Equalization formula changes would benefit N.L. most: projections
Scenarios eyed as program comes up for renewal
Newfoundland and Labrador could be the big winner if the federal government tweaks the formula for its equalization program that doles out cash to needy provinces.
The program is up for renewal next year and the Parliamentary Budget Office ran the numbers for four different potential changes to the formula. In two of those four scenarios, Newfoundland benefits.
The four scenarios considered by the PBO centre on controversial aspects of the program that have drawn complaints from economists, academics and, especially, politicians in provinces that aren’t content with their share.
Alberta, where most of the agitation for change originates, won’t stand to make a penny in any of the hypothetical outcomes, even with projections reaching more than 70 years into the future.
The former Wildrose Party in Alberta had long advocated for changes to the equalization program and the newly formed United Conservative Party has now taken up the cause, calling for a referendum on the issue. However, UCP Leader Jason Kenney’s suggestion, which is to remove resource revenue from the equalization formula, would massively increase Newfoundland’s share of the funds.
The current formula only includes 50 per cent of resource revenue, which is meant to make sure provinces still have an incentive to exploit natural resources. But according to the PBO’s numbers, even at the tail end of a recession and without any resource revenue included, Alberta’s relatively high personal and corporate income returns prevent it from slipping into “have not” status.
The numbers confirm what University of Calgary economist Trevor Tombe found when he ran a similar projection. The PBO’s predictions are focused on fiscal sustainability, and so don’t provide dollar amounts, but Tombe expected Newfoundland to see an extra $224 million, if the formula removed resource revenue.
The PBO also projected winners and losers if all of a province’s resource revenue were included in the formula and found that provinces with fewer natural resource revenues, like Prince Edward Island and Nova Scotia, would benefit.
Another tweak the PBO considered would remove a clawback for provinces receiving equalization funds. Currently, a province can’t end up with a better fiscal capacity due to equalization money than a “have” province. Removing that cap would also be a boon to Newfoundland and “would benefit Quebec more than any other by far,” Tombe wrote.
The PBO also projected how the program would react if the overall cap on funding were removed. Right now, it’s tied to the country’s GDP — a measure brought in by the Harper government to stop the payments from skyrocketing while inequality among provinces grew.
In recent years, as recessions hit Alberta and Saskatchewan, inequality has flattened and equalization payments have been lower. As the payments sunk below the cap, the government spent the leftover money through “adjustment payments.” Controversially, Ontario was the big beneficiary of this decision, receiving $963 million in equalization money, despite becoming a “have” province.
With the removal of the cap, the PBO projects the effect on individual provinces will be small, but the government should expect the equalization program to grow substantially over the long term. By 2091, the total cost of the program could be 40 per cent higher without the cap.
Since the economy dipped in Newfoundland and Labrador, the lack of assistance from the equalization program has vexed its politicians.
“We’re certainly not a have province,” Newfoundland and Labrador Finance Minister Tom Osborne told The Canadian Press in December.
The main culprit is the three-year moving average the formula uses to determine a province’s ability to generate revenue. The program, though, isn’t designed to alleviate the effects of a recession, but to even out structural differences between provinces.
The moving average deliberately takes the focus off temporary trouble in the economy and gives a longterm picture of a province’s ability to provide services.