08 October 2015

The uncivil Civil War #nlpoli

At the heart of the ongoing civil war between Danny Williams’ provincial Conservatives and Stephen Harper’s federal Conservatives is the claim by Williams that Harper broke his 2006 election promise on Equalization.

Williams wrote to each of the federal party leaders and asked the leaders to state their party’s position on Equalization.

“As a result of the inadequacy of the equalization program over the years,” Williams asserted, “Newfoundland and Labrador has a debt of approximately $12 billion, which on a per capita basis far exceeds that of any other province. The Government of Newfoundland and Labrador is advocating the following reforms to the equalization program:

1. Return to a formula-driven approach to the determination of equalization entitlements, abandoning the “fixed-pot” approach introduced in October 2004.

2. The measurement of fiscal capacity must extend beyond simply revenue raising capability to include accounting for the impact of debt and debt servicing costs.

3. Comprehensive revenue coverage (which would include, in full, all renewable and non-renewable natural resources), and,

4. A return to the 10-province national average standard.

Williams’ opening paragraph was – of course – utterly false. What is important for the war that erupted in 2007 are the four points Williams listed as being the provincial government’s position.  The first and four points were Equalization amendments a number of province’s supported.  The second bullet was a laughably transparent effort to reward the provincial government for decades of financial mismanagement.

The third one is most interesting because it is exactly the opposite of the provincial Conservative platform commitment in 2003.  It’s also exactly the opposite of what everyone claimed the provincial position was in 2007 and afterward.  The demand for complete inclusion of all revenue sources worked to the advantage of Newfoundland and Labrador and Nova Scotia with their 1985 and 2005 side deals.

Harper’s reply – delivered in January 2006 – broadly described the federal Conservative approach to Equalization reform.  As in 2004,  Harper made a specific commitment on the handling of resource revenues. 

“We will remove non-renewable natural resource revenue from the equalization formula to encourage the development of economic growth in the non-renewable resource sectors across Canada.”

“The Conservative government will ensure that no province is adversely affected from changes to the equalization formula,”  Harper added.

The 2007 Equalization Reforms

After a testy fall in and spring leading up to the federal budget,  the 2007 budget implementation bill made significant changes to the Equalization program, as the federal Conservatives had committed.

The federal government’s solution was a fairly typical one for Equalization. It offered the qualifying provinces several ways to qualify and to maximise their revenue.

Generally, the federal government accepted the recommendations of the federal panel on Equalization appointed by the Liberals in 2005.  The standard would come from a comparison of all 10 provinces using a simplified measure of fiscal capacity.  overall, the new approach would provide more stable and predictable funding.

Federal finance officials would assess provincial revenues using two versions of the formula. One would use 50% of provincial resource revenues.  The other would exclude non-renewable resource revenues completely. Like Nova Scotia,  Newfoundland and Labrador had the option of calculating Equalization using the old fixed pot formula coupled with the 1985 and 2005 Equalization offsets.

In other words,  the federal Conservatives had delivered exactly what they had committed to deliver in 2006.  They had specifically rejected the Nova Scotia position (100% inclusion of all revenues) which was also the Newfoundland and Labrador position on paper.  But from the standpoint of Harper’s 2006 letter to Williams,  Harper had done exactly what he said he would do.

Newfoundland and Labrador could maximise its revenues under three formula options, while other provinces  - except for Nova Scotia - had only two.  Once it opted for the new formula system, though,  Newfoundland and Labrador couldn’t opt to go back to the old Equalization system.

A biased assessment

Memorial University economist Wade Locke delivered his first assessment of the new Equalization proposals at a public meeting at the university in early April 2007.  Locke’s slides – titled “Cutting through the Gordian Knot” – were dense and technically complicated. Locke explained that he was assessing the budget implications for each of the Atlantic provinces as part of a collaborative effort with Paul Hobson, an economist in Prince Edward Island.  Hobson and Locke subsequently published their paper through the Atlantic Provinces’ Economic Council.

Locke repeated twice in his slides that the calculation stretched the limit of his analytical ability.  It appears Locke assessed the operation of the budget using only one set of assumptions about oil prices rather than across a range of possible prices.

Several points stand out amid the mass of information Locke crammed in 54 densely laid out slides.  First, Locke was hypnotised in April 2007 with the operation of the fiscal capacity cap included in the Equalization formula.  This limited the amount of money any province could receive so that its fiscal capacity from all sources of revenue – including Equalization - did not exceed that of the “Have” province with the lowest fiscal capacity.  This had been a contentious issues with Williams but it was something the other provinces were very keen on.  They generally agreed with the federal position that the Equalization program had to operate fairly to all provinces.

Second, Locke used only a single estimate for oil prices for his analysis.  This severely limited Locke’s ability to compare the operation of the Equalization system.  Locke’s subsequent contention that the new formula disadvantaged Newfoundland and Labrador is a direct result of this extremely limited analysis.  Locke’s reference to a specific loss was dependent entirely on the assumed price of oil.  it was also based on the unfounded assumption that a province had an entitlement to Equalization transfers regardless of fiscal capacity or the impact

Experience confirms that Locke’s analysis of loss or disadvantage was wrong. it also confirms that Locke’s analysis was not independent.  Locke’s title slide for his April 4 presentation specifically called the presentation “independent”.  Subsequent slides emphasised that Locke was not being a partisan on the issue. 

Locke’s commentary in 2007, as in 2004 and after the Equalization battle were never anything but a highly partisan presentation in support of whatever provincial government project Locke was commenting on. Given events subsequent to Locke’s 2007 commentaries it isn’t clear if he was actually a consultant for the provincial government at the time of his presentations or if the provincial government merely  adopted his assessment after the fact. 

The limited nature of Locke’s analysis also ties to the third point, namely that Locke ignored something he knew himself would be a crucial issue.  In 2005, Locke had told an audience at another public lecture that calculations using existing oil forecasts showed that Newfoundland and and Labrador would become a “have” province within five years.

Locke’s April 4 analysis showed the province ceased to qualify for Equalization around the same time (2009-201) under two of the three calculations.   The point is buried in his slides and nothing in the slide text suggests he drew attention to it. Locke did include it in a version of his presentation published in Newfoundland Quarterly  The June version of Locke’s paper with Hobson contends the province would qualify for Equalization under both versions of the new approach (50% resource exclusion and 100% exclusion).

The point here boils down to this:  if oil prices increased above the assumption Locke used, the provincial government would either have failed to qualify for Equalization in any event or had an own-source fiscal capacity such that the theoretical losses of Equalization simply wouldn’t have mattered.

Notional Loss.  Actual Gain.

After his April 4 presentation, Locke focussed on the illusion of loss that came from his faulty analysis. He readily joined in the political attacks on the Harper administration even though the attacks were – quite obviously – based on misinformation.

What Locke let slip in his original presentation, though, was the advice the provincial government took.  The loss in Locke’s slides was entirely notional.  In practice, Locke grasped quickly that the provincial government was better off sticking with the existing system for at least two years and then converting to the new system in order to maximise its cash. 

You can see two things if you compare Locke’s figures from 2007 with actual events. The first is the extent to which Locke’s calculations of loss and his political attacks on the federal Conservatives were based on fiction. The second is the way the provincial government was able to do exactly the federal Equalization formula allowed:  they gamed the system and maximised their return.



Locke  (Old Formula)

Locke (New Formula)






















The Two-Faced Government

Publicly, the Williams Conservatives launched their new jihad on their  federal cousins using Locke’s flawed assessment.  Finance minister Tom Marshall issued a news release on April 13 that accused the federal government of misleading the public.  Marshall had no sense of irony or hypocrisy.

Marshall pegged the value of the deception at $11 billion based on Locke’s flawed analysis.  Marshall went further, though, by harkening back to the 2005 federal transfer deal:

Not only does this new equalization formula provide less money to Newfoundland and Labrador than what we are receiving today, it appears to make it extremely difficult to qualify for the second eight-year term of the Atlantic Accord 2005. It is as if the federal government is trying to strip us of the benefits of the Atlantic Accord in its new equalization program.

Marshall made no mention of the fact that the provincial government signed the 2005 deal expecting that it would not qualify for the second eight years.  Danny Williams hysterical war through November and December led the federal government to insist on harder renewal terms than earlier versions of the deal.  Even if that weren’t true,  provincial officials had Locke’s own assessments, including the one from April 4.

Though shalt have no gods but Danny

The provincial government thus carried on a public political war based on misinformation that they included in their public statements  while privately they gamed the system to maximise provincial revenues. 

More plainly in 2007 than in 2004,  the provincial Conservatives identified the real target of their scorn.  In 2004, getting rid of John Efford had been a part of the plan but not an obvious one. In 2007,  Marshall identified the real goal for the provincial Conservatives.

“These numbers contradict everything the federal government and Fisheries and Oceans Minister Loyola Hearn, in particular, have said since budget day,”  Marshall said in the news release.”  With John Efford gone, the provincial Conservatives now wanted to kill Loyola Sullivan as a political rival and ensure Danny Williams’ personal political hegemony.

The war was on.


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