Deconstructing the Gap: Quantifying the Impact of Unprincipled Allocations of Federal Transfers to Ontario

Abstract

The majority of federal government spending comes in the form of transfer payments to Canada’s provinces and citizens. However, not all of these transfers are allocated in a fair and principled manner. Previous Mowat Centre reports have assessed the fairness of larger transfers such as Equalization and EI. This report goes deeper by examining whether the more than 600 other smaller federal transfers are allocated in a fair and principled manner. A principled transfer is one allocated in a manner that is clear and transparent, is fair to Canadians regardless of where they live, is consistent with the transfer’s policy objectives, and is predictable while having flexibility to adapt to changing circumstances. We find that many of these smaller transfers – which together account for $30B in federal spending – fail this test. In 2017-18 Ontarians received $1B less than they should have received had these transfers been allocated in a principled manner. This includes significant gaps in allocations for economic development ($205M), immigrant settlement ($105M), indigenous health ($83M), indigenous education ($22M), the Gas Tax Fund ($19M), and others. Combined with gaps stemming from larger unprincipled transfers (Equalization, EI, and labour market transfers), Ontarians received $3.7B less in 2017-18 than they should have under principled transfer allocations. The path towards a more principled and fair transfers system is both clear and achievable. As a first step, the federal government should transparently account for its chosen allocation methods. Where deviations from a principles-based allocation exist, these should be explained. Over time, these deviations from principle should be addressed. At the same time, the federal government should ensure that transfers are adequate to meeting federal obligations and that they do not impose overly rigid conditions or unduly leverage funding from provinces. Adequacy and conditionality mean that the gap faced by Ontarians is in fact much higher than $3.7B annually. Addressing this will ensure that federal funding is allocated in the fairest way possible.