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Federalism and the Atlantic Provinces

Traditionally, Atlantic Canada has proven to be a strong ally of both Canadian federalism and of federal government involvement in its economic, social, and financial life. Nevertheless, the relations between the federal government and the provinces of Newfoundland and Labrador, Nova Scotia, New Brunswick, and Prince Edward Island have been strained at times. This article provides an introduction to key issues and debates in Canadian federalism by looking through the lens of Atlantic Canada. The feature covers the regional economy and federal development policy, provincial finances and fiscal federalism, and offshore energy and relations between the federal government and the region.

Atlantic Canada and Federal Economic Policy

Regional economic disparity and federal-provincial relations

Provincial Finances and Fiscal Federalism in Atlantic Canada

Provincial financial crises and federal fiscal transfers

Offshore Energy and Federal-Atlantic Canada Relations

Atlantic offshore energy sector and federal-provincial relations

Sources and Links to Further Information

List of article sources and links to more on this topic

Atlantic Canada and Federal-Provincial Economic Policy

Regional economic disparity and provincial-federal relations

A major problem facing the provinces in Atlantic Canada today, consisting of Newfoundland and Labrador, Nova Scotia, New Brunswick, and Prince Edward Island, is regional economic disparity. As a whole, the region has not enjoyed the same level of economic development and prosperity as other parts of Canada. Accordingly, this disparity has contributed to tensions between the Atlantic provinces and federal governments over the years, specifically in the area of regional economic policy. This section provides an overview of the Atlantic economies, as well as trends and issues in federal economic development policies in the region.

Overview of Atlantic Canada Economies

Prior to Confederation, Atlantic Canada was a centre of economic activity in the Canadian colonies. Beginning in the late 1800s, however, the region began to experience a major economic decline – a decline that continued for much of the 20th century. Today, the economies of Newfoundland and Labrador, Nova Scotia, New Brunswick, and Prince Edward Island are the smallest among all of the Canadian provinces.

Real Gross Domestic Produce by Province (2006)

Rank

Province/Territory

GDP $ Billion

Rank

Province/Territory

GDP $ Billion

–

Canada

1,282,204

 

 

 

 

 

 

 

 

 

1

Ontario

521.6

6

Saskatchewan

38.4

2

Quebec

259.9

7

Nova Scotia

28.6

3

Alberta

183.3

8

New Brunswick

22.8

4

British Columbia

158.3

9

Newfoundland/Labrador

17.7

5

Manitoba

40.3

10

Prince Edward Island

4.0

1. Source: Statistic Canada, Real Gross Domestic Product, Expenditure-Based, by Province and Territory.
2. Figures in Real GDP, expenditure-based, and chained (2002) dollars.

The relatively small size of each of the Atlantic economies is due, in large part, to their smaller populations and geographical areas. However, other indicators show deeper economic issues in the region. The Atlantic provinces have traditionally had the lowest levels of Gross Domestic Product (GDP) Per Capita in the country – a measure which considers the level of economic activity relative to population size. The one exception has been the recent performance of Newfoundland and Labrador. In 1990, the province had the lowest GDP per capita in the country. By 2003, however, it was among the top four provinces in Canada, behind only Alberta, Ontario, and Saskatchewan.

Nominal Value of GDP Per Capita by Province

Province/Territory

1990

1997

2003

Rank

($)

Rank

($)

Rank

($)

Canada

—

24,548

—

29,516

—

38,495

 

 

 

 

 

 

 

Ontario

1

27,465

2

32,004

2

40,346

Quebec

4

21,892

6

25,902

6

33,853

Alberta

2

28,760

1

37,825

1

54,075

British Columbia

3

24,113

3

28,968

5

35,041

Manitoba

5

21,881

5

26,186

7

32,708

Saskatchewan

6

21.077

4

28,064

3

36,749

Nova Scotia

7

18,681

8

21,843

8

30,883

New Brunswick

8

18,184

7

22,384

9

29,900

Newfoundland/Labrador

10

15,949

10

19,116

4

35,243

Prince Edward Island

9

16,616

9

20,572

10

28,106

Source: Baldwin, et. al., Catching Up and Falling Behind: The Performance of Provincial GDP Per Capita from 1990 to 2003.

Another factor to add to the equation is that traditionally the Atlantic provinces have experienced higher levels of unemployment relative to other parts of Canada. In 2006, each of the four Atlantic economies ranked in the top five for unemployment, with Newfoundland and Labrador having the highest level of unemployment (14.8 percent). By comparison, the national average was 6.3 percent.

Unemployment by Province (2006)

Rank

Province/Territory

%

Rank

Province/Territory

%

–

Canada

6.3

 

 

 

 

 

 

 

 

 

1

Nfld & Labrador

14.8

6

Ontario

6.3

2

P. Edward Island

11.0

7

British Columbia

4.8

3

New Brunswick

8.8

8

Saskatchewan

4.7

4

Quebec

8.0

9

Manitoba

4.3

5

Nova Scotia

7.9

10

Alberta

3.4

Source: Statistic Canada, Labour Force, Employment, Unemployment, Numbers and Rates, By Province.

Much of the Atlantic region also faces high levels of industrial underdevelopment. This is most clearly evident in Newfoundland and Labrador. In 2002, manufacturing output in that province accounted for 5.75 percent of provincial GDP, far below the national average of 16.85 percent. The manufacturing sectors of Nova Scotia and Prince Edward Island are more robust than in Newfoundland and Labrador; nevertheless, as the Table below shows, they still fall far short of the national average. Of the Atlantic provinces, only New Brunswick has a strong manufacturing sector. In 2002, manufacturing accounted for 14.83 percent of the provincial economy.

2002 Manufacturing Output (in millions of 1997 dollars)

 

Real Manufacturing Output ($)

Share of Total Real GDP (%)

Canada

164,941

16.85

Atlantic Provinces

5,946

10.75

 

 

 

Newfoundland/Labrador

724

5.74

Prince Edward Island

304

10.17

Nova Scotia

2,275

10.39

New Brunswick

2,643

14.83

Source: Sharpe, The Canada-Atlantic Canada Manufacturing Productivity Gap: A Detailed Analysis, p. 50.

The Atlantic region has also experienced important shifts in its natural resource economies, which have presented challenges and opportunities. Traditionally, one of the most important natural resources in the Atlantic region has been the ocean fishery. The Atlantic fishing industry, however, experienced some difficulties towards the end of the 20th century, particularly in the case of the cod fishery, where over-fishing resulted in partial or complete closure of much of the fishing season and substantial levels of unemployment among fishermen.

At the end of the 20th century, a new resource emerged in the Atlantic region: offshore oil and gas. In Newfoundland and Labrador, the offshore energy sector has come to dominate the provincial economy, replacing fisheries as the leading goods-producing sector. As of 2005, there were two major offshore oil and gas sites in operation, Hibernia and Terra Nova, with a third, White Rose, scheduled to begin production in 2006. In 2004, offshore energy production totalled $6 billion – accounting for a substantial portion of the province’s overall economic activity. Nova Scotia also possesses substantial offshore oil and gas deposits, although not developed to the same extent as in Newfoundland and Labrador. Substantial offshore oil and gas deposits, as of 2007, had not been found in New Brunswick or Prince Edward Island. However, New Brunswick does have modest onshore energy deposits, and there may be some quantities of natural gas beneath the eastern end of Prince Edward Island.

Origins of Federal Economic Policy in Atlantic Canada

Beginning in the 1950s, the Atlantic provinces began to introduce comprehensive government policies in an attempt to stimulate their provincial economies. This included forming government development agencies, offering incentives to local businesses, and improving provincial infrastructure. Collectively, the provinces also recognized that federal participation and coordination were necessary to ensure the success of these development programs.

The first real attempts at regional development by the federal government came in the late 1950s under the Conservative government of John Diefenbaker. The Conservatives made the reduction of regional differences and the growth of regional economies an important national policy, and introduced several job creation programs to address the problem of seasonal unemployment in the region. Subsequent federal governments built upon these initial programs.

In 1969, the new Liberal government of Pierre Trudeau consolidated and rationalized regional development programs with the creation of the federal Department of Regional Economic Expansion (DREE). The Trudeau government viewed regional disparity as a source of national disunity and believed that “have-not” regions would become increasingly discontented with their economic positioning vis-à-vis more prosperous regions of Canada. The DREE was given a powerful minister, deputy minister, and a substantial budget to target industrial development in Atlantic Canada and Eastern Quebec.

The DREE has since undergone several re-organizations. In the early 1980s it was merged with the Department of Industry to create the Department of Regional Industrial Expansion (DRIE). In 1987, DRIE was split into several agencies – each with its own regional focus. This included the Atlantic Canada Opportunities Agency (ACOA), Federal Economic Development in Northern Ontario (FedNor), Western Economic Diversification Canada (WD), and the Canada Economic Development Office for Quebec Regions (CED). What was left of DRIE became the Department of Industry, Science and Technology, and later – as it is known today – Industry Canada.

Grievances with Federal Policy on Regional Development

Over the years, political and business leaders in the Atlantic provinces have heavily criticized federal regional development policy. While, collectively, the provinces have supported federal participation in its development initiatives, it has taken issue with the particular policies and approaches taken by successive governments in Ottawa.

Three issues in particular have been a source of grievance. Originally, federal regional development had been focused on stimulating industrial growth and job creation in the underdeveloped regions of Atlantic Canada and Eastern Quebec. However, over the years the federal government began to divert attention and funds to other parts of the country; by 1980, less than 20 percent of DREE funding went to Atlantic Canada. Critics have argued this lack of focus has handicapped any real success in economic development policy for the Atlantic provinces.

Second, many federal development programs in Atlantic Canada have been deemed to be costly mistakes that have produced no real results, in terms of either growth or opportunity. Critics have argued this is the result of short-term thinking on the part of the federal government, and that such development strategies have been solely focused on temporary employment gains. What is needed instead, many argue, is a broad and long-term vision for economic development in the region.

Finally, historically, federal regional development has been undertaken in a very “top-down” manner. Politicians and bureaucrats in Ottawa directed development policy and programs with little input from the provincial governments or local residents and business leaders. Critics have argued that federal programs were often ineffective because they overlapped or contradicted provincial development programs, or because they were inappropriate to the specific communities in which they operated.

New Development Policy: The Atlantic Investment Partnership

In 2000, following several provincial and federal studies on economic development in the Atlantic region and successive one-on-one deals reached between the federal government and individual provinces, the governments of Canada and the four Atlantic provinces announced the Atlantic Investment Partnership (AIP), a long-term development initiative for the region.

This new initiative represented an important shift in federal regional development policy. First, the AIP is dedicated solely to economic development in the Atlantic region, unlike earlier federal programs that targeted development across the country and lacked any particular geographical focus. Furthermore, the AIP is a partnership between the federal government and regional stakeholders, such as provincial and municipal governments, business, universities and colleges, and research institutes. Accordingly, many have observed that there has been a greater attempt by the federal government to take a “bottom-up” policy approach, with input from leaders and groups directly affected by regional development programs. Finally, previous federal policy was often accused of being made in an “ad hoc” manner, and without a broad and clear vision for economic development. The AIP has specific objectives, including closing the skills, innovation and productivity gap between the Atlantic provinces and the rest of the country, as well as moving the Atlantic economies away from dependence on natural resources.

When the Atlantic Investment Partnership was announced, it involved a five-year, $700 million commitment on the part of the federal government. Major federal investments included $300-million for an Atlantic Innovation Fund to strengthen innovation and competitiveness in Atlantic Canada; $110 million for the expansion of National Research Council facilities in Atlantic Canada to promote greater research in the region; $135 million for a Strategic Community Investment Fund for community-level economic development and job creation projects; and $123.6 million for trade, investment and business skills development.

In 2005, the federal Liberal government, helmed by Paul Martin, announced the Atlantic Investment Partnership would continue. The new initiative, referred to as the “Second Wave,” was based on the same principles and objectives of the original agreement, with additional federal funding of $708 million and an extension until 2010.

Conclusions on Federal Development Policy in Atlantic Canada

In the 20th century, the Atlantic economies did not fare as well as other provincial economies, resulting in regional economic disparity. The Atlantic region has traditionally experienced lower levels of GDP per capita, higher levels of unemployment, and industrial underdevelopment compared to other regions in the country.

The federal government has engaged in economic development policy in the Atlantic region since the 1950s. This federal involvement, however, has often been highly criticized. At the time of writing, economic disparity continues between the Atlantic provinces and other parts of country. Critics have also pointed to deficiencies in the manner in which the federal government has implemented policy; programs have tended to be developed in an ad hoc fashion, and top-down, with little in the way of a clear, long-term vision for development and local input.

Beginning in the 1990s, the federal government began to change its approach to economic development in Atlantic Canada. These changes culminated in the 2000 Atlantic Investment Partnership and the 2005Second Wave Partnership, which, over 10 years, committed almost $1.5 billion in federal funding for the region. The two agreements have taken into account some of the traditional criticisms of federal development policy in the Atlantic region, including the need to incorporate local input and to focus on long-term development strategies and goals, such as closing the skills, innovation and productivity gap between the Atlantic region and other parts of Canada. .

Provincial Finances and Fiscal Federalism in Atlantic Canada

Provincial fiscal crises and federal fiscal transfers

Atlantic Canada’s Reliance on Federal Transfers

Fiscal federalism represents a key component of Canada’s federal system. Under fiscal federalism the federal government transfers billions of dollars to the provinces and territories in support government programs and initiatives. This includes such things as the Canada Health Transfer (CHT), the Canada Social Transfer (CST), and the Equalization Program.

Compared to other regions of the country, the governments of the Atlantic provinces have proven to be the most dependent upon federal financial transfers. Due to their smaller populations and economies, the Atlantic provinces do not generally have the fiscal capacity to support key social services that are on par with those of the larger provinces. Consequently, they rely heavily upon federal transfers to maintain many of their social programs.

This dependence is clearly evident when examining federal transfers to the provinces and territories, particularly on a per capita basis and with respect to the percentage of government revenues. Across all provinces and territories, federal transfers equal approximately $2,041 per person in 2007-08, accounting for 23.4 percent of total provincial/territorial revenues in 2007. In most cases, the Atlantic provinces fall considerably higher than these national averages (see Table below). By comparison, Alberta is among the Canadian provinces least dependent on federal transfers, receiving federal transfers equal to $1,698 per person, accounting for only 15.4 percent of total provincial revenues.

Federal Transfers to Provinces (2007-08)

 

Total ($ millions)

Per Capita
($ per person)

Percent of 2007 Provincial/Territorial Revenues

All Provinces/Territories

67,221

2,041

23.4

 

 

 

 

Nunavut

941

30,358

70.4

Northwest Territories

863

20,331

62.0

Yukon

590

19,039

67.7

Prince Edward Island

484

3,487

37.2

New Brunswick

2,529

3,374

37.8

Nova Scotia

2,814

3,013

35.0

Manitoba

3,552

2,996

33.3

Quebec

18,767

2,439

24.9

Newfoundland and Labrador

1,181

2,336

22.4

Alberta

5,886

1,698

15.4

Saskatchewan

1,672

1,680

17.7

Ontario

20,984

1,641

22.7

British Columbia

6,958

1,591

19.4

1. Includes only major transfers: CHT, CST, Health Reform Transfer, 2004 Wait Times Reduction Transfer, Equalization, and Territorial Formula Financing.
2. Figures do not include local government revenues.
3. Source: Department of Finance Canada, Federal Transfers to Provinces and Territories, 2007.
4. Source: Statistics Canada, Provincial and Territorial General Government Revenue and Expenditures, by Province and Territory, 2007.

Reductions in Federal Transfers in the 1990s

The late 20th century saw a significant shift in the fiscal relationship between the federal government and the provinces/territories. During the buildup of the Canadian welfare state during the 1950s and 60s, the federal government had committed to funding significant portions of provincial social programs, such as health care, education, and social assistance. In the 1970s, however, the federal government became increasingly concerned over the rising costs of these programs and began reducing its financial commitment in this area. The result was a downloading of costs, from the federal government to the provinces/territories, in the social spending arena.

This trend continued in the 1980s and 1990s, as successive federal governments attempted to balance their budgets by controlling or reducing funding transfers to the provinces. The most sweeping changes occurred in 1995, when the federal government combined funding for health care, education and social assistance into a new block grant called the Canada Health and Social Transfer (CHST). The new CHST represented a significant reduction in the amount of federal funding to provincial social programs. Furthermore, it completely de-linked federal transfers from the cost of these programs, as federal transfers would no longer increase at the same pace as the cost of the programs. Any increases in program costs would have to borne by the provinces alone.

These federal reductions had serious financial consequences for all provinces and territories, but were especially problematic for Atlantic Canada due to their high reliance on federal transfers (see above). This forced Atlantic governments to drastically cut the level of services provided to residents, and to engage in higher levels of taxation and deficit spending to maintain those services that remained.

Fiscal Crises in Atlantic Canada

As stated earlier, the combination of high reliance on federal monies and the overall reduction in those transfers placed enormous financial stress on the Atlantic provinces. Throughout the 1990s, the governments of the Atlantic provinces engaged in regular annual deficit spending. In other words, the provincial governments were regularly spending more money each year than they were bringing in through general tax revenues and federal transfers.

This deficit spending, in turn, resulted in ballooning provincial debts. In 2003, Newfoundland and Labrador was in the most dire position, with a net debt totalling $9.5 billion. On a per capita basis, this totals $18,343 per person, by far the highest per capita debt level of any Canadian province. Nova Scotia fared not much better. In 2003, it had a net debt load of $11.8 billion, amounting to $12,697 per person – the third highest in the country. Prince Edward Island’s debt amounted to $1.1 billion, or $8,376 per person; New Brunswick had the lowest level debt level relative to the other Atlantic provinces, at $5.9 billion, or $7,882 per person.

Net Debt by Province (2003)

 

Total Net Debt ($ millions)

Net Debt Per Capita
($)

Provincial Average

 

8,836

 

 

 

Newfoundland and Labrador

9,511

18,343

Quebec

95,330

12,721

Nova Scotia

11,888

12,697

Saskatchewan

9,877

9,932

Manitoba

10,217

8,796

Prince Edward Island

1,150

8,376

Ontario

102,611

8,370

New Brunswick

5,921

7,882

British Columbia

20,119

4,843

Alberta

-10,575

-3,347

1. Net debt refers to total liabilities minus total assets.
2. Source: Statistics Canada, Provincial and Territorial Government Finance: Assets and Liabilities, 2004.

This type of debt load places extraordinary fiscal burdens on the Atlantic provinces, as they must pay large annual charges to debt maintenance. New Brunswick, for example, paid $929 million in debt charges in 2007, accounting for 14 percent of its total government expenditures – and the highest level of all Canadian provinces. In 2007, debt charges accounted for 10 percent or more of all expenditures for each of the Atlantic provinces. By contrast, Alberta’s debt charges amounted to only 1.8 percent of total expenditures in 2007.

Debt Charges by Province (2007)

 

Debt Charges ($ millions)

Percent of Total Expenditures

All Provinces

27,067

9.8

 

 

 

New Brunswick

929

14.0

Quebec

10,360

13.7

Nova Scotia

1,080

13.5

Manitoba

1,213

11.7

Newfoundland and Labrador

553

10.2

Prince Edward Island

127

10.0

Ontario

9,143

9.8

Saskatchewan

774

8.3

British Columbia

2,334

6.8

Alberta

554

1.8

1. Figures do not include local government expenditures.
2. Source: Statistics Canada, Provincial and Territorial General Government Revenue and Expenditures, by Province and Territory, 2007.

For many Atlantic provinces, debt servicing outranks spending in relation to other government services, such as social welfare programs (excluding health and education) and protection of residents and property (such as police and fire services). This represents an important ‘opportunity cost’ for these provinces, as investments in public programs and lower levels of taxation are sacrificed at the expense of shouldering large public debt loads. Furthermore, this debt burden can have a downward ‘pull’ on the economy, as investors often look to more fiscally stable regions or provinces.

Recent Trends in Federal Transfers

Beginning in the late 1990s, the Government of Canada began stabilizing its funding to the provinces, alleviating some of the financial pain faced by the Atlantic provinces (as well as other provinces). In 1997, the federal government announced it would put a floor on CHST transfer reductions, meaning that CHST transfer could not fall below a certain level. While all of the Canadian provinces supported the decision, they continued to demand that the federal government increase its overall commitment to social program funding, especially in the area of health care.

This led to several important funding agreements between the federal government, the provinces, and the territories. In 2003, governments reached an accord on Health Care Renewal, under which the federal government committed $35 billion to the provinces and territories for health care over the ensuing five years. The federal government later committed another $2 billion to this total, bringing the federal contribution to $37 billion. In 2004, the federal government, provinces, and territories agree to a new 10-year plan to sustain the health care system. The federal government committed to an extra $18 billion in funding over the next six years in the field of health care, with a guarantee of a six percent annual increase after that until 2015.

In addition to these increases in health care funding, the federal government struck several financial agreements with the Atlantic provinces. These include the 2000 and 2005 Atlantic Investment Partnership agreements (referenced earlier), which involve federal funding for economic development, and the Atlantic Accords, which involve offshore energy revenue and provincial entitlements under the federal Equalization Program (which apply only to Newfoundland and Labrador, Nova Scotia).

Improvement of Provincial Government Finances

By 2007, most of the Atlantic provinces had experienced an improvement in their financial positions. This was due to increases in federal funding, and other factors such as cuts in provincial spending and improving economic conditions.

In their 2007-08 budgets, almost all of the Atlantic provinces projected surpluses. Newfoundland and Labrador forecast a $261.2 million surplus, which included a $66 million reduction in net provincial debt and a $51 million reduction in debt servicing charges (Government of Newfoundland and Labrador, 2007). Nova Scotia also projected a $118.4 million surplus, to be directed into debt reduction (Government of Nova Scotia, Nova Scotia Estimates for the Fiscal Year 2007-08). Similarly, New Brunswick projected a $102.7 million surplus (Government of New Brunswick, 2007-08 Main Estimates). Prince Edward Island was the only Atlantic province not to project a surplus, forecasting a budget deficit of $42.3 million (Government of Prince Edward Island, Estimates 2007-08).

It’s important to note, however, that all of the Atlantic provinces continue to face large debt burdens, which place a heavy strain on government finances and spending. It will take an extended period of regular surpluses for the region to fully escape the fiscal crises of the late 20th century.

Conclusions on Atlantic Canada and Fiscal Federalism

In addition to the persistence of regional economic disparity (see previous section), deficit spending, high debt burdens, and a heavy reliance on federal transfers, have all had a profound impact on Atlantic Canada.

Because of their limited tax bases, provincial governments have had to rely heavily on federal cash transfers to support their social programs – especially in the areas of health care, education, and social assistance – more so than other Canadian provinces. Federal funding reductions of the 1970s, 80s and 90s, subsequently resulted in provincial cuts in social spending in the region, as well as a tendency towards deficit spending, as these provinces have attempted to manage their social program budgets.

Beginning in the early 21st century, the financial position of the Atlantic provinces has improved greatly. This is due to increases in federal funding for key provincial programs, such as health care, and to cuts in government spending and stronger economies. By 2007, most governments of the Atlantic provinces had reversed the trend of deficit spending, and were posting large annual surpluses. Nevertheless, the region still faces a large debt burden – one that is destined to strain provincial government finances for the foreseeable future.

Offshore Energy and Federal-Atlantic Canada Relations

Atlantic offshore energy sector and federal-provincial relations

At the beginning of a new millennium, offshore oil and gas has come to be a core part of the economies of Newfoundland and Labrador and Nova Scotia, spurring economic growth and increases in government revenue. Control over this wealth, however, has become a significant factor element in federal-provincial relations for these two provinces.

Federalism and Offshore Natural Resources

Under the Canadian Constitution, the provinces have ownership over all natural resources that lie within their provincial boundaries. With few exceptions, the provinces have complete jurisdiction to manage and tax the exploitation of such resources as they deem fit. The federal government, on the other hand, possesses ownership over the natural resources in the frontier lands, such as those found in Canada’s north (including the Territories), and off Canada’s coastline.

In most cases, this constitutional jurisdiction works to the benefit of the provinces. In British Columbia, for example, the main natural resources are timber, minerals, and hydro-electricity. As these resources are exploited within the geographical boundaries of the province, each falls under provincial jurisdiction. The same holds true with oil and gas production in Alberta. Oil reserves that exist within Alberta’s boundaries are owned and managed by the provincial government.

However, in the case of Nova Scotia and Newfoundland and Labrador, the oil reserves exist – not on land, but on the ocean bed off the coast. As such, these resources lie outside provincial boundaries and are legally owned by the federal government, not the provincial governments. Accordingly, only the federal government has the constitutional right to manage and tax the exploitation of the oil and gas found off the Atlantic coastline.

With the discovery of large offshore oil reserves in the region, the governments of Nova Scotia and Newfoundland and Labrador began to place pressure on the federal government to gain access to the potential oil revenues.

The issue of jurisdictional control over offshore oil is a difficult one. On the one hand, “have-not” provinces such as Nova Scotia and Newfoundland and Labrador would benefit greatly from control over, and access to, offshore oil revenues. On the other hand, the federal government has an important interest in oil and gas. As highly strategic commodities, the management of oil and gas has both economic and political implications for all Canadians – both in the domestic and international arenas.

Early Federal-Provincial Accords on Offshore Oil and Gas

Beginning in the mid-1980s, the federal government signed several accords with Nova Scotia and Newfoundland and Labrador regarding the management of offshore oil and gas reserves. These complex agreements touched on a number of issues relating to Canadian federalism, including the ownership of natural resources, the sharing of tax revenues, and federal transfer arrangements.

In mid-1980s, the federal Conservative government, helmed by Brian Mulroney, signed offshore oil and gas deals with Newfoundland and Labrador and Nova Scotia, the Canada-Newfoundland Atlantic Accord and the Canada-Nova Scotia Atlantic Accord respectively. Under these agreements, the federal government retained constitutional ownership of offshore natural resources. The provinces, however, were allowed to tax offshore oil production in the same way other provinces (such as Alberta) tax their “onshore” natural resources.

The accords also provided transitional fiscal protection to Newfoundland and Labrador and to Nova Scotia. It was recognized that once offshore oil projects began production, the provinces’ fiscal capacity would improve and, as a result, there would be sharp drops in their entitlements under the federal Equalization Program. To protect against drastic year-over-year equalization reductions, the federal government agreed to guarantee Newfoundland and Labrador and Nova Scotia a certain threshold of equalization payments over a long-term period.

Why would Newfoundland and Labrador and Nova Scotia need equalization protection if their revenues were increasing from the offshore energy industry? One needs to remember that the offshore oil and gas sectors in the provinces are still in their infancy, and that the two provinces will not realize revenues from the industry for many years to come. Furthermore, initial gains in government offshore energy revenues would be completely offset by reductions in equalization payments. The net result: no overall improvement in the financial situation of either province. Under the accords then, the federal government agreed to partially compensate the provinces for reductions in equalization payments until offshore oil revenues were sufficient enough to make each province financially self-sufficient.

Federal-Provincial Issues Regarding the Atlantic Accords

These agreements, however, did not end federal-provincial conflict. On the one hand, the two provinces have raised the issue of provincial tax losses on offshore oil and gas. Of particular concern is the fact that the large companies involved in offshore oil and gas projects are headquartered outside of the Atlantic region, mainly in Alberta or Ontario. As such, the Atlantic provinces cannot benefit from taxing any profits made by these companies; instead, the revenue goes to the federal government and other provinces. This has led to the suggestion that both Newfoundland and Labrador and Nova Scotia should be compensated by the federal government for their tax losses.

On the other side, the issue of whether the federal government should even continue with the Atlantic Accords has emerged. The question is not whether the federal government should allow the provinces to manage and tax offshore oil and gas resources (there has been no suggestion of the federal government exercising its constitutional powers over offshore resources). Instead, the issue has been whether the federal government should continue to compensate the provinces through the Equalization Program. The contention is that provincial finances have stabilized to the point where they no longer need protection from drops in equalization payments.

In response, Newfoundland and Labrador and Nova Scotia have argued that they still require equalization protection in order to continue their financial turnarounds. Moreover, the provinces have also contended that the federal government has realized significant savings under the Atlantic Accords. As provincial revenues from offshore oil and gas have increased, equalization entitlements have subsequently declined. While the federal government has provided some compensation to offset these declines, this compensation has only been partial, resulting in an overall decline of federal transfers to the provinces under the Equalization Program. This has even led some provincial supporters to call for the federal government to increase its compensation under the Atlantic Accords (full compensation as opposed to only partial).

For more information about provincial concerns with the 1985 Atlantic Accord:

Renewed Federal-Provincial Tensions Over Atlantic Offshore Energy

Collectively, these issues led to series of important events in the 2005-07 period. In 2005, the federal government, helmed by Liberal Prime Minister Paul Martin, signed new agreements with Newfoundland and Labrador and Nova Scotia. Under the new agreements, the federal government committed to completely compensate the two provinces for any reduction in equalization payments stemming from increased provincial revenues in the oil and gas sector. Moreover, the federal government agreed to provide the provinces with up-front payments for provincial debt reduction, totalling $2 billion for Newfoundland and Labrador, and $830 million for Nova Scotia. The new agreements were to apply until 2011-12, but only as long as the provinces continue to receive equalization payments.

For more information on the 2005 agreements:

Things boiled over again in 2007, however, when the new Conservative federal government, helmed by Prime Minister Stephen Harper, unilaterally altered the Equalization Program and the Atlantic Accords. Under the reforms, federal transfers under the Equalization Program were enriched; Newfoundland and Labrador and Nova Scotia, however, would no longer be completely protected from declines in these payments due to increasing provincial oil and gas tax revenues. This change led to a very public conflict between the two provinces and the federal government, and created strong dissent within the federal Conservative Party and its Atlantic caucus.

In an effort to overcome the issue, the Harper government offered two options to Newfoundland & Labrador and Nova Scotia. The provinces could either continue with the old equalization formula, and reap the benefits of the 2005 Atlantic Accords, or they could enter into a new enriched equalization formula that included a cap on the amount of equalization payments if offshore oil and gas revenues reached a certain level. In 2007, both provinces agreed to the new formula – although Newfoundland and Labrador did so only for one year, leaving the door open to change its position in the future.

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