Equalization’s Negative-Option Agreement; or How Provinces Learned to Stop Developing and Love the Transfer

eq

By John Williamson, Vice-President, Research

Under Canada’s equalization program, Ottawa transfers nearly $18-billion to provinces with less-robust economies. Today, the three Maritime Provinces receive $3.8-billion each year. Quebec’s allotment is $10-billion.

Provincial governments collect tax and royalty revenues from natural resource development, like drilling for oil or fracking shale gas. Equalization, at one time, was reduced by one dollar for each new tax dollar a province collected from its non-renewable resources. But for some provinces, losing a dollar in equalization for a dollar earned from resources wasn’t enough of an incentive to encourage economic growth. So Ottawa changed its formula. The equalization clawback dropped from 100% to 50% on new resource revenues. That way any have-not provinces that developed local economies would be financially ahead.

Yet, Quebec and the Atlantic Provinces still do not permit hydraulic fracturing of shale gas deposits. They say it is unsafe. Never mind that Saskatchewan, Alberta and B.C. all frack for gas and have prospered economically while safeguarding the environment. Or that equalization is funded, in part, by the development of shale gas resources in western Canada.

One problem with Canada’s equalization program is how it accepts the attitude behind negative-option billing. Negative-option billing is the practice of companies charging consumers for a good without consent by assuming consumers want the product. Equalization is the mirror opposite. Instead of being billed for something, the equalization recipient provinces are sent federal dollars. No questions asked. If they do nothing, they keep the money. A province only forgoes 50¢ of its transfer for every $1 earned when its acts by developing non-renewable resources. But that requires some economic effort.

Consumers hate negative-option billing for good reason. It’s an gratuitous business practice that assumes acceptance of a transaction without notice or even a handshake. But for eastern governments the offer of receiving equalization dollars for no effort is a perfect arrangement. So long as Quebec and Atlantic governments don’t develop shale gas resources the equalization transfers will continue to arrive. That this arrangement has resulted in slow-growth, high unemployment economies is a regrettable by-product of equalization that should be discussed.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s