US embassy cable - 05OTTAWA336

UNCLAS SECTION 01 OF 02 OTTAWA 000336 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, CA, Nova Scotia, Newfoundland and Labrador, Danny Williams 
SUBJECT: MINORITY GOVERNMENT HAS ITS PRICE -- PREMIERS COME 
OUT ON TOP IN TRANSFER PAYMENT DEAL 
 
REF: A) HALIFAX B) 04 OTTAWA 3215 C) OTTAWA 105 
 
1. (SBU) SUMMARY:  The GOC reached an agreement in principle 
on January 28 with the provinces of Nova Scotia and 
Newfoundland & Labrador in the ongoing dispute over offshore 
oil and gas revenue and &equalization8 payments.  The 
provinces were the clear winners, with an eight-year 
renewable deal to keep 100% of their share of offshore 
revenue, with no &clawback8 on equalization payments, plus 
a cash bonus.  The deal effectively amounts to 
double-dipping, since equalization payments are intended in 
part to compensate resource-starved provinces.  But given the 
reality of minority government, the PM had little choice but 
to resolve this major distraction in order to stabilize his 
position in Atlantic Canada.  Following the concept of 
&asymmetric federalism,8 which was advanced in the 
health-care deal in September (reftel B) this concession 
increasingly politicizes otherwise technical fiscal issues 
and opens the door for other provinces to push their agendas, 
some of which are already citing the Atlantic agreement as 
precedent.  END SUMMARY 
 
PREMIERS COME OUT ON TOP 
------------------------ 
 
2. (SBU) The Government of Canada has reached an agreement in 
principle with the Provinces of Nova Scotia and Newfoundland 
& Labrador, in an effort to end the ongoing fight over 
offshore oil revenue and equalization transfer payments.  The 
deals were made after a day of meetings in Ottawa on January 
28.  Premier Danny Williams of Newfoundland & Labrador and 
Premier John Hamm of Nova Scotia met with Prime Minister Paul 
Martin, Finance Minister Ralph Goodale and Minister of 
Natural Resources John Efford, Newfoundland,s only Cabinet 
Minister. 
 
3. (SBU) It appears that PM Martin made significant 
concessions in these negotiations.  For at least eight years, 
the province,s entitlements to equalization payments from 
the GOC will not be reduced by their receipts from offshore 
oil and gas royalties.  The timeline imposed by the federal 
government is open for extension, the Premiers were given 
up-front payments, and Ottawa apparently dropped its demand 
that the provinces balance their budgets as a precondition to 
any deal.  Other provincial leaders -- Saskatchewan,s 
Premier Lorne Calvert, the Northwest Territories, Joe Handy, 
and Ontario,s Finance Minister Greg Sobara -- quickly cited 
the Atlantic agreements as a precedent in arguing that they 
should get a special deal. 
 
4.  (SBU) To counter the perception that the provinces are 
double-dipping, the federal government demanded an eight-year 
limit be imposed on the agreement, so the provinces still 
have an incentive to permanently improve their fiscal 
outlook.  In previous attempts to negotiate a deal, a 
timeline was strongly opposed by Premier Williams, who argued 
that if at the end of eight years Newfoundland had not yet 
acquired  have, status, the rug would be effectively pulled 
out from under its feet and any progress lost.  In this 
agreement, the deal will be reviewed for possible renewal at 
the end of 2012. 
 
5. (SBU) These are Canada's most indebted provinces and even 
with the equalization payments and this offshore revenue deal 
it is not certain that they will achieve fiscal strength. 
Ottawa is expecting a large surplus this year, with smaller 
amounts in the next few years so the lump-sum arrangement 
makes sense in that regard.  The offshore revenue amounts are 
in addition to the October equalization deal (ref) that 
raised federal transfers for FY05 and FY06 by C$274 million 
(US$220 million) for Newfoundland and Labrador and C$333 
million (US$266 million) for Nova Scotia. 
 
6. (SBU) Under the agreement, Newfoundland and Labrador will 
receive about C$2.6 billion (about US$2 billion) from FY2005 
-2012, with C$2 billion (US$1.6 billion) up front. 
Newfoundland and Labrador has a heavy debt burden, and 
unfunded pension liabilities come to over 20% of provincial 
GDP (much higher than other provinces).  Debt service is 
approximately C$2,000 per capita, according to a private 
sector analyst.  Use of the offshore revenue prepayment will 
probably be clarified in the upcoming budget.  One option the 
Premier has proposed is creation of a trust fund that could 
be drawn down when needed. 
 
7. (SBU) Nova Scotia gets C$830 million (US$664 million) up 
front of an estimated C$1.1 billion (US$880 million) over the 
next 8 years.  Premier Hamm has committed the total amount to 
debt retirement, which should free up C$45-50 million (up to 
US$40 million) a year in interest payments.  The Prime 
Minister told national media that his primary motivation in 
the negotiations was to find a way to assist two provinces 
with unique situations and significant budgetary problems. 
These substantial, one-time payments help the PM assert that 
he is working for immediate solutions. 
 
A SWEET DEAL GETS SWEETER 
------------------------- 
 
8. (SBU)  Media reports also indicate the federal government 
dropped its demand that the provinces balance their budgets 
as a requirement for an agreement.  An unnamed federal 
official attending the recent Liberal caucus retreat, said 
the federal government would not include this demand in its 
negotiating position.  A balanced budget would not have been 
a major challenge for Nova Scotia, but Premier Williams 
indicated it would have placed a considerable burden on 
Newfoundland and Labrador.  Balanced budget demands were 
rejected by the Premiers in September,s Health Summit and 
were a key factor in William,s walkout from negotiations in 
December. 
 
9. (SBU) Commentators in the national media speculate that 
the GOC,s status in Parliament was an important factor in 
this negotiation, beginning with Martin,s promise to Premier 
Williams in June which he made to win electoral support in 
Newfoundland and Labrador; his willingness to deal is tied to 
maintaining the support of the province,s seven MPs.  The 
deal will also, of course, be helpful in a future election, 
when Prime Minister Martin will be able to say that he not 
only negotiated a deal which was praised by the provincial 
Premiers, but cut the checks up front. 
 
10. (SBU) Comment: It appears at first blush that Premiers 
Williams and Hamm were the victors in this contest, getting a 
pretty good fiscal deal with few outright concessions.  But 
by eliminating this distraction before the start of 
Parliament and regaining some support in Atlantic Canada, the 
PM did not come away empty handed, and given his minority 
status, could be said to have simply done what he had to do 
in the short term.  It remains to be seen what impact this 
will have on the federal-provincial equation in the future. 
It seems clear that by making another &asymmetrical 
federalism8 arrangement Martin has further complicated the 
equalization transfer payment system, and opened the door for 
claims by other provinces seeking special deals.  Whether 
this can be contained to a technical fiscal question, or 
whether it weakens the structure of the entire federal 
system, remains to be seen. 
 
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CELLUCCI