Canada’s Damaging Regional Subsidies

February 7, 2008



Canada’s Damaging Regional Subsidies



DAVID MACKINNON

Former Nova Scotia and Ontario Senior Public Servant and Critic of Regional Subsidies



Chairman: Catherine S. Swift

President, The Empire Club of Canada



Head Table Guests:



Jocelyn Badovinac: UE, MEd, DH, MMLJ, Honorary Director, The Empire Club of Canada

Linda Banh: Senior Student, Jarvis Collegiate Institute

Grant Kerr: Associate Pastor, St. Paul’s United Church, Brampton

Burton Kellock: Partner Emeritus, Toronto Office, Blake Cassels and Graydon LLP

Bill Fearn: Partner, Global Capital Partners, and Former Deputy Minister of Finance, Government of Newfoundland and Labrador

Tim Reid: Director, Business Development, ZED Financial Partners, and Director, The Empire Club of Canada

Charles Cirtwill: Acting President, Atlantic Institute for Market Studies

Peter Holle: President, Frontier Centre for Public Policy.



Introduction by Catherine Swift:



Over the years, we Canadians have defined ourselves in many different ways—not being Americans, having a publicly funded health-care system, being the Great White North—especially today, and so on. Years ago, Peter Gzowski had a contest on his radio show asking people to complete the phrase “As Canadian as…..” He got the usual entries such as “As Canadian as maple syrup, or the Rockies, etc. But the winning entry was “As Canadian as possible, under the circumstances.”



Something that truly does define us as Canadian is our complex system of regional transfers and equalization payments. The formulae for determining these payments is so complicated it is said only two people in Ottawa understand them, and often they disagree. And as we’ve seen over the past few years in particular, a number of provincial premiers have made a great deal of political hay by claiming there is a so-called fiscal gap and that Ottawa is not giving various provinces the funds they are due. Unfortunately, because these transfers are so complex, politicians can often claim whatever they want and be believed, despite the fact that their claims are often erroneous.



The system of regional transfers has been around for ages, but lately some problems are coming to a head. One of the main concerns is that Ontario, which as a perpetual “have” province, has transferred funds to most other provinces throughout the history of these programs. But Ontario is not in great shape at present. In fact, last year for the first time ever, average per-capita income in Ontario was less than the Canadian average. The looming question is how much longer can Ontarians be expected to send considerable funds to other provinces while it is struggling itself.



Our speaker today, David MacKinnon, will attempt to tackle this interesting but complex issue. David is a native of Prince Edward Island. He attained a BA in Economics from Dalhousie University and an MBA from York University. He was awarded a Centennial Fellowship by the Canadian Imperial Bank of Commerce and York University to study at York, Harvard and Oxford universities and the European Institute of Business Studies. He served as Director, Planning and Economics, and Executive Director, Development Strategy, in the Nova Scotia Department of Development from 1976 to 1981. He later served in several senior capacities in the Ontario Public Service, the Bank of Montreal, and as CEO of the Ontario Hospital Association from 1996 to 2002.



David is a public member of the Council of the Ontario College of Physicians and Surgeons, chairs its Finance Committee and is a member of its Executive, Complaints and Outreach committees. He is on the Board of West Park Healthcare Centre and the Canadian Standards Association and is a Senior Fellow of the Frontier Institute for Public Policy in Winnipeg and the Atlantic Institute for Market Studies in Halifax.



Please join me in welcoming David MacKinnon.



DAVID MACKINNON:



Thank you very much Catherine for that kind introduction.



Before I begin I would like to say that the speech I’m going to give I’ve had much help with and much of it has come from the Frontier Centre for Public Policy, the Atlantic Institute for Market Studies and of course the Ontario Chamber of Commerce which a few years ago took sponsorship of this subject in quite a significant way. I’m very grateful for their help and for the significant research that they’ve all done on this very difficult subject.



I should warn you that this in many ways is a difficult speech for me to give and in some ways it is going to be a difficult speech for you to hear. I will be criticizing the system, which goes to the heart of our federation and to which many people have emotional and personal attachment. I believe I can address it fairly and from a larger national interest because of my own background, which I think is unusual. I have lived and worked in Western Canada, Eastern Canada and in Ontario and my family has substantial roots in Alberta and Quebec and Saskatchewan. I think I’ve seen this from the perspective of all parts of Canada.



Today I’m going to advise you that Canada’s crazy quilt of regional subsidies is doing very serious harm to this province, as well as to the economic potential of the provinces at which it is aimed, which many of you may find surprising. I believe ultimately the system of regional subsidies has the potential to completely undermine the ability of Canada to compete in the global markets of the 21st century.



Before I get into that, I will briefly review what this system is. The regional subsidy system in Canada is very extensive and includes equalization, targeted programs and a very significant number of biases built into regular federal programs. There are three components to this. The principal recipient jurisdictions are Manitoba, Quebec and the Atlantic provinces.



The principal paying region, as Catherine has mentioned, is Ontario whose taxpayers each working day contribute tens of millions, somewhere between and 70 and 90 million each working day, to support programming elsewhere in Canada. I’d like you to think of that. This working force of perhaps eight million every single day has to generate somewhere between 70 and 90 million to support these programs in other jurisdictions. On a per-capita basis Alberta contributes even more.



So why is this system so damaging?



I’ll begin by talking about its impact on Ontario. Most Ontarians believe that government programs are less accessible in recipient jurisdictions than in this province and that we should help others for this reason and that is not so. Accessibility of government programs in recipient jurisdictions, even acknowledging demographic and geographical differences, is better than in Ontario and Alberta whose taxpayers pay so much of the freight. If you’ll excuse me, I’m going to use a few numbers to illustrate that point.



In 2005, Ontario had 2.8 hospital beds per 1,000, Alberta 3.3, Manitoba 3.8, and Newfoundland and Labrador 4.3. Newfoundland and Manitoba had 10.7 and 5.6 nurses per 1,000. Alberta had 8 and Ontario 7.1. I’d like you to think of the implications of the fact that the nursing work force in this province is approximately 70 per cent of the size relative to population of the nursing work force in the recipient provinces and way below the national average. For Ontario’s physicians and nurses, that figure has huge significance.



Average class size in elementary and secondary schools is 13.4 for Newfoundland, 14.9 for Manitoba, 16 for Ontario and 17 for Alberta.



Ontario has only half the number of judges in relation to population as Newfoundland and has by far the fewest in relation to population of all Canadian provinces. Total public-sector employment per 1,000 population in Ontario is 81, Alberta 83, Quebec 92, Newfoundland 105 and Manitoba 117. Manitoba’s public sector is nearly 50-per-cent larger in relation to its population than Ontario’s. Of course Manitoba is a major recipient of equalization.



Numbers don’t tell the story in human terms. The old and the very young in Ontario would find greater challenges accessing hospitals and teachers than most Canadians in other provinces. Human cost is reflected in very bad policy choices.



Why is it that Manitoba can subsidize electricity prices, even in the world that Al Gore describes, by $1.2 billion while it collects $1.8 billion in equalization? Did anybody in this room sign on for that kind of public policy? Or more to the point do you want to continue to pay for it because you are paying for a significant portion of it now?



The second thing most Ontarians believe about the system is that they are assisting economic growth in recipient regions and they are not.



Very briefly the tidal waves of funding from Alberta and Ontario taxpayers to recipient jurisdictions impairs economic growth. It doesn’t help it at all. It impairs it by forcing labour costs to national levels in economies that can’t support them, by funding excessive public services, and by forcing unsubsidized enterprises to compete with subsidized enterprises in ways that impair the performance of those that are not receiving subsidies. I should say that the scale of the gold-plated public services is truly breathtaking.



In Nova Scotia there are 32 hospitals and in P.E.I. eight, 40 hospitals supporting a population of 1 million. In the city of Vaughan, just above Toronto, there isn’t a single hospital for over 200,000 people.



There are 15 universities in Atlantic Canada and four complete provincial public services for a combined population of two million, significantly less than Toronto.



Another thing that most people feel about the system is that equalization is the principal means by which other parts of Canada are subsidized. In other words, there is no equalization outside equalization, and that also is not true. If one takes equalization entirely out of this, federal spending in Prince Edward Island per capita is about double the level of Ontario and federal spending is approximately 50-per-cent higher in all recipient provinces except Quebec and that’s taking equalization entirely out of this equation.



Many Ontarians also believe that equalization reflects the different needs of each province. Unfortunately again it does not. The cost drivers do not factor at all into the equalization system. The program focuses entirely on the revenue side of governments. To put this simply, all the factors that make delivery of programs in Ontario and possibly some other provinces more costly than elsewhere—emigrant support, huge urban areas, unemployment levels, demographics, high labour costs—are not recognized in the calculation of equalization entitlements.



Several observers agree, including the Atlantic Institute for Market Studies, that the per-capita funding needs of provincial programs in Ontario are at least 20-per-cent higher than they are in all the other provinces and the failure to account for that means that the entire analysis that I’ve just gone through seriously understates the severity of this problem and its impact on the people of Ontario.



Finally, most Ontarians believe that equalization at present levels is specifically required under the Canadian Constitution and is firmly grounded in law. It is not. While equalization is mentioned in the Constitution Act of 1982, legal scholars generally agree that it is too vague to have legal consequences or to require any particular level of equalization expenditures or other regional subsidies. I’d now like to turn to how we got into this mess and what Ontario’s legislators need to do to get out of it. Causes are to some extent self-inflicted. Ontario’s leaders—there are a few exceptions, Mr. McGuinty and Mr. Rae being two—have been operating in two vacuums on this question—a factual vacuum and a leadership vacuum.



The scale of the factual vacuum defies belief for a jurisdiction of this size. Ontario governments over the years have never shown any interest in the impact of this system on the recipients in recipient jurisdictions. These Ontario governments over many years did not identify the harm these subsidies do to others and that the money from Ontario taxpayers was being spent on gold-plated services, public services, that are not only beyond the Canadian standards but well beyond North American standards for those public services. Most Ontario citizens have never heard of the failure to consider the cost issues built into the system and to this day in Ontario there are no public studies of the impact of this system on growth, competitiveness, consumption, savings or investment in Ontario, none at all. So if you are a citizen trying to inform yourself on this you have got a real problem. If you believe that facts are the best place to start in solving any complex problem, then Ontarians have been seriously failed by their provincial governments over decades. The present government in its first term is a refreshing exception.



The leadership vacuum is more subtle. If you listen to Ontario’s political leaders in election debates and other similar forums, you will hear them harp back to a misty nostalgic era when Ontario in their view led the federation. Again I hate to be the bearer of bad news, but for most of the 1970s and early 1980s I had the opportunity to watch Ontario delegations at federal-provincial meetings from my vantage points in delegations from the federal government and two other provinces. My colleagues and I did not feel that Ontario was leading at all. We felt that it was simply enabling federal leaders to do whatever they wanted to do at any time. Ontario’s leaders quite willingly seemed to agree to the spending of whatever money from Ontario taxpayers that federal leaders thought necessary and they had no idea of the financial consequences of these decisions for Ontario at the time that they made them.



More seriously, the lack of Ontario leadership has led to a sense of entitlement by others that Ontario will find very, very difficult to manage. Other provinces feel so entitled that they make financial demands regardless of economic circumstances in this province and Catherine has referred to how fundamentally they have changed. If Ontario fell into recession today and its output declined, its citizens would still have to come up with nearly half the guaranteed annual increases for equalization in the coming years. This, I would submit, is an extremely dark shadow on Ontario’s future should our fortunes continue to change in ways that are unsatisfactory.



Demands from other provinces are also made in wildly inappropriate ways. Political blackmail has more easily been played in the last few years of federal minority governments. Three years ago Premier Williams came to this club and noted that Newfoundland came into Confederation with a government surplus, a surplus, and now faced major deficits with the clear implications that the relationship with Canada was the problem. Conveniently he didn’t mention that when Newfoundland entered Confederation it was under the supervision of the British government with disarray in its finances. The only reason it had surpluses was because Canada, then a foreign country, and the United States had spent the war years building large military bases on the island. The omission of these two facts is disingenuous.



We recently had equally outrageous comments from Saskatchewan. That province has been growing much faster than Ontario for a decade, but what did its former premier want and got into a big fight with the federal government to achieve? More equalization. Half of that equalization has come from the hard-pressed citizens of Ontario. The circumstances have changed, but it did not halt the premier of Saskatchewan from making these new financial demands known. Even more leadership problems are evident at the federal level and the first problem is ignorance. Ontario’s MPs seldom if ever express informed concern about the problems I’ve mentioned even though they have been described by banks, think-tanks, other organizations, and have even attracted the notice of the Organisation for Economic Co-operation and Development (OECD), the largest research organization for the international community.



More seriously, the leadership issue gets into the issue of electoral reform. The chances of correcting the problems I’m mentioning are being reduced by the current efforts of the federal government led by Mr. Van Loan, the government House Leader, to ensure that Ontario’s current under-representation in the House of Commons worsens in the years to come. It is odd indeed that an Ontario MP is leading that charge with the hopes that Mr. Van Loan’s Simcoe riding constitutents are noticing. Last time I checked that riding was in Ontario.



Perhaps on a somewhat lighter note, we need to borrow an idea from the Americans and have the modern equivalent of a tea party in Toronto harbour to argue for the principles of representation by population and no taxation without fair representation. I should say most people in other western countries would find it amazing that we in Ontario have to argue for representation by population and no taxation without fair representation in Canada in 2008.



I should now like to turn to the final part of my speech—the actions Ontario’s legislators could take to deal with the issues I’ve mentioned. At first I think they need a change in attitude. They need to get real and get tough. In financial terms and in population terms, Ontario is a Sweden and a half. It should behave with similar sophistication. The 40-year policy of standing aside and enabling the federal government to do its thing is both unseemly and pathetic. Every time I think of Ontario government leaders acquiescing in the financial disaster I’ve outlined and forcing their successors to crawl back to the federal government for funding any time they want to build a subway line I cringe. Getting tough is another thing.



Except for the past eight or nine years, Ontario has for decades been the accommodating lightweight at federal-provincial financial gatherings. This has let other provinces seize the moral high ground on this subject and we need to take it back. There are other specific steps that the Ontario government could take after making that basic change of attitude to get tougher and get more realistic.



The first is that they could put some ideas on the table and work with the Ontario electorate and other Canadians to sell them. These include transferring the GST to the provinces, opposing the cost basis for calculating equalization, and proposing arrangements by which the federal government might assume some provincial debt in return for ending transfer payments and regional subsidies.



Secondly, the Ontario government could undertake a very large public education program on this issue. It could compile the comments that others have made—the Atlantic Institute for Market Research, the OECD, the Frontier Centre, three of the major banks—and they could use them as a basis for an advertising campaign across Ontario. They could also do the same by referring this entire matter to a major organization outside Canada to get an unbiased point of view.



A further step is to clarify the legal underpinnings of this system. While arguably such clarification should take place in the courts a preliminary step could be for Ontario to ask for a formal opinion from a recognized legal expert and make it public. The question that should be put to this person should be aimed at refuting the idea that the present very high levels of regional subsidies and equalization aren’t any way guaranteed under the Constitution. The answer is almost certainly that they are not and understanding that would probably help Ontarians feel more comfortable with the change.



Fourth, Ontario could take an historic U-turn and support Mr. Harper’s efforts to constrain the federal role to its core responsibilities, something which would significantly reduce the opportunities to build subsidies into every program of the federal government which is what most of the other provinces seek.



A fifth thing the province needs to do is become very aware of the consequences of short-term deals. In recent weeks the federal government has taken some steps to lessen Ontario’s fiscal deficit with the rest of Canada and other steps to increase it. There are few public numbers on what the net change is. Ontario should maintain a public money tab of what those numbers are.



The final specific task that Ontario should consider is forming a very specific alliance with Alberta. Both provinces could develop a common approach to the problems that I have described today. It would be much easier and much more likely to get action than either operating alone.



I’d like to conclude with just a couple of very brief thoughts. Ontario is in significant difficulty today. Toronto is the unemployment capital of Canada. We have lost 64,000 jobs in manufacturing in a year, 6 1/2 per cent of the total. We have been in a long slow decline since the 1960s. Our schools, to judge from recent reports by the Toronto Board of Education, are violence-prone and many are infested with vermin. This is not a jurisdiction that can carry the burden for others who in many respects are better off.



Ontario’s leaders have a choice. They can continue to support these dysfunctional regional subsidies that have been disastrous for this province, dangerous for others, and impede Canada’s performance. Alternatively, they can recognize that the problem I have summarized is like an iceberg, a much bigger problem than it appears on the surface—an iceberg that could sink many of our provincial and national dreams. If they act together, they can chart a new course for change. They and their federal counterparts can build a country united by common purpose and shared values rather than divided by unseemly efforts to get others to pay for local services and problems. If they take this new path, it is Ontario’s leaders who have to make the basic change. They can help all parts of Canada achieve a better future, which is what in the end all these systems and every one of us wants.



Thank you for the opportunity to go through a complex subject briefly today. This is, as I say, a difficult subject, but I think the good news is that we can engineer a fundamental change in this part of our federation. The future of all Canadians will be much brighter and individual Canadians will almost certainly be much better off.

Thank you.



The appreciation of the meeting was expressed by Tim Reid, Director, Business Development, ZED Financial Partners, and Director, The Empire Club of Canada.