Canada - West vs East equalization.....?
Equalizaiton
Hypocrisy: Part 2
By:
Frank Atkins – Research Chair of Finance & Capital Markets at the Frontier
Centre for Public Policy
March
2016 – Business in Calgary
In the October 2014 issue of this magazine. I wrote an
article concerning the hypocrisy of the Nova Scotia government banning
hydraulic fracturing while continuing to receive equalization payments.
Apparently, the eastern Canadian hypocrisy club has now expanded to include a
group of Montreal mayors. A group that calls itself the Communaute
metropolitaine de Montreal (MMC), which is headed by Montreal Mayor Denis
Coderre, recently announced strong opposition to the Energy East pipeline.
It is very clear that transfer payments flow from west to
east in Canada. Largely funded by the Alberta oil and gas sector, Quebec
received the largest amount of transfer payments in Canada. Apparently the MMC
chooses to ignore this set of facts. Therefore, they do not want Alberta oil
flowing through their political jurisdictions, but they do not mind transfer
payments, largely funded by Alberta oil, flowing through their jurisdictions.
This can only be labelled as extremely hypocritical.
This problem is compounded by the arcane equalization formula.
Normally, if a province develops new sources of revenue, this would reduce the
amount that they receive in equalization payments. One example here would be
Newfoundland and Labrador, a province which developed their resource sector and
relinquished their “have-not” status. However, under the current funding
arrangements, the equalization formula does not count the market value of
hydroelectric power produced in Quebec, but rather the highly subsidized price
at which hydroelectric power is sold in local markets. My colleague Peter Holle
has estimated that, over the period 2005-2010, if the funding formula were
corrected for this anomaly, Quebec’s equalization payments would have decreased
from $42.4 billion to $28.1 billion.
The conclusion here is that Albert’s transfer payments to
Quebec are actually subsidizing cheap hydroelectric power in Quebec (this is
also true of Manitoba’s hydroelectric power).
The current equalization system creates the wrong incentives
for economic development. However, beyond the fact that the current
equalization system produces poor economic incentives, it also creates a
politically divisive atmosphere in Canada. In the case of Nova Scotia banning
fracking, it is somewhat difficult for provinces such as Alberta to understand
why Nova Scotia can ban fracking, yet receive transfer payments from a province
that uses fracking to generate wealth.
The MMC opposition to Energy East also creates political
divisiveness. Alberta is currently in an economic downturn caused by the downturn
in the world price of oil. Getting Alberta oil to world markets through the
Energy East pipeline would not change the world price of oil, but it would
increase the amount that Alberta receives for its oil, which would help
alleviate some of Alberta’s current economic woes. Alberta then looks at
Quebec, and sees transfer payments subsidizing cheap hydroelectric power, while
at the same time Quebec is trying to block a pipeline that would alleviate some
of Alberta’s current economic troubles.
There is a growing recognition on the part of provincial and
federal politicians that Canada’s equalization system needs to be reviewed and
reformed, yet given the East – West dynamics and electoral math involved, there
has been no serious effort made to date to determine how we can develop a more
fair and responsible system. Until that happens Canadians are stuck with a
broke system.
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