queen’s University and a senior scholar at the Institute of Research on Public Policy says those other have-not provinces will find themselves increasingly squeezed out of a fixed pot of equalization money as Ontario takes a bigger share of the pie.
Federal equalization payments to Ontario have risen 534% in the two years since the province received its first payment. The program has been capped at Canada’s GDP growth since 2009.
Courchene says, that as a result, a “crowding out” effect will make flaws in the oft-criticized federal program harder to ignore.
“The poorer Ontario is, the less other provinces are going to get,” he says. “It’s a big issue and it’s going to get bigger.”
Matthew Mendelsohn, director of the Mowat Centre for Policy Innovation, says Ontario’s growing equalization take will likely cause tension between recipient provinces and the federal government.
“The growth cap has certainly not been happily received by many provinces,” he says. “They’re pushing for change here. And as Ontario’s take grows, that may put even more pressure on other provinces, who may escalate their argument with the federal government, that the federal government should stop the artificial (limit on) growth of equalization.”
Ontario’s diminishing status is partially a result of the demise of its manufacturing industry, says Courchene. The decline is also a relative one, however.
Compared to the soaring economies in B.C., Alberta, Saskatchewan and Newfoundland, all resource-rich provinces whose oil and gas are fuelling growth in India and China — Ontario is looking increasingly impoverished.
“(Equalization) really isn’t a reflection of a province’s underlying economic strength,” says Mendelsohn. “It’s a reflection of whether they are dominantly a natural resource, carbon petro-economy or not . . . .That’s what’s driving the equalization program right now. It makes sense now to think of oil provinces and non-oil and gas provinces rather than poor provinces and rich provinces.”
The resource boom in those petro economies has had a double effect on Ontario, having sent the Canadian dollar soaring by roughly 40% since 2004.
The higher dollar has in turn clobbered Ontario’s struggling manufacturing sector, which has hemorrhaged 290,000 full-time jobs over the past decade.
In economic theory, that scenario is known as “Dutch disease”, so coined by the Economist in 1977 after manufacturing in the Netherlands was decimated by the discovery of a large natural gas field.
“We’re just too small an economy to try to have one of the largest resource operations in the world at the same time as trying to have a world class manufacturing sector,” says Courchene, one of the most prolific and well-respected scholars in Canada.
The Kingston-based academic suggests implementing a fixed exchange rate with the U.S.
“We need to be part of a larger currency so when oil prices rise, we stay with the U.S. dollar, we don’t go up by 20-30% and destroy manufacturing.”
Meanwhile, Ontario continues to struggle even after its equalization top up, with lower levels of public services than many other provinces.
A report by a Winnipeg-based think tank in 2010 stated Ontario had fewer public servants, nurses, doctors, teachers, day-care spots and long-term care beds than in most other provinces.
That runs counter to the objectives of equalization, introduced in 1957 as a means to ensure comparable public services in all 10 provinces.
It costs Ontario roughly 10% more, on average, to provide a “bundle” of public services — one doctor, one nurse, one social worker, a judge and a police officer, for example — than it does in other have-not provinces, says Courchene.
While federal MPs from traditional have-not provinces have long fought for greater funding for their home turf, Ontario MPs have typically considered themselves federal first.
In negotiating a range of federal allocations for such things as immigration settlement, training funds, infrastructure and social housing, Ontario has had to settle for inferior agreements in recent years.
“There’s still a perception out there that Ontario is the fat cat,” says Courchene. “It’s all part of a pattern where everybody assumes Ontario is big enough to look after itself. The answer is increasingly it isn’t. It’s not able to provide the level of public services that other provinces can.”
Although Ontario was eligible for payments for five years from 1977 to 1981, federal politicians at the time balked at sending money to the country’s most populous province. Ontario received its federal transfer, $347-million, in 2009-10.
In 2010, equalization jumped to $972-million. This year it will total $2.2-billion.
Ottawa Citizen

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