Broken System of Federal Redistribution is Transferring Billions Away from Ontario
from Mowat Centre
Federal programs have not kept pace with Canada’s changing economy
Canada’s broken system of federal spending and transfers has not kept pace with changing conditions, leaving Ontarians further squeezed, says a new report from the University of Toronto’s Mowat Centre.
Cheques and Balances is the latest paper from Mowat to examine Canada’s system of federal spending and transfers. It reveals distortions and disparities that mean wealthier provinces continue to be net beneficiaries of fiscal federalism while Ontarians see $9 to $11 billion annually redistributed to other provinces, depending on the methodology used for the calculation.
This leaves Ontario with less capacity to fund services and programs than any other province.
The study is Mowat's follow up to a report released a year ago that looked at the gap in what Ontario pays out to the federation versus what it receives in total federal spending. Cheques and Balances looks at the national picture, comparing the fiscal gaps among all provinces.
The report’s findings dispel the myth of ‘have’ and ‘have not’ provinces. Despite having a higher than average ability to fund services, Saskatchewan and Newfoundland receive more in federal spending and transfer payments than they contribute.
“The findings underscore the need for reform of the current rules for federal redistribution, especially Equalization,” says Mowat Director Matthew Mendelsohn.
“The results also highlight how out of touch some public commentary is about fiscal transfers. The idea, very popular in some circles, that Ontario is being subsidized by other provinces is simply not true.”
One of the study’s key findings is the fact that inequities between provinces are largely driven by natural resource wealth. Today, whether or not a province qualifies for Equalization depends more on a province’s natural resources endowments than anything else, yet the Equalization program is not equipped to deal with those disparities.
According to Noah Zon, one of the paper’s authors, federal decisions on transfers and program spending have not kept pace with changes in the Canadian economy. “Federal policy decisions in areas like Employment Insurance, labour market training, housing and infrastructure disadvantage Ontarians even while some provinces with higher fiscal capacity receive more federal support,” says Zon.
Canada’s system of federal transfers and spending is designed to ensure that Canadians have comparable access to public services, regardless of where they live in the country.
“In the case of many provinces, we see what we would expect in terms of regional redistribution,” says Zon. “But Ontario's case deviates so far from the pattern that it tells us the system needs to be updated to better reflect present-day economic realities. What comes to Ontario in Equalization payments is far outweighed by what Ontario unfairly loses in a number of other programs and by the outsized contribution of Ontario taxpayers.”