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For many years, Ontario has been the quiet enabler for the vast system of subsidies the federal government provides to Atlantic Canada, Quebec and Manitoba. With rare exceptions, it has stood by as equalization grew and as the federal government incorporated subsidies to regions in more and more of its regular programming.

In recent years, evidence has been accumulating that the regional subsidy system is much bigger than it appears on the surface, unsustainable for both Alberta and Ontario and entirely counterproductive because it discourages growth in all recipient provinces.

The most recent addition to this body of evidence is a study by the Fraser Institute entitled Unseen Equalization. The study demonstrates that subsidies to regions are incorporated in EI, patterns of federal employment across Canada, airport ground rental arrangements, federal culture expenditures, skills training, immigrant settlement programs and probably many others.

The study also shows that similarly situated Canadians are often not treated in similar ways by the Government of Canada. Employment Insurance, for example is available for self employed fishers, but not for any other group of self employed workers.

The Fraser study addressed sustainability. It noted that for forty years Ontario has been required to contribute an annual average of 4% of GPP to funding programs in other provinces that are more accessible to the citizens of these provinces than similar programs are for Ontarians.

This annual average is a bigger burden for Ontario’s citizens than defense has been for Americans for each of the past few years.

Alberta’s situation is troubling also. People often overlook the boom-bust cycles in its economy because of its energy resources and forget that it too has to compete in a very rapidly changing energy environment. These problems are especially evident now.  Nevertheless, each year the federal government takes, off the top, a remarkable 7% of all economic output generated in the province.

Virtually all independent commentators have noted that this system discourages growth in recipient provinces. Regional subsidies have enabled the growth of public sectors in most recipient jurisdictions that are much larger than in contributing jurisdictions or even in Greece before the economic crisis fully impacted that country.

The Atlantic Institute for Market Studies in Halifax calls regional subsidies “the help that hurts”.

Part of the problem with this entire system is that the federal government is  uninformed about the economic impact of its subsidy arrangements. It has conducted countless studies of equalization formulas but it has never studied the impact of regional subsidy arrangements, including equalization, on recipient jurisdictions, contributing jurisdictions or Canada as a whole.

The Fraser Institute study demonstrated that federal legislators do not even know how many regional subsidy arrangements there are.

It is now clear that this kind of carelessness must end.

This was demonstrated by a recent federal announcement that transfer payments to Quebec will rise by $1.8 billion in 2014-15 while they will fall by $500 million for Ontario.

The federal government argues that this is formula driven but the more substantial explanation is that Quebec’s economic performance has been impaired by divisive battles over the Quebec charter and constant threats of a new referendum  on separation. The federal government has consequently had to provide additional funding to offset the weakness.

The need for change also arises from globalization and the fundamental competitive challenges Ontario and Alberta face.

The evidence is, however, that Ontario has few allies in Ottawa, least of all its own federal legislators. For that reason, change must be initiated by Ontario, acting with resolution and courage.

Ontario should:

• change its general approach to discussions of fiscal arrangements. In the past, it has argued for fairness which has led to unproductive arguments. The new focus should be economic performance;
• commission an independent review of the economic impact of the regional subsidy system on Ontario, recipient jurisdictions and Canada as a whole and use this to both inform Ontario’s citizens and begin a different dialogue with other Canadians;
• propose a new equalization system that incorporates the actual needs of provincial populations, something that, remarkably, is not currently considered in determining equalization entitlements;
• calculate and inform the public on the unfunded liability attached to regional subsidies if they are continued in future;
• propose policies that would make equalization in any form conditional on achieving national benchmarks of program accessibility and the size of provincial public services.

The recent federal announcement makes it clear that changes of this type are an urgent and pressing necessity, not something that can be further postponed. The longer this system persists, the more difficult the journey that will eventually have to be made to fix it.