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 http://www.mun.ca/arts/.

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.

Greyed Expectations

Reports say there will be increases in equalization to the provinces in the budget later today. Finance Minister Jim Flaherty says provinces will see it as a fair resolution to the fiscal imbalance problem, but not all provinces will be happy with it. Hmm, who could that be? The vibe is that the anticipated 50% inclusion of non-renewables will be part of the new principled long-term equalization formula. There are eight "have-not", sometimes seven, BC and/or SK could be "have" provinces again, so the money has to get split. Quebec gets over $5 billion in equalization each year, and may get the biggest share. The budget has some general tax cuts, and an incentive for hybrid car purchasers, but the bump in overall money for the provinces, the government hopes, will take the sting out of the broken promise he made on equalizaton.

The $1 billion he gave to Sasketchewan farmers might have smoothed over the expected budget news for many in SK, but not necessarily Lorne Calvert. Jack Layton has said a few days ago he supported the view that non-renewables should not be part of the new formula. Dion has not said much about this. There doesn't appear much anxiousness for an election. It won't be surprising if all parties support this budget, but the real proof will be in recipe of the pudding.