A new study of the federal equalization system contains a glimmer of hope for New Brunswick as it debates the merits of shale gas development.

While the province would lose some equalization payments if there were a shale gas windfall, it won’t lose quite as much as some other provinces.


The Alward government has said it is committed to shale gas development in New Brunswick. (CBC)

That’s the conclusion of a case study comparing New Brunswick and Manitoba included in the new report by the Parliamentary Budget Officer Jean-Denis Fréchette.

New Brunswick “reaps a larger net benefit from natural resources development than a relatively rich” province like Manitoba, it says.

The two provinces are used to illustrate how the wealthier of the so-called “have not” provinces would see more of their natural resources revenue clawed back than the poorer ones.

“In a sense, Manitoba is penalized relative to New Brunswick because the composition of its revenues is tilted more towards natural resources,” the report says.

The change “could” have a significant effect on New Brunswick’s budget, Fréchette said in an interview. “It depends on how much natural resource revenue you have in a particular year.”

The phenomenon results from a new “fiscal capacity cap” added to the complex equalization formula by the Harper government in 2007.

It’s designed “to ensure that equalization-receiving provinces are not better off after equalization payments than non-receiving provinces,” Fréchette said. “It's a way to have more fairness in the equalization program.”

Adding to the mix is that, by law, provinces only see half of their natural resources revenues factored into the equalization formula.

New Brunswick’s fiscal capacity under the formula is below the average of all provinces receiving equalization, while Manitoba’s is above, Fréchette said in an interview.

'Even though we may drop down and lose some of those payments, there’s still an opportunity to make more than the payments we’re receiving.' - Economic Development Minister Bruce Fitch

So if New Brunswick sees a 10 per cent increase in natural resource revenue, and its equalization is reduced by half the value of the new revenue, the province still won’t surpass the average of equalization-receiving provinces, he said.

But an identical increase in Manitoba would be subject to the cap, because otherwise the increase would push that province even higher above the average than it is already, Fréchette said.

And that means equalization payments to Manitoba would be reduced both by half the new revenue as well as by whatever amount is needed to bring it back down to the average, he said.

“Manitoba  and it’s also the case for Nova Scotia and Quebec  will get what I call a second hit that New Brunswick, Ontario and P.E.I. do not get,” said Fréchette.

Economic Development Minister Bruce Fitch said the unusual circumstance is another argument in favour of shale gas development.

“Even though we may drop down and lose some of those payments, there’s still an opportunity to make more than the payments we’re receiving,” he said. “That’s the outlook that, to me, gives us that opportunity to move the economy forward.”

The parliamentary budget officer wouldn’t say whether he thinks the softer impact on New Brunswick is fair. “We don’t do that,” Fréchette said. “We just compare.”

“It’s an interesting debate,” he added. “Should a province get richer by its own means and its own resources rather than by receiving equalization payments? The debate is out there, I guess.”