Assessing the impact

The Panel understands that the best ideas can sound good in principle and in theory, but what people want to know is the bottom line. What is the combined impact of the Panel’s recommendations on whether or not a province qualifies for Equalization, how much it would receive, and how that compares with what it currently receives?

The Panel has done a thorough and complete technical analysis to address these critical questions. At the outset, however, it’s important to keep a number of key points in mind.

The Panel has done a thorough and complete technical analysis of its package of recommendations based on the latest available information.

First, the Panel has focused its assessment on what its recommended new formula would provide both in terms of an overall price tag for the Equalization program and the allocation to individual provinces for 2007–08. Consistent with the Panel’s recommendations, the results are based on the most recent data from February 2006 and a three-year moving average including 2003–04 (weighted 25 percent), 2004–05 (weighted 25 percent) and 2005–06 (weighted 50 percent).

Second, the Panel’s calculations are intended as illustrations of the combined impact of its recommendations. They are a snapshot in time based on current information. The actual cost of the Equalization program and the allocation to individual provinces can and will vary depending on actual information available closer to the time when decisions are made for 2007–08.

The provinces have unanimously asked for a return to a formula-based approach.

Third, the impact of the Panel’s recommended approach is compared to both Equalization entitlements that were announced in November 2005 under the New Framework for 2006–07 and to a formula-driven base case. As noted earlier in this report, interim allocations under the New Framework were based on an agreement reached with the provinces rather than on a formula-based approach. The result is that some provinces actually received more in Equalization funding than they would have if a consistent formula had been used.

The provinces have unanimously asked for a return to a formula-based approach. For purposes of comparison, the Panel has also compared the impact of its recommendations with a base case reflecting the impact of the formula developed as part of the 2004 Renewal, just before the New Framework was announced. Two modifications were made. A weighted moving average was applied (as in the case of the Panel’s recommended approach) and a pool of $11.7 billion (the legislated amount for 2007–08) was used. Without this adjustment to an $11.7 billion total, the pool of Equalization funds to be allocated under the pre-2004 formula would have been much smaller.

In the Panel’s view, this is a “more pure” comparison, since it compares the impact of two formula-driven approaches (one before the New Framework and one including all of the Panel’s recommendations).

Finally, Annex 10 provides more detailed analysis of the impact of the Panel’s recommendations.

With those comments in mind, these are the highlights of the financial impacts of the Panel’s recommendations.

Consistent with the purpose of Equalization, the Panel’s recommended approach results in comparable fiscal capacities among all receiving provinces.

• Table 2 compares the fiscal capacity of provinces before and after the Panel’s recommended Equalization formula is applied. It shows that, while there are significant disparities in fiscal capacity of provinces before Equalization, the Panel’s formula results in very similar fiscal capacities among receiving provinces.
• The Panel’s formula does not result in equal fiscal capacities for receiving provinces after Equalization primarily because of the partial inclusion of resource revenues.
• Table 2 also shows the impact of imposing a cap on the amount of Equalization funding provided to some receiving provinces. Consistent with the principle of equity, the Panel recommends that no receiving provinces should end up with a fiscal capacity greater than that of the lowest non-receiving province. In this case, Ontario’s fiscal capacity becomes the cap for all receiving provinces. The cap affects both Newfoundland and Labrador and Saskatchewan.

Table 2 – Provincial Fiscal Capacity Before and After Equalization for 2007–08²⁷

The total amount to be allocated under Equalization is higher and most receiving provinces would receive more than they would under the previous formula.

• As Tables 3 and 4 show, the total cost of the Equalization program would increase from $11.3 billion in 2006–07 to about $12.6 billion in 2007–08 as a result of the Panel’s recommendations. Under the New Framework and the fixed increase of 3.5 percent per year, the total cost of the Equalization program would increase to $11.7 billion by 2007–08. Therefore, the increase resulting from the Panel’s recommendations is about $900 million. This increase is primarily the result of moving to a 10-province standard (which includes high oil and gas prices). If 100 percent of resource revenues had been included along with a 10-province standard, the total cost would have been $16 billion.
• In 2007-08, all receiving provinces except British Columbia and Newfoundland and Labrador would receive more Equalization under the Panel’s recommendations.

Table 3 – Formula-to-Formula Comparison for 2007–08

• The Panel’s assessment shows that British Columbia would not be
  entitled to Equalization under the Panel’s recommended formula because it has a higher fiscal capacity. Using the most recent data, under the previous Equalization formula, British Columbia would have been entitled to only a small amount of Equalization funds, substantially less than it received under the New Framework.
• In the case of Newfoundland and Labrador, the reduction in Equalization entitlements reflects the impact of the Panel’s recommended cap. Under both the Panel’s recommended formula and the modified 2004 Renewal formula, Newfoundland and Labrador has a higher fiscal capacity than Ontario, the lowest non-receiving province.
• In the case of Québec, additional entitlements under the Panel’s recommendations reflect the fact that Québec did not benefit as much from the New Framework as other receiving provinces. They also reflect
  the impact of moving to a 10-province standard and changing the
  measurement of property taxes and resource revenues.

Table 4 – Comparison of the Panel’s Recommendations for 2007–08 with Announced Entitlements for 2006–07

Note: Totals may not add due to rounding.

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