Ottawa giveth, Ottawa taketh away

IAN URQUHART April 5 1976

Ottawa giveth, Ottawa taketh away

IAN URQUHART April 5 1976

Ottawa giveth, Ottawa taketh away


The principle of distributing the nation’s wealth is as old as Confederation and has long been accepted as a responsibility of the federal government. Through a variety of grants and subsidies, taxes and exemptions, Ottawa takes from the rich and gives to the poor. At the government level, the principle has been institutionalized in the form of “equalization grants,” a sort of intergovernmental welfare system by which Ottawa pays out cash to the seven “havenot” provinces.* The amount paid out in equalization grants has been growing rapidly—an annual average increase of 19% in the past five years—and the federal government will spend a total of $2,145 million on them this year, about 5% of the total, federal budget.

But the Fiscal Arrangements Act, the legal authority for the equalization grants, is up for its quinquennial review this year and Ottawa is making noises about changing the act to slow down the rate of increase in the grants. Finance Minister Donald Macdonald was to give a rough outline of his approach at a federal-provincial finance ministers’ meeting early this month in Ottawa, the first in a series of meetings to discuss the problem. “We want a system that provides a rate of growth that is more reasonable,” said one federal finance official the week before the meeting. It is part of a general belt-tightening program that has already seen Ottawa slap a ceiling on its share of medicare costs, impose cutbacks on unemployment insurance payments, and slow down the growth in grants from the Department of Regional Economic Expansion (DREE). The provinces, particularly the have-nots, are starting to feel the pinch. The have-nots can be expected to oppose any move to hold down equalization grants.

The grants are now based on a highly complex formula involving 22 different “revenue sources,” ranging from personal income taxes to mineral royalties to liquor sales. If the sources of revenue in a province fall below the national average, Ottawa compensates the provincial government to make up the difference. The theory is that each province will then have

* Newfoundland, which will receive $224 million in equalization grants this year; Prince Edward Island, $53.7million; Nova Scotia, $285.6 million; New Brunswick, $228.7 million; Quebec, $1,093.5 million; Manitoba, $157.6 million; and Saskatchewan, $101.9 million. The three “have”provinces, Ontario, Alberta, and British Columbia, will get nothing. Thus, indirectly, citizens of the have provinces subsidize citizens of the have-not provinces through their federal tax dollars.

access to roughly equal amounts of revenue per capita to provide public services such as health and education. The federal government wants to develop a more simple formula, such as tying the grants directly to per capita income in a province, without tampering with the general principle. But if a simpler formula had been used in the past five years, the rate of increase in the grants would have been much lower, and the have-not provinces say now is not the time to hold down equalization payments.

Quebec, for example, is facing a $900million Olympic games deficit. Prime Minister Pierre Trudeau has already rejected additional federal aid to Quebec to help the province pay the bills, but Quebec








Growth in personal income $ per capita



Atlantic Quebec Ontario West

Finance Minister Raymond Garneau says Ottawa is duty-bound to help “for the sake of Canadian unity.”

But the Atlantic provinces are facing a more serious and long-term problem with no easy solution in sight: rising power costs. There has been a 50% to 70% increase in power rates on the east coast in the past 12 months alone and analysts predict an-

other 85% hike by 1980. The reason for the enormous increases is that the Atlantic provinces are almost totally dependent on oil-generated power, and the price of oil keeps going up, with another increase slated for this summer. People who heeded provincial advertising to heat their homes electrically have seen their power bills shoot up from $30 a month to $150 or more. Some have been forced to sell their homes. Others have turned down their thermostats to a chilly 50 degrees fahrenheit, and there has been a run on supplies of heavy sweaters. The Atlantic provinces have appealed to Ottawa for special assistance but with no success. If Ottawa also presses ahead with plans to hold down the increase in equalization payments, which make up about one quarter of their annual budgets, they will have to raise their taxes and power rates still higher, or cut back sharply on government services.

Nova Scotia Finance Minister Peter Nicholson said before the federal-provincial meeting in Ottawa that he would make one last effort to attract more federal aid. He sees Nova Scotians as being cast “in the unwilling role of shock troops in the federal war on inflation.” Some federal officials agree with him. Says one DREE official: “If Ottawa doesn’t fulfill its obligation to alleviate the effects of this energy cost problem it will be consigning Nova Scotia and New Brunswick to the reduced level of Prince Edward Island, a subsistence, agrarian society.”

But the federal government can probably count on the implicit, if not stated, support of the three have provinces for its opposition to special assistance and its proposals to hold down equalization grants. Alberta Treasurer Merv Leitch says his province’s main concern is to ensure equalization payments do not skyrocket as a result of the royalties it receives from oil. The federal government has already moved in this direction by decreeing that two thirds of the new royalties Alberta and Saskatchewan are receiving as a result of high oil prices will not be counted in the equalization pool. The move was brought on by figures that showed even Ontario would be receiving equalization grants under the old formula as Canadian oil approached the world price.

Ontario plans to push for simplification of the equalization formula along the lines being suggested by Ottawa, with the resulting slower rate of increase in the grants. Says Ontario Treasurer Darcy McKeough: “All the money we put into equalization and DREE and we still have worse regional disparities than when we started. Something is clearly wrong somewhere.”

According to the published statistics,

McKeough is wrong. The have-not provinces have been slowly, but steadily, narrowing the gap between themselves and the haves. By 1974, the seven have-nots

had an average per capita income of $4,032, or 88.1 % of the national avèrage of $4,966. That is the closest the seven havenots have come to the national average on historical record, which goes back to 1926. But there are still wide disparities. Newfoundland, for example, had an unemployment rate of 15.4% in February, the highest in the country and more than three

times Alberta’s rate of 4.5%. The public services offered by the provinces also vary widely despite the equalization grants. In 1972, Canadians spent a national average of $881 on the education of each student in elementary and secondary schools. But the expenditures ranged all the way from $534 per student in Newfoundland to $1,009 in Ontario.

It was such disparities as these, or worse, g that prompted Mackenzie King to appoint | a Royal Commission on Dominion-Pro3 vincial Relations during the great depres3 sion. The commission reported in 1940 and: 3 recommended, among other things, that the federal government take over responsibility for unemployment insurance and begin paying equalization grants to the poorer provinces. The recommendations were vehemently opposed, however, by three mossback premiers: Maurice Duplessis of Quebec, Mitchell Hepburn of Ontario, and William Aberhart of Alberta. Hepburn called the commission’s report “a blueprint for the destruction of Confederation.” But the federal government introduced the recommendations anyway in piecemeal fashion, finishing with the introduction of equalization grants in 1957.

There will be no Hepburns in this year’s debate over equalization payments, which will culminate with federal legislation to be introduced near the end of the year. All the provinces now agree the grants are a good thing, and much of the debate will take place in private between officials. But the stakes are even higher now than in 1940 and the outcome just as crucial. Says Nova Scotia’s Nicholson: “A more equitable distribution of national resources must be made if the country isn’t to split into two halves, one containing the very rich, the other, the very POOR.”