Robin Hood on steroids

By:  on August 20, 2018

There is a long tradition in western civilization of redistributing wealth to reduce social inequality. It has served as both the inspiration for voluntary charity and the justification for mandatory taxation. Governments not only tax wealthy individuals to subsidize poor ones, but many also take from economically successful regions within countries and give to relatively unsuccessful ones. However, never in the history of organized wealth redistribution have democratic governments robbed from the rich to make the poor richer than the rich.

Except in Canada.

In 1957, the Canadian federal government established a new program called equalization with the intention of ensuring all citizens had access to “reasonably comparable” public services at reasonably comparable levels of taxation, regardless of which province they lived in. Ottawa eventually came to believe the program was so important to the federation that the first Trudeau Liberal government enshrined it in the 1982 Constitution Act. Six decades later, in 2018-19, equalization payments totalling $18.96 billion will be split between six provinces, all located east of Saskatchewan.

Unfortunately, the barometer of success for equalization is no longer measured by the levelling of service disparities between provinces, if it ever was. Indeed, the federal government has never actually defined what constitutes “reasonably comparable” levels of public services.

In fact, despite the stated intentions of equalization, disparities in certain public services have actually increased. My research compared eight education indicators across provinces from 2002-03 through 2017-18, including tuition fees, expenditures per student, post-secondary participation rates, debt levels, and student to educator ratios. During that 15 year period, total equalization payments increased by over $9 billion, or 106 percent, in nominal terms, or 56 percent in real, inflation-adjusted 2002 dollars. The research did not focus on health and social assistance programs because the provinces receive federal funding from the Canada Health Transfer (CHT) and Canada Social Transfer (CST) in addition to equalization payments. Instead, the analysis concentrated on education, as it is the best measure to isolate equalization’s impact on service comparability in Canada.

As equalization payments have grown, service gaps across all education indicators have remained constant or even grown. Services are not “reasonably comparable,” and accessibility to education across provinces is wildly different. But here’s the rub for taxpayers in the provinces that actually pay the bills: disparities have been accentuated by equalization in favour of have-not provinces in every single indicator category.

The most egregious instance concerns undergraduate student tuition fees in post-secondary institutions. As have-not provinces, Quebec and Manitoba recorded average tuition fees well below the national average during each fiscal year from 2006-07 through 2017-18. In contrast, Alberta and Saskatchewan registered tuition fees that were considerably above the national average every year despite being have provinces. Quebec’s average tuition cost in 2017-18 was $2,889, while Alberta and Saskatchewan fees were $5,749 and $7,205 respectively. In other words, students in Quebec received an education discount of 40-50 percent compared to the price paid by students in the Prairie provinces.

Moreover, service comparability also got worse, as the number of outlier provinces grew from three to four over that time period. An outlier province is one where cost or service variability ranks significantly above or below the national average. For example, in 2017-18, the national average tuition rate was $5,802 and the standard deviation among provinces was $1,858. Quebec was an outlier because it was $2,913 below the national average, which is more than one standard deviation away from $5,802.

Another example is student-to-educator ratios in public elementary and secondary schools. The have provinces of Alberta and British Columbia typically had six more students per educator than Quebec and five more than Manitoba. The have-not provinces of Nova Scotia, New Brunswick, and Quebec maintained student-to-educator ratios that were significantly below the national average throughout the entire 14-year period of analysis. The gaps in service comparability did not narrow in any given year and at least 30 percent of the provinces were outliers.

Other studies have shown that have-not provinces have access to more doctors and nurses per capita, more long-term care beds, and more daycare spaces (and at much lower cost, in the case of Quebec) than non-recipient provinces. Equalization has enabled government spending in have-not provinces to increase to the extent that overall, more public services at a more generous level are available to residents of those provinces than in the provinces that pay into the program.

Equalization has produced perverse outcomes, effectively subsidizing higher service levels in recipient provinces using money from have provinces. That leaves have provinces at a disadvantage in delivering services and enables have-not provinces such as Quebec – the largest single equalization recipient at (currently) $11 billion a year – to provide significantly better services than the provinces who subsidize them.

Not even Robin Hood stole from the rich with the intent of making the poor richer than the rich. But then, he wasn’t a federal politician trying to win votes in transfer-dependent Canadian provinces. Equalization has become so politicized that its current design is incompatible with the goal of reaching service comparability. Major reforms are required in order to get the program on track to achieve its objectives and meet its constitutional obligations.

Australia has established an independent arms-length agency to manage its equalization system. Canada should do the same. The creation of an arms-length agency would de-politicize the equalization formula and provide an oversight mechanism to objectively evaluate the program. Removing Ottawa’s control over the program would be a good first step to ensuring equalization lives up to its name and provides reasonably comparable services at reasonably comparable tax rates for all provinces.

 

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