Newly Rich Newfoundland Still Enjoying Perks of its ‘Have-Not’ Past

Commentary, Equalization, Frontier Centre

Anyone who still believes Newfoundland is a have-not province should take a close look at its latest budget.

The province is forecasting budget surpluses of $485-million this year and $59-million next year. Yes, that’s black ink. The province is on a track to generate a combined $5-billion in surpluses between 2006 and 2012, according to its budget tabled last week.

Newfoundland is steadily paying down its debt and ramping up spending. While much of the rest of the country hunkers down, the budget provides more money for schools, hospitals, child care and infrastructure. It’s also selectively cutting taxes and freezing university tuitions, which are already near the lowest in Canada.

Newfoundland’s economy is red-hot, growing 5.6 per cent last year. It is forecast to expand a healthy 3 per cent this year. It’s also leading the country in job creation.

Credit the global commodities boom. There’s been an unexpectedly large windfall from surging offshore oil and mining royalties.

Commodities booms come and go, of course. But something more lasting has happened in the six decades since Newfoundland joined Confederation. It’s become increasingly self-sufficient.

This is no longer the province of failed boondoggles, collapsing fisheries and boom-bust forestry. Today’s boom is based on long-term investments in offshore oil, hydroelectric power, nickel and tourism.

The population is growing again after years of outmigration. Many baby boomers who left the Rock to seek a better life in the Alberta oil patch or the big cities of Central Canada are coming home to retire, building big homes up and down the Avalon Peninsula.

And yet Newfoundland still enjoys most of the privileges of its have-not past. It is a beneficiary of large federal transfers ($1.8-billion this year, representing a quarter of government revenue). Other major federal programs, such as employment insurance, are also badly tilted in the province’s favour because of a preponderance of seasonal work and a high structural jobless rate. All Canadian workers pay in to employment insurance, but Newfoundlanders are among those most likely to qualify for full benefits. Nine out of 10 unemployed Newfoundlanders get EI, compared with only four out of 10 in Ontario, where part-time work, self-employment and a surplus of new entrants to the labour force disqualify many.

These kinds of inequities have long stirred resentment in the traditional “have” provinces of Ontario, British Columbia and Alberta. But the grumbling is getting louder.

Ontario Premier Dalton McGuinty lashed out at the federal government’s recent pledge of $4.2-billion in loan guarantees for the Lower Churchill hydro project in Labrador. “Ontarians should understand 40 per cent of the federal government’s money comes directly from Ontarians,” he complained. “… Ontarians will not stand by and let their tax dollars be used by the federal government to subsidize electricity rates in other parts of the country.”

It isn’t just about fairness. It’s about building a stronger national economy, critics say. In a February report, the Ontario Chamber of Commerce said transfers of $40-billion to $50-billion a year from the wealthiest provinces to lower-productivity regions are wrecking the country’s economy. Ottawa is “actively punishing productivity and rewarding inefficiency, and doing so on a large scale through regional subsidies,” argued the report, Dollars and Sense: a Case for Modernizing Canada’s Transfer Agreements.

It said equalization and other transfers suck up roughly 5 per cent of the combined economic output of Alberta and Ontario. “It is a regional subsidy system that punishes productivity, rewards inefficiency, does so on a massive scale and is difficult to change,” the report concluded. “It is so large that it almost certainly outweighs all other steps taken by the federal government to improve Canada’s productivity performance.”

This might not matter if Ontario’s economy were growing at a blistering pace. It’s not. Under Ottawa’s complex formula for calculating equalization, Ontario was officially labelled a have-not province in 2009. Even so, it continues to pay more into the system than it takes out.

The consequences of decades of financial neglect are now evident in health care and education. Per capita, there are fewer doctors, nurses, hospitals and universities in Ontario than in most other provinces. Newfoundland, in contrast, ranks near the top.

The country is changing, but the federal system seems rooted in the mindset of the 1950s.