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David Dodge at a meeting of G20 finance ministers and central bankers in Mexico City: 'We seem to have lost trust in each other.'Tomas Bravo/Reuters

Former Bank of Canada governor David Dodge is calling on Ottawa to put Canadian tax dollars behind a west-to-east oil pipeline as a way of easing the country's growing, energy-fuelled, economic imbalances.

Mr. Dodge said the Conservative government needs to move beyond its "hands-off" approach on the issue and approve direct federal incentives, such as loan guarantees, targeted tax breaks or public-private partnerships.

There is already some private-sector activity aimed at reversing the direction of existing pipelines to move Western crude east. Western Canadian producers are eager to access world prices for their crude. Meanwhile, many Eastern consumers are already paying those higher prices on imported fuel, while losing out on current low prices from surplus North American production.

But Mr. Dodge said direct government efforts to grow struggling Eastern Canadian economies are the best way to ease a much bigger problem: growing tensions over equalization transfers that are poised to become less and less effective by the end of the decade.

"By and large, the philosophy at the moment is a pure hands-off philosophy, i.e. 'Let today's market and today's relative prices determine what happens,' with relatively little thought to the future and relatively little thought about, if you will, leaning against the wind," said Mr. Dodge.

The former governor, who is now a senior adviser with the law firm Bennett Jones LLP, spoke in advance of a Wednesday evening speech to the Public Policy Forum at Carleton University on the topic of equalization and natural resources revenue.

Mr. Dodge argues there is a role for government in stabilizing a national economy that is becoming imbalanced.

"When you have the big tilt at the moment as we do, in what I call the resource super cycle, then you have to think very hard about tilting the playing field back a little bit toward the other sectors and that would be tilting it back towards the lower-income provinces," he said.

Mr. Dodge retired from the Bank of Canada in 2008 after seven years as governor. Prior to that, he was a federal deputy minister at Health Canada from 1998 to 2001 and Finance Canada from 1992 to 1997.

The issue of how to address natural-resources revenue in Canada's equalization system has dogged federal governments of all stripes for decades. Prime Minister Stephen Harper faced this political headache early on, when then-Newfoundland and Labrador premier Danny Williams went on a political rampage over Ottawa's 2007 changes to how natural resources are counted in equalization.

Newfoundland, with its growing natural-resources revenues, is now a "have" province in the federal system, which aims to ensure that all Canadians have access to similar levels of provincial government services at similar levels of taxation from coast to coast.

Equalization is set to cost Ottawa $15.4-billion this year, divided across six provinces in the following way: Quebec, $7.4-billion; Ontario, $3.3-billion; Manitoba, $1.7-billion; New Brunswick, $1.5-billion; Nova Scotia, $1.3-billion; and Prince Edward Island, $337-million.

Last December, Finance Minister Jim Flaherty announced that future growth in the overall budget for equalization would be capped at the rate of economic growth by tying it to the rise in nominal gross domestic product through to 2018-19.

But Mr. Dodge calculates that this cap on equalization at a time when some provinces are enjoying big gains in resource revenues means the disparity between provinces will worsen. Mr. Dodge pegs this gap at $2-billion in 2012 and $6-billion by 2020.

Mr. Dodge said the government could make changes to the formula by uncapping equalization or removing resource revenue from the formula, but that creates other challenges and political battles. That's why the former governor concludes that the best answer is to help the "have-not" provinces grow their economies so that they have the tax base to provide good social services.

In addition to promoting an expanded Eastern role in the energy sector, Mr. Dodge said Ottawa could also help equalization-receiving provinces by encouraging nuclear power refurbishment, "next-generation" manufacturing in the auto and aerospace sectors and military procurement.

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