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Non-renewable resource revenues
Equalization Dilemma - An Ontario Solution
By Myles Higgins Tuesday, May 6, 2008The solution to Ontario’s fiscal and public image concern rests in doing what Ottawa, at the request of Ontario itself, refused to do more than a year ago.
Remove all non-renewable resource revenues (100% of them) from the equalization calculation.
It’s that easy.
Today the entire nation, or at least politicians and media, are in a tizzy over the pending fate of Ontario. It’s been that way ever since reports last week indicated that Ontario will qualify for equalization support in a year or two.
The news media (in what has to be the oddest twist of all) is now blaming Newfoundlander & Labrador for Ontario’s woes.
It seems that someone got the bright idea that since Ontario is heading toward “Have Not” status while Newfoundland and Labrador is moving away from it, the entire problem must be the fault of the folks down east.
Newfoundland and Labrador has nothing to do with the current situation in Ontario. The truth could actually be just the opposite. In fact, the province proposed a solution to Ontario’s problem over a year ago but nobody listened.
Today Ontario Premier,Dalton McGuinty, is blaming Ottawa for this insulting situation because the taxpayers of Ontario (like taxpayers across Canada) send huge sums of money to Ottawa. His complaint is that Ontario gets only a small percentage of those federal revenues back in return.
Of course it doesn’t all come back. If every penny collected in federal taxes went back to its region of origin there would be no need for federal taxes to begin with (or a federal government for that matter. Welcome to the world of Equalization, Dalton!!!
More people + Higher paying jobs + More Industry = less federal support.
It’s just that easy.
It seems Mr. McGuinty believes Ontario should be able to get more of that tax money back (which is what equalization payments would permit him to do) but he doesn’t want it to be called Equalization.
That would be an embarrassment.
The problem is that the Federal and Ontario governments have painted Ontario into a corner and they have nobody to blame for it but themselves.
One of the major sticking points Ontario, and other provinces, have had with federal provincial relations over the years is Ottawa’s penchant for entering into so called “one of” funding arrangements with provinces. As a result Stephen Harper has pledged never again to enter into side deals. Instead he has said he will only implement funding transfers that are applied fairly across the entire country.
Under those circumstances providing special funding to Ontario alone without cutting a side deal or using the equalization system isn’t easy. In fact it may prove to be a political hot potato for Stephen Harper should he try.
Another big problem for Ontario is the Equalization system itself.
When Stephen Harper’s government changed the formula there were two key “enhancements” included in the legislation. Those changes were at least partly facilitated (or should I say “forced") by representatives of the Ontario government.
First the calculation was modified so all 10 provinces are included in determining the average that serves to define who receives equalization and who doesn’t. In simple terms, those below the average line receive equalization and those above it do not.
The second major change was the inclusion of 50% of non-renewable resource revenues in calculating the average.
Newfoundland and Labrador fought long and hard for the Conservative government to exclude 100% of those revenues from the calculation (Stephen Harper promised he would on multiple occasions) because including them would skew the average by including revenues that are “temporary” in nature. Once the oil is gone it’s gone in other words. It’s like selling a car. The income is one time only, not like a regular salary.
Ontario was dead set against the idea and, thanks to pressure Ontario applied on the federal government, Harper’s promise was never kept. The 100% exclusion never happened.
Fast forward to 2008.
The government (and likely the people) of Ontario do not want to carry the public shame of having to accept equalization payments from taxpayers across Canada.
If Ottawa and Ontario find a way to sign some sort of “one of” deal, allowing Ontario to skirt equalization, then both parties would have to admit that they were wrong in fighting such deals for other provinces. Once again Ottawa would be opening up a door they said was closed forever.
So, maybe the solution may not so much rest in finding a way to pump more taxpayer money into Ontario as it is in ensuring that Ontario does not cross that dreaded line into “Have Not” status.
Isn’t it really just a question of perception more so than reality?
According to Dalton McGuinty it doesn’t even make sense that Ontario is close to receiving equalization because so much revenue is generated in his province. I agree. That’s why the simplest solution is the best.
The reason Ontario is so close to the “Have Not” line is because the new 10- province standard (which includes oil revenues) has allowed Alberta to raise the bar so high that Ontario is in jeopardy of falling under it.
If non-renwable resource revenues were removed from the calculation then Alberta would have little effect on those overall numbers. Ontario would once again assume, what it sees, as it’s rightful place on the top of the Canadian heap.
It’s a win, win, win situation.
- Ontario regains status and avoids a painful loss of dignity.
- Newfoundland and Labrador keeps its limited oil revenues enabling it to pay down debt and diversify its economy in preparation for a future without oil.
- Stephen Harper can finally make good on a promise that, as an economist, he knows is correct and which has caused a political rift between two levels of government while, inadvertently though it may be, is now causing collateral damage to another.
