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Turbulence ahead for the money plane?

With each Yukoner's share of territorial formula financing and other delightful federal programs working out to roughly $22,500 this year, it's remarkable how few people understand how the "formula" actually works.

With each Yukoner’s share of territorial formula financing and other delightful federal programs working out to roughly $22,500 this year, it’s remarkable how few people understand how the “formula” actually works.

There’s nothing surprising about this, because the formula is so complex that there are probably more people in the Yukon who understand particle physics or the Arab-Israeli conflict.

And, besides, no one needed to know how it worked.

The money kept coming like clockwork, with a spot on the Whitehorse airport tarmac always shovelled and ready for the arrival of the “money plane,” a federal Challenger executive jet carrying a minister you’d never heard of with a giant photo-op cheque from a program you’d never heard of either.

But what’s going to happen to our formula now that the global economic crisis has hit? Is our $1-billion budget safe?

To answer these questions, you have to cut through the acronyms and jargon and identify the “drivers” of the formula.

These are the statistics they plug into the black box in Ottawa. And since there are many drivers in the formula, we will try to find a couple of the most important.

The overall objective of the formula is to transfer enough money to the Yukon government so it can deliver services to Yukoners that are comparable to those received by Canadians still stuck living in Southern Canada. The formula essentially produces a cheque equal to the amount of money needed for our services, minus an estimate of what we can raise in taxes locally.

But, as Mies van der Rohe said, God is in the details. And understanding a few of these details will help us answer the question about whether the global economic crisis will do to the Yukon what it has already done to Lehman Brothers.

Detail No. 1: The Escalator. The formula has an automatic

double escalator that boosts our funding thanks to two statistics. The first is our population growth relative to Canada’s, which can work for or against us. But the second is based on the expenditure of provincial governments. This is supposed to factor in how much it costs provincial governments to provide “typical levels” of service, but we get an unexpected benefit now. As every provincial government boosts spending to stimulate its economy, it inadvertently stimulates ours too. Thanks (again), Ontario!

Detail No. 2: the Rolling Average. When it estimates how much money we need, the formula uses a three-year average. This is good, since it means that, long after the good year of 2007 is forgotten in Fort McMurray, it will still be boosting our numbers.

Detail No. 3: the Anti-Perversity Factor. In the old days, the formula was notorious because if a territory’s tax revenues grew by $1 thanks to economic development, the cheque from Ottawa would fall by more than $1. This was called the Perversity Factor and was said to discourage economic development. This has now been changed, so that if we continue to enjoy growth (thanks to the formula of course), then each dollar of new tax revenue will cost us only 70 cents in Ottawa money.

So the upshot of this is extraordinarily good news for the Yukon. We have a three-year rolling average buffering us from abrupt change and, if there is any change, it is likely to be bigger cheques from Ottawa since the provincial governments are about to go on a spending binge of heroic proportions.

However, no economics column would be complete without wallowing in some downside risk.

The first risk is that only 80 per cent of the money plane’s cargo is from the formula itself. The rest of the money is from the Canada Social Transfer, Canada Health Transfer and an alphabet soup of other programs.

If the slowdown lasts longer than Prime Minister Harper forecasts, and these programs get cut in an Ottawa austerity drive in 2010 or 2011, that will hurt.

The second is a more fundamental restructuring of the formula by a cash-strapped federal government, if the recession drags on.

The feds made major unilateral changes to programs in the 1990s and could do it again.

The formula for the three territories now costs the federal government $2.5 billion a year. This is increasingly noticeable in a list of $229 billion in federal spending programs, representing 1.1 per cent of federal program cash spent on 0.3 per cent of the population. It would be lovely if the federal government continued to fund the formula like this, but we might be unwise to count upon it.

So the good news is that the money plane has clear skies on its way to Whitehorse for the next year or two. But after that we—like everyone else on the planet—have to hope that the global economic crisis doesn’t get much worse.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels. His next book Game

On Yukon! appears in May.