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Three cheers for Premier Higgs' equalization reality check

January 24, 2019
Three cheers for Premier Higgs' equalization reality check

This column was published in the Telegraph-Journal on January 24, 2019.

Equalization is one of several federal transfers that takes money from all Canadian taxpayers and gives it the governments of so-called have-not provinces – those Ottawa defines as lacking the fiscal capacity to generate that revenue on their own. The remaining so-called have provinces receive nothing.

The intent of equalization is to provide an equal level of service delivery in every province, but the roads with the worst potholes are paved with good intentions.

Higgs proposed changing equalization in December at the first ministers’ meeting in Montreal, suggesting equalization payments should be cut to encourage provinces to grow their own economies.

Higgs first proposed renewing talks around the Energy East pipeline, to transport oil from Alberta to New Brunswick. Quebec Premier Francois Legault rejected the idea, stating “there is no social acceptability for oil in Quebec.”

Legault’s defiance exposed a flaw within equalization: Legault can hamper Quebec’s economy by rejecting resource development and hurt New Brunswick’s economy by rejecting the pipeline – all while still receiving plush payments from Canadians. 

In response, Higgs suggested the equalization program needs a much-needed shake-up.

"My point was if people felt the pain, if I felt the pain, if Quebec felt the pain and they didn't get 70 per cent of the current transfer payments … I mean, they don't feel anything, so they can just say, 'No, we're not allowing anything through our province, but yet I'll take the money." Higgs told media.

Equalization is even worse for taxpayers in the have-not provinces than it is for those in the have provinces. The transfer creates perverse incentives in have-nots, driving governments to leave natural resources undeveloped, forgoing GDP growth.

New Brunswick has also left jobs and revenues untapped by banning hydraulic fracturing and depending on handouts from Ottawa instead. Higgs has moved to lift the ban and hopefully investor confidence will recover in time.

A shortage of equalization dollars is often mistakenly perceived as the cause of poor policy outcomes. The services in many parts of New Brunswick are lacking. But that’s driven mostly by provincial policies (such as paying twice for worse service through duplicative language requirements) and economic realities (such as a shrinking tax base).

There’s good evidence to suggest that equalization might actually be making life worse for New Brunswick taxpayers.

Research from the University of Calgary School of Public Policy in 2014 showed that equalization incentivizes recipient provinces to raise their business and personal taxes, because doing so drives up the average tax rate in Canada, thereby raising the province’s grant entitlements.

This research also showed that equalization transfers drive recipient governments to increase spending. Equalization cheques may cover some of that, but those bills inevitably hit New Brunswickers with higher taxes. Each of these twisted incentives scare off investment and result in fewer jobs, worsening the fiscal outcomes in provinces that equalization is intending to help.

Gradually weaning New Brunswick off equalization just makes sense. Higgs deserves kudos for calling for federal equalization reform. In the meantime, he should tailor provincial policy to reduce the dependence on transfers.

The end goal is a better quality of life for New Brunswickers. So the end goal for New Brunswick should be to become a have province, not remain a have-not.

Paige MacPherson is Atlantic Director of the Canadian Taxpayers Federation.

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