 (EM285) 
June 9, 2005
In Brief:
European Lessons for Canada
In Europe, the natives are restless. The “no” vote in France and Holland on a proposed constitution for the European Union exposed deep fault lines beneath the continent’s proposed model. As it happens, the rejected “superstate” resembles all too closely the federal system entrenched in Canada. We should consider why the French and the Dutch turned down a policy of further centralization because the same objections apply here. The economies of Germany and France are close to recession and Italy is in one. Politicians in those countries lack the will to trim back the welfare state, cut regional and industrial subsidies and adopt competitive tax rates. Driven by excessive labour costs and benefits, unemployment is at record levels and rising. Immigration serves as the only means to counter aging European demographics and a low birth rate. Voters are concerned about losing local identity and control in an over-centralized mono-state and dislike the prospect of obeying the whims of anonymous and unaccountable bureaucrats in Brussels. Britain’s New Labourites are leery of the forced import of labour regulations like limiting the maximum work week to 48 hours, a policy that would encourage continental-style stagnation. Recent EU members in eastern Europe with quickly growing flat-tax economies see “tax harmonization” schemes as a plot by high-tax countries to avoid necessary reforms. Powerful economic forces that are splintering and decentralizing the state now besiege Old Europe’s attachment to high taxes and spending Mobile, job-creating capital flows to places with the most attractive basket of public services, taxes and regulation. A majority reject the political elite’s grandiose, imperial vision of a single unified Europe. People are comfortable with what they have now—a federation of countries co-operating closely in a free trade area with a single market and a unified currency. In Canada, citizens torpedoed another schmozzle of compromise cooked up by the political class, the 1992 Meech Lake Accord. Much of our political tension today stems from the efforts of the central government to impose a “one size fits all” policy on a nation of diverse regions. A gun control registry panders to urban Toronto while outraging the regions. Ottawa tells a hapless Sam Katz that Winnipeg must spend shared gas taxes on “green” initiatives instead of fixing bombed-out streets. Parents can expect help only if they use an inflexible, non-profit daycare model favoured by so-called childcare professionals and the bureaucratic elites they lobby. Policy old-timers cling desperately to the high levels of federal control essential for the survival of highly subsidized, provider-focused policies. Yet taking away the ability of distant entities to impose these orthodoxies will lead to a more dynamic and harmonious country. Today’s old Europe is a wealthier metaphor for Winnipeg and Manitoba, with the leaking of the educated young to other provinces, aggressive immigration to replace them, state spending of half the economy and lavish federal subsidies and transfers. As in Italy and Belgium, the policies minimize private investment, because the federal equalization formula rewards Manitoba for having the highest tax rates in western Canada. This concentration of power in government and ultimately among a handful of politically engaged groups has predictably resulted in one of the most politicized economies in Canada. In Canada, the most distant government garners the most revenue through powerful tax levers, particularly the income tax and the GST. The money eventually funnels back to where it came from, minus distant overheads and many attached political conditions–the ideological Canada Health Act the most obvious example. A quick peek at the Canadian constitution reveals that the federal government is involving itself in areas far beyond the limited roles prescribed for it. The more astute provinces resent jumping through Ottawa’s expensive hoops in areas like healthcare, education, daycare and the environment, where they are supposed to have jurisdiction. What fuels the Bloc Québecois, unsurprisingly, is this obtrusive and unwanted federal presence in areas where constitutionally it has no business. Under our original federalism—and in the EU arrangement most likely to emerge—the feds would look after the military, the courts, negotiating foreign treaties, ensuring a sound currency and maintaining an open trading market within Canada. Even though Ottawa sticks its nose into everybody’s business and is swimming in money, it is not doing several of these basic tasks especially well. A few bold reforms might restore balance. The $30 billion in GST revenues in 2004 are roughly equivalent to current federal transfers to the provinces. A swap of the GST to the provinces—and a harmonization with the PST—in return for an end to all transfer programs would bring taxing power closer to the people. This idea was endorsed by none other than former Ontario Premier Bob Rae during his recent visit to Winnipeg. And while we’re at it, why not transfer the gasoline tax to the provinces and let them make their own infrastructure choices? Surely they will know better than remote officials in Ottawa. The Brussels “superstate” is dead, and Canada’s stumbling drift towards overweening federalism deserves the same fate. Perhaps this is something for the Conservatives to talk about, who, as yet, have still to offer a compellingly different and attractive vision of the future to Canadians. If Ottawa stuck to its knitting and returned power to provinces, we would slay separatism, simplify government and make it more accountable and transparent.  Related Items:
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