In the third instalment of its special Equalization Commentary series, the Atlantic Institute for Market Studies (AIMS) provides an economically-sound proposal for dealing with non-renewable resources under Equalization.
It’s an idea endorsed by Todd Hirsch, Chief Economist with the Canada West Foundation, headquartered in
“AIMS’ proposal is a more balanced approach to dealing with non-renewable resources under the Equalization formula. An approach that will encourage all provinces to act more prudently with our non-renewable assets,” says Hirsch.
As the latest AIMS Commentary, The 100 Per Cent Solution, explains “when the equalization formula counts non-renewable natural resource revenues as part of the ‘fiscal capacity’ of the equalization-receiving provinces, it treats that money as income rather than as assets, as new value created rather than as a simple transformation of an existing asset from one form into another. And by treating the resource revenues in this way, and deducting them from the equalization payment,
Non-renewable natural resources are just that – non-renewable. So they must be managed in the interests of all present and future citizens of the jurisdictions that own them. We therefore have both a financial responsibility and a moral obligation not to treat this money like some lottery windfall, or selling the house to finance a splurge on fancy cars and new clothes.
The problem, of course, in dealing with non-renewable natural resource revenues and equalization, is that many provinces do act irresponsibly with these revenues and spend them as if they are ordinary provincial income. While the revenues last, they do effectively boost the fiscal (i.e. spending) capacity of these provinces. Thus, an inequity is created whereby some provinces can afford richer services than others simply by running down their capital assets to finance current consumption. But such abuse is not a reason for the equalization program effectively to force all recipient provinces to act in this way.
The 100 Per Cent Solution provides a relatively straightforward solution to the problem. It suggests that
It suggests that “if a province is a net contributor to equalization, and it spends its non-renewable natural resource revenues to finance ordinary program spending, that money should count toward its fiscal capacity, and therefore feed through to the calculation of the 10 province standard. Correspondingly, if an equalization receiving province spends its non-renewable natural resource revenues as ordinary program spending, that money should be counted in that province’s fiscal capacity and therefore deducted from its equalization entitlement. If, on the other hand, a province acts responsibly, and treats its non-renewable resource revenue as the asset that it is, this should be reflected in the way those revenues are treated under equalization.”
The 100 Per Cent Solution author Brian Lee Crowley says, “Not only would the approach recommended in this Commentary remove a major source of conflict between the provinces over natural resource revenues and how to integrate them into equalization, but it would introduce a dynamic element into the equalization program. It would actually reward provinces for sound management of their assets and lead to significantly lower levels of dependence on equalization transfers in several provinces”
The 100 Per Cent Solution is the third in AIMS’ Equalization Commentary series. The two previous Commentaries have been widely read and commented on in the media, including in both the Globe and Mail and the National Post. In Why Some Provinces are More Equal Than Others, the authors showed that there are good reasons to think that
For further information, contact:
Brian Lee Crowley, AIMS President