Equalization allows Nova Scotia and New Brunswick to pass up jobs, income, and tax revenues

Canada’s federal equalization program is motivated by good intentions. However, the program has unintended consequences, and creates perverse incentives that have allowed at least two “have-not” provinces to shun sensible economic opportunities—and the subsequent jobs, incomes and government tax revenues.

Two examples: the ongoing ban on hydraulic fracturing or “fracking” in Nova Scotia and the just-imposed fracking moratorium in New Brunswick.

Natural resource development is a proven aid to prosperity—something that lower oil prices (unless they stay low forever) will slow but not hinder. It is impossible to gauge exactly the economic benefits of natural gas development through fracking in Nova Scotia and New Brunswick. However, research from a wide range of sources suggests that fracking may bring considerable economic gains to the region.

For instance, Nova Scotia’s Department of Energy notes that “Nova Scotia has ample onshore exploration and development opportunities.” But of course, that presumes companies are allowed to explore and develop those onshore resources.  More concretely, Nova Scotia’s Independent Panel on Hydraulic Fracturing provided a “lower-medium case” scenario, which estimated that shale gas development could result in hundreds of millions of dollars in additional revenue each year, for decades.

In addition to increased revenue for governments, fracking would likely create thousands of high-paying jobs in both Nova Scotia and New Brunswick.

Look at Pennsylvania, with its shale gas boom in the Marcellus region and the 28,000 mostly high-paying jobs (up from 13,000 jobs in 2010) attributed to the shale gas sector. And the average salary? A cool $92,914, according to the Pennsylvania Department of Labor and Industry.

Meanwhile, back in the Maritimes, the governments of Nova Scotia and New Brunswick take a different tack due in part to the equalization program, which provides a budgetary “cushion” for poor policy decisions that thwart potential extra economic development.

The result of that cushion, that lollygagging approach to development, is less investment.

On a per worker basis, New Brunswick ($21,451) and Nova Scotia ($20,874) each attract less than half the investment of Newfoundland and Labrador ($44,189). Newfoundland’s employment growth has been double that of Nova Scotia and triple that of New Brunswick over the past decade. And average household incomes in Nova Scotia ($37,456) and New Brunswick ($36,373) fall well short of those in Newfoundland and Labrador ($41,687).

By placing bans and moratoria on fracking, governments in Nova Scotia and New Brunswick have essentially stopped pursuing socially and environmentally responsible onshore natural resource development, even though jobs and extra tax revenues are sorely needed in the region. So citizens of these two “have not” provinces can expect more of the same: unemployment rates chronically above the national average, low levels of private sector investment, and household income levels well below the national average.

Evidence from across North America proves that natural resource development is an important driver of economic growth. However, Canada’s equalization program, by its nature, contains a built-in effect which allows governments to take a pass on sensible economic opportunities time and again.