APEC assessment of Budget 2007 and Equalization

From the Atlantic Provinces Economic Council:

June 13, 2007

APEC releases study on the Equalization Options of Budget 2007 for the Atlantic Provinces

APEC is today releasing a new report on the implications of the proposed changes to the Equalization program for the four Atlantic provinces. The report entitled Assessing the Equalization Options of Budget 2007 for the Atlantic Provinces has been prepared by Professor Paul Hobson of Acadia University and Professor Wade Locke of Memorial University, both Senior Policy Advisors of APEC.

Following on the recommendations of the Expert Panel on Equalization, the new Equalization program includes the re-establishment of a ten province standard, simplified measures of fiscal capacity and a more predictable and stable payment system that is formula driven. The new program also reverses a pre-election commitment to exclude natural resource revenues, and includes 50% of these revenues.

The study provides estimates of the revenue flows to the four provinces under the current program (Fixed Framework) and the new Equalization program for each fiscal year from 2007-2008 to 2019-2020, the year in which the Nova Scotia and Newfoundland and Labrador Offshore Accords expire. These simulations utilize publicly available data projected forward, based on certain key assumptions. In particular, it is assumed that the aggregate of the fiscal equalization payments under the Fixed Framework will grow at an annual rate of 3.5% (as currently specified by legislation) and that non-oil and gas fiscal capacities for all provinces grow at an annual rate of 1.4% (the aggregate rate of growth of per-capita fiscal capacity in Canada over the last ten years). In addition, the simulations take into account changes to the Fiscal Arrangements Act, and to Offshore Accord legislation as detailed in the Budget Implementation Act (Bill C-52).

The Atlantic Accord, signed in 1985, and the Canada-Nova Scotia Offshore Petroleum Resources Accord, signed in 1986, gave Newfoundland and Labrador and Nova Scotia, respectively, the right to collect royalties and to levy taxes on offshore operations as if the resources were on provincial land. In addition, the Accords provide Equalization offset provisions to compensate for potential reductions in Equalization payments as these additional revenues come on stream. The 2005 Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act provided for additional Equalization offset payments to Nova Scotia and Newfoundland and Labrador to ensure that each province would receive 100 percent of the benefit of its offshore revenues. That is, offset payments would ensure no claw back of offshore revenues through Equalization.

The summary revenue implications for each of the four Atlantic provinces are provided in the table below. Nova Scotia, New Brunswick and Prince Edward Island are better off financially under the new Equalization program for two years and thereafter are disadvantaged by the revised Equalization program. Newfoundland and Labrador is immediately worse off under the new program.

Specifically, the impacts on the provincial treasuries are:

o Nova Scotia - $159 million increase in revenues for the first two years under the new Equalization program, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $1.4 billion less under the new Equalization program than under the Fixed Framework;
o New Brunswick - $68 million increase in revenues for the first two years under the new Equalization program, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $1.1 billion less under the new Equalization program than under the Fixed Framework;
o Prince Edward Island - $7 million increase in revenues for the first two years under the new Equalization program, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $196 million less under the new Equalization program than under the Fixed Framework;
o Newfoundland and Labrador - $654 million reduction in revenues for the first two years under the new Equalization program, an increase of $22 million in the third year, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $1.4 billion less under the new Equalization program than under the Fixed Framework. It should be noted that Newfoundland and Labrador will no longer be a recipient of Equalization after 2008-2009, under both the Fixed Framework and the new Equalization program. [Emphasis added]

Beyond 2007-2008, both Nova Scotia and Newfoundland and Labrador can choose to permanently opt into the new Equalization program or remain under the Fixed Framework. The results clearly indicate that both provinces should remain under the Fixed Framework. Since other provinces were not offered this choice, this would result in an unprecedented situation in which two distinct Equalization programs are operating simultaneously, a situation which is not likely to be sustainable.

Furthermore, Equalization payments under the new program are constrained by a fiscal capacity cap. For purposes of the cap, fiscal capacity is measured, on a per-capita basis, as the sum of non-resource fiscal capacity, one hundred percent resource fiscal capacity, (pre-cap) Equalization entitlements and payments under the Accord legislation (applicable only to Nova Scotia and Newfoundland and Labrador). Total fiscal capacity of a receiving province cannot rise above that of the lowest non-receiving province. Should it do so, Equalization payments are to be reduced accordingly.

The Budget Implementation Bill contains significant changes to the 1985 Atlantic Accord, and to the 2005 Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act, necessitated by the introduction of the new Equalization program. The protection provided by the Accords is undermined by any Equalization reductions caused by the fiscal capacity cap, since any reductions amount to claw backs of Accord payments. In the authors’ view, this violates both the letter and the spirit of the Accords. [Emphasis added]

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The Atlantic Provinces Economic Council is an independent, non-profit research and public policy organization that seeks to advance the economic development of the Atlantic region.

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