It's a fact that it costs more to provide public services in Ontario than in Prince Edward Island or Quebec. In PEI, the average doctor made $236,000 in 2010, compared to $340,000 in Ontario. A primary-school teacher with 10 years experience earned about $57,000 in Quebec, but $71,000 in Ontario. Yet, Ottawa ignores these cost differentials when doling out equalization payments.
The result, concludes Queen's University's Tom Courchene, is that the current system of federal transfers is "too generous to those provinces that have traditionally received equalization" and leaves Ontario with "the lowest real purchasing power" of any provincial government. Based on the cost of public services, he thinks Ontario should be getting a whopping $8-billion more than the $3.2-billion it will collect in equalization payments this year.
This is just one of the bold conclusions Prof. Courchene makes in a new paper published by the Mowat Centre at the University of Toronto's School of Public Policy and Governance. He is one of a small group of experts in fiscal federalism, so it matters when he says "the existing distribution of money and power in the Canadian federation is increasingly untenable."
With resource revenues creating massive gaps in provincial wealth, Prof. Courchene warns that the richer provinces could become tax havens with vastly superior public services. Indeed, some might argue this is already happening. Ottawa's move to cap growth in equalization payments and transfers for health and social spending will enable it to balance its budget but make it near-impossible for poorer provinces to do so without slashing current services or investments in future-oriented infrastructure and education. This, Prof. Courchene points out, is "a disastrous economic strategy in an increasingly human capital and informatics era."
Prof. Courchene's suggestions for dealing with these "highly explosive issues" won't please Albertans or Quebeckers. One reaction is likely to be that Ontario made its bed by repeatedly signing overly generous public-sector union contracts. Other provinces will naturally resist footing the bill. Prof. Courchene doesn't address the origin of Ontario's higher costs, but insists that "reworking" federal transfers is critical to the survival of the Canadian economic union.
What's striking is how his view of the country differs from the portrait painted by Mark Carney in his final speech as governor of the Bank of Canada. The title of that May address was "Canada Works" and it described a virtuous circle in which Alberta's rising tide has "lifted all boats."
"Canada's monetary union has all the elements of an effective currency union: an integrated economy, fiscal federalism and flexible labour markets," Mr. Carney insisted. "… Canada does not need to repair. To keep Canada working, we need to build."
Prof. Courchene, by contrast, sees an economic union under nearly unbearable strain. And he lays part of the blame at the feet of Mr. Carney and his predecessors for allowing the Canadian dollar to overshoot, both on the way down in the late 1990s and on the way up a decade later. The 62-cent (U.S.) Canadian dollar of 2002 made labour cheap, but it was disastrous for productivity as firms put off investing in new equipment. As the currency hit $1.10 in 2008, our manufacturers had the worst of both worlds. They were suddenly unmodern and expensive.
Prof. Courchene reprises the idea of an Alberta sovereign wealth fund that would mitigate currency swings by investing oil royalties outside Canada, while preserving oil wealth for future generations. In addition to aligning equalization payments with the cost of services, Prof. Courchene proposes clawing back health transfers from richer provinces. Ottawa only recently started allocating such transfers on a per capita basis – ensuring that all provinces are treated equally – so Prof. Courchene's proposal would prove costly for Alberta and Newfoundland.
Yes, oil wealth has made Newfoundland the second-richest province in Canada, and yet employment insurance rules still treat unemployed Newfoundlanders more generously than unemployed Ontarians – and will continue to do so under Ottawa's controversial reforms. Prof. Courchene would go even further, stripping the "equalizing components out of national programs for citizens," such as EI, while leaving "the task of equalization to the equalization formula."
Of course, Prof. Courchene's proposals are unlikely to go anywhere. No federal leader wants to talk about regional wealth disparities. Tom Mulcair already got burned for trying. Is is any wonder Justin Trudeau only wants to talk about the middle class?