Monday, July 23, 2001
The National Post

Harris aims at the wrong target
There’s a difference between the Maritimes and a welfare recipient winning the lottery
By Brian Lee Crowley

Ontario Premier Mike Harris is exercised about inequities in the way Ottawa treats his province, and rightly so. But he should reserve his fire for the federal government, and not shoot thoughtlessly at his potential allies in the battle for fairer federal-provincial arrangements. That’s what he did with his recent attack on the Atlantic provinces. And through his intemperate language, he’s needlessly opened the door for Allan Rock, Frank McKenna and others to attack him as unpatriotic and ignorant about the way Canada works. Poor Tony Clement, the Ontario Health Minister, had to be sent in to appeal for the nasty tone to be lowered on all sides.

Those of us trying to find new ways to end the Atlantic provinces’ dependence on federal transfers have seen great promise in the newly developing offshore oil and gas industry. Major deposits are being exploited in Nova Scotia and Newfoundland, and more may be forthcoming. We’ve been arguing that equalization treats that natural resource endowment inequitably, and retards its development by making the federal government, rather than the provinces, the chief beneficiary of the revenue generated. Mr. Harris says Nova Scotia and Newfoundland keeping the royalty revenues generated by the offshore without reduction in equalization payments is like a welfare recipient winning the lottery and wanting to keep his benefits. The analogy doesn’t hold up.

The welfare recipient who wins the lottery has something he didn’t have before: his lottery winnings. Ken Boessenkool, a national policy analyst, argues in a recent paper that when the Atlantic provinces get their royalty revenues from the sale of offshore oil and gas, they are merely converting an asset they already essentially control — petroleum resources — to a different form, cash. No net new wealth has been created, but a non-renewable resource is depleted. If equalization claws back that revenue, Ottawa is in effect seizing the province’s capital, not reducing the federal contribution to the province’s annual income.

The provinces should invest that capital in debt reduction or the creation of genuine economic infrastructure, just as responsible individuals invest their capital to provide a return over time. Alberta and Alaska do precisely this with a share of their natural resource revenues, placing them in an investment fund on behalf of the whole population. More recently, Alberta has profited from strong natural resource prices to pay down its debt.

Two other pieces of Alberta’s experience are relevant. First, when equalization was introduced in the late 1950s, Alberta was not wealthy and received equalization. But the formula then did not allow the clawing back of natural resource revenues by the federal government. That, plus the province’s rich resource endowment, gave it the leg up it needed to become self-supporting and, eventually, a huge net contributor to the cost of running Canada.

The other Alberta experience noted by Mr. Boessenkool is that the value of its natural resources has a powerful “knock-on effect” on economic activity. And that brings us back to Mike Harris’ welfare analogy. After all, he’s dead right that the rest of the country should expect the Atlantic provinces to reduce their reliance on federal transfers when prosperity hits. But, Premier Harris, think about when that clawback should come into effect.

When the resources are developed and start to generate the economic activity that leads to higher wages, corporate profits and retail sales, the resulting higher provincial tax revenues are fair game for federal clawback. The Atlantic provinces can and should see their equalization payments reduced at that point, because such clawbacks are the only way they can escape the debilitating dependence that equalization has helped create. But they will escape dependence because they will have been rewarded for developing their own resources, rather than penalized for doing so, as the equalization formula does.

Premier Harris should support reform that ends asset seizure and rewards provinces for sound development of their resources. And the Atlantic provinces need to come to the table, too, and support Ontario’s demands for equitable treatment of all Canadians by federal programs such as employment insurance. Neither side should allow Ottawa to engage in its old divide and rule tactics. For both Ontario and the Atlantic provinces, the policy problem lies in Ottawa, and they should be making common cause in putting it right.

Brian Lee Crowley is the founding President of the Atlantic Institute for Market Studies. Ken Boessenkool’s paper is available on the AIMS Web site at .