Three-Card McGuinty

You have to tip your hat to Dalton McGuinty. Another premier, on discovering that his province was about to qualify for payments under the federal equalization program, might have seized the occasion to demand that the program be enriched. But as the premier of the largest province in Canada, McGuinty no doubt feels an obligation to rise above such petty concerns. Surely statesmanship, then, explains his demand that the program from which Ontario may soon be drawing $1-billion and change should be radically curtailed — or in McGuinty’s words, to “revisit the perverse dimensions of the existing fiscal network that ties us to the rest of the country.”

Statesmanship, or confusion. Perhaps aware that his adversaries would blame Ontario’s impending descent into “have-not” status on his government’s economic policies, McGuinty tried to change the subject by attacking the feds, dusting off his favourite complaint from yesteryear, the so-called $20-billion gap: the amount by which federal tax revenues collected in Ontario exceed federal spending in Ontario. The result was utter intellectual chaos, the premier shuffling numbers and definitions back and forth like a cardsharp at three-card monte, with casual disregard for logic, truth, or basic mathematics.

To McGuinty, there is something “perverse” in the proposition “that somehow we are in need, while at the same time we’re sending $20 billion to the rest of the country.” It’s one thing, he said, “to send $20 billion to the rest of the country in good times, but in periods of economic challenge, this is nonsense. We can’t afford to do that.” The impending arrival of a billion-plus in federal equalization payments, far from redressing this imbalance, only seemed to exacerbate McGuinty’s anger. “It’s crazy,” he told reporters. “We will be paying ourselves equalization with our own money.” And one more time, for emphasis: “We have ended up with the possibility here where . . . were we to become a recipient (of equalization), we would rescue ourselves with our own money. That’s how perverse and nonsensical this financial arrangement is.”

Where. Does. One. Begin.

Let’s start with the $20-billion gap. Not so long ago, you’ll recall, it was the “$23-billion gap.” That it could have shrunk $3-billion since then may indicate that this much-cited statistic has nothing to do with any entrenched unfairness to Ontario and everything to do with changing economic conditions. And even the revised figure is out of date. it’s based on data from 2005 — not 2010, the year Ontario is projected to start drawing equalization. By then, the gap is likely to be considerably smaller, if it has not disappeared altogether.

Why’s that? Consider the actual reasons for that fabled gap. The biggest part of it is simply a result of the federal government being in surplus: the amount by which federal revenues exceed federal spending, not just in Ontario, but across the country. In 2005-06, the whole country experienced a “gap” on the order of $13-billion, of which Ontario’s share would be roughly $5-billion.

Billions more is accounted for by the simple fact that incomes are higher, on average, in Ontario than in the rest of Canada. It isn’t unfairness that explains why Ottawa collects more tax revenues per capita in Ontario than in most other provinces: it’s arithmetic, especially under a progressive tax system, where higher average incomes are taxed at higher rates.

Sorry, did I say incomes in Ontario are higher than average? I meant they were — 2005 was the last year that Ontario’s per capita GDP exceeded the national average. By 2010, they are projected to be 5% below the average. So the situation the premier rails against — still sending $20-billion to the rest of Canada, even as a have-not province — does not exist now, and almost certainly will not then.

Now, even McGuinty, if pressed, would not claim that the whole gap is the product of institutional bias against Ontario. At most, you could find about $2- or $3-billion, largely arising from lower-than-average per capita federal transfers for health and social programs, a legacy of past efforts to reduce the federal deficit. But here’s the thing: the feds have already moved to raise Ontario back to the national average, as of the 2007 budget.

And here’s another thing: at the time, McGuinty had no problem with “paying ourselves with our own money.” The higher federal transfers he had been demanding were, after all, paid for largely by Ontario taxpayers, just as surely as its equalization payments would be. That may be wasteful — why not just leave the money in Ontario taxpayers’ pockets, rather than processing it through two levels of government — but it’s hardly unusual.

It does suggest, however, some confusion between “Ontario,” meaning Ontario’s taxpayers, and “Ontario,” meaning the Ontario government — a confusion McGuinty routinely exploits. It isn’t the Ontario government that “sends” $20-billion to the rest of the country. If anyone, it’s Ontario’s taxpayers. Yet when it is suggested that Ontario might improve its economic performance — and avoid the stigma of have-not status — by cutting taxes, notably the province’s nation-leading corporate tax rates, McGuinty pleads poverty. “Some of my colleagues are in a position to reduce their corporate income taxes because we sent them 20 billion Ontario dollars,” he explained. “If we could keep a few more of our dollars, we might be able to entertain that kind of a conversation.”

You follow? Our taxpayers are paying so much in federal tax that we can’t afford to cut their provincial taxes. We can’t cut taxes, because taxes are so high. Talk about perverse.