[HALIFAX] — AIMS today released two new major papers on equalization and the future of Atlantic Canada: Equalization: Milestone or Millstone? (requires Adobe Acrobat Reader) by Roland T. Martin, former Deputy Minister of Finance for Newfoundland and a noted expert on public finance in Atlantic Canada, and Taking off the Shackles: Equalization and the Development of Nonrenewable Resources in Atlantic Canada (requires Adobe Acrobat Reader) by Kenneth J. Boessenkool, a distinguished policy researcher and author based in Calgary, Alberta.

Working separately, and from very different regional perspectives, these two analysts have come to very similar conclusions. “Equalization is looked at internationally as a milestone for revenue sharing within a federation, yet the numbers demonstrate that, in its current form, it could become a millstone around the neck of the receiving provinces,” argues Martin. “Equalization is a welfare trap,” says Boessenkool even more bluntly, “Recipient provinces have little incentive to reduce their reliance on equalization in favour of developing provincial resources.”

These studies review the history and workings of equalization and determine that only a fundamental shift in emphasis, from transferring revenues to building local fiscal capacity, can hope to provide the “reasonably comparable services at reasonably comparable levels of taxation” called for in Canada’s constitution.

The equalization program can strip away over 90 percent of any new provincial revenues from natural resources, double counts the impact of new development on provincial economies and penalizes provinces for realizing a return on the sale of a provincial capital asset. There is a strong disincentive for provinces to pursue the timely and responsible development of provincial natural resources – development that would reduce their long-term demands on the equalization system and result in savings for all Canadians.

“When you look at equalization since its inception in 1957,” says Martin, “you find that the four Atlantic provinces, for example, have barely improved their ability to cover their own spending needs from their own revenue sources compared to when the program was introduced. After 44 years and $180 billion [in current dollars] we are not significantly ahead in our ability to be self-sufficient.”

Martin suggests several possible equalization reforms which, either individually or in combination, would significantly improve the current system:

Remove oil & gas tax revenues from the equalization formula and return to a 10-province standard for the remaining tax revenues.
Build into the equalization formula explicit recognition of differences in public service costs throughout Canada by calculating appropriate benchmark unit costs for selected expenditures such as education, health and transportation. (MORE)
Implement a differential tax structure for personal and corporate income taxes by transferring sufficient tax points to the lagging provinces. This move should be combined with a long-term growth acceleration plan that includes immediate personal and corporate tax reduction and increased spending in economically leveraged areas, such as education, training and transportation.
Such changes would result in a more stable equalization calculation, more accurate assessment of those “reasonably comparable services”, greater opportunities for increased provincial fiscal capacity and a greater dependence by the provinces on “own source” revenue. The goal must be to supply the incentives necessary to urge lagging economies to approach the national average and thereby lower the demands on equalization, benefiting all Canadians.

Boessenkool reinforces the argument to remove nonrenewable natural resources from the equalization formula. As he puts it, “This is a win-win situation: we could reduce the overall cost of equalization, put more money into the hands of the provinces long-term and promote expanded self-sufficiency. At the same time, we would simplify the current formula, protect the federal treasury from the sometimes wild variations in resource prices and implement a true national, 10- province standard.”

Boessenkool argues that excluding nonrenewable natural resources from the equalization formula is the correct course of action for three reasons. First, equalization deals primarily with normalizing income streams. Returns from natural resource development should not be viewed as income but instead simply represent the transfer of an existing stock of wealth into another form. Second, the sale of this capital asset (the nonrenewable natural resource wealth) spurs the economy and generates income which is measured within the equalization system already – through increased personal, property and sales taxes. Removing the actual asset from equalization would eliminate the current double counting.

Finally, and most importantly, removing nonrenewable natural resources form the equalization formula would eliminate the tax back on increased provincial revenues and eliminate the disincentive for exploration and development. This change would promote the timely development of resources and increase provincial self-sufficiency, reducing future demands on equalization and delivering a measurable return to all Canadians.

These studies demonstrate unequivocally that the current debate about fixing equalization is focusing on the wrong issues. Provincial finance ministers and others try to cast the debate in terms of getting more federal revenue for provincial coffers. The real question is how can equalization be reformed so as to spur provincial economic development allowing the provinces to have more of their own revenue and be less dependent on transfers.

The work is also extremely timely, given that politicians of all political persuasions have been calling for major equalization reform in the lead-up to the program’s renegotiation when the current agreement expires in March 2004.

These papers mark the launch of two new AIMS series called The Equalization Papers and The Oil and Gas Papers of which the Institute’s President, Brian Lee Crowley, will be the editor.


For further information, contact:
Roland T. Martin, 902-835-8795
Kenneth J. Boessenkool, 403-514-4115
Brian Lee Crowley, President, AIMS, 902-499-1998