August 8, 2024
Dear Premier Ford,
Since 2020, Fairness Alberta has been explaining why Canada needs deep reforms to equalization and fiscal federalism more generally. As you can imagine, we were pleased to see the Premiers so focused on these matters at the recent Council of the Federation meeting in Halifax.
Ontario has a great deal in common with B.C. and Alberta when it comes to the degree of redistribution of wealth out of our provinces by the federal government. I believe our analysis of these fiscal flows and the key transfer programs shows that Ontarians are seeing too many tax dollars go to Ottawa only to flow to other provinces.
In 2022, Ontarians sent $33 billion more to the federal government in taxes than the government spent back in Ontario. Despite hosting the nation’s capital, this is not an unusual total for Ontario (see Finances of the Nation).
To be clear, we believe that the more productive provinces in Canada should certainly help the others, but the current level of redistribution is not transparent, fair, or conducive to economic growth. It also goes hand-in-hand with federal interference in provincial jurisdiction. The combination of sending too many of our tax dollars to Ottawa and that fiscal power being used to dictate service conditions is bad for outcomes and accountability; it is also straining the unity of Canada.
By reforming the status quo we can improve outcomes, save money, and strengthen the connection between taxpayers and the governments that serve them.
The issue that four of your fellow premiers are now focused on is equalization. Funding the equalization program accounts for about one-third of the $33 billion total net amount Ontarians sent to the rest of Canada via Ottawa. While Ontario is getting back a half-billion dollars this year and next, its taxpayers are responsible for paying about $11 billion into the fund (as I detail in a recent column for the Hub).
The reason for the small payment to Ontario highlights the biggest flaw in the formula: the size of the equalization program is not related to the relative inequality between the Provinces. As the inequality has shrunk over the last decade, the payments kept growing. When the below-average provinces are brought all the way up to the median, any remaining budgeted dollars in the $25 billion program are then divvied up to over-equalize them. They were getting so over-equalized that their fiscal capacities were being boosted past Ontario’s. Thus the payment to Ontario.
In other words, Ontario is (somewhat controversially) getting a payment that only offsets 5% of the $11 billion Ontarians pay, and it is only because the bloated program is paying so much extra that it pushes the so-called ‘have not’ provinces further ahead than Ontarians. Ontarians will be funding the equivalent of $2700 per family of four this year to not just bring other provinces to the average, but to push them right up to Ontario’s capacity.
The other major weakness with the equalization program is that it is not adjusted for provincial differences in cost of living, and this penalizes Ontario in particular. Every province is struggling to keep up with inflation, population, and interest-rate pressures. Ontarians face many challenges that their neighbours do not, especially when it comes to housing costs being out of reach. Should Ontarians not see more of their hard-earned tax dollars going to directly fund the services in Ontario which they identify as needs?
Put simply: does Ontario not need to pay its front-line workers more than its neighbouring provinces in order to have the same quality of life as they do? We believe this should be acknowledged and equalization reformed accordingly.
We think $2700 per family of four, or $10.5 billion from Ontarians as a whole, is too much to be sending to Ottawa to improve services in neighbouring provinces when Ontario has the challenges it does.
Again, the productive provinces should help ensure equitable access to services across Canada, but how much is too much?
Ontarians, like the three western provinces, have higher than average incomes, which corresponds to higher than average income taxes. Every time the federal government expands a program, even when these provinces get an even per capita share back, their taxpayers pay more than they get back for the ‘privilege’ of this federal program they often cannot use or do not support.
When these are genuinely federal programs, this is inevitable and acceptable. When it is the federal government using its tax room to elbow its way into provincial services, in additiona to all the other problems it becomes clearly unfair when you consider that Ontarians are paying more than a dollar to get that federal dollar back for their provincial services.
A brief is attached explaining and quantifying the issues outlined here. It is a considerably updated version of a brief we sent your previous Parliamentary Assistant (Ms. Khanjin) in 2022.
Reforming equalization and fiscal federalism more generally will be controversial, but it is critical to reducing our federal deficit and/or ensuring Canadians are treated more equitably when it comes to delivering front-line services.
Canada, and Canadian unity, could really use your help.
Sincerely,
Bill Bewick, Ph.D.
Executive Director, Fairness Alberta
Ontario Brief: Fairness Alberta on Equalization and Fiscal Reform (August 2024)
Ontarians sent $33b more to the federal government than the government spent back in Ontario (despite hosting the nation’s capital). More productive provinces should certainly help the others, but this level of redistribution is neither transparent, fair, nor conducive to economic growth.
Alberta, B.C., and Ontario have much in common on this front. In fact, Ontarians may have the most to gain from our reasonable reforms.
What is the benefit in Equalization and other fiscal transfer reforms for Ontario?
- Reduced personal and corporate taxes
- Reduced provincial debt
- Improved provincial services
- Improved national unity (addressing western alienation)
For example:
- If our reforms were allowed to reduce the size of equalization, that would reduce the tax/debt burden on Ontarians by $3-5 billion annually.
- If our equalization reforms outlined here were adopted, Ontario’s government would get as much as $7.7 billion more back this year to spend in health and education.
More generally, If the federal government scope creep is not stopped federal taxes will go up substantially, disproportionately paid by workers in Ontario, BC, Alberta, and Saskatchewan.
Federal/Provincial Fiscal Fairness
The federal government was expanding further and further into provincial jurisdiction before COVID – now childcare is a massive new federal spending program, federal pharmacare and dental care loom, and infrastructure funding comes with all kinds of strings attached. This trend must be reversed. Albertans and Ontarians should decide how they want to build their provinces and economies. In particular, they should decide how their social services run – it is a core element of our Constitution.
These federal intrusions don’t just limit the independence of Alberta and Ontario, they cost us billions because of the redistribution between provinces inherent in any federal program. Even in an equal per capita spending program like the $55 billion health and social transfers, Albertans and Ontarians each pay $1.5 billion more than we get back because of higher tax payments. If we funded these provincial responsibilities via provincial taxes directly, there would be no loss. Higher-salary jurisdictions like ours would have the resources our public services need. In the status quo, we quietly lose out due to this hidden equalization.
Those who pay a higher share of taxes always pay more when the federal government expands. In 2019 Albertans and Ontarians each sent about a net $20 billion more to Ottawa than was spent back in their provinces. In 2022 Ontario hit $33 billion net.
Equalization – Equalization is only a part of this net loss but it is one-third of Ontario’s net loss ($10.5b out of $33b). As large cheques are written only for select provinces it is a much clearer form of redistribution. As has emerged since Alberta’s 2021 referendum, it is also very flawed.
Flaws:
- For one thing, overall payments grow with GDP despite the provinces’ fiscal capacities having become much more equal since 2015. This $25 billion budgeted amount should be a cap but not a floor, with the remainder either put against the federal debt or sent back fairly to all provinces.
- A second glaring problem is the fact the formula doesn’t treat Quebec as if it were getting the full value at Quebec Hydro. With the GDP growth rule above lifted, if the formula just ignored Quebec’s rate subsidies and assumed full fiscal capacity from Hydro, Quebec’s payment drops from $13 billion to $5.8 billion (scenario #2 below). The overall program drops $8b, enabling a CHT top-up as Saskatchewan has proposed, a refund to net payers, deficit reduction, or other options).
- Newfoundland’s case focuses on the absence of any variables to consider costs of services. They focus on population density, but we look at cost of living. If you don’t need to pay nurses and teachers in Moncton and Montreal what you do in Mississauga, why would those provinces need an equal fiscal capacity to afford equal services? They don’t. If you use CPI as a proxy for what services/salaries cost then Ontarians suddenly get $6.4 billion back, and the overall program falls by $5 billion (netting Ontarians an $8b benefit).
Province | Equalization (2024 $M) | #2 GDP/Hydro | #3 GDP/CPI | #4 GDP/CPI/Hydro |
NL | $218 | $198 | $0 | $0 |
PE | $610 | $619 | $519 | $533 |
NS | $3,284 | $3,340 | $2,960 | $3,044 |
NB | $2,897 | $2,941 | $2,238 | $2,304 |
QC | $13,316 | $5,802 | $4,674 | $239 |
ON | $576 | $0 | $6,465 | $7,768 |
MB | $4,352 | $4,429 | $3,255 | $3,373 |
SK | $0 | $0 | $0 | $0 |
AB | $0 | $0 | $0 | $0 |
BC | $0 | $0 | $0 | $0 |
Canada | $25,253 | $17,328 | $20,111 | $17,261 |
Savings | $7,925 | $5,142 | $7,992 |
If you combine these reasonable reforms to the formula, as we do in scenario #4, Ontarians would be entitled to $7.7 billion to fund provincial services. With their 44% share of the $8 billion savings included this is a potential net benefit of over $11 billion to Ontarians – reducing their tax burden and boosting the front lines.
We explained the proposed changes (GDP escalator, Quebec Hydro, cost of living) more fully in this column (2021 numbers): https://calgaryherald.com/opinion/columnists/opinion-follow-the-money-quebec-unfairly-benefits-from-flaws-in-equalization and talked about cutting the program in half in light of the convergence between provinces since 2015 in this National Post column “Robbing Ontario and the West to pay for the rest – exposing the unfairness of Equalization.”
More recently we outlined how the criticisms from B.C.’s government apply just as strongly to Ontarians: Bill Bewick: B.C. and Newfoundland are right to complain about equalization—but where is Ontario? – The Hub
In short: Ontarians would benefit by $3-5 billion if Equalization was a fairer size (roughly half) and would benefit by up to another $7 billion in payments if changes were made to recognize the cost of living pressure differences between have provinces like Ontario and the have-nots.
Fairness Alberta will continue to beat the drum in Ontario and BC to help them recognize that in addition to all the other ways the feds quietly redistribute wealth to Quebec and the Maritimes, they are paying the equivalent of $2400 per family of four to provincial governments representing only 30% of the population solely through a bloated and unfair Equalization program.
Estimate of net revenue from each province for Equalization (based on federal revenue contributions), and returned in payments:
