COLUMNS

SHUT UP-AND RAISE TAXES

If the provinces want more money, they should just get it themselves

PAUL WELLS June 6 2005
COLUMNS

SHUT UP-AND RAISE TAXES

If the provinces want more money, they should just get it themselves

PAUL WELLS June 6 2005

SHUT UP-AND RAISE TAXES

The Back Page

PAUL WELLS

If the provinces want more money, they should just get it themselves

ON JUNE 2, a special subcommittee of the Commons finance committee is releasing its report into the “vertical fiscal imbalance”—the notion that Ottawa has more money than it needs and the provinces don’t have enough. There’s a very broad constituency in the country for the idea that the refusal to “fix” the fiscal imbalance is proof of a wicked federal Liberal plot to hoard taxpayer cash. Almost everyone in Quebec seems to believe this, as do most provincial governments and all the federal opposition leaders.

This corner hasn’t seen the subcommittee report. But I’m guessing the subcommittee’s

chairman, Bloc Québécois finance critic Yvan Loubier, hasn’t changed his mind since he spoke at the group’s final public meeting in Ottawa. Loubier called the fiscal imbalance “an old problem.” Federal resources are “disproportionately high,” those of the provinces are disproportionately low. And the feds aren’t sharing. Just ask the Conference Board of Canada,

Loubier said: “Over the next 10 years, surpluses of several tens of billions of dollars will gather in federal government coffers while the provinces face increasing deficits.”

It must have been hard for Loubier to say that with a straight face, given the testimony he’s been hearing.

I’ve read what Loubier’s committee heard between February and early May. Most witnesses did agree there’s an imbalance, that it’s tilted in Ottawa’s favour, and that the feds should tilt it back by sending billions more to the provinces.

That’s because most witnesses were elected provincial politicians. It turns out that when you ask a provincial politician whether he’d like another government to tax the citizenry and quietly hand him the money, he says yes.

But the subcommittee also heard from non-partisan technical experts. And most said either that there is no fiscal imbalance; or that it’s smaller than in other federations and shrinking; or that if the provinces need more revenue they should just raise taxes instead of tugging at Ottawa’s sleeve. “It

may be useful for governments to blame others for their ills,” Richard Bird of the University of Toronto’s Rotman School of Management said. “But generally you shouldn’t believe them when they do so.” The very premise of the committee’s work is “faulty,” Brian Lee Crowley of the conservative Atlantic Institute for Market Studies testified. Rod Dobell of the University of Victoria called the Loubier committee’s mandate “badly skewed.” Its assumption that there’s an imbalance that needs fixing “violates the first rule of policy analysis,” he said, “which is to get the question right.” Since the feds and provinces have access to the same tax sources, either can raise its own revenues to match its spending. As Dobell and Harvey Lazar from Queen’s University pointed out, the last time “fiscal imbalance” was a hot topic was in the 1980s, when the feds were drowning in deficits and claimed they couldn’t raise enough

revenue to keep up with the provinces.

If “balance” means each level of government raises just as much tax revenue as it spends on its own responsibilities, that’s “both conceptually wrong and practically impossible,” Bird said. “It’s not a worthwhile goal to think about.” Why? Because it makes perfect sense for the national government to do a lot of the tax collecting in a federation, while states or provinces do much of the local spending, Ron Watts of Queen’s University said.

Watts said there’s a “virtually universal” mismatch in federations between each level of government’s revenues and spending. So federations transfer money from centre to regions. But Canadian provinces depend less on these transfers than do provinces or states in almost any other federation.

Why are the provinces short of cash? Actually, some aren’t: look at Alberta. Or British Columbia, where, Dobell reminded the MPs, transfers from Ottawa have already made the provincial government’s books far healthier. Other provinces, Lazar noted, cut taxes even while they complained about a revenue crunch from the feds. Both Michael Mendelson of the centre-left Caledon Institute of Social Policy and Richard Bird from the blue-chip Rotman School said the provinces should just raise their taxes if they want money.

It’s a classic tactic that when you can’t demonstrate catastrophe in the past, you predict it for the future. Loubier cited the Conference Board. But every time that organization tries to predict federal surpluses several years out, its prediction shrinks because every time the feds increase spending, cut taxes or give money to the provinces, the “imbalance” shrinks. The Conference Board’s Paul Darby actually testified before the subcommittee. He said the provincial situation has improved yet again in the past year. We’ll see whether Loubier heard him. (71

To comment: backpage@macleans.ca Read Paul Wells’s weblog, “Inkless Wells,” at www.macleans.ca/paulwells