End of the 'fiscal imbalance' myth

So that’s that. After this week, let us hear no more, ever again, about the blessed “fiscal imbalance.” It was always a sham, there was never anything to it, it was obvious to anyone who bothered to look. But this was the week when it became impossible to sustain even the pretense....

Leave aside the gaping logical hole in the argument that there is some sort of structural imbalance in the federation’s finances: namely, that the provinces can raise every sort of tax the feds can, plus some -- notably resource royalties -- they can’t. Just look at the facts. They’re all there in the federal budget -- the same one that claims to be fixing the “fiscal imbalance.”

Are the provinces, collectively, in poverty, while Ottawa abounds in plenty? All the provinces are now running surpluses: in the aggregate, they took in $9-billion more than they spent last year. The average provincial debt-to-GDP ratio is less than 20%; Ottawa’s debt is still 33% of GDP. Provinces pay 8 cents of every revenue dollar in debt interest; the feds, 15 cents.

Is the federal government hogging the available fiscal room? Federal spending, excluding transfers to the provinces, is now just 10% of GDP, versus the provinces’ 16%. The same holds true on the revenue side. Federal revenues: 16% of GDP. Provincial revenues (including transfers): 18%. And the gap is widening.

And yet, in the face of all this evidence that the provinces, far from starved for funds, have never been richer, the budget still forks over an incredible $47-billion in cash transfers this year -- $51-billion, if you count funding for infrastructure: one quarter of all federal program spending, and more than twice as much as the provinces received just a decade ago. This, from the government that claims to be “clarifying roles and responsibilities”!

How did it come to this? In essence, there never was a fiscal imbalance, even in the provinces’ imaginations: there were three, mutually incompatible imbalances. There was Quebec’s agenda, unchanging as ever, for more money, dressed up as a systemic federal-provincial thing to enlist the aid of other provinces. There was Ontario’s quite different complaint, which was not that Ottawa was stiffing the provinces in general, but that it was being shortchanged relative to the others. And there was the ambition of the newly rich oil-producing provinces, Newfoundland, Nova Scotia and Saskatchewan, to get out from under the equalization clawback.

But the only way to deliver enough booty to Quebec to make a dent in its demands was to give it the lion’s share of any increase in transfers, and the only way to do that was to smuggle it in via a “reformed” equalization program: otherwise it would be too clear to all what was going on. But to deliver to Quebec, you had to include oil revenues in the equalization formula, and to deliver to Newfoundland and the others, you had to exclude them. And while both might have been satisfied simply by expanding the program, that ran you afoul of Ontario. Only two sides of this puzzle could be solved at once, and all of the budget’s obfuscations couldn’t conceal which two.

Or if they had any hope of getting away with it, that was lost the moment Jean Charest chose, the day after the budget, to announce he was blowing the money on tax cuts, worth about $750 to the average family. All that stuff about essential public services being deprived of funds, all that doggerel about Ottawa having the money but the provinces having the needs -- all forgotten, in an instant. Taxpayers in the rest of the country have the pleasure of knowing they are paying so that middle-class Quebecers can go on another annual ski trip.

But if Charest’s federally-funded tax dodge did not give the game away, Ontario’s budget did. Here’s how hard done by Canada’s largest province is: in the coming fiscal year, it will receive $16.1-billion in funding from Ottawa, or more than one-third of all federal transfers. That’s up from $7.8-billion in fiscal 2002, just six years ago. Ontario’s share has been rising, not just in absolute terms, but relative to the other provinces.

That at least clears up one puzzle: how the McGuinty government has been able to sustain such extraordinary levels of spending -- a 30% increase in just four years. In popular mythology, it’s because Mr. McGuinty took the difficult but necessary step of raising taxes, after promising he wouldn’t. He had to, don’t you know, after Mike Harris’s heartless, ideological tax cuts had starved the government to the bone. Just one problem with that explanation: tax revenues were higher under Mr. Harris than under Mr. McGuinty.

Look it up. Personal income tax revenues, on average, under the tax-cutting Mr. Harris: 4.3% of GDP. Under the tax-raising Mr. McGuinty: 4.2%. Total own-source revenues -- that is, exclusive of federal transfers -- are roughly the same under the two governments, at around 13% of GDP. Mr. McGuinty’s four-year spending spree has been financed, not with his own tax hikes, but with a massive increase in federal transfers -- the very transfers he has spent the last four years complaining about.

Not that this is likely to shut him up, you understand, any more than Mr. Charest. I only say that it should.