Ontario's Have-Not Economics

With a provincial election coming in October, and Dalton McGuinty's governing Liberals down in the polls, it's easy to understand why the Premier and his Finance Minister, Dwight Duncan, would want to get in front of the media as often as possible to defend their record. Unfortunately, their message has been fractured on one key issue.

On Wednesday, Mr. Duncan told reporters that he rejects Ontario's status as a have-not province. Ontario, long the economic engine of Canada, received its first equalization payment of $347-million in 2009-10. It received $972-million in 2010-11, and this year is set to receive $2.2-billion in equalization transfers. Mr. Duncan, however, is in a state of denial. "It's not a 'have-not province,' " he told reporters. "That is dishonest. That language is intellectually dishonest. And anybody who uses it isn't telling the truth."

"Equalization has nothing to do with strength of the economy," Mr. Duncan added. "Equalization has everything to do with a formula that has been gerrymandered." For emphasis, he then described the formula as "absolutely crazy."

Technically, it is Mr. Duncan who is wrong: The phrase "have-not province" has become a term of art in Canadian econo-speak, referring to any province that is a net beneficiary under our equalization scheme. Ontario falls into that category, so usage of the term is not only correct but uncontroversial.

On the other hand, Mr. Duncan is right on the broader principle: The equalization formula is just that - a formula. Not only that, it's a formula created by politicians who "gerrymandered" it for arbitrary, parochial reasons - most notably, the perceived need to shower wealth on Quebec.

This editorial board has long been critical of the equalization program, and would be pleased to see it killed, or at least cut back to a nominal level. The great disparities in provincial per-capita income that led to the creation of the program in 1957 have been eliminated. Any constitutional or humanitarian mandate for its continuance (at least in its present form) evaporated long ago.

Perhaps the worst part of the equalization program is the manner by which it rewards provincial politicians for incompetence and bad investments. Mr. Duncan seems to understand this principle, and is embarrassed by it. But not so his boss. The day before Mr. Duncan tore into the "absolutely crazy" equalization formula that allows Ontario to qualify for transfer payments from other provinces, Premier McGuinty was in Vancouver ahead of the 2011 Council of Federation meetings with his provincial and federal counterparts. Speaking with reporters, he made clear that he would resist any attempt to dilute the payouts yielded to have-not provinces under the equalization system. Ontario would "assert itself," he said, to oppose any change that would result in the province receiving any less than it already is.

It is impossible to reconcile these two positions. If the government of Ontario believes that the equalization formula is crazy, intellectually dishonest, a gerrymandered mess - why is the Premier defending the very same status quo that Finance Minister Duncan finds so objectionable?

The answer is obvious, of course: Ontario desperately needs the cash. Over the three years Ontario has been receiving equalization, it racked up deficits of $19.3-billion in 2009-10, $16.7-billion for 2010-11 and a further $16.3-billion is projected for this year. That's an extra $52-billion in debt over three years. The Liberals' only plan for getting Ontario back to black are a few tiny trims.

If the Ontario Liberal party truly had the courage of Dwight Duncan's anti-equalization convictions, it would refuse to accept the transfer payments, adding moral weight to claims that the system is broken and obsolete. But no provincial politician - in Ontario or any other "have not" jurisdiction - has the courage to do such a thing, That is why, in 2011, we're still saddled with an expensive, economically perverse transfer scheme that, in sum, impoverishes the whole country.

---

Related Items:

• View more articles on Equalizational Policy

---

The Frontier Centre for Public Policy

is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."