Blogs & Comment

Federal equalization payments have unintended consequences

Canadian think tanks join forces to deal with the misallocation of resources among provinces.

(Photo: Dimitri Vervitsiotis/Getty)

As a policy issue, regional transfer payments don’t show up on most Canadians’ list of concerns. But like an iceberg, what’s unseen can inflict harm in unseen ways. Six Canadian non-profits and think tanks (see list below) believe that the accumulation of unintended consequences has become serious enough for them to join together in a coalition to raise awareness of the issue.

The current federal equalization agreement, which manages transfer payments, needs to be renegotiated by 2014. Until it’s signed, the coalition will be publishing commentaries, briefings and reports aimed at drawing attention to the drag that the transfers have on the Canadian economy—and the need for alternative arrangements. The first report, Robbing Peter to Pay … Peter? Equalization Inequities, was released by the Atlantic Institute for Market Studies on May 1.

One of the adverse side effects of regional transfers is to impair the movement of labour and capital to their most productive uses within Canada—underutilized resources, in short, have an incentive to remain in regions where subsidization of public services is extensive. The transfers also result in low-income persons in “have” provinces subsidizing high-income persons in “have-not” provinces.

The principle of equalization is included in the Constitution but that shouldn’t rule out finding better ways of achieving the objective. Moreover, the growing fiscal problems of the provincial government in once-prosperous Ontario suggest a need to find solutions that deliver more bang for the tax buck.

(Note: The six think tanks are: Atlantic Institute for Market Studies, Reseau Liberte-Quebec, Montreal Economic Institute, The Canadian Taxpayers Federation, The Frontier Centre for Public Policy and The Manning Center for Building Democracy)