“Quebecers are well aware that we’re a have-not province, and there’s no pride in this,” said Yourri Chassin, an economist with the Institute.
The four page note, released Tuesday, calls for Quebec to ramp up oil, shale and electricity development, while simultaneously calling on Ottawa to grant the province a five to eight year “grace period” before clawing back equalization payments.
“There’s a bit of incentive needed to kickstart this process,” said Mr. Chassin.
Under the current equalization regime, Quebec stands to lose 50 cents in equalization payments for every dollar it collects in resource revenues. Mr. Chassin argues that the formula is subtly hindering the province’s willingness to approve mines and oil drilling projects.
Quebec is effectively stuck in a “welfare trap,” claims the report, referring to an economic conundrum in which welfare recipients have no incentive to find work, since a minimum wage job would pay just as much.
The issue came up during the Alberta election when Wildrose leader Danielle Smith joked that a “Quebec colleague” told her the province had imposed a moratorium on shale-gas development in order to keep its revenues low and its equalization payments high.
“Grace period” programs were implemented in Nova Scotia and Newfoundland and Labrador to entice the provinces into developing offshore oilfields without seeing immediate clawbacks in their equalization cheques. Thanks in part to the arrangement, Newfoundland and Labrador became a “have” province in 2008 for the first time in its history.
Nevertheless, Sonya Gulati. a senior economist at TD Bank, suspects that a Newfoundland-style program for Quebec would be a hard sell to the rest of Canada, particularly since Quebec already takes such a large share of federal dollars. Besides, she said, “we’ve already seen a lot of money and interest in development, it doesn’t seem like they’re taking equalization payments into account.”
Quebec has received equalization payments consistently since the program was established in 1957, the only major province to do so.
The aim of equalization, as entrenched in the Canadian constitution, is to “provide reasonably comparable levels of public services at reasonably comparable levels of taxation.” When the rates are calculated, auditors focus on “fiscal capacity,” Quebec’s ability to raise revenues,” and ignores the province’s actual rates of tax revenue – which is among the highest in Canada.
Resource revenues are different, as the money is automatically counted towards fiscal capacity at a ratio of 50%.
In the 2012-2013 fiscal year, equalization payments constituted $7.4 billion of Quebec’s $70.1 billion budget, roughly accounting for 11% of all government spending.
In 2010, a paper by the Frontier Centre for Public Policy advocated scrapping equalization entirely, arguing that it allowed “have not” provinces to fund robust social programs at the expense of “have” provinces. “The evidence presented in this paper strongly suggests that, in many important areas, levels of government services in donor provinces such as Alberta and Ontario are significantly below those that exist in the major recipient provinces,” it read.
The province’s tuition fees, currently the focus of a massive three-month student strike, are the lowest in Canada. Quebec students pay only $8,672 towards a four-year university degree. Quebec taxpayers kick in $39,000 and, all things being equal, the rest of Canada is on the hook for the remaining $5000.
Mr. Chassin remained skeptical that without some form of austerity, energy and mining dollars would be enough to sustain Quebec’s gilded welfare state. “By itself, resources may not be enough to get Quebec totally out of the equalization payments,” said Mr. Chassin. “But it’s a good first step.”
Source: national post
Author: Tristin Hopper