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Dec 21, 2012

New Mowat Research on Fiscal Transfers: Current Equalization Formula Not Working for Canada in General, Ontario in Particular

December 21, 2012

New research on Equalization by Mowat Director Matthew Mendelsohn.

Toronto – The Mowat Centre in the School of Public Policy & Governance at the University of Toronto has released a new research paper on Canada’s fiscal arrangements. Back to Basics: The Future of the Fiscal Arrangements is the latest paper in the Mowat Centre’s Fiscal Transfers series. It shows that Canada’s system of fiscal arrangements is in urgent need of repair. The system continues to transfer billions of dollars away from Ontario at a time when Ontario’s own fiscal capacity is below the national average.

“Fiscal arrangements simply have not kept pace with changes in the Canadian economy,” says Matthew Mendelsohn, author of Back to Basics and Director of the Mowat Centre.

“The situation is not fiscally sustainable for Ontario and is certainly not in keeping with the most basic principles of equity that are the foundational blocks of the fiscal transfer system. The current redistribution of Equalization funds undermines Ontario’s ability to provide comparable levels of public services to its residents and its ability to make capital investments that help ensure future prosperity,” he adds.

Mendelsohn suggests that new conversation on fiscal transfers is needed.

“In the short-term there are a number of steps that the federal government can take to address the current inequities facing Ontario,” says Mendelsohn.

Recommendations in the report include:

• immediately removing the GDP growth cap that is arbitrarily applied to Equalization and particularly punitive to Ontario;

• creating an independent council that would provide transparent reporting on inter-regional redistribution (provincial fiscal capacity, net redistribution and related issues);

• including the cost of providing public services in the Equalization formula;

• including a measure of federal spending in provincial fiscal capacity calculations

Mendelsohn suggests that in the medium-term, what’s needed is a single needs-tested federal fiscal transfer to replace the Canada Health Transfer, Canada Social Transfer and Equalization program. The transfer would have a basic principle: transfer more funds to less prosperous provinces and fewer funds to more prosperous provinces. This basic principle is no longer operative in today’s fiscal arrangements.

“Historically, Canada’s fiscal arrangements have undergone changes and responded to new circumstances. Changes are now necessary once again to address this pressing, national problem” says Mendelsohn.

Read the full report