Greasing the wheels of federalism

The Globe and Mail's John Ibbitson (subscriber access only) thinks the outlines of a solution to the alleged "fiscal imbalance" has been found through a mix of more equalization plus increased program-related transfers to the provinces:

The O'Brien report [aka the Expert Panel on Equalization and Territorial Formula Financing, appointed by former Finance Minister Ralph Goodale] reminds us of what equalization is supposed to be about: helping poorer provinces provide services at a level roughly comparable to those that richer provinces are able to provide.

In recent years, that simple goal has become hopelessly distorted. The O'Brien report, if adopted, would put the program back in sensible shoes, with the formula based on a 10-province standard, with natural resources partially included, and with a cap so that no have-not province ended up better off than one of the haves.

Happily, the O'Brien report is not revenue neutral. Implementing its recommendations would increase funding for the program by $900-million. That happens to be just about right.Ontario Premier Dalton McGuinty has been leading the charge against an equalization-based solution. But he will not oppose the recommendation of the O'Brien report, because it is sensible, and because he can live with the $450-million hit his taxpayers would take, since he is also expecting a straight per capita transfer to more than compensate.
Combining the O'Brien report with a per capita transfer and a promise to keep out of provincial affairs should also satisfy Quebec Premier Jean Charest. His province would benefit from both deals, and all Quebec has ever wanted is to be given the money and left alone.

After years of increasing federal transfers to the provinces, the so-called "fiscal imbalance" will be solved by more federal transfers!! I do not believe that there is a "fiscal imbalance" – the story never mentioned in the press is the role of provincial tax cuts over the past decade, tax cuts that have a value of five times the loss of transfers in the mid-1990s. No matter, this is about politics.

I can live with a "solution" that increases both equalization and per-capita transfers for social programs. But I'm not convinced that the game is over yet. The government of Quebec and corporate Canada (and their think tanks) are pushing for major decentralization of our federal structure by eliminating program related (non-equalization) transfers and pressing for major tax cuts in the $20 billion plus range. Ideologically, this fits with where the Harper government is at, although perhaps the politics of a minority federal Parliament and the messiness of federal-provincial poltiics will take that option off the table – for now.

Stay tuned. Lots more meetings to happen over the summer and fall. 

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