It’s time for Ottawa to rethink how it distributes money to the provinces

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One of the least appreciated aspects of recent federal budgets is how they will exacerbate already growing disparities in regional wealth. As a result, gaps in the quality of public services between the rich provinces and their poorer cousins risk widening dramatically in coming years.

In theory, this would be a violation of the Canadian Constitution, which commits the federal government to ensuring " provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation." In reality, it's already happening.

As Ottawa moves to cap health and equalization transfers to the provinces – and distribute health transfers on a strictly per capita basis – have-not provinces are finding it increasingly difficult to maintain services at current levels. Atlantic Canadians and Quebeckers already pay higher taxes than other Canadians, so their governments cannot raise them further without jeopardizing their economies. And Ontario has also joined the club of equalization recipients, drawing more money each year and reducing the amount other provinces get.

In a new analysis of the March federal budget, Queen's University professor Tom Courchene warns that the "distribution of money and power in the federation not only is untenable, but is compromising our competitive future in the Information Age."

Writing in the latest issue of Policy Options, Prof. Courchene notes that, even after equalization payments are taken into account, the fiscal capacity (in essence, the tax base) ranges from an average of $7,100 per capita in the have-not provinces, including Ontario, to $12,700 in Alberta.

"Given these differentials, it should hardly be surprising that richer provinces have moved in the direction of becoming tax havens or providers of superior public goods and services," he notes.

Prof. Courchene offers two potential remedies to the wealth gap, one of which is especially unlikely to fly with the wealthiest provinces – Alberta, Saskatchewan, Newfoundland and British Columbia.

His first and least controversial idea would see Ottawa launch a national pharmacare program, assuming the burden of paying for prescription drugs for seniors and low-income earners. The drug bill for is particularly hard on the Atlantic provinces, which have a higher proportion of seniors. And all provinces have been struggling to rein in drug costs, in part by collectively negotiating price discounts with suppliers. If Ottawa assumes the cost of drugs directly, the provinces would have more for other health-care services.

"Since Ottawa holds the constitutional power over drug patents and generics, assuming control of pharmacare would ensure it had to live with its own decisions on patents and generics," Prof. Courchene adds.

In a more provocative proposal, Prof. Courchene also suggests that Ottawa should claw back health and social transfers from the richer provinces if their fiscal capacity exceeds 115 per cent of the national average. That money would then be redistributed among the provinces with per capita revenues below the 115 per cent threshold.

The latter idea is unlikely to get very far. It would be rejected by the Western provinces, which fought hard to get the Harper government to distribute health transfers on a strictly per capita basis in the first place. Nor are the Liberals and New Democrats likely to risk alienating voters in Western Canada by embracing the idea.

But Prof. Courchene's analysis does underscore the new reality of an increasingly unequal Canada, a problem that a future federal government will eventually have to address.

Konrad Yakabuski writes about public policy for The Globe and Mail.