X-Efficiency: Equalization

Equalization has been a very hot topic in Ottawa and Atlantic Canada lately. It is making some noise even in Saskatchewan.

From a policy stand point, I believe that the federal government is doing the right thing - by putting a cap on equalization payments including oil and gas (non-renewable resources) revenue. But from a political point of view, I think maybe the Conservative over-promised during the 2006 campaign.

Anyhow, I put the blame on Paul Martin, who started this whole mess, by brokering "side-deals" with individual provinces during the 2004 and 2006 campaign. Those were very bad public policies.

Yesterday Globe's editorial and Andrew Coyne's article summed up my thoughts.

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PUBLICATION:	National Post
DATE:	2007.06.13
SECTION:	Editorials
PAGE:	A18
COLUMN:	Andrew Coyne

Nova Scotia's sweetheart deal

I am trying to decide which is the more outrageous: the Atlantic premiers' phoney grievance over the new equalization formula contained in this year's budget, or the Harper government's phoney promises with regard to same before the last election. It's a near thing, but I'd give the premiers' preposterousness the edge over the Harperites' hypocrisy.

Indeed, it is only the Harper government's well-earned reputation for deviousness that has allowed the premiers' campaign to get as far as it has. Were the Conservatives less distrusted, Premiers Danny Williams and Rodney MacDonald would be seen for what they are: shakedown artists, in the grand tradition.

The facts are these. Constitutionally, offshore resources are under federal, not provincial ownership. Twenty-odd years ago, however, the Mulroney government agreed to pretend they were provincial, giving the Atlantic provinces first crack at the royalties.

In 2005, the Martin government took this a step further, agreeing not only that the provinces of Nova Scotia and Newfoundland were entitled to collect royalties on resources they don't own, but that they should continue to collect equalization payments as if they did not also collect royalties. Many experts had argued that the "clawback" on equalization payments should be less confiscatory. But the Atlantic Accords stipulated there should be no clawback at all. Sweet.

Too sweet: They should never have been signed. Under the Accords, the two provinces will still be entitled to equalization even after their governments, already awash in oil revenues, have grown wealthier than Ontario's. When is that far-off day? In Newfoundland's case, it's today: For 2007-08, Newfoundland's per capita revenues, equalization included, total $7,094, to Ontario's $6,631. This is simply untenable-- which is why the O'Brien report, on which the new equalization formula is based, proposed a "cap" on equalization payments at this point, ensuring Ontarians will not be put in the position of paying for services in provinces that are richer than their own.

So it is with not a little chagrin that I can report that the 2007 budget did nothing whatever to disturb the accords. The "contract," as both sides have taken to calling it (Contract? What did Newfoundland or Nova Scotia bring to the table? What did they offer in return?), is, alas, wholly intact. The issue is not whether the new equalization formula, with its "10-province standard" and "50% inclusion-rate," is better or worse for the Atlantic provinces. (It depends on the price of oil, among other things.) The issue is that nothing compels either province to adopt it.

As it has been described in the press, they have a choice. They can stick with the existing formula, and remain covered by the Atlantic Accords. Or they can switch to the new formula, which promises to pay out more in the short term -- but which includes the cap. Newfoundland, for instance, chose to stay with the old formula for this year, meaning it is no better and no worse off than before. Nova Scotia, on the other hand, received $95-million more in equalization this year by opting for the new formula.

But in fact, they don't have to choose even then. Even after taking the new formula -- and the extra cash -- Nova Scotia can still go back to the old one next year. And even if they stay with the new formula, the Accord still applies. They remain exempt from the clawback -- as long as their fiscal capacity does not exceed that of Ontario's. Only then does the cap kick in.

It's hard to see the injustice in any of this. The most that can be said for the premiers' position is that the Accords say payments should be based on "the Equalization formula as it applies at the time." On the premiers' reading, this means they should be entitled both to the protections of the Accord and the new formula's enriched payments. But the new formula isn't just about higher payouts. It also includes the cap.

What the premiers are demanding is some mythical third option, one with higher payments, no clawback and no cap. They want the best of three worlds: to have their cake, eat it and spin it above their heads.

Which would be more outrageous, were that not what Stephen Harper, in effect, promised them. As Opposition Leader, Mr. Harper was not only unequivocal in committing to full exclusion of resource revenues from any new equalization formula -- meaning no clawbacks -- but that this should apply, well, forever: i.e., sans cap. Here he is in the House of Commons on November 4, 2004:

"Why should Newfoundland's possibility of achieving levels of prosperity comparable to the rest of Canada be limited to an artificial eight year period? … Why is the government so eager to ensure that Newfoundland and Labrador always remain below the economic level of Ontario? The Ontario clause is unfair and insulting to the people of Newfoundland and Labrador, and its message to that province, to Nova Scotia and to all of Atlantic Canada is absolutely clear. They can only get what they were promised if they agree to remain have-not provinces forever."

It is not true, then, to say that the Accord has been violated. It is true that Mr. Harper played Atlantic Canadians for suckers. At least he is paying the price.

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PUBLICATION:	GLOBE AND MAIL
DATE:	2007.06.13
PAGE:	A18
SECTION:	Editorial

EQUALIZATION Know a rich deal when you've got it

The nasty quarrel between the federal government on one side and Newfoundland and Nova Scotia on the other may be reduced to half a dozen simple words: "as it exists at the time." But underlying the disagreement over what this language in the Atlantic Accords means are years of bitter wrangling with Ottawa as the two have-not provinces have sought to reap maximum benefits from the offshore oil and gas bonanza without giving up any of the cash that flows their way through federal transfers, including equalization payments.

When then-prime-minister Paul Martin signed the Atlantic Accords in 2005 with Newfoundland and Nova Scotia, he gave them an exceedingly generous gift on behalf of other Canadians. Both provinces (and several others) receive equalization payments, under a system designed to ensure that all provinces can provide roughly similar services for similar levels of taxation. In a deal calculated to last until 2011-12 and possibly 2019-20, the Martin government agreed to compensate Newfoundland and Nova Scotia dollar for dollar for any equalization payments clawed back because of the money they were making from their offshore resources, regardless of how wealthy they might become.

In other words, if they became richer than Ontario, they would remain beneficiaries of equalization while poor Ontario would remain a net contributor. This was bad policy made for opportunistic reasons, and it has not improved with age.

Nevertheless, Prime Minister Stephen Harper has repeatedly said he would honour the agreement. His March 19 budget introduced a new wrinkle. The two provinces could keep the existing system unchanged or opt for an amended, potentially richer equalization formula with a substantial catch: The new formula, one version of which would for the first time take into account 50 per cent of natural-resource revenues, would impose a cap on how much any province could receive, so that no recipient could end up with a higher fiscal capacity than any non-recipient. For Newfoundland and Nova Scotia, it was like putting a fresh piece of cheese in a mousetrap - tantalizing yet frustrating. More money, but with new limits.

Not surprisingly, they have cried foul at Ottawa's tactics. They want all the cheese they can gobble up without triggering the trap, and insist that the wording in the Atlantic Accords guarantees it.

Thus, the six critical words. The agreements specify that the calculation of payments Ottawa gives them to offset the clawbacks is based on the equalization formula "as it exists at the time." Nova Scotia says that means the new enriched formula; and, since the 2005 accord doesn't impose a cap at least until 2011, the province says it is entitled to all the money under the new formula even if the payment exceeds the threshold of a non-recipient. "Forcing Nova Scotia to choose an obsolete equalization formula clearly contravenes this provision," the provincial government insists. (Nova Scotia tentatively opted in to the new formula; Newfoundland, which is enjoying a much greater bonanza from the offshore resources, has calculated that it's better off staying with the terms of its Atlantic Accord.) Ottawa sees it differently. It argues that the new formula, which attempts to reinstate national principles instead of one-off deals, is a much better arrangement for all Canadians; but since it's not mandatory, it doesn't offend the terms of the Atlantic Accords.

If Nova Scotia and Newfoundland don't like the conditions of the new deal, they can stick with the old one - as Newfoundland has done, albeit unhappily.

The political fight is unusually heated. Unlike Newfoundland, which has produced a stream of premiers who love nothing better than a bare-knuckled brawl with Ottawa, Nova Scotia's leaders have tended to prefer the quieter realm of backroom negotiations and compromise. So the fact that Conservative Premier Rodney MacDonald has taken off the gloves and that Nova Scotia's longest-serving federal Tory, Bill Casey, chose to vote against the budget at the cost of his seat in caucus shows the depth of anger at what Nova Scotians see as a callous betrayal (as well as the fact that the politically weak Mr. MacDonald has finally realized the Prime Minister handed him a gift).

A political price is the inevitable fallout of an opaque process that was utterly mishandled by the Harper government, whose secretive, high-handed methods do not engender the goodwill or secure the compromises necessary to prevent deep fissures. Paul Martin bent the equalization formula out of shape in trying to please everyone; Mr. Harper has made the situation worse by not caring whom he displeases.

He is right in arguing that he hasn't abrogated the Martin agreement; the provinces can stick with the old or, as the six words suggest, opt for the new. He is not obligated to offer the best of both worlds.

But he has accomplished his goal through unnecessary guile and divisiveness when it might have been achieved through consultation and negotiation.

Newfoundland and Nova Scotia, having made a famously favourable bargain with the federal government in the Atlantic Accords, should stop complaining that the new deal on offer has a barb in it in the form of a cap. Of course it does. Ottawa seeks to preserve a basic principle of equalization - that the goal is to raise provinces to the per-capita level of those that don't receive equalization, rather than help them surpass it. The two provinces are in the fortunate position of not being required to go anywhere near the barb, while having the option of receiving equalization under the formula they originally agreed to and the freedom to surpass the non-recipient threshold for years to come. Nice terms if you can get them. The mice should be careful not to bite off more than the country will let them chew.