Equalization Bailout?

I have always grudgingly admired the Canadian Taxpayers Federation’s ability to manufacture news, but last week’s op-ed by Kevin Gaudet takes the cake. It launches an attack on Equalization from an utterly false premise:

Next year, federal equalization payments to the provinces are expected to decline anywhere from 10 to 15%. As a result, some premiers are demanding that the program be modified in order to keep payment levels artificially high. The Harper government should reject these expensive demands.

As I noted at the time, the 2008 Economic Statement and 2009 Budget set future Equalization payments according to “a three-year moving average of national gross domestic product (GDP) growth.” GDP has not declined by 10 to 15%. So, on what basis would Equalization payments be “expected to decline anywhere from 10 to 15%”?

As Finance Canada pointed out through a letter in Monday’s National Post, “the three-year average of nominal GDP growth will almost certainly result in year-over-year growth in total equalization payments, not the 10% to 15% decline suggested by Mr. Gaudet.” My letter (see below) on these recent developments was printed in the same edition.

The total pool of Equalization money is allocated among provinces based on their relative fiscal capacities. Changes in fiscal capacity could conceivably reduce payments to a particular province by 10 to 15% (and increase payments to other provinces by a corresponding amount.) However, Gaudet posits this percentage decline in the total Equalization pool, which is inconceivable under the current system.

While the federal government will not unveil specific Equalization payments to particular provincial governments until December, it has already projected the total cost of “Fiscal Arrangements” through 2014-15. This line item includes about $2 billion annually for Territorial Formula Financing plus statutory subsidies minus the Youth Allowances Recovery. But the lion’s share is Equalization.

As the following table shows, these numbers did not change much between the January 2009 Budget (Table 4.6) and the September 2009 Fiscal Update (Table 6). Lower economic-growth forecasts have slightly reduced projected future expenditures by between $0.1 billion and $0.3 billion annually, a far cry from Gaudet’s claim of “between $1.5-and $2.2-billion per year.”

Fiscal Arrangements ($ billions)

 

Budget 2009

Fiscal Update

2008-09

 $15.1 

 $15.2

2009-10

 $16.0

 $16.2 

2010-11

 $16.5 

 $16.4  

2011-12

 $17.0

 $16.8  

2012-13

 $17.9  

 $17.6   

2013-14 

 $18.9  

 $18.6  

2014-15 

 NA   

 $19.5 

The Canadian Taxpayers Federation’s bogus dollar amounts are at least consistent with its assertion of a 10-to-15% decline. However, it offers no explanation of where it got these percentages in the first place.

Several major newspapers – The National Post, Vancouver Sun, Winnipeg Free Press, New Brunswick Telegraph-Journal – printed the op-ed. Apparently, none of them questioned its unsourced, unexplained figures that contradict the publicly available figures.

Of course, it is fair game to question the government’s fiscal projections and estimate different numbers based on other data. But even in an opinion piece, one should not be permitted to simply pull numbers out of the air.

My letter:

The ins and outs of equalization

National Post

Monday, October 26, 2009

Kevin Gaudet argues that if the economic crisis has narrowed regional disparities, the federal government should unapologetically allow equalization payments to fall. He has a point that the Equalization formula should determine increases or decreases in payments.

But last year, when regional disparities were projected to widen, the federal government arbitrarily capped future payments at the national rate of economic growth. I do not remember Mr. Gaudet defending the equalization formula’s sanctity back then. If the federal government can impose a ceiling on prospective increases, it is understandable that equalization-receiving provinces would expect a floor under existing payments.

As recently as September’s fiscal update, the federal government committed to “protect the growth track of major transfers to other levels of government in support of health care, social services and equalization.” If implemented, this sensible policy will help to prevent possible provincial and local cutbacks from undermining needed federal stimulus.

Erin Weir, economist, United Steelworkers, Toronto.

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