The fiscal imbalance myth refuses to die

Québec 2007 - Déséquilibre fiscal

Five years ago, with the Parti Québécois in power, the latest chapter of an old tome was written in Quebec.
The old tome, a favourite of many Quebec governments, was about how Ottawa had too much money and power compared to Quebec. The new chapter was called the "fiscal imbalance."
The name grew from a study called the Commission on the Fiscal Imbalance that found - lo and behold - a "fiscal imbalance" between Ottawa and Quebec (and the other provinces) The PQ government appointed Yves Séguin to head the commission. He later became the first finance minister in Premier Jean Charest's Liberal government, from which perch he continued to preach about the "fiscal imbalance."
The Séguin commission reported the discovery of a "fiscal imbalance" on March 8, 2002. The problem of the "fiscal imbalance," Mr. Séguin declared, would be solved if Ottawa eliminated transfers to the provinces for health and education, and instead allowed provinces to keep all the money from the goods and services tax.
Such a change would give the provinces $26-billion instead of $18-billion - for a net gain of $8-billion. Do that, the Séguin group said, and the "fiscal imbalance" would disappear.
So what happened? In 2002-03, the fiscal year of Mr. Séguin's discovery of a "fiscal imbalance," Ottawa was transferring $19.1-billion to the provinces. In 2006-07, this fiscal year, Ottawa is transferring $29.8-billion to the provinces. Next fiscal year, it will rise to $31.3-billion.
In other words, Ottawa is transferring more money this year - about $2-billion more. Next year, the transfers will be about $5-billion more. Even assuming inflation, Ottawa's transfers more than eliminate the "fiscal imbalance" as defined by Mr. Séguin. Moreover, the biggest part of the transfer - the Canada Health Transfer - is growing at 6 per cent a year for a decade. Six per cent! Equalization, another program that isn't counted as a transfer, is growing at 3 per cent a year for a decade, more than the anticipated inflation rate.
Objectively speaking, Ottawa has driven a stake through the heart of the argument, as defined by Mr. Séguin and repeated ad nauseam by Quebec's political class.
As we know, however, myths do not die, and the existence of a "fiscal imbalance" has become a myth in Quebec. Myths do not fade away like old soldiers. They have a life of their own. They are propagated widely, believed almost universally and uncritically, drive political actors, and cannot apparently be dislodged from the minds of the news media and general public.
Such is the "fiscal imbalance" myth. Its reality was always a highly contestable proposition, but it lives on. Worse, the myth drives policy.
Prime Minister Stephen Harper, searching for votes in Quebec before the last election, pledged to solve this problem. Mr. Harper, an economist and an intelligent man who must understand reality, has been wrestling with that promise.
Mr. Harper cannot let the promise go because it was a promise, although he's broken a few of those already. He's obviously reckoned that combatting a myth would take too much political capital, and likely prove a losing struggle, given the myth's durability in Quebec.
He did rename the problem the "fiscal balance," and hinted through his Finance Minister at ways to solve the problem other than handing over money. (Ottawa has cut taxes hugely. The provinces have enormous taxing powers. Why not raise taxes?) But apparently Mr. Harper has decided that to help party fortunes, and Mr. Charest's re-election, he must do something to solve a non-existent problem.
Mr. Harper's government is likely - as predicted by observers long ago - to buy his way out of the box. The government will increase equalization payments that will please Quebec (and other receiving provinces), hand out money on a per capita basis for postsecondary education that will please Ontario (a bit) and invest in infrastructure to make all provinces happy.
Quebec can then go on spending $1,500 more per capita than Ontario - and although much poorer, just about the same per capita as Alberta - without having to raise taxes even higher or cut spending.
That's the real problem for Quebec, not the "fiscal imbalance." And Mr. Harper will apparently solve it.

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