Sooner or later, Ottawa always caves

Here’s how crazy things have gotten in the Atlantic equalization tussle. The claim that the Atlantic Accords have been “broken,” recall, does not rest on any actual change in the agreement the premiers of Newfoundland and Nova Scotia extracted from Paul Martin in 2005. The two provinces are every bit as much entitled to the accords’ protection after the recent budget as they were before... -- that is, they may continue to collect all of the offshore oil and gas royalties the federal government signed over to them twenty years ago and all of the equalization payments to which they would have been entitled had the oil never been discovered. They may continue to do so, what is more, even if the effect of the combined federal largesse is to raise their per capita revenues above those of Ontario, the poorest of the “have” provinces that effectively underwrite the program.

No one seriously disputes this. The claim of mistreatment, rather, rests entirely on the budget’s introduction of a new equalization formula, which the two provinces have the option -- but not the obligation -- of adopting in place of the existing one. The new formula offers higher payments, at least in the short term, at the cost of imposing a cap once their fiscal capacity is equal to that of Ontario. In the provinces’ version, the accords were intended to indemnify them against any reduction in the amount of equalization to which they were entitled, not just under the formula that applied at the time the accords were signed, but under any formula. If the new formula implies higher payments, they should get them, too.

And if the new formula also includes a cap? Well, that was prohibited by the accords. Asking them to give up the accords’ no-cap guarantee in return for higher payments -- to choose between the old formula and the new -- is, on this view, to deny them benefit of the new formula.

So far, so theological. But here’s where things get really crazy. It turns out the new formula doesn’t necessarily pay out more. It depends on a whole set of assumptions about oil prices, economic growth and the like. A study for the Atlantic Provinces Economic Council estimates that over time the Atlantic provinces would be worse off under the new formula than the old. But rather than resolve the dispute -- thank heavens we can stay with the accords! -- it only seems to have inflamed it. The nerve of those double-dealing feds! To deny us benefit of a formula that would make us worse off!

When people are behaving this irrationally, it’s time to look for deeper causes. In fact there is nothing particularly novel about the current dispute. In inventing new names for old demands, dressing up a crass shakedown operation as a heroic defence of principle, the premiers of Nova Scotia and Newoundland are behaving no differently than their counterparts elsewhere. What was the “$23-billion gap” for Ontario, or the “fiscal imbalance” for Quebec, or the “Romanow gap” for the rest, is now the “broken Accords” -- spurious grievances, using meaningless ratios and tendentious statistics, that with constant repetition assume the status of moral absolutes, if not laws of physics.

It is learned behaviour, in other words. The premiers are only responding to incentives. They do it because that is what our political system encourages them to do -- because, in short, it works. Sooner or later, Ottawa always caves.

It should be obvious by now that the feds cannot win this game. The past few years have witnessed the most massive increase in federal transfers to the provinces in our history: from roughly $22-billion in fiscal 2000 to $44-billion this year -- not including payments under the Atlantic Accords. Three other federal provincial “accords” on health and social transfers added a total of $103-billion to provincial coffers. The equalization program has been enriched, and enriched again, even as disparities in provincial incomes lessened. All told, fully one dollar in four of federal spending now goes out the door in transfers to the provinces. And that’s not even counting the tax points transferred in 1977, now worth $21-billion.

With what result? The provinces are more bitter, more resentful than ever, every one of them doing its best to convince its citizens they are getting done out by the rest. All this unprecedented outpouring of federal generosity has succeeded only in whetting the premiers’ appetites for more, rewarding the worst actors and teaching the others to try harder. It has created a uniquely poisonous political culture, whose leading figures consider it the whole of their job to whine to other levels of government, each one with a more aggrieved sense of entitlement than the last. And if the feds should ever dare to resist, they are accused of that worst of crimes, offences against “co-operative federalism.”

Perhaps it will occur to someone after this last episode that it should indeed be the last. If the feds cannot win this game, they should stop playing.