Annex 10: Illustrative Financial Impacts of the Panel’s Recommendations

Assessing the fiscal impacts

Based on this assessment, the Panel considers the most relevant comparison to be between what provinces would receive if the Panel’s formula were adopted against what they would receive if the 2004 Renewal formula were used with aggregate entitlements as legislated under the New Framework. Both formulas use the same two-year data lag and a weighted three-year moving average.

• Table 4 compares 2007–08 Equalization entitlements under the two formulas.
• Tables 5 and 6 compare 2006–07 and 2005–06 Equalization entitlements under the two formulas to assess the robustness of these results.
• Figure 1 summarizes the results of these three tables.
• Table 7 provides an additional perspective by comparing what provinces would receive under the Panel’s formula in 2007–08 against what they are expected to receive in 2006–07 based on the
  extended New Framework announced by the federal Minister of Finance in November 2005.

Table 4 – Formula-to-Formula Comparison for 2007–08

Note: Totals may not add due to rounding.

Observations

Table 4 shows the most relevant comparison. Equalization entitlements under the Panel’s formula compared with the 2004 Renewal formula, including the two adjustments discussed earlier.

• Total entitlements in 2007–08 would be $887 million higher under the Panel’s formula.
• Saskatchewan would get the largest per capita increase in entitlements, due to the partial (50 percent) exclusion of natural resources. This benefit would be limited, however, by the fiscal capacity cap. The fiscal capacity cap limits Equalization when a province’s total fiscal capacity (from own-source revenues, payments from Offshore Accords, and Equalization) reaches Ontario’s (the non-receiving province with the lowest fiscal capacity). As shown in Table 1, Saskatchewan’s total fiscal capacity is identical to Ontario’s under the Panel’s formula. In the absence of the cap, Equalization would push Saskatchewan’s fiscal capacity well above Ontario’s.
• Newfoundland and Labrador’s entitlements would go down the most, since the payments from offshore resource accords already effectively exclude 100 percent of offshore resource revenues in the Equalization formula. To prevent Equalization from pushing the province’s total fiscal capacity over Ontario’s, the province’s Equalization entitlements would be limited to $482 million for 2007–08. Table 1 shows that, after the fiscal capacity cap, Newfoundland and Labrador’s total fiscal capacity is identical to Ontario’s.
• British Columbia would see a small reduction in Equalization ($8 per capita). This is because under the Panel’s formula, British Columbia’s fiscal capacity increases significantly relative to other provinces, even rising above Ontario’s. This is primarily because of technical improvements in the measurement of fiscal capacity for property and other tax bases.
• Québec would receive the largest increase in aggregate entitlements, the third highest increase when measured on a per capita basis. The higher entitlement is due primarily to the 10-province standard, and the improved measure of fiscal capacity for the residential property tax base, which in the past had over-estimated Québec’s fiscal capacity.
• Other receiving provinces would receive higher entitlements, due to the impact of moving to the 10-province standard along with changes to the measure of fiscal capacity.

Table 5 – Formula-to-Formula Comparison for 2006–07

Note: Totals may not add due to rounding.

Table 6 – Formula-to-Formula Comparison for 2005–06

Note: Totals may not add due to rounding.

Observations

Tables 5 and 6 provide the equivalent calculation to Table 4, but for 2006–07 and 2005–06, the other years for which a complete set of reliable data is available. To better isolate the impacts due to difference in the two formulas, the base case uses a fully implemented 2004 Renewal formula (under the legislation, it would not have been fully phased in until 2007–08). The results are similar to Table 4, demonstrating the robustness of the results over time.

The change in Equalization entitlements for three provinces deserves special note:

• British Columbia’s losses would be somewhat larger in the earlier years. This is because under the base case they would have received a modest amount of Equalization ($48 and $57 per capita) in 2006–07 and 2005–06, respectively. In the Panel’s view, by giving only a 50 percent weighting to the stratified property tax base, the 2004 Renewal formula in the base case underestimates the province’s fiscal capacity, and fails to appropriately recognize that British Columbia has some of the highest property values in the country.
• In contrast, Newfoundland and Labrador would have received more Equalization under the Panel’s formula in these earlier years. This is because resource revenues, and the revenues that are effectively excluded from the Equalization formula by the Offshore Accords, are not as large in the early years. As a result, the cap would have reduced entitlements by $73 million in 2006–07, and would not have impacted the province in 2005–06.
• Saskatchewan would also have received considerably more under the Panel’s formula in the early years. This is primarily due to the fiscal benefit that the province would have received from the partial exclusion of resource revenues with the interaction of the fiscal capacity cap, which cuts off a smaller amount of Equalization in these earlier years. The fiscal capacity cap would not have had as big an impact on Saskatchewan’s Equalization because its post-Equalization fiscal capacity in the absence of the cap was only slightly above Ontario’s.

Figure 1 – Financial Impact of the Panel’s Recommendations Based on a Formula-to-Formula Comparison (2005–06 to 2007–08)

Observations

Figure 1 summarizes the impacts presented in Tables 4 to 6 for 2007–08, 2006—07, and 2005–06, respectively. As seen in these tables:

• Saskatchewan’s gains under the Panel’s formula would be larger in 2005–06 and 2006–07. The gains are smaller in 2007–08 as its resource revenues go up and, accordingly, the fiscal capacity cap limits its Equalization entitlements.
• Similarly, Newfoundland and Labrador initially gains under the Panel’s formula, but loses in 2007–08 because the province’s overall fiscal capacity (including offset payments) rises sharply due to increased resource revenues. Accordingly, the cap limits its entitlements.
• British Columbia would experience small decreases in the early years under the Panel’s formula. These decreases would begin to disappear in 2007–08, as the province’s fiscal capacity increases to the point that it is no longer eligible for Equalization under the Panel’s formula or the 2004 Renewal formula.
• Other provinces—whose fiscal capacities remained relatively constant—would experience similar gains in all three entitlement years.

Table 7 – Comparing the Panel’s Recommendations for 2007–08 with Announced Entitlements for 2006–07

Note: Totals may not add due to rounding.

Observations

Table 7 compares what the Panel’s formula would give provinces in 2007–08 with what provinces are expected to receive in 2006–07, based on the New Framework announced by the federal government in October 2004 and extended in November 2005. Since this comparison is not the most relevant for determining the impact of the Panel’s formula (because the allocation used for 2006–07 was never intended to be more than a transitional stopgap, pending a more permanent solution), only a few comments are offered.

• If the Panel’s recommendations were adopted, total Equalization entitlements would increase by $1.3 billion in 2007–08 compared with announced entitlements for 2006–07 (using October 2005 data).
• Most provinces would see a year-over-year increase in their Equalization entitlements.
• Québec would see the highest year-over-year increase. Like other receiving provinces, it benefits from the move to the 10-province standard and improvements in the measure of fiscal capacity, particularly for the property tax. However, Québec also benefits because under the New Framework allocation agreement it received the lowest per capita entitlements.
• Newfoundland and Labrador’s Equalization entitlements would decrease, primarily due to the fiscal capacity cap. In the absence of the cap, Equalization would push Newfoundland and Labrador’s fiscal capacity well above Ontario’s.
• British Columbia’s entitlements also decrease when comparing the Panel’s recommendations for 2007–08 to the announced entitlements for 2006–07. The decrease is primarily due to the fact that entitlements under the New Framework were based on earlier data (which indicated that British Columbia had a significantly lower fiscal capacity than subsequent data revealed), primarily because of the method for calculating residential property tax capacity.

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