Who Should Own Revenues from Natural Resources in Canada

The question of who should hold jurisdiction over the rights of revenues generated from the exploitation of natural resources is not an easy question to answer. Currently, the responsibility lies in the hands of the provinces (Usher, 1995). However, considering the extremely uneven distribution of natural resources amongst the provinces, across this vast nation, questions are raised about the appropriate treatment of revenues from natural resources, specifically dealing with equalization payments (Boadway, 1983). The current equalization program has shown potential for equalization across provinces. Many argue that it does more damage than good, causing destabilizing effects on total fiscal resources of receiving provinces (Smart, 2004). If Canada were to initiate a new system of equalization, in which revenues generated by natural resources deemed to be of national interest (such as energy resources) were under the jurisdiction of the Federal government, and resources off less impact on the nation's economic stability (such as forestry resources) were the responsibility of the provincial governments, Canada would find a more equal fiscal climate amongst the provinces, leading to a stronger symmetrical federal system.

Equalization is enshrined within the Canadian constitution under section 36 (2) of the constitution act of 1982, to be a responsibility of the federal government of Canada (Usher, 1995). However, the responsibility of exploring and exploiting natural resources to produce revenues falls under the jurisdiction of the provinces (Perry and Treff, 1999). Considering the differences in revenues generated from the exploitation of natural resources, Alberta generating the highest with $4.32 billion and Prince Edward Island generating the lowest with $4 million (Usher, 1995), would it not seem logical to have both of these responsibilities falling under the same jurisdiction? However, due to arguments posed against the provincial government's ability to control equalization payments, it seems only fitting that the federal government would assume the responsibility. Then considering the current system for calculating and making equalization payments, there are arguments against the efficiency and effectiveness, which would call for a reform (Smart, 2004). A symmetrical federation (which Canada strives towards) is characterized by equal constitutional recognition of regional governments (brooks, 2004). It could also be considered the equalization of power between regional governments. Power can be defined in terms of the capabilities of one government relative to the capabilities of another, such as military, technological, or economical capabilities (Kauppi and Viotti, 1999). Therefore equalization of provincial fiscal status is important in maintaining a symmetrical federation. With the Federal government controlling the most dynamic and important resources, as well as the most economically beneficial, insurance is provided that the equalization will be handled properly and effectively. Canada also must reform the process, moving away from the 5 province standard, to a national standard of equalization calculations.

The equalization program is based on an ideal that believes no citizen in Canada should be a "second class citizen", regardless of their geographic location. Despite whether they live in Charlottetown P.E.I, Toronto Ontario, or Victoria B.C. the ideal stipulates that all citizens will be entitled to roughly the same level in services from the government (Usher, 1995). Many believe it is a key factor to the unification of Canada, and is why the equalization program has been referred to as "The glue holding the Canadian Federation together" (Smart, 2004). The program ensures the transfer of revenues, and equality across provincial boarders from the "have" to the "have-not" provinces (Boadway, 1983). Equalization payments are unconditional Ð'- receiving provinces are free to spend the funds on public services according to their own priorities (Department of Finance Canada, 2005). These payments are made to ensure what is termed horizontal equity where equals (anyone in Canada) are treated equally. That is to say that two people, with the same income before government interaction, will be ensured the same income after government interaction, despite geographic location (Musgrave, 1959). The equalization program transferred almost ten billion dollars a year to receiving provinces between 1999 and 2004 (Department of Finance Canada, 2005). The equalization is based on the discrepancy between what an individual pays in taxes and receives in public goods or services, from province to province. It allows the recipient provinces to increase public services with no extensive tax burden for the citizens, while allowing enough to remain in the lucrative province to provide relatively the same services. This is the purpose of the equalization program.

The question of who is to control the equalization program is answered considering a basic conflict intrinsic to any society that is the conflict between the rich and the poor over the degree of redistribution. The rich provinces would generally wish to give less, to provide more for their citizens, while the poorer provinces would like to see a higher degree of redistribution to provide adequately for its citizens (Usher, 1995). If redistribution were controlled entirely by the provinces, all it would take would be a province in which the rich were politically dominant, having a double impulse to limit the redistribution efforts. With limited efforts, the residents of set province would have to pay less towards taxes while enjoying more public services (Usher, 1995). Therefore it is not difficult to see why the onus of redistribution falls at the plate of the federal government, who supposedly holds no bias, or inclination towards any province.

Equalization payments are calculated according to a formula set out in federal legislation and regulations. Provinces with the ability to raise revenues, or fiscal capacity, below the national threshold receive payments from the government of Canada to bring their capacity up to that standard (Department of Finance Canada, 2005). However, this standard is not on a national basis, which would seem more logical, rather it is based on the average fiscal capacity of the five "middle income" provinces; Ontario, Quebec, Manitoba Saskatchewan and British Columbia. The payments bring any provinces below this standard up to 95% of the level of this average (Department of Finance Canada, 2005). Though the equalization program shows the potential for complete equalization across the provinces, many call for reform of the program, arguing that it causes dependency of the recipient province's economy on the more affluent economies of the "have" provinces (Smart, 2004). The