08 March 2007

Flaherty coy on federal hand-outs

Federal finance minister Jim Flaherty is a seasoned politician.

You can tell by the way he stuck to his talking points during every scrum and one-on-one interview during his visit to St. John's on Wednesday. He even flashed a grin or two as he repeated the same words over and over again, especially in answer to any question about proposed changes to the Equalization formula. The provincial politicians behind him in the media event - like Fabian Manning and fish minister Loyola Hearn - may have looked like they were having white-hot pokers inserted abruptly into their tenderest places, but Flaherty spoke with the confidence you'd expect of the guy with his hand on the nation's purse.

The CBC paraphrase of his typical response is as close to the actual words that it ought to have quotation marks around it:
Flaherty said the federal government will respect the revised Atlantic Accord, the 2005 agreement between the federal government and Newfoundland and Labrador and Nova Scotia.
There's the thing.

The current federal government has never said it would tamper directly with the offshore revenue deals signed with both Newfoundland and Labrador and Nova Scotia in January 2005. Those bilateral deals could only be amended with the consent of the parties, and given the situation, it is highly unlikely Danny Williams would ever crack that one open again.

So what's Flaherty going to do?

Well, the federal finance minister knows from his days in provincial government exactly how the provincial governments look at the feds as both a pot of limitless money and as a convenient whipping boy to take the blame for any provincial shortcomings. Flaherty knows full-well the fiscal reality of the various provinces as opposed to the poor-mouth they like to put on for the cameras.

In other words, Danny Williams' public rhetoric about Equalization bounces off Flaherty like ball bearings off a concrete floor. That isn't saying Flaherty is a cinder-block head; to the contrary, Flaherty is a sharp guy and his political smarts make him impervious to the sort of hyperbole Danny Williams likes to toss around.

What Flaherty referred to in his interviews yesterday sounds like good policy in the making. He spoke of providing long-term, stable funding to the provinces based on the federal government's constitutional obligation to provide the top-up commonly known as Equalization.

It would seem pretty clear by now to all but the handful of die-hards that Flaherty won't be removing non-renewables from Equalization calculation as promised in two successive elections (see below). Flaherty and his boss Steve Harper will do something else, i.e. like a variation on O'Brien and count only half the non-renewables. They might add a little deal with provinces can exclude all non-renewables in exchange for a commitment to spend the cash on debt reduction or infrastructure.

The feds might impose a cap on Equalization, as suggested by several people and by the O'Brien expert panel. Under that approach, no province could receive their own revenues, plus the Equalization to-up plus any other sort of Equalization-like cash from Ottawa and wind up with more cash per capita than, say, Ontario. That province doesn't get any Equalization at all.

The Ontario cap wouldn't be such a bad prospect. For starters, Equalization is a top-up. Our goal should be to have a higher per capita income for the provincial government based entirely on its own revenues so that we don't need to get hand-outs from Ottawa. The cap is only important if your goal is to keep sucking on the federal fiscal teat rather than becoming a self-sufficient province.

Think about that the next time you hear Danny Williams get agitated about caps. If he really wanted this place to be like Alberta, he'd be signing a different tune.

What's more, an Ontario cap would still give Newfoundland and Labrador bags of federal cash. Danny Williams may have argued against a cap in 2004 but that was when everyone thought our economy would soon make us a so-called "have" province. As it is, Williams has managed to postpone that for a decade - at least. The Ontario cap will have a negligible effect on provincial revenues. Certainly, the Ontario cap pales in comparison to the balaclava Williams himself has set on virtually all the entire provincial economy.

As for Williams reaction, that is getting increasingly hard to predict. He talks a tough game, but in his last encounter with the federal government he settled for considerably less than what he asked for. Unlike his dealings with the Hebron partners, Williams actually dropped his ask with the feds in 2004. He kept going downward until he hit a figure that the feds would live with. Williams signed on and declared victory but Bond readers can go back and see the whole thing in the archived postings from early 2005.

Williams could declare victory if it looks anything decent. Most people wouldn't know if he got it or not, whatever "it" is. Williams could also declare yet another jihad against Ottawa. Don't count on that having much political impact though. The poll numbers might be big but the federal Conservatives got elected despite Danny Williams not because of him. The local party faithful aren't necessarily faithful to Danny. Even in the worst case scenario, Harper would be losing three members of parliament. It won't affect any future Harper administration, minority or majority.

The real question is not really what Flaherty, the crafty old hand will do with Equalization. Rather, we all can wonder what Danny Williams will do in response.

Bond money would go on something far less spectacular than he has suggested to date. Heck, he might even raise his fist up and declare victory, even though he said "yes" to less.



For your amusement, following is a news release from the Conservative Party of Canada on Wednesday, May 26, 2004. Note that it quotes Roland Martin, a former provincial deputy minister of finance from the Peckford era who apparently did some work advising Danny Williams.

Take out of the release what you will. Your humble e-scribbler predicts that Ken Boessenkool holds more sway with Stephen Harper than Rolie Martin ever did.

In any event, for the record, here's the CPC policy statement from 2004:

Expanding revenue capacity of Atlantic Provinces: full access to non-renewable resource wealth

The current equalization formula penalizes provinces which have non-renewable resource revenues by clawing back up to one dollar on every dollar of revenues collected from equalization payments. This discourages investment in what is fast becoming one of the key routes to growth in Atlantic Canada – development of natural resources.

When Alberta discovered oil in the 1940s and 1950s, no such clawback existed. Prior to its discovery of oil, Alberta, too, was a “have-not” region that received equalization-type grants from the federal government. It is simply unconscionable that Paul Martin is crippling development in Atlantic Canada through the punitive equalization program. Despite promises to address this inequity, the federal Liberals have not changed the equalization formula.

Non-renewable resources such as offshore oil and gas are among the most promising avenues for real growth in Atlantic Canada. Developing these resources provides a critical short term investment for longer term growth. When the federal government taxes these revenues away by 70 cents to a dollar, however, they jeopardize the opportunity to establish longer term growth.

A 2001 study by former Newfoundland Deputy Minister of Finance Roland Martin for the Atlantic Institute for Market Studies (AIMS) called for the removal of oil and gas revenues from the equalization formula while moving towards a ten province standard for calculating equalization. Martin wrote: “The status quo is not an option if Canada is to maintain its competitive position in an increasingly competitive global economy. Without early and fundamental changes to the equalization program, this cornerstone of federalism and fiscal arrangements as we have known it could cease to be recognized as a milestone by other nations and become Canada’s fiscal millstone.” (Roland Martin, Equalization: Milestone or Millstone, p. 41)

A Conservative government led by Stephen Harper will remove non-renewable resources from Equalization so that Atlantic provinces would enjoy the benefit of these revenues. We will also move towards a ten province standard for equalization. These changes will be phased in to ensure that no recipient province will receive less money during the transition to the new formula than the current formula provides.