Once in a while, nice people, whom I don't know, come up to me in public places and ask: What the heck is going on in Ottawa?
Now, I worked in and out of government in Ottawa for 30 years; I still travel there a lot and I have friends who keep me posted on interesting issues. But I sometimes have only the vaguest idea of why politicians do what they do.
Dalton McGuinty (left) shakes Danny Williams’ hand. Ontario and Newfoundland may soon be swapping their respective roles as have and have-not provinces.
I have a recurring nightmare that some gentle reader is going to ask me to explain equalization payments.
The idea behind equalization is simple enough: Ottawa hands out funds to poorer or "have-not" provinces to help bring their standards of living closer to those of wealthier or "have" provinces.
Figuring out how to do this is difficult. I have a card that sets out the procedure: First, you establish national average tax rates in various fields. Then you apply these to the tax bases of the provinces. These bases include taxes on income, property and sales. These calculations give you each province's fiscal capacity. Then you figure out the national average fiscal capacity. If a province is below the national average, it gets equalization.
Problems popped up a few years ago when Ottawa began fiddling with the formula. In the old days, the national average for fiscal capacity was based on five provinces, not including oil-rich Alberta. Oil was considered a non-renewable resource subject to wild price changes. Now, however, the national average is based on the performance of 10 provinces and takes into account some resource revenues. As you know, Newfoundland and Labrador, Alberta and Saskatchewan are drowning in oil priced well over $100 a barrel.
As a result, the national average fiscal capacity is zooming upwards as are equalization payments.
This has had two important consequences.
A TD report says Ontario, which can't match the explosive growth of the western oil barons, will qualify for as much as $400 million in equalization payments in 2011 and $1.3 billion in 2012. Ontario, which produces 40 per cent of our wealth, hasn't qualified for equalization since 1983.
Between 2002 and 2007, Ontario's economy grew three per cent a year, much less than the five to eight per cent advances in the four westernmost provinces.
Hang on; the situation gets stranger. Ontario Premier Dalton McGuinty says his province hands over to Ottawa about $20 billion more than it receives in grants and programs. So if Ontario were to receive equalization, it would, in effect, be paying for it.
More than that, if Ontario gets equalization it would mean more than 70 per cent of Canadians would be living in have-not provinces, a situation that's not sustainable.
For one thing, Ottawa, which is flirting with a deficit in the next two years, couldn't afford the amounts involved.
Here's another question I'm worried about getting from a customer: How come Manitoba gets about $2 billion in equalization payments when it led all provinces in average weekly earnings increases in the first two months of 2008 and tied with Alberta for the second-highest provincial economic growth last year -- 3.3 per cent? The answer seems to be that Manitoba has done better recently, but the 2006 census shows it still ranks seventh in median earnings per individual.
Some reader is bound to notice that provinces scream like piglets being weaned just before they become have provinces.
The same day the TD report hit Ontario, Newfoundland and Labrador announced it had become a have province, thanks to oil, for the first time since it joined Canada in 1949. You'll recall the province's premier Danny Williams getting so angry about equalization he threatened to take down Canadian flags.
As well, Saskatchewan made all sorts of dolorous noises before it became a have province because of rampaging markets for potash, grain and oil. The province's Bakken field in the southeast has turned into the largest conventional oil discovery in Canada in more than 50 years.
Finally, I'm afraid someone is going to ask me these questions: What's going to happen to Canada when we run out of oil? Canadians and their governments are spending record amounts, but they're not putting much into productivity growth. Without strong productivity, we're going to have a tough time after a commodity bust. Why aren't our politicians doing more about that?
I'm not sure I have the answer to that question either.
Tom Ford is managing editor of The Issues Network.
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