Equalization – AIMS Institute 100% Solution
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Over the past several weeks much has been made of the federal government’s promise, and later refusal to exclude 100% of non-renewable resource revenues from the equalization formula. Three provinces, Newfoundland and Labrador, Nova Scotia and Saskatchewan, all feel betrayed by the Harper government. Prime Minister Harper on the other hand has said he kept his promises and that the right solution to the fiscal imbalance was delivered by the new plan.
Meanwhile, the people living in provinces with resource based economies continue to cry foul while many Canadians are being told that the people there are just whiners who want to “have their cake and eat it too” or are looking to, as I political reporter Mike Duffy said just this week, “Double Dip”.
This is an image being nurtured by Ottawa but in reality nothing could be further from the truth. In fact, regardless of promises made or denied, the reality is that what Newfoundland and Labrador, Nova Scotia and Saskatchewan are trying to do with their non-renewable resource revenues and the equalization program is the correct and proper thing to do in all of Canada. It’s the federal government that has it wrong and is denying these provinces the ability to grow their economies and move off of equalization permanantly.
In July of 2006 the Atlantic Institute of Market Studies (AIMS), after reviewing the findings of the expert panel on equalization which were used in large part as a model for the “New” equalization system, released a paper outlining the best option for Ottawa to take. It wasn’t the expert panel option and it wasn’t the one adopted by the Harper Government.
The AIMS option would see 100% of revenues exempted, would make so called “have not” provinces more self sufficient (even after their resources were depleted), would save Ottawa billions in equalization costs and would ensure that province’s moved away from equalization permanantly rather than temporarily as a result of high oil revenues.
The AIMS report identified that resource revenues of this kind are not the same as revenues from taxes or renwable resources such as hydro power and logging. Since non-renewables are finite the revenues from them are not “new income” but simply a conversion of assets from one form to another As such they should be viewed differently and not included in equalization calculations.
An example used is that of a baker who receives income from selling bread, cakes, etc. This is true revenue since expenses are incurred and a product (which can continue to be made) is sold for income. Just like taxes or the revenues a province receives from renewable sources.
On the other hand, if the baker decides to sell one of his ovens, this money is simply the conversion of one asset (the oven) for another (cash) and is not recorded as income. The same holds true for non-renewable resources like Oil and gas. Once they are gone they are gone and the province’s in essence are just converting their oil or gas asset to cash.
The paper goes on to explain that if provinces are willing to take their non-renewable resource revenue and apply it to paying down debt or to converting it into a trust fund that would provide future income then in the long run the entire country would be better off since the province could use the money saved from servicing debt to supply services and the money saved or earned in this way is the true ongoing revenue that should apply to equaliztation calculations.
Under this approach Canada would actually save billions in equalization while allowing provinces to move from “have not” to “have” permanently.
The AIMS paper is a must read for anyone who is still under the misconception that Newfoundland and Labrador, Nova Scotia and Saskatchewan are simply looking for handouts. The opposite is true and should be clear to anyone who bothers to take the time to read the report. The fact is, under the current scheme, if a province is forced to use non-renwable resource revenue to supply services, which it is because the federal government has taken away equalization dollars, then when the resources are depleted the province will need even more equalization funding to maintain those services.
Check it out yourself at: http://www.aims.ca/library/Equalization3.pdf
By Myles Higgins
@ May 9, 2007