Ottawa's shift leaves Ontario with $640-million less in federal transfers

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After years of stepping in to prevent provinces from receiving lower transfers from Ottawa, the Conservative government has quietly shelved the practice – leaving Ontario with a $640-million cut.

Finance Canada has invoked a policy over the past four years called "total transfer protection" as a temporary move to help provinces and territories "in transitioning through current economic challenges."

This meant that if the equalization formula – combined with health and social transfers – produced a total reduction in transfers for a province, Ottawa would step in to cover the loss.

The policy has paid out more than $2.2-billion to seven provinces, including the four Atlantic provinces, Quebec, Manitoba and Saskatchewan. The coming year would have been the first in which Ontario qualified.

For the first time since the transfer protection policy started, only one province was set to see reduced transfers next year. But that province, Ontario, learned this week that Ottawa won't cover the projected drop from $19.8-billion to $19.2-billion.

Ending the program is a political decision by Ottawa that will provide some help to the Conservative bottom line, while forcing Ontario's minority Liberal government to find the difference ahead of a budget that has the potential of triggering a provincial election.

"I think that the federal government is far more interested in balancing its budget than in the consequences that Ontario is experiencing," said Matthew Mendelsohn, the director of the Mowat Centre and a former deputy minister of intergovernmental affairs with the Ontario government. "I think if the consequences were being felt in another province, the federal government – based on their history – would do something about it."

Total transfer protection was relatively inexpensive this year, with $49-million going to New Brunswick and $7-million going to Manitoba. But in recent years, it has been a significant federal expense.

In 2012-13, Ottawa provided transfer protection of $680-million to Nova Scotia, New Brunswick, Manitoba and Quebec. In the 2011-12, Ottawa sent a total of $952-million to Nova Scotia, New Brunswick, Manitoba and Quebec.

And in 2010-11, the transfer protection payments totalled $525-million and were given to Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Manitoba and Saskatchewan.

The program started quietly in 2010-11, but evidence of its existence is largely limited to references in footnotes to Finance Canada charts. There was also no official announcement from Finance Canada ending the program, but spokesperson Stephanie Rubec confirmed Tuesday that it is now over.

"This temporary measure was extended on a one-year basis for each of the three subsequent fiscal years, but was always a temporary measure that would be ended," she said in a statement.

Ending the total transfer protection program partly explains why Ontario will receive lower transfers next year. The reason why Ontario is facing a loss in the first place is because equalization is based on a three-year average of economic growth and the Ontario economy has strengthened since the recession, leading to lower equalization payments.

Ontario became an equalization-receiving province in 2009-10, receiving $347-million that year. Equalization payments to Ontario grew to a peak of $3.3-billion in 2012-13 and are projected to be $2-billion in 2014-15.

Another point of concern for Ontario is that Ottawa has moved to a per capita formula for calculating the Canada Health Transfer. The effect is that Alberta receives more for health, but its gains are made up by smaller increases to other provinces.

Ontario Finance Minister Charles Sousa first learned of the lower transfers Sunday night in Ottawa during a dinner meeting of federal, provincial and territorial finance ministers.

"I'm shocked at the sudden change of events, which I see as a complete assault on the province," he said in an interview Tuesday, adding that he made his anger known to federal Finance Minister Jim Flaherty and Minister of State for Finance Kevin Sorenson. "I said 'this is a kick in the teeth to Ontario. You've just given us a huge blow.' "

Mr. Sousa said Ontario is being "punished for doing a good job" – seeing a decrease in equalization payments because of its strengthening economy.

Ontario Progressive Conservative finance critic Vic Fedeli was nonplussed by the federal government ending transfer protection, arguing that the province's growth can offset its decrease in equalization.

"Our corporate tax base has gone up eight per cent since the 2009 recession, and that's a healthy rebound of revenues," he said.

Wes Sheridan, the finance minister for PEI, said Mr. Sousa is right to be surprised that Ontario would not receive transfer protection.

"There had never been a conversation about when [transfer protection] would end or keep going," he said. "It's tough to get that kind of news. We're all battling to try and get back to balance and I feel for him."