As the eurozone bumps along from major crisis to minor crisis to existential crisis, the point is often made that a key feature of successful monetary unions that is missing in the eurozone is a system of transfers. These transfers act a sort of compensation for renouncing the option of pursuing an independent monetary policy.
Here's how I recently tried to transpose the Greek debt crisis to a Canadian scale:
To put things in a Canadian perspective, let’s look at Manitoba. Manitoba’s public finances look nothing like Greece’s, but its share of Canadian GDP – about 3 per cent – is similar to Greece’s share of eurozone GDP. Suppose that instead of running a surplus and a debt of $10 billion in 2008, Manitoba had a Greek-scale debt of $40 billion, a deficit of $5 billion a year, and that it was having problems finding buyers for its bonds.
This doesn’t sound like a very big problem: $5 billion was 0.3 per cent of Canada’s GDP in 2008. In this scenario, we would probably expect a federal bailout, a restructuring of Manitoba’s public finances and a few pointed barbs at Manitoba’s expense. But it wouldn’t have been an existential crisis for Canada, and the file would have been closed well before 2015.
The reason that this wouldn't be a very big problem is that Canada has a federal government that has significant taxation powers - even after five years of the Conservatives' starve the beast strategy, federal revenues are 14% of GDP. And the federal government uses its powers of taxation and spending to redistribute income across Canada on a scale that many Canadians may not appreciate.
When people talk about federal transfers, they probably think of the equalization payments Ottawa makes to the 'have-not' provinces. But equalization payments are only a part of these transfers, and not the most important. Most of these transfers are the difference between federal spending and revenues: recipient provinces receive more in federal spending than they pay in federal taxes. (The difference between EI contributions paid and EI benefits received is also included.)
Negative values mean that federal revenues exceed federal expenditures. The red line is the difference between federal government revenues and expenditures within Canada; it doesn't take into account federal spending on goods and services imported from the rest of the world. The sharp jump in 2008/9 is associated with the move from surplus to deficit. As one would expect, the Atlantic provinces, Quebec, Manitoba and Saskatchewan were net recipients from Ottawa over this decade. Ontario was the biggest net contributor until 2007, at which point Alberta took over.
Here are the same data, but expressed as shares of GDP:
I must say that that this one surprised me. Net federal transfers are the equivalent of 15% (!) of Atlantic Canada's GDP, and about 6-7% of Manitoba-Saskatchewan's GDP. And while Quebec is a net recipient, federal transfers are a fairly small share of Quebec GDP. On the contributor side, the federal government takes the equivalent of 6-7% (!) of Alberta GDP to be redistributed elsewhere. This used to be the case for Ontario as well, but its contribution declined during the 2000s.
And here are the data in per capita terms. (I didn't bother correcting for inflation; I don't think it would add anything.)
Once again, I was surprised by the scale of these transfers. During the height of the oil boom, Alberta contributed almost $6000 per Albertan to Ottawa to be spent elsewhere, and Atlantic Canada received roughly $5000 per person.
There's no conscious decision to take $5000 (or whatever) from each Albertan and give $5000 (or whatever) to each person in Atlantic Canada. Moreover, these transfers are not once-off 'bailouts'; they are made year after year.
The contrast with the eurozone is, to say the least, striking. Since there is no supranational government with the means to make Canadian-style transfers, they have to be thrashed out by the constituent national governments, and these national governments answer to their own people.
It's probably for the best that the scale of these transfers are not well-known, and that they occur automatically in the course of the federal government's usual operations. And it's also for the best that the provinces aren't involved.