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Wednesday, May 09, 2007

Equalization - AIMS Institute 100% Solution

Over the past several weeks much has been made of the federal government's promise, and later refusal to exclude 100% of non-renewable resource revenues from the equalization formula. Three provinces, Newfoundland and Labrador, Nova Scotia and Saskatchewan, all feel betrayed by the Harper government. Prime Minister Harper on the other hand has said he kept his promises and that the right solution to the fiscal imbalance was delivered by the new plan.

Meanwhile, the people living in provinces with resource based economies continue to cry foul while many Canadians are being told that the people there are just whiners who want to "have their cake and eat it too" or are looking to, as I political reporter Mike Duffy said just this week, "Double Dip".

This is an image being nurtured by Ottawa but in reality nothing could be further from the truth. In fact, regardless of promises made or denied, the reality is that what Newfoundland and Labrador, Nova Scotia and Saskatchewan are trying to do with their non-renewable resource revenues and the equalization program is the correct and proper thing to do in all of Canada. It's the federal government that has it wrong and is denying these provinces the ability to grow their economies and move off of equalization permanantly.

In July of 2006 the Atlantic Institute of Market Studies (AIMS), after reviewing the findings of the expert panel on equalization which were used in large part as a model for the "New" equalization system, released a paper outlining the best option for Ottawa to take. It wasn't the expert panel option and it wasn't the one adopted by the Harper Government.

The AIMS option would see 100% of revenues exempted, would make so called "have not" provinces more self sufficient (even after their resources were depleted), would save Ottawa billions in equalization costs and would ensure that province's moved away from equalization permanantly rather than temporarily as a result of high oil revenues.

The AIMS report identified that resource revenues of this kind are not the same as revenues from taxes or renwable resources such as hydro power and logging. Since non-renewables are finite the revenues from them are not "new income" but simply a conversion of assets from one form to another As such they should be viewed differently and not included in equalization calculations.

An example used is that of a baker who receives income from selling bread, cakes, etc. This is true revenue since expenses are incurred and a product (which can continue to be made) is sold for income. Just like taxes or the revenues a province receives from renewable sources.

On the other hand, if the baker decides to sell one of his ovens, this money is simply the conversion of one asset (the oven) for another (cash) and is not recorded as income. The same holds true for non-renewable resources like Oil and gas. Once they are gone they are gone and the province's in essence are just converting their oil or gas asset to cash.

The paper goes on to explain that if provinces are willing to take their non-renewable resource revenue and apply it to paying down debt or to converting it into a trust fund that would provide future income then in the long run the entire country would be better off since the province could use the money saved from servicing debt to supply services and the money saved or earned in this way is the true ongoing revenue that should apply to equaliztation calculations.

Under this approach Canada would actually save billions in equalization while allowing provinces to move from "have not" to "have" permanently.

The AIMS paper is a must read for anyone who is still under the misconception that Newfoundland and Labrador, Nova Scotia and Saskatchewan are simply looking for handouts. The opposite is true and should be clear to anyone who bothers to take the time to read the report. The fact is, under the current scheme, if a province is forced to use non-renwable resource revenue to supply services, which it is because the federal government has taken away equalization dollars, then when the resources are depleted the province will need even more equalization funding to maintain those services.

Check it out yourself at: http://www.aims.ca/library/Equalization3.pdf

29 comments:

Glenn said...

"The AIMS paper is a must read for anyone who is still under the misconception that Newfoundland and Labrador, Nova Scotia and Saskatchewan are simply looking for handouts."

I would suggest the misconception occurs because of the way that Premier Williams has framed the argument to the rest of Canada.

I would also suggest that this is an excellent breakdown of the different approaches towards equalization and that if there was a charismatic, witty and honest politician out in front promoting these different approaches to Canadians, the debate would indeed be framed in a different context.

Thus, I must therefore conclude that this latest endeavour by our dear leader has much more to do with another agenda than the one we are being sold. Since I've heard and read from many different sources about the high intelligence and business acumen of Premier Williams, there is no logical reason to undertake such a misguided approach other than to appease those NF nationalists, mostly from 'town', who desire their own country. (I used the old abrreviation instead of NL since I haven't found any Labradorians expressing the same views as those from the island portion with regards to establishing a nation, other than to have their own province in Canada.)

I am equally puzzled as to why PMSH or Stephane Dion hasn't supported or acknowledged these alternative equalization packages. Sounds like an excellent platform to start a nation building campaign to me.

Glenn

Edward G. Hollett said...

Glenn makes some valid observations.

One of the key parts of both the AIMS presentation and a later one by Ken Boessenkool from Alberta was the use of the Equalization revenue for debt reduction.

That is something the current administration in NL has NOT done. In fact very little money is being put towards debt reduction.

Net debt reduction for this year and last year will total less than $150 million on a $12 billion debt load.

This is one of the areas where the province and the feds should be on the same wavelength and it was therefore one of the ways this whole issue might have been resolved different about a year or so ago.

It remains a mystery why nothing has been done about the debt.

Anonymous said...

To say that nothing has been done about debt is simply not true. The Atlantic accord money was put into pensions which are another aspect of government debt since these funds had been short changed over many years by several governments ( Liberal and PC ).

Edward G. Hollett said...

The net debt of the province has been reduced by less than $150 million according to the finance minister in the most recent budget.

You are absolutely correct, but that has apparently done nothing to change the size of the big number.

The provincial government has consistently failed to implement a debt reduction program despite having more cash at its disposal than any previous government in the history of Newfoundland and Labrador and despite per capita spending second only to Alberta.

NL-ExPatriate said...

Very misleading Mr Ed

I would have thought you would know better.

The reason the debt is still at 11.5 BILLION is because we have consolidated our debts under the one.

That is to say the 2 billion retroactive from the Atlantic Accord was put towards the unfunded public service pension fund.

MUN's debt has been included into our debt as it should have been from the beginning but through creative accounting was ommitted over the years.

Very disingenuous and misleading Mr ED.

If you want to oppose the present govt at least choose credible topics like.
Election representative,
Policy on Bottom Dragging,
Pay raises for Premiers staff. I could see maybe bonuses like was allude to that they were.

Starrigan said...

Well done Crazy Eddy .... now you know why I call you an a$$hole. I believe Steve promised 100% of non-renewable resources.

Anonymous said...

The current NL government did the correct thing by putting Atlantic accord money into the underfunded pension plans which were approaching a crisis situation. That resulted in a significant reduction in the provinces debt. Pension debt is just as much debt as any other kind and the government faced enormous pressure to spend the money in other areas ( many of which would be quite deserving ) but choose to tackle debt, a politically difficult decision but the right one. They have also made a modest reduction in the net debt (as Ed likes to call it) so progress is being made. If 10 years from now the provincial debt situation is as bad as it is today then yes the current government will failed the people of the province. For now though they have started us down the right road and deserve much credit for that. All that said the government can't be one dimensional in its priorities, there are significant needs in health, education, infrastructure, economic development etc that must be addressed so the government has to take a balanced approach.

kodak said...

The original Harper offer would have been the preference, however, as a consolation, before the budget, I thinking of a counter compromise, where with a 50/50 equalization deal, the fed. and prov. govs. would agree to a minimum mandatory debt reduction payment for NL as part of the 50% equalization deal. It would help get the debt down sooner than the many generations from now. Loyola Sullivan said a few years back that if we had a surplus of $250 for 48 years, it would get us debt free, but in the meantime, so much has to go service this major credit card.

NL-ExPatriate said...

Kodak read the AIMS 100% solution I think you will agree it is a principled approach like the feds want while at the same time addressing the fact that Non-renewable resource revenues are not true income but more like capital and as such should be treated like so.

You will also remember that because of putting the money into the unfunded pension liabilities our credit rating increased with all three bond rating agencies saving us even more money.

Also by consolidating our debt and taking out a loan at a lower rate we saved ourselves even more money from debt payments something like 2-300 million a year I believe?

Starrigan please refrain from disparaging remarks towards Ed. I know he is a rabid Liberal federalist but we are here to argue the merrits of an opinion or point. Just because Ed and his Ilk are blind with partisan loyalty doesn't mean we can't refrain from a meaningfull debate. I don't even bother reading WJM's comments anymore and I barely read Ed's less and less each and every one I read.

I would encourage all of you to read the link to the AIMS 100% solution I think it has merrit.

Ed Hollett said...

Ex-Pat:

There's nothing misleading about it at all. I stated exactly what is the case.

What is misleading is insisting that something is being done about the debt when in fact nothing has been done.

It has been reduced by a paltry sum because the provincial government has done nothing about it, despite having more than enough cash to do so.

At the current rate the debt will be eliminated in 170 years. This is ludicrous. Were the provincial government to apply an approach like that suggest even in Boessenkool (which is well within its financial resources under existing circumstances), the debt would be reduced considerably within 10 years.

A clue to the government's real intention lies in the finance minister's rejection of balanced budget legislation. He rejected it so that he could run deficits when he needs to do so. Now given the factr he is forecasting almost unprecedented growth in government spending over the next three years, how can the government NOT do something substantial to reduce the debt?

Gerald said...

Hi Ed,

You know for a fact that with the kind of debt load this province has it has to take time to pay down. I'm not saying the provincial governemnt can't do more, but perhaps if Mr. Harper had kept his promise it wouldn't take so long to pay the debt down.

Also, I noticed you responded to Patriot by cleverly answering some of his questions but glaringly you avoided answering one important one.

You have defended Simon on a couple of comments (or at least commented against those who have spoken out against his comment) so why not answer the question, do you agree with the offensive comment he made?

At least his wife had the stones to stand by her man. What about you? Do you stand by your partner in blog land?

Anonymous said...

So when the oil runs out in twenty years, and the rest of the country is producing far more non-renewable resource revenue than we are, I guess we'll rant and roar and kick and scream and cry and fight and whine and bawl that those types of resources get re-included, right?

Please let me know the plan, I'll be living out west somewhere for sure.

What a pile of garbage. You people are chronic Koolaid drinkers. Leave the island and get out of this cult while you can.

Deirdre Greene said...

Gerald: I like that. I've got stones :-) Well, I admire your stones and respect the fact that you have the courage of your convictions to attach your name to your comments.

Edward G. Hollett said...

Gerald:

yes, I do know that with a debt of that size, it would take a while to pay down or even significantly reduce.

However, with virtually no action being taken, it will never be dealt with. As I noted, at a rate of about $70 million per year we'd be debt free in 171 years. We'd have half of it paid down in about 80 years.

If you take a look at the government's financial statements, it's pretty obvious there is sufficient cash to make a much more significant effort than $70 million per year.

As for your other point I did answer it: it is absolutely hypocritical to criticize one person for remarks while at the same time giving free reign to people to post abusive comments without any effort to reign them in.

Gerald said...

Ed, thanks for your comments on several of my points even if I don't agree with you.

You still did not answer the question that has been asked here several times however. I know you said you did by saying:

"it is absolutely hypocritical to criticize one person for remarks while at the same time giving free reign to people to post abusive comments without any effort to reign them in"

But that is just a political style non-answer. The question was, do you agree with and stand behind the words published here by Simon Lono? Your answer does not tell us whether you do or not.

Edward G. Hollett said...

Gerald:

It is as simple an answer as you can get and it goes directly to the point:

If someone fosters a climate of personally abusive attacks or allows the climate to develop, don't be surprised if every once in a while someone comes by and throws back the same invective.

The only difference is that Lono made remarks about a general group of commenters. Most of the anonyposters make direct personal smears from behind their cloak of darkness. On top of that, that invective is about all they offer.

Anyone with a blog faces this issue. In my corner of the universe, I don't allow anons. That's why most of the people who write here don't comment on my blog, even though they all read it.

When I did allow anon comments what I got was this sort of irrelevant and or abusive comment.

Since I re-opened comments, I have had to delete only one comment and I explained why I did so.

The pseudonymous commenter made some pretty vicious and completely un-called-for remarks about the Premier. This individual ran an anonyblog of his own where he engaged in pretty much the same sort of scurrilous stuff aimed at me, the premier and others.

Well, his blog vanished not long after and frankly, the world is the richer for it.

Meanwhile over my own corner of the universe, the comments - even when critical - are at least thoughtful.

Substituting a '$' for an "s" obviously isn't very thoughtful.

Fundamentally it gets down to a pretty simple idea. If you want comments, and feedback and some kind of thoughtful exchange, then you take steps to encourage that.

If you want to recreate the same climate that exists on nf.general, then you'll do something else.

Anonymous said...

Ed, I have to jump in on your response to Gerald. I've been an anon poster hear for some time and I personally don't attack anyone.

My name is Mark if you need to know(you don't need to know my last name becuase I'd prefer not to broadcast it to the word via the web.)

I take the point of your response very clearly. However blaming the environment of any blog for someone deciding to make a blanket stereotyping statement about an entire group of people is not really an excuse now is it?

You clearly appear to be against this sort of thing so why won't you come right out and say you do not agree with Mr. Lono's characterization of those people if you truly do not?

As for the comments themselves, I have sent them to the leadership of the Liberal party, which I believe Mr. Lono is a member. Hopefully their response will be more direct than your own.

Anonymous said...

So, Mark, your still anonymous. Did you sign the letter to the Liberal party? Dont expect an answer if you didnt.

Edward G. Hollett said...

It's interesting that people seem to be jumping on one set of comments yet they ignore entirely the other comments.

And frankly Mark, while I take you at your word, one of the problems with the anon comments is that I don't know who it is that is saying what.

Beyond that I have no time for stereo-typing full stop. One type of stereo-typing. I have no time for stereo-typing of Newfoundlanders any more than I have time for stereotyping non-Newfoundlanders.

Heck, I'll take you back to the Premier's speech in Halifax in 2001 in which you can find the most vicious stereo-typing of people on a partisan and national basis. How odd that the same man then heads to the mainland accuses newspapers and all sorts of other groups of being xenophobic. His argument taps into local xenophobia in a way we haven't seen in decades.

And as a final observation, if my point is clear, then it's clear, obviously. Perhaps then you'd like to discuss the substance on any of threads.

WJM said...

His argument taps into local xenophobia in a way we haven't seen in decades.

I'd say forever, in fact.

I don't think the invective was this bad during the worst of the Fortune Bay outrages, the French Shore controversy, the Gatling Gun Howard incident, or the Blaine-Bond affair, combined.

And there's a purpose for that.

If Danny can't make things better, he will make things worse.

sense said...

Funny - last I checked there were more than just three provinces in Canada.

What does 100% exclusion do to provinces like PEI and New Brunswick?

The fact is 100% exclusion is nothing more than a means of concealing vast resource wealth of some provinces from distribution. And if Newfoundlanders believe that's in their long term interest - given the relatively small resource base they have compared to SK, BC, Alta, ON, etc. then they truly are naive.

Anonymous said...

The Hon. Gerry Byrne was on Talk Radio this morning. Hon. Byrne you gave us a lot of great information with regards to how we are being treated with regards moniea designated for Summer jobs for Students in the province of Newfoundland and Labrador. My God what a haphazard way to run Government. Thanks Gerry.

It is great to have a change of government sometimes, a lot of information on the dealings of governments get released that would not orniarily be released. We are getting a great lesson into how monies are spent.

Anonymous said...

You sense who said this: And if Newfoundlanders believe that's in their long term interest - given the relatively small resource base they have compared to SK, BC, Alta, ON, etc. then they truly are naive.

You have to be senseless, the value of the untold resources in Newfoundland and Labrador and the vast offshore waters that belong to this province, ARE FAR MORE than you can ever imagine. PLEASE GO BACK TO YOU DRAWING BOARD AND DO ANOTHER ESTIMATION. I heard a geologist say on a news media a few days ago that the geological structure of the province holds much wealth. Of course a lot of it has yet to be discovered.

By the way "sense" I do believe given the blanket statement you made that YOU DO NOT HAVE ANY SENSE AT ALL.

Edward G. Hollett said...

"You have to be senseless, the value of the untold resources in Newfoundland and Labrador and the vast offshore waters that belong to this province, ARE FAR MORE than you can ever imagine."

The more I read this stuff, the more I come to two conclusions:

1. You need to get that caps lock thing fixed; and,

2. You are the caller to OL who worships the Premier but who gets upset when people mention your name on the air. You make exactly the same arguments using almost exactly the same words.

If you make them publicly, why don't you sign your name here?

And while we are at it, do you have any evidence to back up the idea - as you seem to suggest - that the resources of NL are greater than the entire rest of Canada combined?

WJM said...

And while we are at it, do you have any evidence to back up the idea - as you seem to suggest - that the resources of NL are greater than the entire rest of Canada combined?

Someone said in on Open Line once, so it must be true.

It might also be the same person who said Labrador is as large as "Africa put together".

WJM said...

I heard a geologist say on a news media a few days ago that the geological structure of the province holds much wealth. Of course a lot of it has yet to be discovered.

The "geological structure" of most of the province is the Canadian Shield country of Labrador... of which ON, QC, MB, and Nunavut have even larger chunks than Labrador itself does.

NL has a lot of mineral resources, but not the largest resource base in Canada, and certainly not one which is somehow holding the economy of the rest of the country together, as some strange chauvinistic strain has, in some bizarre parallel universe, convinced itself.

Anonymous said...

WJM: YOU SAID The "geological structure" of most of the province is the Canadian Shield country of Labrador... of which ON, QC, MB, and Nunavut have even larger chunks than Labrador itself does. UNQUOTE

Newfoundland and Labrador also has the Atlantic Ocean as its frontage. I am sure there are resources under those waters, of which some of them will be in Newfoundland and Labrador's jurisdiction. Not all of the province's you mentioned have the same.

WJM said...

Newfoundland and Labrador also has the Atlantic Ocean as its frontage. I am sure there are resources under those waters, of which some of them will be in Newfoundland and Labrador's jurisdiction. Not all of the province's you mentioned have the same.

Two other provinces (BC, NS) have "ocean frontage"; three more (QC, NB) have internal mare clausum waters in the Gulf and Bay of Fundy.

However, even with the existing offshore projects, the mineral value of Newfoundland and Labrador is still hardly the top in Canada, let along propping the rest of the country up.

People need to develop a respect for the facts and a realistic sense of themselves and the province.

Edward G. Hollett said...

"Newfoundland and Labrador also has the Atlantic Ocean as its frontage. I am sure there are resources under those waters, of which some of them will be in Newfoundland and Labrador's jurisdiction. Not all of the province's you mentioned have the same."

Of course, what is forgotten here is that under the 1985 Atlantic Accord, all oil and gas resourcces on the continental shelf near Newfoundland and Labrador are functionally under the control of the province.

The facts on all of this are well known and pretty simple. There are resources, all controlled by the provincial government.

We certainly don't need to go around imagining all sorts of mystical, fantastic, undiscovered wealth, a sort of Ali Baba's cave sits out there waiting for Aladdin to discover.