For anyone who has paid attention to the student protests/riots in Quebec 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 Quebecers — has been compounded by myth-making from Quebec politicians about who 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 a day day-care (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. Taxes only explain part of Quebec’s ability to finance a lavish social welfare state.
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 10 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 question is about who benefits when 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 calculation: If the equalization program ended, and all the provinces simply kept their portion of federal taxes paid into the program, Quebec would have to raise taxes by $74.billion, or borrow more money, or pare back its lavish social programs, or some combination of the three.
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.
Governments in British Columbia and Alberta make 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. 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.
Mark Milke is a Senior Fellow at the Fraser Institute.