Equalization - A Made in Ontario Solution

As odd as it may seem, the solution to Ontario's fiscal and public image problems rests in doing what Ottawa, at the request of Ontario itself, refused to do more than a year ago.

Remove all non-renewable resource revenues (100% of them) from the equalization calculation.

Today the entire nation, or at least politicians and the media, are in a tizzy over the pending fate of Ontario. It's been that way ever since a report last week indicated that Ontario will qualify for equalization support in a year or two.

The news media (in what has to be the oddest twist of all) now appears to be blaming Newfoundland & Labrador for Ontario's woes.

It seems someone got the bright idea that since Ontario is heading toward "Have Not" status while Newfoundland and Labrador is moving away from it, the entire problem must be the fault of the folks down east.

Clearly Newfoundland and Labrador has nothing to do with the current situation in Ontario. The truth may actually be just the opposite. The province proposed a solution to Ontario's problem over a year ago but nobody listened then and nobody is listening today.

Ontario Premier,Dalton McGuinty, is blaming Ottawa for this insulting situation because the taxpayers of Ontario (like taxpayers across Canada) send huge sums of money to Ottawa. His complaint is that Ontario gets only a small percentage of those federal revenues back.

That's not news and it isn't Ottawa's fault, nor anyone elses.

Of course all of that money doesn't go back to Ontario. If every penny collected in federal taxes went back to the same regions it came from there would be no need for federal taxes (or for a federal government for that matter).

Welcome to the world of federalism Dalton!!!

A Higher Population + More Higher paying jobs + More Industry = Less Federal Support.

It's just that easy.

It seems Mr. McGuinty believes Ontario should be able to get more of that tax money back (which is what equalization payments would permit him to do) but he doesn't want it to be called Equalization.

That would be an embarrassment.

This leads us to the root of the Ontario problem.

The Federal and Ontario governments, in partnership, have essentially painted Ontario into a corner and they have nobody to blame for it but themselves.

One of the major sticking points Ontario had with federal provincial relations was Ottawa's penchent for entering into "one of" funding arrangements with individual provinces. As a result Stephen Harper pledged to never again enter into a side deal. Instead he said Ottawa will only implement funding transfers that are applied fairly across the entire Country.

Under those circumstances finding a way to provide special funding to Ontario without cutting a side deal or using the equalization system isn't easy. In fact it may prove to be a political hot potato for Stephen Harper should he try.

Another big problem for Ontario is the equalization system itself.

When Stephen Harper's government changed the formula there were two key "enhancements" included in the legislation. Those enhancements were at least partly facilited (or should I say "forced") by representatives of the Ontario government and Ontario MPs.

First the calculation was modified so all 10 provinces would be included in determining the average that defines who receives equalization and who doesn't. In simple terms, those below the average receive equalization, those above it do not.

The second change was the inclusion of 50% of non-renewable resource revenues in calculating the average.

Newfoundland and Labrador fought long and hard for the Conservative government to exclude 100% of those revenues from the calculation (Stephen Harper promised he would do it on multiple occassions) because including them would skew the average. By including revenues that are "temporary" in nature, resource dependent provinces are handicapped in their ability to use this one time money to build and diversify their economy.

Once the oil is gone it's gone. It's like selling your car. The money generated is one time only, not like a regular salary. As such it shouldn't be treated, or taxed, as if it were.

Ontario was dead set against the idea and thanks to the pressure it applied on the federal government Harper's promise was never kept. The 100% exclusion never happened.

Fast forward to 2008.

The government (and likely the people) of Ontario do not want to carry the stigma and public shame of having to accept equalization payments from taxpayers across Canada.

Ottawa and Ontario cannot cut a "one of" deal, allowing Ontario to skirt equalization, without both parties admitting that they were wrong for fighting such deals in other provinces. This would result in Ottawa opening a door they said was closed forever.

So, perhaps the best solution doesn't rest in finding a way to pump more taxpayer money into Ontario so much as ensuring that Ontario doesn't cross that dreaded line into "Have Not" status.

After all, isn't this really a question of perception more so than reality?

According to Dalton McGuinty himself it doesn't even make sense that Ontario is about to receive equalization when so much revenue is generated in his province. I agree. That's why the simplest solution is the best.

The reason Ontario is teetering on the brink of crossing the "Have Not" line is because the new 10 province standard (which includes oil revenues) has allowed Alberta to raise the bar so high Ontario is in jeopardy of falling under it.

If non-renwable resource revenues were removed from the calculation Alberta would have little effect on the overall numbers.

Ontario would once again resume, what it sees, as it's rightful place at the top of the Canadian heap.

It's a win, win, win situation.

- Ontario regains its status and avoids a painful loss of dignity.

- Newfoundland and Labrador keeps its limited oil revenues, enabling it to pay down debt and diversify its economy, in preparation for a future without oil.

- Stephen Harper can finally make good on a promise that, as an economist, he knows to be correct. A promise that has caused a political rift between two governments and, inadvertantly though it may be, is now causing collateral damage to another.