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Trevor Tombe: Ontario getting hundreds of millions in equalization means the program isn’t serving its purpose

Commentary

Canada’s equalization program has a long history, and is not without its critics. It’s been controversial right from the start. 

The reason is simple: unlike the two other major federal transfers for health and social programs, equalization provides more (per person) to some provinces than others. And several receive nothing at all. The gap between “have” and “have not” provinces often leads to conflict.

Of course, such tensions are natural—and almost unavoidable—in a large and diverse country like Canada. And while equalization often serves as a whipping boy for other unrelated concerns, especially in Alberta, a common complaint is that some recipient provinces are either undeserving or receive too much. 

The latest payments for the upcoming 2023/24 fiscal year may further inflame this particular concern for one simple reason: Ontario will receive a $421 million equalization payment, despite not really qualifying. I’ll explain.

First, a quick summary of how it all works.

Since some provinces have weaker economies than others, they have a harder time raising revenues. If all provinces had tax rates and structures set to the national average, for example, Alberta would raise nearly $14,000 per person while New Brunswick and Prince Edward Island would raise roughly $7,700.These and all calculations in this article are my own and correspond to the fiscal year for which the latest possible data is available.

To ensure that provinces have the capability to deliver reasonable public services without having to resort to abnormal tax rates, the federal government provides top-up payments to any provinces with below-average “fiscal capacity” to bring them up to the national average. 

You have to squint to see Ontario’s amount in that graph. But it’s there. Here are the totals:

  • Quebec: $14 billion
  • Manitoba: $3.5 billion
  • Nova Scotia: $2.8 billion
  • New Brunswick: $2.6 billion
  • Prince Edward Island: $561 million
  • Ontario: $421 million

One of these provinces is not like the others. 

Ontario’s fiscal capacity is between 3.5 and 6.4 percent above the national average in the calculation for 2023/24, depending on whether resource revenues are partially included or not.

So why does a “have” province receive a payment?

Simply put, there are too many dollars to go around and Ontario got some of the excess.

During the financial crisis, the federal government pegged the total amount of equalization payments to Canada’s overall economy.Technically, equalization increases based on a three-year moving average of Canada’s forecast nominal GDP growth. For 2023/24, that is based on 2021’s actual growth and the latest projections for 2022 and 2023.

For many years, that shrank equalization below what the formula wanted to pay out. But since 2018/19, the reverse has been true: the formula alone would pay less than is available. Lower oil prices shrank the gap between rich and poor provinces, meaning less was required to bring all provinces up to at least the national average.

In 2023/24, fully $2.3 billion is left over after running the main equalization calculations. This isn’t itself new; it’s the sixth year in a row that it’s happened.

Those leftover dollars have to go somewhere. But why to Ontario?

When those leftover dollars are distributed, they have to be allocated in such a way that no province that receives even a penny is better off than a province that receives nothing. This coming year, the best-off have-not province is Quebec. If we just let the formula do the work, then Quebec would have received $12.7 billion, which would leave it with $10,740 in total fiscal capacity per person. Ontario, meanwhile, has $10,871 in fiscal capacity per person. 

Allocating the $2.3 billion in leftover payments to just the have-not provinces, however, would provide them with $195 per person more, leaving Quebec with $10,935—which is more than Ontario! So, we have to give Ontario something so they can keep up.

There’s nothing inherently wrong with Ontario receiving equalization. If they are below the national average in their ability to raise revenues, then they should qualify. One can agree or disagree with that core principle, but at least it’s clear. 

The problem in 2023/24 is that Ontario isn’t below average, yet receives a payment anyway. In effect, we’re overequalizing. 

It’s also a strange quirk in the formula that was not likely intended at the time it was introduced back in 2008.

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The government’s primary concern then was to ensure equalization was on a “sustainable growth path”. The financial crisis and high energy prices did result in Ontario falling below the national average, so rightly would qualify for payments. But at a time when large fiscal stimulus programs were being explored, the federal government was rightly concerned about the strain on its own budget when Ontario entered the program. This was a legitimate concern.

So they pegged the size and growth of the program to the economy. 

But, interestingly, this was broadly seen as a cap at the time, not a floor. Even the minister of finance noted, “we made it clear that equalization…would not grow faster than the rate of growth in the economy, that is nominal GDP.” He’s referring to a ceiling here, not a floor. The Throne Speech also used that language.The “cap” was such frequently used language that the House of Commons’ online Hansard search tool has “equalization payments cap” as its own topic!

For this reason and others, it’s high time we review the equalization formula and improve its design. All programs and policies need review and renewal. And it’s not unusual that they sometimes behave differently than intended.

The current formula expires in March 2024. So this year is a critical time to review these arrangements and ensure they serve their intended purpose. The current formula does not. And Ontario becoming a have/have-not province makes this clear yet again.

Malcolm Jolley: Five New Year’s resolutions for writing about wine

Commentary

I am sure I recently heard a news report on the CBC that explained Canadians (or possibly Americans) had stopped making New Year’s resolutions because we (they) had become wise to the fact that they are rarely realized. I cannot find the source, and the memory may well be false. Or it might be a projection, since I am hard-pressed to remember when I last made a genuine resolution to do something differently as the calendar turned. This changes now!

The school holidays in Ontario mean that, as I write at the turn of the year, we are still taking it easy, family-style, until the 9th of January. I fancy myself like René Descartes exiled in wintry Holland: I am staying with in-laws in the damp and drizzly Grey County countryside and prone to self-reflection. My cogito ergo sum moment is to resolve to do better in this column, and I have the following five ideas about how to do it.

More people

The French came up with the idea of terroir, that a wine had what the American wine writer Matt Kramer called “somewhereness”. This worked well for the French, whose somewheres included Bordeaux, Burgundy, and Champagne, and has been copied by all the other somewheres where wine is made. But surely, the most important thing about any somewhere is the people there.

Contrary to the Natural Wine Taliban (TradeMark pending), wine does not make itself, and the story of the people who make the wine is the real story of the wine. It’s easy to forget this and get caught up in geography, climate, grape variety, cellar equipment, or whatever else and forget about the minds that make the decisions about what ends up in the glass. I resolve to do better at this and bring The Hub readers more interesting stories about interesting people making interesting wines. Maybe it means less how and more why.

More books

The best “work” I had this year was reading Andrew Jefford’s book, Drinking with the Valkyries. If Revenue Canada asks you, I bought the book to write the Hub column about it a few weeks ago; you know, for professional reasons. That it was an absolute pleasure to read, and write about, is simply a happy coincidence… Though in all seriousness, Jefford’s writing reminded me how much my thinking about wine has been shaped on the shoulders of giants like him, and Kramer, Lynch, Olney, Robinson, and others.

There are giants in the making too, writing now and shaping how I think about wine just as much. An overlooked privilege of wine writing is, I think, that those who practice it are forced to intermingle at tastings and press trips. It’s a pleasure to meet the author of a book (in this case about wine) and discover the person who wrote it is as interesting, if not more, than what he or she wrote. I resolve to take advantage of these meetings, past, present, and future to tell Hub readers the stories of others who write about wine, and why.

More food

The story of wine, as it spread from the Southern Caucasus across the Mediterranean Basin and to the shores of the Atlantic, is the story of culture and food. Wine is food, say the French, and they mean it. In North American culture, wine is a drink too, which is fine, but a sip is always better with a nibble, even if it’s just an olive or a potato chip.

I resolve to try harder and more frequently to place wines in their context at the table, especially a Canadian table at whatever time of year we happen to be in. While wine is a pleasure unto itself, it’s also an enhancer of other pleasures, not least gastronomic. The Italians say one never grows old at the table. I will try and remember that wine’s foremost place is there.

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More New World

I am grateful for the liberty my editors at The Hub grant me with regard to the subject of these columns. But, with freedom comes the danger of complacency. Looking back, I see my bias, and great love, for the wines of Western Europe. I will confess to a particular fondness for the wines of Italy, and could likely write 50 columns a year just on that subject. But I am not a hedgehog and wish to be much more of a fox.

The world of wine is vast and holds pleasures from all corners of the Earth between the 30th and 50th latitudes. In my old job, my advertising clients were wine importers who represented wineries from across the globe. I resolve to get back in touch with them, and also to follow my own nose, to find out what’s interesting in the Antipodes and South America. Watch out for a report from Argentina, where I plan to be in February.

More Canada

I know we are also in Le Nouveau Monde, but as Thomas Bachelder says, Canadian wines are a bit “Trans-Atlantic”, because of our cooler climate (however hot it gets in the Okanagan). I am with Heather Reisman: my wine world definitely needs more Canada. 2022 was my year of re-engagement with the geography of wine, but most of that happened in Europe. It’s only late in the last year that I began to think about getting back to Niagara and seeing what’s happened on the ground in the last three years. And then, there is Beautiful British Columbia, which is making some of the most exciting wines in the North American West. Stay tuned.

What else? If you would to see more of something or other in these columns this year, please get in with me through The Hub at editorial@thehub.ca.