Ottawa is suppressing key parts of a politically explosive federal report that reveals Ontario is being shortchanged by Canada’s national wealth-sharing scheme, the Star has learned.

The 67-page study is a searing assault on a $15.4 billion-a-year equalization system that redistributes taxpayers’ dollars to ensure equivalent levels of health, education and other programs across the country.

Its conclusion: Ontario and B.C. lose out because it’s much more expensive to operate in those provinces. Conversely, Quebec and the Maritimes, where the cost of living is cheaper, reap disproportionate benefits.

And when the government was forced to release the report, it removed large, potentially controversial, chunks.

Entitled, “An Operational Expenditure Need Equalization Formula for Canada,” the report was written in 2006 by Peter Gusen, then director of federal-provincial relations at the federal finance department in an attempt to analyze how much it costs to deliver services in different provinces.

The Star has obtained the uncensored report.

“ ‘Poor’ provinces are not generally needy. British Columbia has the highest expenditure need per capita and Quebec the lowest,” wrote Gusen, then, in one of 27 sections of his report censored by Ottawa.

“Cost matters as much or more than work load. Ontario and B.C., typically regarded as ‘rich,’ are invariably the high-cost provinces. As a result, they are more often than not the most needy.”

Yet Ottawa has never taken into account that wages and cost-of-living expenses are higher here and in B.C. than most other provinces when dispensing equalization payouts.

Gusen’s review was delivered in the dying days of former prime minister Paul Martin’s government and a heavily redacted version was not released until 2010 when Matthew Mendelsohn, director of the Mowat Centre for Policy Innovation at the University of Toronto, sought its release using freedom of information laws.

“I’ve never seen the original,” Mendelsohn, one of Canada’s leading experts in federal-provincial financial arrangements, said in an interview.

“The main conclusion of the study is clear . . . if you were to include any sense of the cost of providing public services . . . in the equalization formula, Ontario would be getting a lot more in fiscal transfers,” said the former Ontario deputy minister of intergovernmental affairs.

“Ontario would certainly make a case that when you just give us our share to hire nurses, we can’t hire as many nurses as you can in Manitoba or New Brunswick . . . but none of that’s calculated,” said Mendelsohn.

After obtaining the full, uncensored copy of Gusen’s report, the Star asked David MacKinnon, a former senior civil servant who has written two studies on equalization for the Ontario Chamber of Commerce, to compare it to the edited version.

“They deliberately set out to make it impossible to interpret anything serious from the study—and they did that,” said MacKinnon.

“They got rid of the quantitative tables, which allow somebody reasonably quickly to make a judgment on almost all matters of where the money is going to and coming from.”

Indeed, eight tables that detail the health, education, social assistance, and other financial needs of all 10 provinces were removed from the blacked-out report released to the Mowat Centre.

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Perhaps most significantly, the “overall expenditure need” diagram was deleted. This table showed that in an average year from the late 1990s to the early 2000s Ontario needed $4.56 billion more than it was getting and Quebec required $6.39 billion less to provide the same level of services.

“This study really means that the entire system of regional subsidies is nonsense,” said MacKinnon.

“It shows that everything the federal government has been saying to the public for the 50 years or so that they’ve been doing this (equalization) is misleading.”

MacKinnon said he doubted partisan politics played any part in censoring a report commissioned by a Liberal government and locked down once Prime Minister Stephen Harper’s Conservatives were in power.

“Governments of all political stripes would do the redaction. It’s deer in the highlights. The federal government has never looked at expenditure need. Even more seriously, it’s never examined economic impact (of equalization) so they don’t know what this system is doing.”

Therefore, this has led to a situation where “citizens with the least access to provincial programming are required to generously subsidize citizens in other provinces with much more access.”

Ottawa now limits increases in equalization to the rate of growth in the economy and Ontario, which has a $16 billion deficit, is considered a “have-not” province and thus receives $3.26 billion from the program. That’s less than half of Quebec’s $7.30 billion subsidy.

But Premier Dalton McGuinty argues Ontarians are just being paid with their own money — and considerably less than the billions they fork over to Ottawa to redistribute elsewhere.

“For decades, equalization and other regional subsidies have been described as the glue that holds Canada together,” said MacKinnon.

“This pillar of the Canadian federalism is . . . standing on quicksand. It is probably doing fundamental damage to productivity and our prospects for competitiveness in the 21st century, an outcome that would be avoided if regional subsidies could be based on actual need in each province as well as the tax and revenue calculations presently being used.”

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