Magazine article Policy Options

An Urgent Call to Reform Equalization: A Response to Dodge, Burn and Dion

Magazine article Policy Options

An Urgent Call to Reform Equalization: A Response to Dodge, Burn and Dion

Article excerpt

More federal spending will not fix regional inequalities. It's time for the have-not provinces to cut their public sectors.

L'accroissement des dépenses fédérales ne pourra combler les inégalités régionales. Il est donc temps pour les provinces moins nanties de réduire la taille de leur secteur public.

In their article in the August 2012 issue of Policy Options, David Dodge, Peter Burn and Richard Dion contributed fresh ideas and thinking to the national discussion on fiscal arrangements. It is clear, however, that more fundamental ideas, beyond those they suggested, must be considered. The global financial crisis has thrown into bold relief the problems of economies driven by excessive public sectors and elevated feelings of entitlement for support from others. Fifty years of very large regional subsidies have not improved the relative performance of most lagging jurisdictions and have, in fact, done great harm.

To many, the idea that federal regional subsidies, such as Equalization, could be a major cause of deficient performance by regions is counterintuitive. Many people assume that money would always be helpful in these regions or credit regional subsidies of all kinds with greater regional income equality.

There are insightful critics of the current arrangements, however. In Retreat from Growth, Fred McMahon describes the burdens caused by excessive politicization of the economy and examines the extent to which federal regional subsidies are negatively correlated to economic growth.

The lessons McMahon and others have drawn can be simply summarized. Economies that are primarily driven by the culture of government and its ecology of rules, regulations, top-down management and sometimes cronyism are less likely to perform well than those that emphasize markets, entrepreneurship and well-managed but minimally necessary regulation and government intervention.

McMahon's analysis is applied to the regional economy of Atlantic Canada. Nevertheless it also seems applicable to Manitoba and Quebec because of their dependence on transfers and the larger role of government in these jurisdictions, relative to the government role in Ontario and western Canada.

The attachment many Canadians have to Equalization and other regional subsidies is driven by a sense of historical grievance and entitlement. Moving away from policy based on grievance will clearly require shedding some very heavy baggage.

If one engages in a discussion on regional economics with Atlantic Canadians, the allegedly deleterious effects of Sir John A. Macdonald's National Policy immediately come to the fore and are used to justify various federal payments and subsidies coming to the region now. More than 70 years of globalization and tariffreductions, including the North America Free Trade Agreement, get passing attention, if any at all. There is still a deep sense of grievance, despite the passage of time and despite the extent to which globalization has altered all important trade relationships.

The arguments made by Quebec nationalists are also related to a sense of grievance. The underlying mantra for 50 years has been that nationalists want to be masters in their own house in economics, finance, language and culture, in order to avoid unwarranted intrusions on the life of Quebec from outside.

But no jurisdiction can be a full master of its fate. The world is flat, as Thomas Friedman reminds us, and everyone competes with everyone else in everything. No jurisdiction - not the United States, not China and not the European Union - is master of its own house on matters of finance, economics, trade and language.

Any analysis of the future of Equalization and other regional subsidies must consider whether they are fair. In order to consider fairness, it is necessary to first assess the incomes of all parties so that those with the least capacity can be identified. Second, it demands assessing need, so that populations that need help are singled out. …

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