View topic - Equalization buys big government :: Free Dominion - Principled Conservative - Party and Canadian Politics

Posted: 04/ 15/ 04 1:12 pm Post subject: Equalization buys big government

Here's another stinging indictment of equalization, a socialist relic that is being discredited worldwide....

Equalization buys big government

Peter Holle
National Post

Wednesday, April 14, 2004

Last month's federal budget renewed one of Canada's most sacred policy cows -- our $10-billion equalization program -- for another five years. The first of a three-part series looks at how equalization locks "have-not" provinces into enormous welfare traps.

Well-intended transfer payments shift resources from "have" to "have-not" provinces to ensure a reasonably similar level of services across the country. While that sounds noble, the downside lies in the program's creation of perverse incentives. Equalization locks "have-not" provinces into enormous welfare traps that encourage increased dependency on its funding.

Saskatchewan's beleaguered Finance Minister, Harry Van Mulligen, understands the welfare trap well. As social services minister in the Roy Romanow government, he spearheaded a set of welfare reforms lauded for helping welfare clients achieve independence. Welfare reform's main goal should be to reward the decisions of individuals to work, he maintains.

"But what about my province and equalization?" he asks. "Why does it punish Saskatchewan for having a successful oil industry?" It's a good question. Bizarrely, in 2001 the equalization system deducted $885-million from his province's transfer payments because Saskatchewan's oil industry generated $668-million. The province would be ahead if it shut the whole industry down. "The federal government should stop punishing Saskatchewan for economic growth in our resource sector," Van Mulligen says.

The formula for determining transfer amounts is so complex that perhaps only 30 government technocrats and academics in Canada understand it at all. One "solution" proffered for the Saskatchewan equalization rip-off is to duplicate the arrangement for fellow "have-nots" Nova Scotia and Newfoundland -- namely that the feds will only claw back 70% of offshore oil revenues. Ouch.

A 2002 study by the Atlantic Institute for Market Studies shows how recipient provinces maximize their subsidies by raising taxes on weak tax bases. On average, in "have-not" provinces personal taxes are one-third higher, capital taxes are more than twice as high and sales are half again as high as in "rich" provinces. Are we surprised that capital, jobs and growth gravitate toward Ontario and Alberta?

The global experience with equalization is just as poor. Invariably too complex to be understood by more than a few, it drains the economic vitality of productive regions while entrenching counterproductive policy choices in poor ones. Most damagingly, equalization inflames aggressive separatism in some countries.

Consider the following three examples:

- In Belgium, Flanders heavily subsidizes the regions of Wallonia and Brussels. Governments in the latter two raise taxes and aggressively regulate the economy with the knowledge that economic misperformance increases Flemish transfers. The separatist Vlaams Blok Party is campaigning to take Flanders out of Belgium.

- The residents of prosperous Stockholm refer to Sweden's equalization program as the "Robin Hood Tax," an odd metaphor since the legendary rebel stole from the tax man, not the other way around. The transfer is huge -- more than $11,500 per Stockholm resident. Not coincidentally, the most impressive public sector reforms, including the introduction of competitive markets in health care and transportation, have occurred in Stockholm. Recipient regions coast along with old monopoly models funded by their more efficient counterparts.

- Equalization also strains the Australian federation. Tasmania, the poorest state, receives 65% of its revenues from transfers. Not surprisingly, the easy outside money allows the state to impose comparatively high taxes and restrictive labour and environmental legislation -- all amid an accelerating drain of young people and entrepreneurs, the lifeblood of a successful economy.

A 2002 critique of Australia's equalization system identified problems that resonate eerily in Canada. It refers to "game-playing" bureaucrats who redefine activities to maximize equalization payments. The system creates "a tendency toward a reduced effort on cost-reducing reform" -- a phenomenon called the "flypaper effect." "Money 'thrown' at a state government tends to stick, even though the welfare of households would be better served if the money were passed on to them through lower taxes."

Let's apply the flypaper effect to Canada, particularly Manitoba. In 2003, it received $1.4-billion, or 19% of its budget, through equalization. It has the largest provincial government in Western Canada -- 24% of GDP. The extra spending is about the same as the amount it receives in equalization. It spends the most per capita in Canada on health care, without better results. Bringing health spending down to the Canadian average would reduce it by almost $400-million.

Predictably then, Manitoba has Western Canada's highest personal and capital taxes. It also has little incentive to build its tax base; it sells its hydro-electric resources too cheaply, for example. According to Tom Adams, director of the think-tank Energy Probe, Manitoba could realize at least $900-million a year in extra revenue if it priced its electricity at market rates.

But why should it? As long as Alberta and Ontario pay the freight for a system that bloats its public sector, keeps its taxes uncompetitive and removes any reason to price resources properly, it will continue to coast along in a "have-not" purgatory.

In short, Manitoba is paid to have a big government and not grow or innovate -- a rational result of an irrationally complex and distorting system.

http://www.canada.com/national/nationalpost/news/comment/story.html?id=b9a52b9e-6534-4c5c-a7b1-78c777c91a62

Posted: 04/ 15/ 04 1:38 pm Post subject:

Posted: 04/ 16/ 04 9:10 am Post subject: Marxism

This system is very easy to understand, just call it what it really is, MARXISM. "From each according to his means, to each according to his needs" Karl Marx.

Posted: 04/ 16/ 04 10:13 am Post subject:

Transforming equalization

Peter Holle
National Post

Friday, April 16, 2004

Last month's federal budget renewed one of Canada's most sacred policy cows -- our $10-billion equalization program -- for another five years. The last of a three-part series looks at how equalization can be transformed.

Equalization began as a simple program in 1957. Despite cumulative expenditures of more than $200-billion through 2004, the economies of "have-not" provinces have fallen progressively behind. It is time for an honest re-evaluation.

Perhaps revisiting the policy's origins may provide a starting point. Nobel Laureate James Buchanan, the "father" of equalization theory, originally described it as a bribe to induce residents in low-income regions to stay home, to avoid swamping wealthy ones with migrants.

But the gnomes who devised Canada's program ignored his preferred method. Buchanan recommended transfers to individuals through regionally lowered income taxes, not unconditional transfers to "have-not" governments. The value of the inferior option was limited, at best, to investment in such productivity enhancements as education or transportation.

In 2001, Buchanan repeated his prediction that our style of equalization would tend to expand government in recipient provinces. Public sector intermediaries capture the transfer's benefits, the so-called "flypaper effect." It explains why "have-not" provinces host the largest governments, as a percentage of their economy.

Both "have" and "have-not" provinces have a stake in substantive reform. Equalization ought to make poorer provinces self-sustaining, not lock them into dependency or hobble them with high taxes and inefficient services. Equalization could instead be structured to place the "have-nots" back on a growth track. The effort would unravel decades of fiddling and fumbling with obscure formulas and the complex policy distortions they produce.

It is unreasonable to expect "have-not" politicians to bear the cost of reform. Making equalization truly transformative would require a transition period and appropriate compensation for adjustments. Saskatchewan, clearly ripped off in the present system with 125% clawbacks on resource revenues, also deserves special consideration.

FOUR IDEAS FOR REFORM:

- Tinkering with the formula: Recent research shows that removing resource revenues from the formula would greatly simplify it while mitigating the egregious welfare-trap effect. A second fix would make transfers sensitive to the effectiveness of spending in recipient regions, with a simple rule that recipient provinces cannot spend more than national averages on public services. This would end the perverse situation where "have-not" provinces spend more per capita for health care and education than donors, and give impetus to structural reform in these low-performing sectors.

- Regional federal tax reduction: Buchanan's original theory entails dramatic income tax reductions in "have-not" provinces. Both Paul Martin and Frank McKenna have talked about converting regional development and job-creation programs into a 10-year federal tax holiday for "have-nots." This conversion would generate political heat from stakeholders fighting to maintain the flow of funds through the public sector. But paying fellow provinces to lower taxes while removing systemic foibles that make them uncompetitive is the sort of assistance that might really help.

- Debt-for-equalization swap: Most equalization money goes right back out the door in the form of provincial debt service charges. If Ottawa and the provinces swapped debt for equalization, the provinces could clean up their balance sheets and stop those payments. Based on present distribution and assuming a cap rate of 7.5%, capitalizing the current $10-billion commitment into a one-time debt swap of $135-billion would see Ottawa assume, for example, $52-billion, $18.5-billion and $15.8-billion in ownership of the respective debts of Quebec, Manitoba and Nova Scotia. Future transfers, along with their accompanying distortions, would disappear. The price? A manageable increase in a steadily falling federal debt, with a further saving from lower servicing costs due to Ottawa's better credit rating. It would have to include strict rules that prevented provinces from simply running up new debt.

- The tax swap: The total bundle of equalization and other federal transfer programs comes to about $33-billion in 2004. Federal GST revenue is projected at almost $29-billion, or roughly the same amount. Subject to harmonizing it with provincial sales taxes, the federal government would simply hand over the GST in place of these transfers. By eliminating the whole complex mess, this would sidestep unnecessary bureaucratic and political churn. It would also be the least difficult to sell, since all provinces benefit from the swap.

Imagine the day Manitoba had competitive taxes, an innovative, high-performing public sector, and priced its hydro resources properly. With a growing population and strong business investment, it would become a "have" province, and the story would be replayed in the Maritimes and Quebec. Dramatic equalization reform is the fastest way to get there.

Peter Holle is president of the Frontier Centre for Public Policy, a Winnipeg-based think-tank.
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What a well thought out series
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Posted: 04/ 17/ 04 8:32 am Post subject: Taxes

I read somewhere that 40 cents out of every tax dollar sent to Ottawa is consumed by the beauracy, now I believe it, Alberta needs to send that letter advising Ottawa that we intend to quit the con game of equalization. Fri, April 16, 2004
Top heavy

By LINK BYFIELD -- Calgary Sun

The sweeping green lawns and soaring stone Peace Tower on Parliament Hill leave a lasting and pleasant impression.

But how many people remember the rather nondescript office buildings across Wellington Street?

Well, according to a news story this week, there is a plan to set aside the entire city block across from Parliament Hill for the ever-growing staff of the Prime Minister's Office (PMO) and Privy Council Office (PCO).

It now takes a whole city block to accommodate the people who control the prime minister's contact with the public, Parliament and civil service.

There are more than 100 staffers in the PMO, and more than 800 in the PCO, currently spread out around town.

Understand, these are just the central co-ordinators. They are the pinnacle, the creme de la creme. Beneath them is a mountain of 37 cabinet ministers, 47 federal departments and major agencies, and 283,000 public servants.

One thing PCO boss Alex Himelfarb did a couple years ago was report to then-prime minister Jean Chretien on what Canadians think about the federal government.

The report was blunt.

The PCO concluded that Canadians see public institutions as "remote, self-serving, inaccessible, non-responsive, occasionally inept, excessively adversarial and increasingly irrelevant."

The PCO was equally candid about the sad state of parliamentary democracy.

It wrote: "The political executive (i.e. cabinet] retains a virtual monopoly on the use of democratic authority, but this power is at times exercised without the counterweights of collective decision-making, strong accountability to Parliament and public transparency."

All the same, said the PCO bureaucrats, ordinary MPs are too short-sighted to develop a grasp of policy, so the powers of the prime minister (and by implication of the bureaucracy) should not be weakened.

In other words, Canadians already hold government in contempt because it doesn't work, but for heaven's sake don't change it.

It's an interesting reflection that Himelfarb is probably the most politically powerful man in Canada -- equal and in many ways superior to Paul Martin --yet not one voter in 100,000 knows he exists.

We might just want to bear this in mind as Paul Martin heads toward the next election promising (or perhaps more accurately, threatening) to horn in even more on health-care delivery, bestowing more money as long as the provinces do what he says.

In a few innocent minds, such talk probably still prompts images of Paul Martin and kindly souls like Alex Himelfarb poring over aging Aunt Martha's chart and getting concerned about how long it's taking her local hospital to fix her hip.

However, I think this impression of Ottawa is wearing thin.

Before the January Throne Speech, Martin (or Alex Himelfarb, or someone) had the PCO set up eight focus groups across the country to test all the new Martinite buzz words ("building a 21st century economy," "asserting Canada's role in the world," "creating a new partnership with municipalities," etc.) to see if they turned people on.

They didn't. Nobody had a clue what most of them meant.

The only thing that got people really enthused was the idea of spending more on health care.

If Martin just promised us that, it would work for him. But no, he also wants to interfere more in how provinces spend it, which is none of Ottawa's constitutional concern.

Martin, who sounded strangely frantic even before he needed to be, is getting shriller by the week.

Steve Harper can take this man easily. He just has to make two promises -- to increase health transfers to the provinces, and to cut taxes.

That's it. He'd win.

And if anyone asks how he proposes to afford doing that, he just has to point across Wellington Street at Alex Himelfarb and his 800 PCO tinkers and fix-its, co-ordinating their 47 departments and major agencies, and their quarter-million remote, self-serving, inaccessible, non-responsive, occasionally inept, excessively adversarial and increasingly irrelevant employees.

Martin thinks we need them all.

We don't.

We could get rid of half of them and never notice the difference.

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Posted: 05/ 12/ 04 7:54 pm Post subject:

The welfare trap argument is popular with economists but ignores politics: what government (left or right) will get re-elected if it doesn't do its best to make sure the economy grows and people have jobs? Frontier doesn't like the Manitoba NDP's economic policies. Fine. But they are hardly adopting them to run the economy in to the ground knowing they'll get more equalization in return. Similarly, Conservative Danny Millions in Newfoundland isn't going to stop work in the oilfields because he gains nothing in taxes from it -- if he closes the oilfields, he'll get kicked out of office.

Posted: 05/ 12/ 04 7:58 pm Post subject:

replace it with something workable

take on the debts of the atlantic provinces
take enough debt from Quebec, Saskatchewan, Manitoba, and now even BC so that their interest payments they save will cover the equlization

then only PEI and NL need cash, and that should be piddence
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