Tuesday, March 13, 2007

Equalization: From "Promise" to ComPromise

Alberta paid off its debt several years ago and hence does not receive equalization because it is a rich "have" province. The longer our provincial debt exists the more we pay out to service the interest on the debt. Conversely the quicker we get it paid off, the better the province and ultimately the country benefits. If Stephen Harper stuck to the "promise", or the idea that he supposedly inferred, that all (100%) non-renewable resource revenue would be exempt from the equalization formula, then that would mean billions more for the province. That scenario would be an excellent opportunity to pay down the province's debt more expediently, and get out of the equalization business, albeit still many years away.

Harper's Letter to Danny Williams - quote on non-renewables in the equalization formula:

We will remove non-renewable natural resource revenue from the equalization formula to encourage the development of economic growth in the non-renewable resource sectors across Canada. The Conservative government will ensure that no province is adversely affected from changes to the equalization formula. (Feb. 4, 2006)

That's what he told Williams in writing, it's pretty general and leaves the percentage of non-renewable removal wide open. It does not actually say 100%, but did he mean 100% by verbally expressing that to Danny Williams?

It would appear that Harper has gone from "promise" to compromise. As long as Harper looks pretty in the polls, then he probaly won't budge much from the much talked about, and seemingly expected, 50% of non-renewables, rather than 100%, excluded from the equalization formula. One argument for keeping 100% of non-renewable revenue is that it is a one time only opportunity for that particular resource, e.g., oil and gas. That type of income for the province is finite.

How will the Liberal or NDP's version of equalization compare to Harper's and to Danny Williams' vision of a fair formula? Even if Stéphane Dion made a "promise" to Premier Williams to totally clear non-renewables from equalization, or say 25% inclusion of non-renewables, offer to Danny Williams, which would sound better, then we will still have to ask, "what is a promise?" What does general wording really mean other than wishful thinking? On the other hand, even if we had more detail in writing up front, e.g., "100% of non-renewables will be removed ..", does that matter anyway?

If the province is ultimately stuck with some compromise on equalization, then how about a counter compromise offer? For example, if 50% is the amount, then what if 25% of that were to be mandatorily put towards our provincial debt. That is, in addition to what the province normally pays or should pay, according to income percentages (or at least an average of the last 10 payments, for example). The rule could be that the province has to make its payment towards the debt each year first, then the federally held in trust 25% portion can then be paid towards the debt also.

The net debt per capita for Newfoundland and Labrador, for 2005-06 was $22,733. The debt for the same year was $11.7 billion.


Anonymous said...

I for one hope Harper breaks his promise. His promise will be patently unfair to other "poor" provinces. When did topping up Newfoundland's EQ money at the cost of PEI and NB while Alberta hides its oil revenue from the calculation become a sensible policy.

Unfortunately all of the local media coverage has been on the making or breaking of the promise, rather than the merits of it.

It's a stupid idea from the get go. Besides, NL's oiul revenues, thanks to the revised Atlantic Accord, are protected from the mythincal clawback for years to come anyway.

But it still means Harper is either a liar today or was stupid a year ago. Or both.

kodak said...

Hi Anon,

There's plenty of angles to look at how to restructure equalization and that's one. I can see how it may seem unfair to other "poor" provinces in regards to overall provincial income. I'm still learning the basics of this, but from what I understand, NL's equalization will not be "topped" up if non-renewables were excluded from the formula, it just would not be decreased. Other provinces' revenue would not be affected either. You mentioned Alberta's oil revenue. Since AB is not a recipient of equalization, their income from oil would not be affected. The eqaulizaton pot comes from all Canadian taxpayers.
Provinces like PEI an NB would not get less equalization, but it could if their population decreased by whatever decrement is used in the formula.

Anonymous said...


That's a pretty good way to put it. With reference to your post I'm all for debt reduction, it's absolutely needed ASAP but I'm uncomfortable with the idea of Ottawa being able to dictate how much of Newfoundland's ( or any other provinces ) revenues should be put towards any particular area. Could you imagine Quebec's reaction to being dictated to in such a manner by Ottawa.

kodak said...

Thanks Anon, I thought it was a fitting way to call it. Yes, we have a giant credit card and so much goes to pay the interest. Loyola Sullivan said a couple of years ago, "We have to run a surplus of $250 million a year for 48 years just to get to no debt". So it is taking a great deal of our resources to just pay that down, resources that could be spent on economic, infrastructure, health, education initiatives.

Good point about Canada possibly dictating how much we should pay on the debt. However, again, a compromise could be reached between the provincial and federal governments. Say for example, they would agree that there would be a minimum amount, perhaps 20%, but a recommended 50% would be preferred. I would have been satisfied with the 50/50 deal but with the condition that NL would put some towards its debt. Everyone wins. We'd pay it of sooner, and be more independent sooner as well.