Wednesday, April 04, 2007

Wade Locke's Assessment of Equalization - Implications for NL

Dr. Wade Locke of MUN's Dept. of Economics began crunching numbers shortly after the 2007 budget. Tonight he gave a detailed presentation of three different equalization options. There were many charts and figures which will be posted tomorrow at

I will just offer a few pieces of information I took from this. Dr. Locke emphasized that even for him understanding and analyzing how equalization works stretched his skills to the limit. He also stressed that he is just presenting his assessment for public knowledge, and not making any recommendations to people or the government.

  • There are three equalization options:
    (1) Status Quo
    (2) O'Brien recommendations/"50% Option" - (50% inclusion of natural resource revenues in the equalization formula, with cap)
    (3) The "Harper Letter" (no natural resources 0% included in formula and no cap)

  • In terms of the economic benefits to Newfoundland and Labrador, the O'Brien option (50% inclusion of natural resources) is an improvement over the status quo.

  • The 50% option would also allow NL to keep the Atlantic Accord longer than would be possible than under the status quo.

  • In two (2) years time (2009), NL may not qualify for equalization payments, or the next couple of years following that. There is currently a two year delay in the equalization formula, i.e., we would still get an equalization payment in 2011 but not 2012. That means by 2012 we would be considered a "have" province and not get equalization for 2012. Therefore, after 2012 a new set of equalization rules would have to be applied to NL in that case till 2020.

    (Please excuse my lack of detail here but it was challenging to observe, interpret and take accurate notes in the time provided - the next item is where I am unsure of the particular term he used, could have been "natural resource revenue", will have to verify that tomorrow)
      Up to 2020

    • using the Status Quo formula NL would get $18.5 billion
    • using the 50% option, with cap, NL would get $22.8 billion
    • using the "Harper Letter", without cap, NL would get $28.6 billion
  • Dr. Locke was asked by someone in the audience if he personally had a preference. His suggestion was to stay with the Status Quo for the next two years, and then switch to the 50% (O'Brien) option.

  • Total revenue from oil alone up to 2029-30 is approximately $18.6 billion

    Like a lot of people I'll take much more time to read the details of what Wade Locke presented and form a clearer opinion. However, based on his presentation, my feeling about our options are more positive than before this information. Even without the "Harper Letter" option where a promise was kept, it appears that NL still does much better than the status quo. The Harper Letter option would be best for the province, but if that's not going to happen, the 50% option sounds better than the status quo to this blogger, so far anyway.

    Anonymous said...

    Still even these estimates show that Harper's broken promise vs. his new formula would cost NL something like $6 billion over that time, maybe more if oil prices go even higher. That's serious money that could go a long way towards funding Hydro projects or reducing debt. I think $6 billion is something worth being upset about.

    kodak said...

    Yes you're talking huge sums of money which could be used for Hydro or putting towards the debt. It would be best to see a government live up to the commitment/suggestion in Harper's letter to the Premier, we were led to believe. Liberal leader Dion has not given much detail but has expressed support of Williams' position. However, it's not likely that Harper is going to budge, and may remain in power after an election. In light of that possible scenario, if we are not going to get the "Harper Letter" promise of 0% exclusion of natural resources with no cap, then of the other two options, the 50% one is clearly the best. Locke was not trying to sell the 50% option, but for me, while it was very upsetting that Harper used this province and mislead people here, this information was a slight way of taking the edge of upset for Harper's broken "promise".

    The $5 billion difference between the O'Brien option and "Harper's promise" option is understandably upsetting, and people here, and hopefully Sasketchewan and NS too, will reflect that in the next election.

    Anonymous said...

    Mr locke also stated that his formula's don't take into account any future oil and gas projects. IE: Hebron, Orphan Basin, West coast in the gulf etc. I do think he included the South Hibernia which is on hold due to a lack of info from the oil industry.

    WJM said...

    Who is holding out the "Harper letter" as an option?

    kodak said...

    wjm, you perhaps ask that question because of the way I worded my last paragraph in the post. I can only speculate that Premier Williams could still see it as an option, an option if say a Liberal government were in power in Ottawa. You're probably more familiar with how these things work, i.e., even though the 2007 budget was passed, including the new equalization plan, could a new government change the equalization plan from the O'Brien to the "Harper Letter" version? I am not sure.

    Locke used "Harper Letter" and "option" to identify the three different equalization scenarios. About four or five days ago I heard on tv news that Dion said he supports Williams stance. So again, I don't know what that means but it seemed to be welcoming, if nothing else.

    Anon, you're right about not including Hebron, Orphan Basin, West coast in the gulf etc., in the revenue projections. South Hibernia was included.