Equalization and oil

Canadian Business Magazine - July 9, 2001
http://www.aims.ca/Media/2001/prjul0901b.htm
An oily arrangement
Robin Hood economics are robbing Nova Scotia blind
By Andrew Nikiforuk

Nova Scotia's offshore hydrocarbon reserves are so rich that people now joke that the province has stopped being a hewer of wood — and become a passer of gas. But Nova Scotia, home to great offshore natural gas deposits, is suffering more gas pain than gain, thanks to Ottawa.

For every dollar of royalties the province reaps from offshore gas, it keeps only 19¢. The rest goes to Jean Chrétien and his crew. That means that over the next 30 years, Nova Scotia will bank only about $6 billion from a projected $36-billion gas fortune.

The money grab has nothing to do with greed and everything to do with the nation's Robin Hood equalization policy. It allows the feds to take from rich provinces and give to poor provinces to make Canada a land of happy equals, if not persistent Liberal voters.

Policy-makers, however, never counted on poor provinces like Nova Scotia and Newfoundland becoming rich from oil and gas. In fact, the nation's equalization formula — a nifty calculation when things are bad — turns into a regular millstone when the economy perks up, as Nova Scotia is now discovering. Like some perverse welfare scheme, equalization demands that Nova Scotia and Newfoundland (projected to produce about 40% of the nation's conventional oil) cough back 70% to 100% of their oil and gas revenue in clawbacks. It also takes a look at rising real estate and labor prices that accompany economic growth and makes another federal subtraction.

"Here we have the least well-off provinces trying to seize a chance to become less reliant on Ottawa, and Ottawa is preventing that from happening," notes Brian Lee Crowley, president of the Halifax-based Atlantic Institute for Market Studies (AIMS). With his aptly named "Campaign for Fairness," Nova Scotia Premier John Hamm has made the same point — and even recruited Alberta's Ralph Klein to support his province's crusade to keep its gas wealth.

Last month, AIMS released two damning papers that document just how equalization has entrenched inequality in Atlantic Canada. One, by Roland Martin, a former deputy minister of finance in Newfoundland, notes that after 44 years and $180 billion in transfer payments, the four Atlantic provinces are no more self-sufficient today than when equality arrived in the form of big federal cheques. In fact, Nova Scotia's dependence on handouts from Ottawa has climbed from $596.4 million to $1.26 billion in constant dollars in the past 15 years.

Another paper, by Calgary policy researcher Kenneth Boessenkool, proposes a solution to this welfare trap: just remove oil and gas revenue from Ottawa's equalization formula. That way, poor provinces would have a greater incentive to develop their oil and gas to build self-reliant economies, pay off their debts, lower equalization payments and become mini-Albertas.

That prospect, however, might not sit well with Ottawa. The current scheme has the benefit of making poor regions politically indebted to the federal Liberals as well as reluctant allies in constitutional battles. Crowley has even heard tales about bureaucrats saying "they don't want another Alberta on their hands." But he believes the whole equalization boondoggle is just an unintentional lack of foresight, a habitual ailment in the capital.

Whatever the case, it's time for Ottawa to unshackle the provinces and get smarter about giving money away and clawing it back. Canada could use a few more independent-minded provinces like Alberta. And Nova Scotia knows from Alberta's experience that you can't become an equal without being a master in your own house.