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Thursday, February 05, 2009

End equalization squabbling: Toss the GST to the provinces

Mark Milke Mark Milke, #27 on the Western Standard’s Liberty 100 list, wants to end federal equalization payments.

His plan to do this, however, strikes me as a tad complicated. He's proposing that the federal government scrap the equalization payments to the provinces and territories and instead give them the GST money collected in their respective jurisdictions, and then assume enough debt from each province or territory so that this equalization-GST swap leaves the have-not regions in a neutral revenue position.

It sounds clumsy to me, but Milke thinks the idea is worth a shot due to the perverse incentives equalization payments create. Here's what he writes:

With equalization, there’s no need to reform provincial spending and tax policies to make them more efficient. In fact, the incentives run the other way.

For example, Manitoba charges $1.2 billion less than market rates for its provincially-owner power, effectively subsidizing local consumers; Quebec subsidizes daycare for every participating family regardless of whether they are poor or rich. End equalization and provinces might just decide such subsidies are unwise.

Changing the perverse incentives due to equalization is a useful goal. It’s one all federal parties should remember if and when Ottawa’s books return to a surplus position.

Read Milke’s column, “End equalization squabbling: Toss the GST to the provinces,” here.

And pick up his latest book, A Nation of Serfs?: How Canada's Political Culture Corrupts Canadian Values.

Posted by Matthew Johnston

Posted by westernstandard on February 5, 2009 | Permalink


This proposal sounds to me like a non-starter. The GST comes out of the pockets of the people of each province, so giving it back to the provinces by definition cannot amount to "equalization." So what "have-not" province would agree to it?

Posted by: Grant Brown | 2009-02-05 11:56:06 PM

According to the proposal, Grant, if I understand it correctly, the have-not provinces would have some of their debt retired by the feds, freeing up money that would have been spent on interest payments. Enough debt would be retired to make up for any lost income from the equalization-GST swap.

I'm not sure why this wouldn't create a perverse incentive to incur debt.

Posted by: Matthew Johnston | 2009-02-06 12:07:34 AM

The problem with equalization is that it is welfare for provinces. The loser provinces like PEI have no incentive to end their anti-business, high tax, regulatory, market destroying laws.

End equalization and replace it with nothing.

Posted by: Chris | 2009-02-06 10:19:01 AM

Sounds like a better plan, Chris.

Posted by: Matthew Johnston | 2009-02-06 3:52:31 PM

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