Sunday, May 06, 2007


Interesting take on how Non-Renewables shouldn't be included in the equalization formula

The second option is to see natural resource revenue as a special form of provincial asset that should be excluded from a province's baseline fiscal capacity. The idea here is, since most natural resource revenue comes from non-renewable sources and, in turn, is a temporary source of provincial income, it should be used for special purposes like a savings fund or economic diversification. According to this camp, no natural resource revenue should be included in the equalization formula.

This argument holds the most water when provincial natural resource revenue is actually used for special purposes such as debt reduction or a savings fund rather than thrown into the same kitty as other provincial revenue.

The third approach splits the difference and argues that natural resource revenue is at once the same as other sources of revenue, and yet different from them.

This school of thought recognizes that provinces with access to natural resource revenue tend to treat it just like income tax and sales tax revenue. However, it also recognizes that there is something special about revenue derived from non-renewable resources.

Non-renewable resources are not an ordinary source of provincial income, but an asset that belongs to current and future residents. To the degree that provinces treat their non-renewable resource revenue as a financial asset rather than as more cash for current programs (e.g., by saving resource revenue in an inflation-proofed fund and only spending the earnings), it should be exempted from the province's general fiscal capacity. One option here is for the equalization formula to exempt whatever portion of natural resource revenue that is diverted into a provincial savings fund (or debt reduction).

All three options have merit, but the third approach is perhaps the most true to reality. Provinces generally do not treat their natural resource income as a special form of revenue and this should be reflected in the equalization formula.

Nonetheless, these revenues are special and the equalization formula should not penalize provinces who treat them as such.

And nowhere in there does he say a Colonialist CAP should be imposed.

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