17 August 2015

The 2004 war with Ottawa revisited #nlpoli

The 2004 “war” with Ottawa over a version of federal Equalization payments to Newfoundland and Labrador is an early episode in the provincial Conservative administration.

The confrontation helped propel Premier Danny Williams to unprecedented heights of popularity.  This, in turn, affected the rest of his tenure as Premier.  It was a critical element in his quest for political hegemony in the province during his first term.

In SRBP’s review of Ray Blake’s new book on federal provincial relations, there are some comments about Blake’s chapter on Danny Williams and the war with Ottawa in 2004. The review wasn’t the place to get into that.  The subject is too big. 

This post will explain the problems with Blake’s accounts and with other accounts of the period.

Let’s start by establishing the current versions of what happened in 2004.  While there have been some commentaries on the episode, much of it exists either in individual imagination or in popular perception. There have been some commentaries by academics.   Since it is hard to summarise what people in the province, generally understand, let’s take the view of three academics as a usual description of what people believe happened in 2004.

The Academic Version

Political scientist Chris Dunn wrote a piece in February 2005, immediately after the disputed ended with a January 2005 agreement between the federal and provincial governments.. “Why Williams walked, why Martin balked: the Atlantic Accord dispute in perspective”  appeared in Policy Options.  This is a contemporary account, written by someone knowledgeable about the issues involved.

According to Dunn, “the premier’s proposal [was] that there be a new offset provision in the Atlantic Accord allowing Newfoundland and Labrador to retain 100 percent of the benefit of the offshore petroleum revenues it receives, notwithstanding the treatment of those revenues under the equalization program, which provided that 70 percent of these revenues be clawed back to the federal treasury.”

Dunn’s colleague Alex Marland also include a passing reference to the 2004 war in “Masters of Our Own Destiny: The Nationalist Evolution of Newfoundland Premier Danny Williams.”  (2010)  While Marland’s account appeared six years after the events, it still can be taken as reflecting a general understanding of the period.  At the time of the war with Ottawa, Marland was a communications director in Williams’ administration.

Marland describes Williams’ objective as “an increased share of offshore oil revenues.”  Marland also claims that Williams’ stunt of removing Canadian flags from provincial government billings worked.
“In February 2005, Martin authorized a revision of the Atlantic Accord and advanced a $2 billion payment to Newfoundland and an important psychological boost. Williams arrived at the St. John’s airport—deal in hand—and was greeted by hundreds of supporters. He had seemingly singlehandedly undone Newfoundland’s legacy of bad economic deals and perceptions that others benefited from its resources.”
Along the way to that successful conclusion, Williams encountered a couple of problems as a n unreliable federal government failed to deliver on its commitment.  Williams rejected two federal proposals.  The first was in October 2004,  immediately prior to a federal-provincial conference on Equalization.  The second was in December.

The Blake Version

The most complete account thus far  of the 2004 talks between the federal and provincial governments is contained in Ray Blake’s Lions or jellyfish:  Newfoundland-Ottawa relations since 1957.  The chapter “The battle for a fair share: Danny Williams, Equalization, and Ottawa” combines the Atlantic Accord discussions with the later  - but intimately related  - dispute over Equalization.
Blake contends that, after their initial meeting in late 2003,  Prime Minister Paul Martin “did not take Williams’ demands seriously”  and “paid little attention to Williams’ insistence that the offshore revenue sharing” arrangement under the 1985 Atlantic Accord was not working.

Williams wrote to John Efford in March 2004 and asked that the federal government change the existing Atlantic Accord offset provision for Equalization  to allow ”the province to keep provincial revenue from the offshore without any clawback from equalization payments.” 
“Williams insisted that the equalization offsets provisions of the Atlantic Accord could ‘provide a payment equal to 100% of the net direct provincial offshore revenue.’”
Williams rejected a federal proposal in October 2004.  As Blake describes,  the proposal was to provide a transfer equal to the revenue lost in the Equalization program.  The money deal would last eight years,  that is, until the end of the 1985 Equalization offsets.  As well,  the combination of oil revenues, Equalization and the offsets could not exceed the per capita fiscal capacity of Ontario.
Williams claimed that this did not reflect his understanding of an agreement with Martin reached in 2004.  Williams said the two first ministers had agreed to “a deal that protected 100 per cent of offshore revenue from equalization clawbacks, with no restrictions and no pre-established time frame.”

Williams rejected a second offer in December, 2004.  The deal contained the eight year time limit.  Blake says the proposal “insisted that Newfoundland introduce only balanced budgets” during the life of the agreement in order to continue receiving the transfer.

In response to this latest offer, Williams ordered Canadian flags from provincial government buildings in the province.  A public protest saw 40,000 letters and e-mails supporting Newfoundland and Labrador’s position sent to Martin and federal finance minister Ralph Goodale.  Blake states at that point in his account that Martin wrote a conciliatory letter to Williams on January 15 in which Martin indicated he would meet with Williams directly but that he would not entertain a permanent offset payment.

“Martin wanted a deal desperately,” writes Blake, “and in late January 2005 he surrendered to Williams’ demands, diminishing his role as prime minister in the process.”

The Context at the Start

Blake’s summary of the political and economic context at the start of the dispute in 2003 is generally accurate. The incoming Williams administration faced a significant financial problem to address. Its two pronged approach was to introduce spending cuts and internal reform on the one hand and go looking for more cash on the other.

The internal reform was a review of existing government programs and spending.  Williams appointed Ross Reid to direct the review. 

Williams went to Ottawa for the cash. The demand was based on the loss of Equalization payments that occurred as provincial own-source revenues increased. That has been how Equalization has worked, generally, since 1957.

At this point, it is useful to understand the issues of Equalization and the 1985 offsets.

Equalization and offsets

The 1985 Atlantic Accord gave the provincial government the right to set and receive royalties, rents, and taxes from the offshore as if the resource was within provincial jurisdiction.  At the time, both the federal and provincial governments understood that the the Equalization program would reduce the federal Equalization transfer directly proportional to oil revenue.   The result would be that the overall provincial revenue would likely stay the same.  Oil revenue would merely replace federal Equalization transfers on a dollar-for-dollar basis.

To mitigate the impact of the Equalization program on provincial revenues, the 1985 Accord included provision for an offset transfers.  For a period of 12 years,  the federal government would transfer to the provincial government an amount related to the decline in Equalization. It would start at 100% of the Equalization loss and decline progressively until the 12th year, under a schedule described in the agreement.

By the early 1990s, the provincial government came to realise that the Accord offsets would not likely operate as intended.  The provincial government would, in fact, lose revenue.  While the Mulroney administration emphatically rejected any discussion of revisions, its successor had a different view.

Prime Minister Jean Chretien and finance minister Paul Martin provided Newfoundland and Labrador access to  an Equalization calculation called the generic solution.  This removed 30% of the annual revenue for a specified non-renewable resource from the annual Equalization calculation.  Initially, Newfoundland and Labrador had to chose between the Accord offsets or the generic solution at the start of the fiscal year.  By the time Williams took office, the provincial government made its choice at the end of the fiscal year.  This produced the added benefit in that the provincial government could always pick the option that maximised its federal Equalization-related transfer.

What Danny Wanted

What’s important to realise at this point is that the provincial government set and received all of its revenue from the offshore, without any reduction. This simple fact is often lost in discussions that include words like clawback or net effect. Clawback is especially misleading since it suggests that Equalization is an entitlement for all provinces.

You can see the potential for misunderstanding if you look at Dunn’s description of what the provincial government sought.  Dunn  says it was the ability “t 0 retain 100 percent of the benefit of the offshore petroleum revenues it receives.”  Not 100% of the revenues but 100% of the benefit.
Blake uses Williams’ own words to describe the provincial objective as “a payment equal to 100% of the net direct provincial offshore revenue.”  Williams defined “net direct provincial offshore revenue” in such a way as to make it plain it would provide the equivalent of provincial oil revenue in any given year.

In other words,  the Williams demand was for a new federal transfer equal to the provincial oil revenues, in addition to the oil revenues.  This is how the provincial government defined “100% of the benefit” in such way as to mean  - in actual effect - 200% of the actual revenue.    The provincial government would receive all its oil revenue and, in addition, it would receive a second payment from Ottawa of the same amount.

This money could only come from general federal revenue.  After all, the federal government only received from the offshore what it would normally collect in federal taxes from any industry.  That was nothing in comparison to the royalties.  The federal government did take an additional 8.5% as a result of the shares it owned i  Hibernia.  But the federal shares in Hibernia did not provide anything close to provincial revenue from all the offshore.

The second point to realise is that, despite Williams’ claims to the contrary, what he was talking about was an Equalization transfer by another name.  He proposed initially to open the 1985 agreement and replace the existing provisions with an entirely new set.  This proved to be an unwise approach.  It  raised the prospect that the Americans and Mexicans could now include the 1985 agreement under the North American Free Trade Agreement. This would jeopardise, among other things, the local benefits provisions of the 1985 Accord.

While the provincial government subsequently accepted an agreement outside the 1985 Accord, there is no question that everyone was talking about addressing the offsets Equalization losses that came as a result of oil revenue.

Martin’s reply

Danny Williams met with Paul Martin in Ottawa in December 2003.  He followed this with a letter on his return to St. John’s. Williams sent his letter on January 4, the same day he made a province-wide address announcing layoffs, wage freezes, spending cuts and the program review.

Martin’s January 27 reply to Williams’ letter was positive. The Prime Minister welcomed Williams’ commitment to work both constructively and co-operatively with the federal government. He expressed confidence that the provincial government could meet its financial problems by a combination of “controlling expenditures and expanding the economy.”

On the specific subject of the Atlantic Accord, Martin said that the federal government was “open to discussing the issues related to offshore resources. However, it is imperative that these discussions be based on the principle of fair treatment across the country.”

There is a fairly obvious discrepancy here between Martin’s letter and Blake’s contention that Martin did not take Williams seriously or that he  “paid little attention” to Williams’ view that the Accord provisions were not working.

True, Martin did have an understanding of the issues  that derived from first-hand experience that Williams’ evidently lacked.  He knew, for example, that the provincial government already received all the 1985 Accord revenues without reduction. He also knew that the provincial government had options available to it to allow the provincial government to maximise its additional revenue using the offset provisions of the Accord or the technical details of the Equalization program.

Martin also had the first-hand experience as finance minister of coping with serious government financial problems.  That’s likely why Martin’s response to Williams generally positive. Had he been genuinely dismissive, Martin could have easily rejected  Williams’ overture flatly.  He didn’t.

The Provincial Proposal

In late February, Williams presented federal cabinet minister John Efford with the provincial proposal for an Equalization type-transfer that would – in effect – double provincial oil revenue..  What Blake described was the version made public on March 4.  In light of later denials that the offshore revenue transfer proposal as related to Equalization, the provincial government’s February proposal listed as a benefit that the Equalization savings from increased oil revenue “would equal” the revised offset payments.

Over the next several months, the provincial and federal governments exchanged letters and on occasion Williams and Martin spoke by telephone.  Based on a letter from Williams to Martin in  late May 2004, for example,  Martin proposed in a telephone conversation that the federal government could freeze the offsets at the 2004 rate as a way to give the provincial government extra cash.

Williams rejected this.  Efford also spoke publicly about a federal willingness to provide additional cash for a defined period.  Williams didn’t reject this idea but suggested it was a sign the federal government was willing to do something to meet the provincial demand for more money.

The federal election campaign started on May 23, 2004.  Martin visited the province on June 5, 2004.  What happened that day proved to be a turning point in the ongoing discussions over offshore revenue and Equalization.


Next:  “From agreement to disagreement”  (August 19)