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Jul 11, 2014

Canada’s Finance Minister is entitled to his own opinions, but not his own facts

July 11, 2014

This week, the National Post published my op-ed addressing recent comments made by Canada’s federal Finance Minister regarding Ontario’s long-standing criticism of federal policies governing fiscal transfers and their impact on Ontario’s balance sheet.

This is an important conversation that directly affects Canadians. I appreciated the fact that Minister Oliver is engaging the issue. I also appreciated his direct response in the Post to my own comments. Unfortunately however, it is just as misleading as his original op-ed.

The Minister and I both agree on something: total fiscal transfers to Ontario are up. But this is not the issue or the point of any complaint that I am aware of. No one has said that transfers are down. The question is equity—whether transfers have been principle-based and formula driven.

No one expects the federal government to randomly pick numbers out of the air, “How about, um, $2 billion more for Saskatchewan, and say, $3 billion more for Manitoba?” “Well, transfers have gone up to everyone” is not a sensible response to Ontario’s concerns over equity. Canadians expect the size of transfers to be based on defensible principles and transparent formulas. After all, if a province expects to receive $2 billion more, only to be told it will get $1 billion instead, the defense that “transfers are up” is neither convincing nor reassuring.

Minister Oliver hasn’t dealt with the substance of the Ontario government’s critique or any of the substantive issues in my piece. I want to address his three main points.

First, he said that the numbers I use are old and out-dated (incidentally, my wife says exactly the same thing about my wardrobe). The numbers we use are actually the latest to be made available by the federal government. If they’re old it’s because the federal government stopped reporting them! In our reports here and here, we have explicitly called on the federal government to report the numbers again. And we’ve always been transparent: Our numbers are from 2009.

Could Minister Oliver’s public concern with moldy numbers be a sign that the federal government intends to start reporting the data series they ended in 2009? Many of us hope so.  If they do, I suspect Ontario’s contribution to the rest of the country – which we peg at about $9 billion – is likely lower due to the fact that Ontario’s Equalization payments are higher than that year. I look forward to new data so we can continue the conversation using up-to-date numbers.

On the issue of redistribution specifically through the Equalization program itself, the Minister is right that the data are outdated. In my piece I cited the figure of $3.1 billion which the Equalization program redistributes from Ontario. That number has now been updated by finance officials—it has now increased to $4.5 billion in 2013-14.

This number is arrived at through a simple calculation that does not involve making difficult methodological choices. It isn’t based on fancy assumptions. It is just the number: Ontario – with below average fiscal capacity – redistributes $4.5 billion to other provinces through the Equalization program, the one program that is supposed to be designed to support provinces with below average fiscal capacity!

Second, Minister Oliver takes exception to the fact that our estimates remove deficit spending from our calculation. We did this for two reasons. One, it is the right thing to do (and I will explain why in a moment); and two, we did this because when we measured Ontarians’ contribution to the federation in earlier reports we were criticized for not removing deficit spending!

I’m starting to feel like I’m playing whack-a-mole. If deficit/surplus spending is included in the calculation, the federal government calls it a distortion (and it is). But when the calculations are made to control for this distortion, the Minister shouts “ah ha!” and claims we’ve missed something important by not including it. The federal government can’t have it both ways. I’m starting to believe that it doesn’t actually matter which method we use because the federal government will always claim we should have used another.

In fact, we used several different methods in our most recent paper and we’ve repeatedly asked the federal government for their own estimates and suggestions on alternative methods we should be using. I continue to wait, but hope that the federal government will offer a response soon.

The method we used in a recent paper eliminates the impact of the surplus or the deficit from the calculation. I think this is the right method to use. In times of big deficits like the federal government was running in 2009, all provinces receive much more than they contribute to the federal government—because the federal government is spending more than it takes in. In times of big surpluses, all provinces receive much less.

This is why, in part, Ontario’s famous “$23 Billion Gap” a decade ago was criticized by the federal government. The calculation method to arrive at $23 Billion conflated real inequity with the fact that the federal government was collecting more than it needed from all provinces. The federal criticism of that calculation was fair, which is why we control for the impact of the size of the deficit/surplus in Mowat Centre calculations.

It does seem strange for the Minister of Finance to criticize our calculation method. After all, we accepted the federal government’s earlier critique and are now using the method they suggested.

Third, Minister Oliver doesn’t deal with the substance of my critique on equity. His comments on  infrastructure funding highlight this failing. He claims that Ontario received 35% of infrastructure funding over the past eight years and will receive “the largest share” of infrastructure spending in the new program.

Ontario is far and away the largest province in Canada. It has almost twice the population (38.5%) of the second most populous province and pays almost twice as much in federal taxes as the second largest province. Is “largest share” really the standard?

I have long argued that federal fiscal transfers should be principle-based and allocation formulas should be transparent. The Mowat Centre released a paper yesterday that makes the same case. Is this really too much to ask? The lack of transparency and principle-based formulas is corrosive and divisive.

So why 35% of infrastructure funding? Why not 33% or 40%? We’re talking about a $53 Billion program, so the differences are not insignificant. Allocations based on population make sense in major transfers. Needs-based transfers also make a lot of sense, where wealthier provinces receive less and those with lower fiscal capacity receive more. But the federal government didn’t take either of those approaches. It put together a grab bag of different approaches and it refuses to explain or justify the rationale behind the total allocations, hoping maybe people will be confused by the big numbers or comforted by the reassurance that Ontario is “receiving the largest share.”

Well, I’m not comforted. No one in Ontario should be. And Minister Oliver’s response makes me even more uneasy.

I don’t like to complain. Really. I don’t. I’d much rather work on other pressing public policy issues. Or take my kids to Centre Island. But the structure of fiscal federalism is not working for Ontario. But the Minister’s response – to my response to his response to Ontario’s position (whew!) – is not serious. He hasn’t addressed Ontario’s main concerns regarding: 1. The structure of the Equalization program (i.e., it is unfair to Ontario during commodity booms), 2. The lack of principled allocation formulas for many federal transfers, and 3. The recent tinkering with the formulas to weaken Ontario’s balance sheet.

I know this is not an easy issue to deal with, nor is there is much political appetite for the discussion. But the status quo is not sustainable for Ontario and the federal government should begin to more seriously engage with this pressing national issue. A more serious response from the federal Minister of Finance to Ontario’s reasonable critique is overdue.

Release Date

July 11, 2014


The Mowat Centre



Matthew Mendelsohn

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