Thank you, Mr. Chair.
Let met briefly introduce myself. I've been a professor of economics for 29 years. For 25 of those years, I have studied equalization and associated aspects of federal-provincial fiscal relations. I have been working on this particular file ever since the budget came down. I've done some very detailed analysis of what is being proposed here. I'm still revising my results as I better understand what is proposed in Bill C-52.
My presentation today will focus solely on fiscal equalization payments to the provinces and associated changes to the offshore accords. The bill also makes important changes to the determination of territorial formula financing payments, as well as to the growth and distribution of the Canada social transfer and the eventual distribution of the Canada health transfer. These matters would require a separate presentation.
The bulk of Bill C-52 lays out, in terms of the text, the terms of the new equalization program applicable to the provinces. Associated changes to the Federal-Provincial Fiscal Arrangements Act are in clause 64, pages 64 to 83. In addition, clauses 80 to 86, pages 93 to 103, lay out the associated changes to the Canada-Newfoundland Atlantic Accord Implementation Act and the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act. My point is, getting your head around all this is a huge undertaking.
Proposed section 3.1—this is in clause 80--specifies amounts for fiscal equalization payments to the provinces for 2007-08. What people need to understand is that these amounts are derived from application of the formula described in the subsequent proposed section 3.2. There are, in fact, three formulae at work in generating those numbers. One involves the O'Brien formula coming out of the expert panel. One involves a variant on that formula, with zero inclusion of natural resource revenues, and the third involves effectively a continuation of the status quo on option to Newfoundland and Labrador and to Nova Scotia.
If you go into the details of these—that's where the numbers come from—in particular how these numbers will be generated in future years, that's proposed section 3.2. Paragraph 3.2(1)(a) is the O'Brien formula. Paragraph 3.2(1)(b) is the zero inclusion of natural resources formula. And that is only part of what is being undertaken.
Proposed section 3.3 makes important transitional provisions for British Columbia with regard to the calculation of revenues derived from property taxes. There has been very little study of what the implications of those provisions are.
Proposed section 3.4 introduces the new cap on equalization, the so-called fiscal capacity cap, designed to ensure that equalization payments do not raise a province's total fiscal capacity above that of any non-receiving province. Where that does occur, equalization will be reduced. Indeed, it can be eliminated as a result of exceeding the cap.
Proposed section 3.5 provides definitions of terms and bases. There is a lot of important material in there that people are still getting their heads around. It explains the process, the three-year moving average lag of two years that will generate the data on equalization, but also the changes in how bases are being measured for purposes of determining equalization. Very little study has been made of that aspect either.
Proposed section 3.6 is very important. It makes special provision for Nova Scotia and for Newfoundland and Labrador, allowing them the option of continuing under the fixed framework indefinitely and, indeed, specifying an annual 3.5% growth rate in the aggregate equalization pot. Either province can, at its option at any time in the future, including during this year if it wishes, opt into the new program. That is specified in proposed section 3.7.
Beyond 2007-08, Nova Scotia and Newfoundland and Labrador will have to make choices. For 2007-08, the choices are obvious, and what choices are made in this particular year are not irrevocable. However, they will be irrevocable in subsequent years if either province opts into the new program. I would simply make the point that the analysis I've been involved in would suggest, from Nova Scotia's point of view, that remaining within the fixed framework indefinitely into the future would likely be its most preferred option, notwithstanding the fact that it might involve taking slightly reduced benefits in the 2008-09 fiscal year.