Sun, Jun
17
2007

Breech!

Sun, Jun 17, 2007

It’s official: I feel sorry for Peter MacKay. With Bill Casey gone and Gerald Keddy wavering, the former leader of the Progressive Conservatives could well find himself the only Conservative party MP still standing in Nova Scotia, and his own popularity is coming more and more in question. Those who wrote off Lizzie May’s chances in Central Nova might well be eating crow in the next election.

But I’ve got to tell you, I never expected the Conservative Party to stumble and expose the cracks between its Progressive Conservative eastern wing and harder-right western wing in this fashion. I never expected equalization to dominate the news from Parliament Hill this late in the spring session. I never expected this to be the issue where the government might conceivably fall.

And lest you think that the Liberals are sitting back and laughing, they face a potential caucus revolt of their own, as Liberal senators from Newfoundland, Nova Scotia and Saskatchewan consider voting against the budget, potentially plunging us into constitutionally obscure waters. Many senators may do this in defiance of Liberal leader Stephane Dion’s strict orders, for though he opposed the budget in the Commons, he wisely does not want to be demonized for using his party’s majority of unelected senators to thwart the decision of the House.

What has caused Newfoundland, Nova Scotia and Saskatchewan to go ballistic and threaten both the Conservatives’ minority parliament and Stephane Dion’s hold on the Liberal leadership? Well, money, of course. Money and all the prosperity it buys. In the end, it’s always about money.

From the point of view of Nova Scotians, the debate may be as follows:

In this nation, we have a program of equalization where taxpayers of provinces which perform above a national average end up paying cash to taxpayers in provinces which perform below the national average. The intent of this program is to try and maintain a relative consistency of prosperity and/or government services across the country, so that an education in Saskatchewan means the same thing as an education in Newfoundland, so that Halifax has the infrastructure it needs to compete on a relatively even keel with Toronto, and so that the poorer provinces don’t face bankruptcy in dealing with their poor.

It should be noted that every Canadian taxpayer pays money into the equalization program, and the funds are divvied out by a complex formula, so it isn’t as simple as Albertan, Ontarian or British Columbian taxpayers paying for the services received by Quebeckers or the people of New Brunswick. Quebeckers and New Brunswickers pay a portion of their own equalization payments but get more out; Alberta and Ontario just pay into the program, and get nothing out. A full explanation of this crazy formula can be found on Bouquets of Gray and on Andrew Spicer’s website.

Well, since the equalization program has been instituted, the Atlantic provinces have been “have nots”. They have been areas of persistently high unemployment, partly the result of being dependent on resource industries that have been depleted (see cod, lumber and coal), and partly the result of being somewhat removed from the economic action (all of Southern Ontario is a day’s journey from Chicago, New York and Washington; we’re closer to where the market is, and that brings businesses to us). This has produced a cycle of poverty which has made it difficult for the Atlantic provinces to maintain a standard of living comparable to the rest of the country.

However, thanks to recently discovered oil reserves, money is finally going Newfoundland and Nova Scotia’s way. But here’s where things get complicated. It’s not clear how resource revenues are to be counted in the equalization formula. Alberta doesn’t get its oil resources counted, partly because land-based natural resources are the exclusive purview of the provinces, but also because if Alberta’s oil resources were counted, the equalization formula would be sent completely out of whack — possibly to the point of rendering Ontario a have-not province (which would be just wrong) (see a further explanation here). But this exception only includes land resources, not explicitly offshore resources… except until 2005 when the Paul Martin Liberals signed the Atlantic Accord with Nova Scotia and Newfoundland, saying that revenues from offshore resources wouldn’t be included in the equalization formula.

According to some sources, the oil revenues heading Newfoundland and Nova Scotia’s way are sufficient to change these provinces from “have nots” to “haves”, making them contributors to the equalization program, if not now, then within the next few years. Many people in the “have” provinces would say, fair’s fair, that’s the way it’s supposed to go, so pay up. However, the equalization formula tends only to consider the amount of money governments can raise through taxes; not other economic indicators.

Well, as far as Newfoundland and Nova Scotia is concerned, years of being “have not” provinces means that they have a lot of catching up to do. And formula or not, they’re well aware of the amount of money they’ve received through equalization in the past, they’re well aware of how much money they could potentially lose through equalization in the future, and the number received by summing these together could contribute a lot to each province’s economy, either through tax cuts, or through infrastructure renewal, or through investments in health and education. These provincial governments are responsible for their voters’ wellbeing, and they would be irresponsible (not to mention politically suicidal) if they didn’t go to bat for their electorates.

So there is a considerable interest in Newfoundland and Nova Scotia to ensure that the turnaround resulting from offshore oil revenues is not clawed back by the equalization formula. These interests are shared by Saskatchewan, who is experiencing an oil turnaround of its own. Ontario and BC are ambivalent or hostile, since they’ve been paying into Confederation for some time (with their resource revenues explicitly considered in their equations), and want their burden shared. Alberta is ambivalent; they also want their burden shared, but any chink in the policy of not counting their resource revenues in equalization threatens to increase their own burden dramatically.

Thus we have the Atlantic accord, which is very popular in Nova Scotia and Newfoundland, and which almost broke apart the Conservatives when they were first threatening to topple the Paul Martin Liberals in 2004 (the day before Belinda Stronach broke ranks and crossed the floor, the headline of the National Post read “NEWFOUNDLAND TORIES WAVER.”). With the Conservatives precariously placed at around 36% popular support, and more than 30 seats shy of a majority government, they’ve had to scramble to broaden their coalition. Losing much of their Atlantic support (and potentially some of their 12 [out of 14] Saskatchewan MPs) has got to be quite a blow.

But if Newfoundland is the Rock, Quebec is the Hard Place. Complicating this discussion is the Quebec issue of “fiscal imbalance”, which got bandied about a lot during the 2004 and 2006 elections. My take on the “fiscal imbalance” is that it describes the situation where the federal government seems surprisingly able to maintain budget surpluses, while the provinces (especially Ontario and Quebec) find it difficult to stay out of deficit.

This perceived injustice breathed a lot of life into the separatist Bloc Quebecois, until the 2006 election when Stephen Harper started speaking their language, and making inroads into La Belle Province. After breaking the see-saw between the Bloc Quebecois and the default federalist Liberals, the Conservatives sought to address the fiscal imbalance in the 2007 budget by altering the equalization formula. Alberta and Ontario held their breaths; as contributors of over $30 billion more into Confederation than we get out through government services, we weren’t interested in having our burden increased to placate the separatists, but Harper managed to cool some heads by sending some climate change money Alberta’s way, and immigration and transportation money Ontario’s way.

But as you can tell, addressing the fiscal imbalance questions over equalization, and bridging the prosperity gap through the Atlantic Accord means spending a lot of money — something the Conservatives traditionally do not enjoy doing. To ensure that Quebec receives more revenues without hitting up Alberta and Ontario again, that money has to come from somewhere, and Nova Scotians fear that it has come from watering down the Atlantic Accord, adding some offshore resource revenues to the equalization formula.

The Atlantic Accord is a signed contract between the federal government and the governments of Nova Scotia and Newfoundland, and it’s supposed to last until around 2020. So Nova Scotians and Newfoundlanders are crying foul over the possibility that the Conservatives are watering it down. Finance Minister Flaherty tried to offer a compromise, saying that the two provinces could stick to the original accord, and the old, less generous equalization formula, but the provinces responded by saying that now they’re being treated differently in a program that’s supposed to apply across the nation, specifically due to their offshore oil revenues.

And if you are still reading post this after all of that rigmarole, you are one dedicated reader.

It gives me no joy to see the Conservatives hung up on this, partly because I try not to go in for schadenfreude, but also because, like the income trust flip flop, I think the Conservatives have this one basically right. While I understand the desire of Newfoundlanders and Nova Scotians to capitalize of their new found wealth, I still think we’re twisting the equalization formula into something other than what its original founders intended. The formula as it stands is so complicated that just looking at it is enough to make your head explode. If we keep on adding more and more exceptions, we come to a point where we have to ask, why was this established in the first place, and if it’s no longer doing what it was established to do, why should it be maintained?

But I suspect the root of the Conservatives’ problems come from their attempts to address the fiscal imbalance as Quebec defined it.

The Conservatives’ 2004 policy of addressing urban issues by transferring five cents of the federal gas tax to the provinces would have gone a long way to addressing the fiscal imbalance. Billions of dollars would have been transferred from the Federal treasury to the provincial governments, without any strings attached. For some reason, however, this policy did not make it onto the Conservatives 2006 election platform, and the idea has not been raised since.

I suspect part of the reason for this is that a simple transfer of the gas tax would amount to a fair amount of cost to the federal government, and not enough benefit. There’s no ribbons to cut and little in the way of photo opportunities when you’re just transferring taxpayers’ money from one bank account to another. On the other hand, the provinces get to use the money for their own political aggrandizement. They can cut taxes; they can reinvest in health and education, or they can start building subways.

Harper would be far from the first federal politician to think this way. Jean Chretien, in trying to increase spending in our national health care system, once questioned why the federal government should blindly restore tax transfers to the provinces, without assurance that the provinces wouldn’t just turn around and use the money for tax cuts (he said, with his eyes fixed pointedly on Mike Harris, who had cut provincial income taxes by 30% and was now complaining about the cuts in federal health care transfers to the provinces). Harper, similarly and understandably, is loathe to give Quebec politicians — two-thirds of whom are borderline separatist — the same opportunity to use federal tax dollars for provincial gain.

(Yes, I know there is only one taxpayer, but there is still a lot of political clout in determining who gets to cut the ribbon at various projects, and voters respond to that, depending on what election they happen to be voting for at the time. Harper is shrewd enough to know this.)

Unfortunately, by taking the less obvious, more complicated path, Harper has discovered there are more pitfalls en route. You can’t please Quebec, and Alberta, and Saskatchewan, and Ontario, and Nova Scotia and Newfoundland, without a lot of direct spending, and that’s something that doesn’t come naturally to this prime minister or his core supporters.

So that’s where things stand. Short of scrapping the changes to the equalization formula and addressing the fiscal imbalance through tax transfers, Harper is going to have to make a difficult choice: Quebec or Newfoundland? Alberta or Saskatchewan? Ontario or Nova Scotia? And with thirty seats still to go before his precious majority, those were choices he desperately did not want to make.

More disturbing, though, is the strain this dispute is having between the provinces. The way the battle has been framed, it can not be won without the losers finding themselves within a readily defined boundary that, maybe, just maybe, they could consider taking out of Confederation. Danny Williams already played that card with Paul Martin, and we know the Parti Quebecois are hoping that this battle goes in such a way that they can once again point to Quebec being shafted by the rest of Canada.

I don’t have any answers other than the ones I’ve given, but if we are to engage in this debate, perhaps these are some of the questions we need to ask:

  1. What is equalization? What is it intended to do and what should its measures of success be?
  2. Does the current system achieve this and, if not, what alternate formulae could we or should we use?
  3. Why should resource revenues be excluded from the year-to-year equalization formula? And, finally:
  4. Is equalization the best means at hand to ensure a semblance of equality between the provinces or do better methods exist; for example, could we not simply transfer tax points from the federal government to the provinces to get their revenues more in line with their responsibilities?

To This List, Add a Body of Pathologists

Ever wonder what the proper collective noun was for a group of animals? Do you know about a pride of lions and a murder of crows? What about a zeal of zebras? Well, wonder no more: this site provides a definitive list.

Have fun adding your own:

  • A skeleton crew of paleontologists.
  • A history of archaeologists.
  • A scribble of writers.

On This Day

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