No joy for N.L. in proposed fiscal stabilization changes

Posted on December 15, 2020 | Ashley Fitzpatrick | 0 Comments

Newfoundland and Labrador Finance Minister Siobhan Coady has contradicted Ottawa’s portrayal of proposed changes to the federal fiscal stabilization program, saying the changes will not offer any new, meaningful support to Canada’s most easterly province.

The proposed changes are offered in a section of the federal fall economic statement titled: “Significant support for provinces and territories.” They include moving a per-capita cap on transfers paid out under the program up from $60 per person to about $170 per person in 2019-20 and 2020-21 (indexing to nominal GDP growth per person).

According to the Government of Canada statement, the changes overall would create, “a more effective backstop to provinces that face an extraordinary drop in revenues” and, if approved, “result in billions in additional support to provinces for 2020-21.”

But in a statement to Atlantic Business Magazine, Coady noted provinces with a high reliance on resource revenues (like Newfoundland and Labrador) still must have a larger decline in total revenue than other provinces to receive comparable entitlements. Under current estimates, according to the statement, Newfoundland and Labrador is not expecting to qualify for the fiscal stabilization program in 2020-2021.

“While this is an improvement toward modernization, the proposed increase in the cap is unlikely to benefit this province and the other technical changes proposed will have limited or no benefit to this province in future years,” she said.

At present, according to provincial Finance, Newfoundland and Labrador is expected to see a 45 per cent decline in offshore revenues this year, representing over eight per cent of its total provincially sourced revenues.

Despite the size of that hit, the province would have to see a more-than 50 per cent drop of resource revenue or five per cent drop of non-resource revenue in order to receive a payment under the transfer program.

As for next year? Well, everyone’s hope is next year will not be a repeat of 2020.

“We requested further changes to address the concerns of this province,” Coady said in the statement.

A question was posed by Atlantic Business Magazine to federal Finance on the language used in the fall statement, but with no direct response on that subject.

The program

The fiscal stabilization program is the lesser-known sibling of equalization. It was created in 1967, as an aid to provinces experiencing a sudden, year-over-year drop in revenues and finding themselves in immediate need. The idea went along the same kind of thinking as offering federal aid to areas hit by a natural disaster. It’s about using the power of the federation; pooling the cost for everyone’s long-run benefit. It also by extension makes use of the federal government’s lower debt cost compared to the provinces.

2020 would appear to be exactly the kind of year the program was designed for, but by the time COVID-19 arrived in Canada, the program offered “no real protection” for provinces, having “atrophied to near insignificance,” as University of Calgary associate professor of economics Trevor Tombe described in a February 2020 paper for the Institute for Research on Public Policy (IRPP).

Tombe explained how fiscal stabilization is limited both by the $60 ceiling on per capita payments (established in 1986) and the qualifying thresholds.

However, he didn’t automatically argue for all the changes to the program that provinces with significant resource revenues – Alberta, Saskatchewan, Newfoundland and Labrador – have sought at varying times.

While Alberta has seen payments under the program, for example, the cap has made the payments small in comparison to the overall losses. Lifting the cap would offer more support, but what is the signal from a policy perspective?

It’s well understood there is risk in reliance on resource revenue, given commodity price swings and forecasting challenges. So is it fair to transfer all of that risk to the federal level? Wouldn’t, for example, a change ending the program’s cap altogether discourage, as Tombe put it, the provinces opting for “more resilient budgets”? 

“One might argue (…) that such easily avoidable risks should not be borne by other Canadians through the federal stabilization program,” he’s stated.

An argument in favour of the cap continues in that the provinces could introduce more stable sources of revenue. The easy example is in Alberta and the idea of introducing a sales tax there. Clear options for Newfoundland and Labrador are harder to come by.

Work in progress

Fiscal stabilization was not designed as anything approaching a cure-all. If Newfoundland and Labrador did somehow come to qualify for 2020-21, assuming the proposed changes to the cap are in place, the province could receive only up to $89 million.

Again, the province is not expecting to qualify.

Newfoundland and Labrador has seen aid from this program, designed for sudden and deep shocks, on rare occasions in the past. In 1991-92 the province received $32 million ($53 per capita at the time) and in 2015-16 the province received $8 million ($15 per capita; there was also an overpayment the province was allowed to keep, being not alone in receiving an overpayment).

All provinces have received payments from the program at some point. And other provinces have hit the per-person cap. For example, in the same year Newfoundland and Labrador received a transfer from the program in 1991-92, so too did Nova Scotia, with the latter landing at $55 million.

As for reforms on the table, Tombe has more recently described the newly proposed changes to the fiscal stabilization program as the first meaningful changes since 1995.

“In my view, they are a modest but meaningful change to an increasingly important transfer program,” he stated, in a Dec. 8 brief for Policy Options (published by the IRPP), laying out general expectations for who might receive 2020 payouts.

Equalization and looking ahead

In thinking about the long-term, policy analysts and economists are all looking at Newfoundland and Labrador’s declining fiscal capacity.

The province is expected to return to “have not” status under the larger transfer program in the near future and should begin to receive equalization payments again, as noted in a report this month from public policy researcher and Fraser Institute senior fellow Ben Eisen and economist Milagros Palacios, associate director for the Institute’s Addington Centre for Measurement.

“For 2020, we estimate Newfoundland and Labrador has the third lowest per-person fiscal capacity in Canada, ahead of only PEI and New Brunswick. This is a remarkable change, considering the province had the second highest per-capita fiscal capacity in the country in 2010-2011,” they stated.

Newfoundland and Labrador might not be the only province making the transition.

“Indeed, if oil prices remain low and economic growth is weak, the data suggest it is conceivable Alberta may also become an equalization recipient,” they stated.

The pair also highlighted what they referred to as the “great convergence” since about 2007-2008, whereby the gap in fiscal capacity between Canada’s “have” and “have not” provinces has been closing.

Eisen and Palacios say since 2014-2015, adjusting for inflation, per-person fiscal capacity has dropped 22.2 per cent in Saskatchewan, 37.4 per cent in Newfoundland and Labrador, and 41.3 per cent in Alberta.

It’s something to keep in mind on several fronts. First, a change in the total revenue a government can realistically raise has to factor into provincial budgeting. Second, equalization is a limited, shared pot and as more provinces receive transfers, less will be landed by the provinces already receiving transfer payments from that program.

With all of that said, Newfoundland and Labrador is set to benefit significantly from the flood of federal spending to date in response to COVID-19.

As Scotiabank economists Rebekah Young and Marc Desormeaux noted in an Oct. 8 note, second quarter transfers to Canadian households from the federal government landed at nearly $55 billion, surpassing losses from those same households of about $21 billion. The province can benefit given many supports are taxable benefits.

Yet the provincial government is still facing a significant deficit on the year and multi-billion-dollar borrowing demand.

Looking ahead, the Jan-Feb edition of Atlantic Business Magazine will offer a closer look at the state of affairs in all four Atlantic provinces.

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