The CTE develops studies, papers and outreach activities that:
The goal is to shift away from today’s transfer regime, which creates dependency while discouraging economic growth and opportunity. The model we seek is transformational in nature – one that empowers economically vibrant, self-sustaining provinces to pay for their own public services.
The topic of equalization is one of the most poorly understood areas of Canadian public policy. Most people believe the system helps recipient provinces, but a substantial body of evidence indicates that unconditional transfers lock the “have nots” in a powerful welfare trap, where they fall prey to perverse incentives to maximize subsidies by keeping taxes and spending high. Specifically, the present formula and program:
In a 2001 Frontier Centre interview, the intellectual father of equalization, economist and Nobel laurate James Buchanan recanted his original theory, which laid out a limited case for governments to “bribe” people not to move to more economically vibrant areas. Canada had made a mistake, he argued, by transferring equalization subsidies to governments instead of individuals and accurately predicted that transfers would simply bloat up recipient governments. His original proposal, that taxes be reduced in “have not” areas, would have avoided the capture of transfers by higher state spending.
Equalization is a classic “concentrated benefits versus dispersed costs” challenge, where the unorganized public simply has little individual incentive to confront an entrenched subsidy system. It is no coincidence that the “have not” provinces have overly politicized economies, as different elements chase subsidies that arrive with no strings attached.
The challenge is developing options that allow politicians in recipient provinces safe and reasonable ways to move to smarter alternatives. These paths to reform would enable politicians to say their provinces are not losing benefits, that alternatives clearly have more benefits than downsides, and enjoy an adjustment period to facilitate a move to a normal growth economy for their regions.
A Policy for the Future, Not the Past
The Centre for Transformational Equalization will develop a theme of transformational equalization that considers several alternatives:
Tinkering with the formula
Regional federal tax reductions
The tax swap
As a final task, the CTE would deal with the very public misconception that equalization as we know it is here to stay since it was entrenched in the Canadian constitution in 1982. It is, in fact, quietly acknowledged that the constitutional basis for equalization is tenuous and legally unenforceable. Read more.
The debate about our federal government’s dysfunctional transfer programs needs an injection of fresh new ideas, and the timing could not be better. The Frontier Centre’s Transformational Equalization Project examines how “have not” provinces have been harmed by these well-intended subsidies, and explores comparatively big picture ideas aimed at converting equalization from a welfare trap into a helping hand. These include a one-time buy-out, where the federal government would retire debt and provide a “heritage fund” to replace annual transfers, or the swap of the GST to the provinces in exchange for an end to both equalization payments and federal social and health transfers, or another trade-off, the reduction of federal taxes in “have not” regions.