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Now it’s a have-not, Ontario can stop moaning

McGuintyites shouldn’t be demanding cash, they should be demanding the feds cut taxes


 

Dalton McGuinty

Let’s get one thing straight right from the start: Ontario is in no material sense a “have-not” province. If the province is now on the equalization dole for the first time in Canadian history, it is not because it has grown poor—Ontario’s median family income, at more than $66,000 in 2006, was second only to Alberta’s—but because other provinces have grown rich.

Likewise, if a couple of the former “have-not” provinces now find themselves among the “haves”—Newfoundland and Saskatchewan, joining British Columbia and Alberta—it is not because of any particularly Herculean effort on their part, but because of the sudden and spectacular rise in the price of oil in recent years.

Still, it does rather stand things on their heads, doesn’t it? I don’t mean in the sense that Newfoundland is now paying into a program that Ontario is drawing out of. I mean that both provinces have abruptly been deprived of any basis for their enduring grudges against the feds, the care and feeding of which has been the particular passion of their respective premiers.

Can it have been only last year that the country was covering its ears at the caterwauling out of St. John’s over the alleged iniquities in the new equalization formula—you know, the one that would have kept Newfoundland poor for a hundred years? It would have done nothing of the kind, of course: it would merely have capped the province’s equalization payments once its per capita revenues equalled Ontario’s, and then only if the province opted in to the new formula.

But never mind—it’s all beside the point now. Newfoundland’s revenues have ballooned to such an extent that it has floated free of the equalization program altogether, and all of the premier’s tantrums, it is now clear, were so much wasted breath.

As for Ontario, which had been working itself into its own snit at the iniquities of that same program—not because it was too stingy, but because it was not nearly stingy enough—that, too, is last year’s news. Now that it is in receipt of equalization payments, the province is suddenly much less interested in cutting equalization—or would be, if it could get over its confusion at finding itself in its current predicament, the very possibility of which it had refused to contemplate until about yesterday.

For now, it is all the province can do to muster a grumpy “we’re only paying ourselves, anyway” even as it is complaining at not being paid enough. The argument, intended to suggest a certain Upper Canadian indignance at having to submit to the program’s absurdities, holds no water whatsoever. Yes, the money that Ontario’s government draws out of equalization comes in part from the money that Ontarians (not their government) pay into it. But that’s true of every recipient province.

Indeed, it’s true of every federal transfer. It’s not some quirk of equalization—it’s in the nature of fiscal federalism. The money the feds pay the provinces comes, not from some place called “Ottawa,” as the provinces would like everyone to believe, but from their own taxpayers. The McGuinty government’s rage is only at seeing the con momentarily exposed to public view.

If Ontario’s overall complaint of ill treatment, the so-called “fiscal gap,” had any basis in reality, the McGuintyites should not be demanding more money for health care, or immigration, or employment insurance to make up the difference, since all of that money comes, in part, from Ontarians. They should be demanding the feds cut taxes. But as it doesn’t, they don’t: it’s just another wheeze to extort more cash from the feds.

I suspect we will hear less about the fiscal gap in future, since the actual explanation for it—not federal mistreatment, but the higher-than-average incomes that Ontarians enjoy—may soon cease to apply. That is, what has been a relative decline until now may turn into an absolute decline. That ought to, but probably won’t, occasion a little soul-searching on the part of the McGuinty government.

It’s all very well to talk about high oil prices, or a high dollar, or a slowing U.S. economy for the role they have played in Ontario’s recent woes. But in fact the province’s economy has been performing sluggishly for the better part of a decade: Ontario’s per capita GDP is virtually unchanged, in inflation-adjusted terms, from what it was in 2001.

That’s not why the province now finds itself in deficit: per capita revenues, after inflation, are 15 per cent higher than they were when McGuinty took office. But without a rising economy to finance its extravagant spending habits—a nearly 40 per cent increase in just four years—the province has had to squeeze every available revenue source dry, first raising personal and corporate taxes by billions of dollars and, when even that proved insufficient, demanding that Ottawa fill the gap. Which it has: you’d never know it from the McGuinty government’s rhetoric, but federal transfers to Ontario have more than tripled in the last decade, from $4.8 billion in fiscal 1999 to nearly $17 billion this year.

Surely, at some point, someone in the province will notice that, for all of McGuinty’s tax increases, the province’s own-source revenues are no higher now, at 13.3 per cent of GDP, than they were under the tax-cutting Mike Harris, while growth is markedly slower. Perhaps it will even occur to them to suggest that, if McGuinty’s policies are not the cause of the province’s economic troubles, they haven’t exactly helped.


 

Now it’s a have-not, Ontario can stop moaning

  1. Andrew suggests, I think, that the feds should slash taxes, leaving room for provincial governments to take responsibility before their own voters for raising and spending the $ required for their own programs.

    Amen. But would Canada recognize itself if ever that blessed event were to happen?

  2. And how come I found this only because I noticed AC’s comment on the comment list of this new disorienting maze of a web page (“sucks!” is the most charitable descriptor that comes to mind)? How come this entire post is hidden from the Blog Central list? Do Andrew and I need to alternate dummy comments every 15 minutes or so in order for comment-watchers to even hear that this tree fell in the forest?

  3. And how many other evening posts have been hidden from view on the blog Central page?

  4. And why did the convenient list of individual bloggers disappear from view?

  5. And why am I asking so many questions?

  6. Ah, thanks, PG, I needed that.

  7. We’re working through everything. Everything will be back to normal soon.

  8. Please do your research Andrew Coyne! What percentage of Ontarians live in Toronto? And what is the median income for people who live in Toronto? It is 10K less than outside Toronto. How much, on average, did Torontians lose on their homes recently? 74K. Now, Andrew Coyne, I think this Maclean’s blog has bigger problems than a new interface! How loud does Mayor Millar complain, can you hear it? Bus runs cut on the TTC. TTC employees pay for parking at work and now commuters also at the ends of the subway lines. My landlord pays $3.10 a bag for garbage collection, long before the property owners of Toronto were made aware of what they are going to have to pay out of pocket to cart away Galen Weston’s garbage. The biggest city of Ontario, the biggest city of Canada, tells the story of how well Ontarians are doing.

    Research, people, research. The blogging is to generate interest and discussion around the articles that you are currently researching. Reach out, Andrew, outward. Not to your buddies in the Albany club, ok? Your Maclean’s blog advertised your attendance at a liveblog of the American election. Your collegue Paul Wells ‘twitter blogged’ from his seat in a live audience. Why didn’t you? Whats the matter, David Frum to busy to share crib notes with you?

  9. Coyne:

    I think you missed the point with Ontario’s argument for fiscal fairness. The issue never seemed to be so much with equalization itself, but all the hidden equalization that goes on with other federal transfers. Why should Ontario receive less per capita for training, immigrant settlement, infrastructure, etc. etc.? Equalization is a debate Canada can and should have. But, at the very least, Ontario shouldn’t be short-changed in federal programs that do not have equalization as their explicit goal.

    You’re also being deliberately obtuse with the argument that all provinces pay into the federal government, whether they receive equalization or not. Ontario taxpayers pay more into the federal government than they receive back in services, transfers to the provincial government, and our proportion of national costs. So, there is no transfer of wealth from other regions to Ontario going on here–this is an important distinction when you have swaggering sneers from St. Johns about subsidizing the welfare bums in Ontario.

    I won’t argue that Ontario could certainly improve its economic situation by reducing the size of the federal government (though a lot of that money is spent in Ottawa, Ontario) and by improving the way it taxes its people. Harmonizing the PST with the GST should probably be the first step, followed by reducing the marginal effective rate of corporate taxation.

  10. This layout demeans the both of us.

  11. Since I am still not sure how anyone would have noticed this post, I will claim some credit for my earlier commentorrhea bringing notice to this topic. And maybe some of that credit is deserved, even.

    As to the “stop moaning.” Surely AC you realize that equalization is the perfect opportunity for universal moaning! The feeder provinces for moaning about all the wealth “stolen” from a successful economy to prop up Canada’s loser class of provinces. The leecher provinces for moaning that some sort of external circumstance (rather than their own socialist-leaning insanity) is responsible for their being hard done by, and the heartless bastards in Ottawa aren’t helping enough. There’s yer federal-provincial relations in a nutshell right there, I tells ya. Hence my earlier question: would Canada recognize itself if this absurd monument to fiscal inefficiency were to be mercifully scrapped?

  12. I have to say, MYL, that I incline to your view — for patriotic as opposed to ideological reasons. I would hate to see my comrades in poor provinces suffer, but at the same time I do think that equalisation is to blame for 90% of our national unity problem (not just vis-à-vis Quebec). Perhaps a compromise: somebody once and for all lays down the law about how equalisation will work from now until eternity and we never depart from that forumla, ever. OR — even better — Ottawa just takes on the management of those programs currently run by the provinces but taxed for by Ottawa. Would only happen after an asteroid collision, but even so it would be glorious.

    Could some knowledgeable person tell me if equalisation programs exist in other federated countries, e.g. Australia and Germany?

  13. Andrew said, “You’re also being deliberately obtuse with the argument that all provinces pay into the federal government, whether they receive equalization or not. Ontario taxpayers pay more into the federal government than they receive back in services, transfers to the provincial government, and our proportion of national costs. ”

    This argument holds no water.

    I don’t know why it’s so hard for everyone to accept but clearly everyone in Canada, from BC to NL, is taxed at the same federal tax rates. Those rates are based on their individual income, not on whether or not they live in Ontario.

    It’s those taxes that fund equalization, health care transfers and many other federal programs. My personal income is well over 60K per year and I live in NL. Therefore I pay as much towards these programs as a comparible person in Ontario so get over it.

    As for Ontario not getting back all the federal money it’s taxpayers pay to Ottawa get over that one as well. It’s called a federal tax and is meant to be used for national purposes. If every province got back the same amount its people paid in federal taxes there would be no need for a federal tax system at all and there would be no money for a federal government to even exist.

    The logic of some people never fails to amaze me.

  14. George, you conveniently cut off the last sentence of that paragraph which completed the thought. There is no regional transfer of wealth from the rest of Canada to Ontario via the federal government, as some people incorrectly conclude is the case now that Ontario will be receiving equalization. And this distinction is significant when comparing to true have-nots like Quebec, that are net recipients of wealth from elsewhere.

  15. Your all looking at this from the wrong angle.
    Why transfer any cash?

    Maybe we could start looking at where the $s are spent and start elimenating superfluous government programs so we could all live within our means.
    Gone is the senate
    Gone is the governer general.
    Gone is the national art gallery.
    Gone is the national museum
    Gone is the cbc.
    Gone are the national parks.
    Gone are sports subsities.
    Gone are arts susidies.
    If it doesn’t pay for itself-gone it is.
    Gone is health care.
    Gone is education.
    Gone are hiways.
    Gone are airports.
    In that way Gone are transfer payments.
    At least the first 8 are not that important.
    Wow–just think of it. If its all gone—
    Gone is government.
    LOL

  16. Andrew [not Coyne], what a wonderfully shallow argument. Why should Ontario get less per capita than other provinces in provincial transfers? The aim of equalization, both the specific policy and the broad commitment, is that Canadians in different provinces should get comparable levels of service, even if their provinces are poor. Ontario tends to get “short-changed” in your view (though, considering oil and gas is taxed quite highly, and that Ontario is no long a wealthier province they increasingly put in less than they get in services) because there are economies of scale in most aspects of government spending. You can’t just give X dollars per head to the territories or PEI and expect them to be able to do what Ontario can.

    So why not just cut taxes and ask the provinces to raise taxes? Well there is a reason we have transfers in the first place, Andrew [Coyne]: the federal government can collect taxes more efficiently than the provinces can. At the same time, because they deal with smaller electorates, the provinces are more effective at spending that money. Moreover, such an approach is rich province federalism – the net beneficiaries are those that pay the most in taxes per capita, ie. the rich provinces. Essentially it means equalization at one end, but another sort of redistribution at the other.

    So why have equalization payments, transfers to the provinces, and so on in the first place?
    Obviously the national unity issue is an important justification for such policies. That argument is pretty cut and dried, however, so I will save space and not go into it. I actually think there is a strong economic justification for redistributive federalism as well:

    One of the key advantages of federalism is policy innovation. Where you have many different polities, with different makeups, you will get different approaches to all sorts of public policy problems. However, because we are all Canadian, our public policy problems are similar enough that the approaches of one province can be adopted by others when it is clear that particular policies work. Quebec’s childcare program provided a model for the federal Liberals. Saskatchewan’s universal healthcare model provided the basis for the federal approach. BC’s electoral reform approach was adopted in Ontario, and so on.

    Secondly, diversity in public policy is extremely valuable in an innovative world. If you look through history, the institutions that enabled one country or another to lead in innovation vary in the extreme. Britain came to lead in textiles and the early industrial revolution because of access to goal and laissez-faire economics. Germany came to lead in chemical dye because it had weak patent laws (initially), and a university system similar to the current American model. At the same time there are some things that always help with innovation – R&D funding, good government, wise macroeconomic policies, etc. which can’t happen in middle-of-nowhere backwaters. New industries tend to cluster in particular areas (eg. silicon valley for IT, or Ontario’s golden horseshoe for cars). Doesn’t it make sense to try to have many economically viable regions within Canada, instead of simply a core and an impoverished periphery?

    Thirdly, and finally, economic diversity provides Canada with a hedge against recessions. Individual regions may suffer (and they will be helped by the rest of Canada) in one time or another, but the country as a whole will suffer less if it has a more diversified portfolio so to speak.

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