Hot! Equalization payments stunting Quebec’s growth

MontrealGazette.com – business
April 30, 2013. By Peter Hadekel, The Gazette

There’s a growing realization that Quebec’s dependence on equalization payments from the federal government is hurting the development of its economy.

The issue has been highlighted as the Parti Québécois government considers what kind of royalty regime to impose on the mining industry and whether to lift moratoriums on oil and gas drilling.

Any extra revenue earned by the provincial treasury results in a proportional reduction in transfers, so there’s a clear disincentive to encourage natural resource development.

It has led some observers, like Quebec Oil and Gas Association president Michael Binnion, to liken Quebec to a social assistance recipient who would lose benefits if he or she found a job.

The welfare trap doesn’t seem to bother Finance Minister Nicolas Marceau, who said last month in his budget update that slowing economic activity would be compensated by higher equalization payments.

It’s a great insurance policy to have, as long as your insurance company continues to pay out. But what if the wealthier parts of the country that pay for equalization through the tax system eventually decide to balk at subsidizing a province that just can’t seem to get its act together?

Viewed from the outside, Quebec has attractive resource opportunities that could substantially improve its standard of living.

But that’s not how the matter is seen by many in the PQ government who want to make resource development harder rather than easier, either through punitive tax measures or tighter environmental restrictions.

What’s the downside for them, if there’s no cost attached to such delays?

Sure, the goal of equalization remains laudable — and the program is one of the best arguments for Quebec continuing to be a part of the Canadian federation. The intent of the transfers is to allow provinces to offer a comparable level of public services across the country.

But there should be a better way to calculate payments so they don’t create disincentives to economic growth, particularly in the resource sector, according to economist Youri Chassin at the Montreal Economic Institute.

He wrote a report last year that highlighted Quebec’s chronic dependence on the transfers. The province has received payments every year since the program was created in 1957.

Quebec receives around half the total paid out under the program, although on a per capita basis it gets less than New Brunswick and Nova Scotia.

The federal government calculates payments by comparing the size of the tax base in various provinces. But as the Montreal Economic Institute noted, the case of natural resources is different.

Fiscal capacity is measured according to the revenues actually earned. What a government receives in forest royalties, mining royalties or profits earned from a public electric utility like Hydro-Québec count directly against the transfers received.

It’s a double-edged sword for the PQ, which is debating whether to boost mining royalties. Higher revenue could cut federal transfers but if investment were to fall as a result of the new tax regime then the provincial government would be indemnified.

One reason Quebec hasn’t moved more quickly to charge higher electricity rates that reflect the true cost of production is that the increased revenue collected from Hydro-Québec would reduce equalization.

Changes to the equalization system in 2007 were supposed to make it easier for provinces to develop their own resource bases without getting penalized.

The Montreal Economic Institute has advocated even further liberalization so that Quebec could get a form of tax holiday on equalization reductions during the first few years of new natural resource projects.

Newfoundland and Labrador could serve as an example. That province and Ottawa negotiated a deal that didn’t penalize development of the Hibernia oilfield and the Voisey’s Bay nickel mine.

It would be an important signal to Quebec that it can develop its rich petroleum and mineral deposits without fear that the benefits would be clawed back.

phadekel@videotron.ca

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