Undermining Equalization
by John W. Warnock
Leader-Post (Regina), June 14, 2006
Premier Lorne Calvert’s government
is undermining the federal principles of equalization, which are now entrenched
in the Canadian Constitution. With the general support of the opposition
Saskatchewan Party, they are insisting that revenue from non-renewable
resources be excluded from any new formula assessing a province’s capacity to
raise revenues. This is not in the general interest of the people of
Saskatchewan nor Canada as a whole.
What is equalization? During the
Great Depression of the 1930s a number of provinces, including Saskatchewan,
faced financial bankruptcy and had to be bailed out by the federal government.
Under the BNA Act, provinces were given the responsibility for the key areas of
education, health and social services, but they were not given the taxing
authority to carry out this mandate. Furthermore, many of the less
industrialized provinces, including Saskatchewan, did not have the economic
base to provide services equal to those available in the more prosperous areas
of the country.
In 1937 Mackenzie King’s Liberal
government created the Royal Commission on Dominion-Provincial Relations,
better known as the Rowell-Sirois Commission after its two chairmen. Unlike
other Royal Commissions, this one held hearings all across Canada, even in
small towns. A wide variety of people gave evidence at these hearings, not just
“stakeholders.” Furthermore, the commissioners actually listened to what the
people told them. Their report
recommended that the federal government adopt a system of “National
Adjustment Grants” provided to a provincial government whenever it “could not
supply Canadian average standards of service and balance its budget without
taxation (provincial and municipal) appreciably exceeding the national average
in relation to income.” This was necessary in order to guarantee “a national
minimum standard of social services” across Canada. John Diefenbaker’s
government gave strong support to this policy in 1957, and it was included in
the Constitution Act of 1982.
The people of Canada told the
Rowell-Sirois Commission that family, friends and community were very
important. People should not be penalized because they live in rural and remote
communities or hinterland provinces. Canadians demanded at least equality of
opportunity if not social justice. The goals of the equalization program were
to reduce regional disparities, create national standards for basic public
services, assist the mobility of people across provincial borders, create a
sense of Canadian identity, and even share the wealth across provincial
borders. It was also established that basic public services should be
considered a citizenship right. This set Canadian confederation off from that
of the United States. These principles have always been opposed by those who insist
that we should allow the economic free market to determine what is best for all
of us.
Implementing these principles has
been difficult. However, from the beginning it was agreed that in creating a
formula for federal equalization grants the criteria should be the “fiscal
capacity” of all provincial governments. To be fair, all potential sources of
revenues must be included. Under the existing formula, thirty-three sources of
revenues are covered, including most resource revenues. There are some exceptions.
Water is excluded because it is often given to industry as a free subsidy, as
in the development of the Alberta tar sands. Rents for water power are not
adequately assessed, as they usually take the form of a general subsidy to
consumers through low rates and special low rates for industrial enterprises.
Almost every country in the world
regards natural resources as a national resource. This is logical because the
geographic placement of natural resources is an outcome of nature and not human
endeavor. The failure to take that position in Canada has led to significant
political and economic problems. To exclude non-renewable natural resources
from equalization would completely undermine the basic principles of
equalization.
The application of any equalization
formula is a difficult political task. For example, when Lorne Calvert’s NDP
government reduces taxes on corporations and people with high incomes, should
this be offset by equalization grants from Ottawa? During the NDP government of
Allan Blakeney resource royalties and taxes were increased. Saskatchewan became
a “have province” and for a few years did not receive equalization payments.
The last three provincial governments have all steadily reduced the royalties
and taxes on the use of natural resources. This has reduced provincial
revenues. But is it fair that this pro-business policy be offset by
equalization grants?
On a number of occasions officials
in the NDP government have told me that they had no intention of raising
royalties and taxes on natural resources back up to the levels they were during
the Blakeney government. They could instead get roughly equivalent revenues
from the federal government under the equalization program.
However, the federal government is
not that stupid. In 1994 they introduced an amendment to the equalization
program called the “Generic Solution.” This was specifically designed to deal
with the Saskatchewan policy, the “distortion” of the program which occurs when
a province reduces its tax rates knowing that equalization would compensate.
In January 2003 the NDP government
feigned surprise when there was a reduction in the equalization grant from
Ottawa. Instead of continuing to assess Saskatchewan’s mining tax base on the
value of mineral production, it shifted to the use of “net profits.”
Saskatchewan’s mines produced 13 percent of total Canadian mineral sales but 55
percent of mining company profits. This was a result of the steady reduction of
provincial royalties and taxes on the mining industry.
There is no money tree in Ottawa.
Equalization payments come from the taxes we all pay to the federal government,
most notably income taxes. The policy of the NDP government is to cut the
royalties and taxes on corporations extracting our resources and instead
collect revenues from federal equalization payments. This policy of taking from
the poor and giving to the rich does not serve us well.
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