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News

Harper's Billions

B.C.'s stake in the equalization game.

By Laura Drake 16 Mar 2007 | TheTyee.ca

Laura Drake is an Ottawa-based reporter.

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Harper and Campbell, not talking equalization

When Stephen Harper announces his second federal budget on Monday, you could forgive some provincial premiers for listening with ears cocked for word on the federal equalization program. After all, depending on what the prime minister does, there could be billions of dollars in federal transfer payments at stake.

Back in 2006, the Conservatives promised to exclude natural resource revenues from the formula used to determine payments under the much-maligned program. To make a complicated story simple, that change would mean a substantial windfall for provinces like Newfoundland, Saskatchewan and, yes, British Columbia, that rely on natural resources for a significant chunk of their revenues.

But while the premiers of Saskatchewan and Newfoundland have spent the lead up to the budget barnstorming the country trying to hold Harper to his word, B.C.'s Gordon Campbell has been surprisingly quiet. And with most experts now predicting that the federal government will finally change the way equalization payments are determined -- though not in the way Harper originally promised -- you would think the issue would be higher on his priority list.

Equalization: fundamentally misunderstood

The equalization program started in 1957, and was enshrined in the constitution in 1982. The program is designed to address the disparate abilities of the provinces to raise revenues and provide services. Alberta, for example, can raise nearly double the money of any other province thanks to soaring oil and gas revenues.

What equalization is not designed to do is fix the so-called fiscal imbalance. The fiscal imbalance is the difference between the federal and provincial spending powers, not the disparities between respective provinces.

Last year eight provinces -- all but Alberta and Ontario -- received equalization. How much no-strings-attached money each received, and each receives each year, is calculated using a complicated formula to determine how much revenue they each generated from 33 different tax bases, including taxes on natural resources. An average total is then crunched using the fiscal capacities of five provinces -- B.C., Saskatchewan, Manitoba, Ontario and Quebec. Any province that generated less revenue than the average was given money by the federal government to top them up.

B.C.: Canada's half-have province

British Columbia has seesawed from have to have-not since the program was founded. For most of the 1990s, the province got nothing. But when a recession hit in 1998, the taps again began to flow. B.C. has been paid out every year since 2000 -- with a peak of $682 million in 2004.

This is something the province is not particularly proud of, according to Hamish Telford, a political science professor at the University College of the Fraser Valley and a member of the Queen's University Institute for Intergovernmental Relations. "My sense of that is that B.C. was never very comfortable in the 'have not' category. We like to think of ourselves as a 'have' province," Telford told The Tyee last week. "I think we were embarrassed a few years ago when we fell from 'have' to 'have not' province."

The result, Telford said, is that you don't hear much from the B.C. government on equalization, even though the province has a lot to gain or lose depending on what happens to the formula. If Harper keeps his promise, B.C.'s payments could go up to $2 billion a year, according to a report done by an advisory panel to the Council of the Federation. If he doesn't, they will, in all likelihood, disappear.

Promises, promises

An official in federal Finance Minister Jim Flaherty's office would only say that the minister is "committed to addressing the fiscal imbalance" in Canada. As for the percentage of resource revenues to be included in the formula: "What it will be after this year's budget remains to be seen."

However, every equalization expert I talked to did not expect Harper to keep his promise. Instead, they said, he is most likely to implement the recommendations contained in the O'Brien report, which was produced by a federally commissioned expert panel on equalization. Under the report's guidelines, the average for equalization would be calculated on a 10-province instead of a five-province standard. The report also suggests removing 50 per cent of non-renewable resources from the funding formula and increasing the percentage of property taxes included in the calculation. All of that would bring B.C.'s equalization payments down to nothing, making it officially a "have" province once again. At the same time, the overall cost of the program would increase dramatically as Alberta's outsized income is added to the average.

Riding Calvert's coattails

Yet that potential $2 billion gain from Harper's promise doesn't seem to have registered with B.C.'s government. Gordon Campbell has quietly aligned himself with the louder duo of Lorne Calvert and Danny Williams, but his involvement in the debate has mostly involved to having his name invoked by the other two.

In contrast, Calvert has made it his personal mission to remind everyone within earshot of Harper's promise, and what his province has to gain. "We're expecting to see the prime minister keep his promise that he made in two elections...but there has been some less than clear messages from Ottawa," Calvert said when I spoke to him last month.

Excluding natural resource revenues from the formula would give Saskatchewan between $800 million and $1.2 billion in payouts. Leaving them, or only partially including them would mean Saskatchewan would get a dramatically reduced total. Calvert takes Harper so much at his word that he talked about "losing" $800 million dollars when I spoke to him, even though his province has never seen a penny of that money. B.C. has more than double that to gain, yet Finance Minister Carole Taylor doesn't return phone calls on the issue -- at least not for this article.

Telford said he thinks Campbell would likely prefer to have B.C. not receive equalization payments in order to look more attractive to investors, for one thing. He also pointed out that Calvert has chosen equalization as his battle with the feds, while Campbell has chosen to pick other ones, such as the Kelowna Accord.

On Monday, it will become clear how willing Harper is to break his election promise. How much it will cost him to do so or not will become clear when the next election rolls around, but if he doesn't keep his word, it won't be Gordon Campbell who will be reminding him.

Editor's Note: Tune into The Tyee's Election Central blog on Monday for live reaction and analysis on the federal budget.  [Tyee]

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