10 October 2007

The best of both worlds for NS

The Government of Canada and the Government of Nova Scotia today reached a deal to settle a dispute over the 2005 offshore equalization offset payments deal.

Under the deal, Nova Scotia will be able to chose either the O'Brien formula with a cap or the Equalization formula as it existed in 2005, whichever delivers more cash to the provincial government.

The agreement is similar in principle to an arrangement reached by the federal government and the Government of Newfoundland and Labrador in the early 1990s in order to maximize equalization and offsets available to the province.

Danny Williams dismissed the agreement as saying "yes to less."

He's wrong.

The ability to toggle back and forth between the two formulas means the Nova Scotia government can always choose the mechanism that will deliver the most cash. Under the federal 2007 budget, Nova Scotia would have been required to switch from the existing formula to the amended O'Brien arrangement with no ability to change, even if the original agreement proved more lucrative.

The agreement works to Nova Scotia's advantage since the province is not forecast to become a "have" province before the expiration of the deal and therefore qualifies for both equalization and the 2005 bonus payments. By contrast, Newfoundland and Labrador will cease to qualify for equalization - and by definition become a "have" province - within the next two years. That change is due entirely to the performance of the provincial economy, especially oil and gas deals signed long before Williams became premier.

The 2005 agreement delivered a single $2.0 billion advance payment. No additional money has been received since the original cheque, despite false claims by the province's finance minister that the current budget contains money from the 2005 offshore deal. The provincial government merely draws down against the advance each year based on a calculation of what the province is entitled to receive. The figures in the budget represent an accounting practice, not new money.

By contrast, in 2005 Williams did say yes to less than he had earlier requested. Williams' initial demand was for a payment from the federal government equal to all the provincial government's offshore revenues, paid over the life of offshore production. In today's terms and based on the provincial government's own figures, that demand would have been worth in excess of $16 billion for the Hebron project alone.

Williams settled for $2.0 billion in cash.