Monday, March 26, 2007

The Fiscal-Imbalance & Weapons of Mass Destruction - they didn't exist

For years we've heard the term "fiscal imbalance" used continually, especially by Ontario Premier Dalton McGuinty. He claimed that Ontario was getting short-changed in the federal transfers to his province. The sentiment was echoed by Quebec, the federal finance minister and the Prime Minister. Looking back, it is reminiscent of U.S. Secretary of Defense Donald Rumsfeld, and Vice President Dick Cheney, announcing over and over that "the whole world knows Iraq has weapons of mass destruction". It was a repeated sermon done with such conviction, that many felt foolish to question something "so obvious". In a different realm of the economy not war, Canadians were fed the whining "fiscal imbalance" line to make it appear that Ontario and Quebec were losing out in the whole deal. This line played well for Harper. Fix the "fiscal imbalance" in ON and PQ and fix the old minority government status with one stone.

Andrew Coyne writes that the whole thing was a myth. His "The 'Fiscal-Imbalance' Myth" is worth reading. Here are some excerpts from the March 24 article. (emphases are mine)

"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.

In essence, there never was a fiscal imbalance, even in the provinces' imaginations. 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.

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 fully $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, even 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 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."

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