Economy, Ontario: Have not province
Ontario’s recent descent into equalization-payment receiving, or “have-not” status is not due to the state of its revenues alone. It is due to other provinces’ revenues, as well.
Ontario is a manufacturing powerhouse, operating largely in North American Free Trade Agreement (NAFTA) economic space. It has suffered from both the U.S. economic collapse and the dramatic appreciation of the Canadian dollar. Meanwhile, revenues of the energy-rich provinces have been increasing rapidly.
The result is that the national (all-province) average of per capita fiscal revenues exceeds Ontario’s, making Ontario a “have-not” province – a recipient of money for equalization purposes.
This means Ontario is entitled to an equalization payment that brings its per capita revenues up to the national average. There are no direct payments from rich provinces to poor provinces. Equalization payments come from Ottawa’s consolidated revenue fund. A fund designed to ensure relatively equal levels of government services to all Canadians.
Indeed, Ontario’s overall relative position has worsened recently, to the point that it now (for the year 2011/2012) receives 15 per cent of the country’s total equalization payments ($2.2 billion out of $14.7 billion).
The equalization formula is based on a three-year average of revenues that is lagged two years (2011 payments are based on the average of 2006, 2007 and 2008), so that the impact of 2008’s high-energy prices is only now entering the formula.
Largely because of the impact that these rising energy prices have on equalization, the overall amount of equalization payments has been capped, and the cap increases in line with the growth of the economy. Currently, this means that Ontario’s receipt of $2.2 billion in equalization payments results in the fact that there is $2.2 billion less for the traditional have-not provinces.
The last time Ontario qualified as a have-not province was between 1977 and 1982. Ottawa passed legislation in 1981 that retroactively prevented Ontario from actually receiving equalization payments, and then altered the formula to ensure Ontario would no longer qualify.
Might this also be the way to go this time around? I would argue that it is not.
To understand my reasoning, it is important to note that Ontario’s actual per capita revenues are, after equalization, less than those of any traditional have-not province.
But the enshrined equalization principle (s36(2)) of the 1982 Constitution Act is not really about equalizing per capita revenues, anyway. Rather, it is about providing poorer provinces with revenues so that they can deliver comparable bundles of provincial public goods and services.
It will cost more (i.e. require more revenue) for Ontario to provide one such bundle than it will for any of the traditional recipients, because wages and prices are higher here. If anything, Ontario needs more in equalization payments than it currently receives, if it is to provide its citizens with comparable public goods and services.
Ontarians need to hope that the U.S., and the global economy generally, will soon return to sustainable growth, and that Ontario will adopt policies that will take full advantage of the recovery.
In the interim, disallowing Ontario from receiving equalization payments would mean that revenue-rich provinces would be able, relative to Ontario, to provide superior public goods, or move in the direction of becoming tax havens. This is not in the interest of Ontario or Ontarians.
This piece originally appeared on The Mark.
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