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

The Panel understands that the best ideas can sound good 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? The Panel has, therefore, done a thorough technical analysis to address this critical question, and the results are provided in this annex.

The assessment begins with an examination of what the Panel’s formula would generate in terms of the overall cost for the Equalization program and the allocation to provinces for 2007–08. Entitlements under the Panel’s recommendations are then compared with what provinces would receive in 2007–08 under the 2004 Renewal formula. The robustness of these results is then considered by extending the comparisons to 2006–07 and 2005–06.

Entitlements for 2007–08 under the Panel’s formula are also compared with what provinces are expected to receive for 2006–07, which will be determined by the New Framework.

The assessment then considers how entitlements would change under the Panel’s formula under different oil and gas revenue scenarios, given the large impacts that changes in oil and gas prices can have on entitlements. Finally, the fiscal impacts of the individual recommendations are presented to give the reader a better understanding of why the Panel’s formula generates the results that it does.

While a thorough analysis of impacts has been undertaken, it should be recognized that the simulations within this annex are simply snapshots in time, based on information current as of February 2006. The actual cost of the Equalization program and the allocation to provinces under the Panel’s formula will vary as more up-to-date data become available. More important, the actual impacts of adopting the Panel’s recommendations will change over the years as provincial economies and disparities among provinces evolve. In this respect, the impacts depicted should be considered indicative of possible impacts.

Equalization entitlements under the Panel’s formula: 2007–08

Table 1 presents each province’s per capita fiscal capacity before Equalization, its Equalization entitlement, and its total fiscal capacity after Equalization for 2007–08. All figures have been calculated using the Panel’s formula with February 2006 data, using a 50 percent weighting for 2005–06 data, and 25 percent weightings for 2004–05 and 2003–04, in the three-year moving average calculation.

Table 1 – Provincial Fiscal Capacity Before and After Equalization for 2007–08¹

The first row shows that there are significant differences in provincial fiscal capacity before Equalization. The second row shows that provinces with the lowest fiscal capacity receive the most Equalization per capita; the three richest provinces do not receive any. The final row shows that, after Equalization, receiving provinces are left with very similar fiscal capacities, although they are not identical because of the partial inclusion of resource revenues.

The last line also demonstrates the impact of the fiscal cap. The Panel believes that Equalization should not push a province’s fiscal capacity above that of the lowest non-receiving province. As a result, Ontario’s fiscal capacity becomes the cap for all receiving provinces for 2007–08. The cap would affect Newfoundland and Labrador and Saskatchewan, ensuring that their overall fiscal capacity after Equalization does not exceed Ontario’s.

Total entitlements for 2007–08, using the Panel’s formula and multiplying each province’s per capita entitlements by their total population, are shown in Table 2.

Table 2 – Equalization Entitlements for 2007–08 based on the Panel’s Recommendations

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