For anyone who has paid attention to the student protests/riots in Quebec over the past few months and knows anything about the vast sums of money transferred between governments in this country, there has been no shortage of ridiculous demands from the Quebec students who are “on strike.” Demands include free tuition and an end to functioning free markets. But their silliness—not shared by most students nor by all Quebecois—has been compounded by mythmaking from Quebec politicians about who ultimately foots the bill for so much of Quebec’s existing poor economic policy.
Exhibit A is Quebec Minister Raymond Bachand. He recently claimed that Quebec’s lavish social welfare model—think $7-day daycare (even for millionaires who can afford the full freight), the cheapest tuition rates in the country, under-priced electricity from Quebec Hydro, and a plethora of other goodies for Quebec voters—is explained by Quebec’s high taxes. He rejects the notion that the $7.4 billion Quebec receives in equalization payments supports Quebec’s over-the-top, expensive and badly designed social welfare model.
Bachand is wrong. High taxes only explain part of Quebec’s ability to finance a lavish social welfare state. Ironically, that province’s high taxes may actually impede even reasonable tax collections. When taxes become too high and burdensome, cheating is rife; so too is depressed economic activity.
Nonetheless, on equalization itself, some background before a further explanation of why Bachand is wrong.
Equalization is one part of $61-billion in annual transfers of federal tax dollars to the provinces. At $7.4 billion, Quebec receives the lion’s share of the $14.8 billion in annual equalization payments. Other provinces that receive equalization (Manitoba, Ontario, New Brunswick, Nova Scotia and Prince Edward Island) take the rest.
Some have defended the Quebec finance minister by noting that equalization payments originate in the federal treasury. Given that taxpayers in every province pay federal taxes, so the reasoning goes, even Quebecois taxpayers pay for the $7.4 billion equalization transfer.
That’s mathematically ridiculous and in error. It is akin to arguing that when ten players put money on the poker table, and six take home winnings (and four do not), that because everyone initially contributed to the poker/equalization pot, no one player/province actually benefits more than another.
The key question is who benefits when all the chips are cashed in. In the case of equalization, it is Quebec and five other provinces. In contrast, taxpayers in four provinces ultimately fund equalization through their federal taxes.
The Bachand argument is undercut and disproven by this clear calculation: If the $7.4 billion in equalization transfers to Quebec ended, the province would have to raise taxes even higher, or borrow more money, or pare back its lavish social programs, or some combination of the three. Of course the $7.4 billion makes a difference to Quebec’s budget and Quebec’s generous welfare practices.
More generally, let’s look beyond equalization to all federal transfer programs, i.e., the other $46-billion in federal transfers to the provinces and also to items such as employment insurance payments. A net calculation there reveals that Ontario, despite receiving equalization, is a net loser in this federal transfer poker game. Ontario’s provincial government points out that it contributes 39 per cent of federal taxes, but ends up with 34 per cent of federal monies deposited back into the province. The provincial governments in British Columbia and Alberta have made similar points.
In other words, when all federal transfers are accounted for, it is taxpayers in Ontario, Alberta and British Columbia who pay more into federal coffers than their provincial governments or citizens receive back, either in transfers from Ottawa, or in direct federal spending in their respective provinces.
Of course, there will always be some net difference in federal flows from and into the provinces, either in government transfers or in direct payments from Ottawa. Think of Employment Insurance as an example. If unemployment rates in one province are high (Alberta in 1980s or the Atlantic provinces now), less money will be put into the federal treasury from taxpayers in such places than is received back in EI payments.
But that reality doesn’t justify the current weird system of federal transfers or the design of equalization, nor does it support the false claims made about equalization by the Quebec finance minister. Problematically, too many people believe myths about equalization just because it is in the constitution, the status of which I will address in my next column.