Editor's Note: As the Liberal Government readies for
their second budget, I would like to remind regular readers of the eight-part
"Budget Colloquy” posted by JM back in 2015. Although you can argue with some of JM’s
recommendations, this series was well-researched and offers a solid analysis of the state of the province’s finances. JM now returns with an introductory post on the equalization issue.
Guest Post by
"JM"
First,
I must disclose that I am not an expert on equalization. It is a complicated federal program, which
played a pivotal role in most of the history of the province. During
the 90’s, equalization provided nearly 30% of the total revenue to the provincial government. The highest
absolute contribution was $1.2 billion which occurred in 2001.
In
1999 NL received over 12% of the total federal equalization allocation, for about
2% of the population of the country.
By
comparison, in 2016 we received no equalization and the province's combined revenue
from other Federal sources ($702 Million) and from offshore royalties ($485
Million) was less than the 2001 equalization value alone, adjusted for
inflation.
As the second budget from the Ball government will likely attest, NL is in dire financial straits. After nearly a decade of hiatus, equalization is again back
in the news. Dwight Ball wants to get back at the negotiating table for the next round of negotiations which occurs every five years.
It
is clear that we need our fair access to equalization. But what is fair, and what is our strategy for
these negotiations?
First, I
would recommend to the readers a recent “Primer” produced by the
Fraser Institute on equalization. Contrary to widely held public opinion, the amount of equalization received by
each province does not depend on the budgetary shortfalls, nor the costs of
services in the province. Rather the amount of
equalization received depends upon how the fiscal capacity of each province compares with the national average. Fiscal capacity is determined by the revenue-generating capability of each province.
What
is also interesting about the Fraser Institute article is that over the past 15 years there has
been clear consolidation of equalization wealth in the direction of central Canada — specifically from Atlantic Canada, which is demonstrated in the following exhibit.
Since
2003 the share of equalization taken by Quebec and Ontario has increased from
about 42% to almost 70% of the total equalization pie. The component to Atlantic Canada has fallen from 40% to 20% in the same period.
Despite
the complex mathematical formulae used to calculate equalization to qualifying provinces, the goals of the
program have never deviated since the program was first established in
1957.
The original intent of
equalization was to “enable less prosperous provincial governments to provide
their residents with public services that are reasonably comparable to those in
other provinces, at reasonably comparable levels of taxation”.
If
the intent of equalization is to ensure broad and equitable access to basic
public services, why does the cost of service delivery not appear to be
considered in the current equalization formulae?
It
is time for equalization to formally recognize the disparity in the cost in
delivery of services from province to province. As noted, Quebec and Ontario receive 70% of the equalization in the country. They also have respective population
densities which exceed the national average. The scale economies such density affords clearly results in a lower cost
of delivery on a per capita basis. A recent report on health costs in Canada provides proof.
Quebec
and Ontario, driven by their centralized, and larger, populations arguably have
the best health care, at the lowest cost per capita. Other services, such as
education, likely follow a similar trend.
So
why would Ontario and Quebec not face an equalization penalty, taking into account their advantageous ability to deliver services at a relatively lower per capita cost?
I believe this a valid question.
In
1957, when the equalization program commenced, Canada was defined by Statistics Canada as 67% urban and 33% rural Now well over 80% urban, Canada is a far less dispersed country than it was in the 50’s. It seems only sensible that its primary method
of national wealth re-distribution is modified to reflect this new reality.
In short, it
is time that the equalization program reflected the per capita cost of service
delivery in its formulation.
Premier Dwight
Ball will have many potential allies in his desire to reconfigure equalization,
and to draw wealth from Ontario and Quebec back into the periphery of the
country.
For
Ball to succeed he will need a more substantive argument than “We need our fair share”. His argument needs to be fact based, substantive and accompanied by a clear communications plan.
As
a province, we must also realize that if the
equalization formulae are changed, whether through the Premier's intercession or in combination with the efforts of other Premiers, Newfoundland and Labrador may still not become — by the definition of the equalization program — a “have
not” province. We may still not receive
equalization.
Our
financial issues are due not to an imposed disadvantage from
Ottawa. Our budgetary crisis is
self-inflicted. It is the result of our inability to keep our spending
habits in check.
Despite
that problem, Dwight Ball — representing a potential ‘have province’ — should be able to
take a leadership role in recommending changes to the equalization program which
reflect modern-day Canada.
It is
time for equalization to reflect the original reason it was established — to ensure that all Canadians have access to comparable services, having been levied comparable
levels of taxation.
It is time for equalization to consider population density, demographics and the per capita costs of
service delivery when comparing the provinces.
Had Newfoundland and Labrador advocated for such sensible changes during the last two rounds of
negotiations, we might have been in a better financial position today.
