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In Defence of Equalization
Recently, the Equalization payments made by the Government of Canada to
provinces with a lower than average capacity to raise revenues, have been
debated in our newspapers. Political, academic and media commentators have
criticized the so-called disincentive effects that Equalization is alleged
to have on provincial economic development.
Equalization is based on the principle set out in section 36 of the
Constitution
Act, 1982 which commits the Government of Canada to helping provincial
governments provide reasonably comparable levels of public services at
reasonably comparable levels of taxation. Inherent in this principle is the
requirement that Equalization payments should decline when a province’s
fiscal capacity increases.
The economies – and hence the fiscal capacities – of Nova Scotia and
Newfoundland will benefit greatly from the development of offshore
resources. Consequently, the Equalization they receive will decline – and
may even end one day. The Premier of Nova Scotia, the Honourable John Hamm,
acknowledged this himself when he said that, under favourable conditions,
offshore resources could give Nova Scotia its "economic
independence".
However, Premier Hamm and others seem to be saying that this situation
could not come about unless Nova Scotia and Newfoundland receive special
treatment. Notably, they do not want their Equalization payments to decline
– or they want them to decline very little – in the wake of the
projected increase in their offshore revenues in the years ahead. In other
words, Canadian taxpayers should pay these two provinces exceptionally
generous Equalization payments today so that they no longer have to be paid
later.
The Government of Canada believes it would be ill-advised to grant such
special treatment to Nova Scotia, Newfoundland or any other province. First,
it is wrong to attribute to Equalization a disincentive or paralysing effect
on economic development. And second, it is essential to maintain equitable
treatment of all the provinces within the Equalization framework.
Equalization does not impede economic development
The fact that the Equalization received by a province declines when its
fiscal capacity increases does not prevent it from taking action to develop
its natural resources or promote any other form of economic development.
The impact of economic development on their revenues is far from being
governments’ main consideration when they make their economic policy
decisions. What guides them above all is a concern to meet their residents’
desire for increased prosperity. No government can long escape the critical
scrutiny of its electorate if it does not do everything in its power to
promote the job creation and greater well-being that flow from taking
advantage of whatever economic development opportunities present themselves.
Equalization has not stopped provinces from developing their natural
resources. Saskatchewan’s oil and natural gas industry was developed even
though that province’s Equalization payments declined as a result.
Similarly, other examples – potash in Saskatchewan, nickel in Manitoba and
hydro-electric development in Quebec, Manitoba and Newfoundland and Labrador
– show that Equalization has not impeded development of natural resources
in the past. There is no reason for it to be otherwise in the future.
Maintaining equitable treatment
The treatment the Government of Canada has given to Nova Scotia and
Newfoundland with regard to offshore resources demonstrates that it is
possible, in our federation, to give effective help to less advantaged
provinces without compromising equity and the principle of Equalization.
The Government of Canada signed agreements with these two provinces in
the mid-1980s to help start the development of offshore resources. Under
these agreements, the Government transferred all royalties derived from the
offshore resources to the treasuries of the two provinces, even though the
Constitution stipulates that these resources are the property of all
Canadians. In comparison, in the United States, all resources found more
than three miles from shore and any royalties generated by their development
belong to the federal government.
Under these agreements, the Government of Canada created a
$225 million development fund for each of the two provinces (the
equivalent of $375 million in today’s dollars). These funds provided
them with additional monies to take advantage of opportunities associated
with the early development of the offshore resources. Also, the Government
agreed to make special payments to increase their revenues over a lengthy
transition period.
The Government of Canada has scrupulously carried out all of the
undertakings it made in signing these agreements. It went ever further in
1993 by taking a 8.5 percent equity stake in the Hibernia project, at a cost
of $435 million, at a time when no other investors were prepared to do so.
In this way, the Government has greatly assisted Nova Scotia and
Newfoundland without jeopardizing the equitable treatment of all the
provinces or the integrity of the Equalization program.
In fact, changes made to the calculation of Equalization under the
Chrétien government have had the indirect effect of further benefiting the
treatment of offshore oil and gas revenues going to Nova Scotia and
Newfoundland. The effect is indirect, since the goal was not to give these
provinces any special treatment. Rather, it was to deal with a technical
problem that occurs in exceptional circumstances when a province accounts
for all or virtually all of a particular revenue source. After consulting
with all the provinces, the government agreed that, in such situations, 30
percent of the revenues in question would be excluded from the Equalization
calculation. In the future, this provision will likely apply only to Nova
Scotia’s offshore natural gas and to Newfoundland’s offshore oil,
although it has applied to other sources in the past. No other source of
provincial revenues, including onshore oil and natural gas, will benefit
from this treatment.
It would be unfair to taxpayers in the other provinces to provide an even
more generous treatment to offshore revenues in calculating Equalization.
This would be difficult to justify to residents of other
Equalization-receiving provinces that do not have significant revenues from
oil or natural gas. Canadians living in British Columbia or Ontario, whose
governments do not receive Equalization, could ask why Nova Scotia and
Newfoundland should receive Equalization payments that give them fiscal
capacities surpassing those of Victoria or Queen’s Park.
Some have proposed that the Equalization calculation exclude all
provincial revenues from non-renewable natural resources. In this way, they
contend, fairness among provinces could be preserved while allowing the Nova
Scotia and Newfoundland governments to increase their offshore revenues
without having their Equalization payments decline. This proposed change
also cannot be justified. Its effect would be to disadvantage those
provinces that have few natural resources in comparison with those that have
many.
It would be arbitrary to exclude certain revenue sources from
Equalization, be they oil and natural gas royalties, revenues from other
natural resources or any other source of provincial revenues. The
fundamental reality is that provincial governments use all these revenues to
finance their public services. In order to make Equalization payments that
allow provincial governments, as stated in the Constitution, "to
provide reasonably comparable levels of public services at reasonably
comparable levels of taxation", the Government of Canada is obliged
to take into account all of their sources of revenue.
In short, far from being an obstacle to economic development,
Equalization is one of the most tangible manifestations of Canadian
solidarity. While respecting the principle of Equalization, the Government
of Canada has been able to help Nova Scotia and Newfoundland derive full
benefit from their offshore resources.
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