Proceedings of the Standing Senate Committee on
National Finance
Issue 10 - Evidence
OTTAWA, Wednesday, June 12, 1996
The Standing Senate Committe on National Finance to which was referred Bill C-31, to implement certain provisions of the budget tabled in Parliament on March 6, 1996, met this day at 5:15 p.m. to give consideration to the bill.
Senator David Tkachuk (Chairman) in the Chair.
[English]
The Chairman: This is our second meeting regarding Bill C-31 which was tabled on March 6, 1996. This is also the second meeting to be attended by the parliamentary secretary to the Minister of Finance. He has agreed to divide his time, as we discussed last week. The first meeting covered all other parts of that massive bill; today we discuss the CHST and the GST parts.
Mr. Barry Campbell, MP, Parliamentary Secretary to the Minister of Finance: Mr. Chairman, I welcome the opportunity to appear before your committee again with respect to Bill C-31.
I am accompanied by officials from the department who are familiar with our topics today. We propose to deal seriatim with the two issues for discussion today. We will focus first on the sections of Bill C-31 which deal with the Canada Health and Social Transfer. Later, we will review the adjustment assistance which the government proposes for the Atlantic provinces which are harmonizing their sales taxes with the federal GST. Bill C-31 itself does not address harmonization; that will be the subject of separate legislation.
The Federal Provincial Fiscal Arrangements Act provides secure stable funding for the CHST until the years 2002 and 2003. Before discussing what has come to be known as the CHST, I want to set this issue in the context of the challenge we face in modernizing Canada's social programs.
Most social programs in Canada were designed in the 1960s and 1970s when economic growth was strong and government revenues were on the rise. Social programs were then manageable and affordable. This is regrettably no longer the case. Sustainability of many social programs has been threatened by slow economic growth and the burden of interest payments on our outstanding aggregate debt.
Because of this, Canada's social programs and system of transfer payments needed to be redesigned and updated to make them more effective and more affordable.
[Translation]
The honourable senators are aware of the key role that the federal government plays in supporting Medicare and other social programs.
Federal transfer payments ensure that the provinces and territories have the means to deliver essential public services such as health care, post-secondary education and social services, while allowing provinces the flexibility to provide programs reflecting their unique circumstances and needs.
For many years now, funding for health and post-secondary education has been provided under a block fund through Established Programs Financing (EPF), while cost-shared funding for social assistance and social services has been provided under the Canada Assistance Plan (CAP).
The third major transfer - Equalization - allows all provinces, regardless of their economic base, to provide people with reasonably comparable services at reasonably comparable tax levels.
Currently, seven provinces receive Equalization; Ontario, Alberta and British Columbia do not because their capacity to raise revenues is relatively high.
Finally, through Territorial Formula Financing (TFF), direct federal cash transfers are provided to the territorial governments - which are not eligible to receive Equalization - to assist them in providing public services.
[English]
With respect to the CHST, after the brief review of the pre-existing various programs, on April 1, 1996, as announced in the 1995 budget, the CHST replaced federal transfers for social assistance under CAP and for health and post-secondary education under EPF. The major transfer programs are now the CHST, equalization and TFF or Territorial Formula Financing.
Unlike the former system, which was based on cost sharing arrangements, CHST is a block fund. This means that the amounts transferred will no longer be determined partly by provincial spending decisions, as was the case under the cost sharing approach. As with EPF, the new transfer is provided through a combination of cash payments and tax points. As a single, consolidated block transfer, the CHST is a more flexible and mature approach to federal-provincial fiscal relations. Provinces have that extra flexibility to design and administer their own programs while safeguarding social programs for Canadians.
The 1995 budget set two-year funding levels for the CHST at $26.9 billion for 1996-97 and $25.1 billion for 1997-98. It also set out the way in which these CHST funds would be allocated among provinces in 1996-97. Each province is to receive the same share of the CHST as it did last year under EPF and CAP. Yet these funding levels have involved a reduction in transfers. In this time of fiscal restraint, transfers could not be exempt, given their size. Cash transfers alone make up over 20 per cent of total federal program spending in fiscal 1996-97.
All of this brings me to today's discussion. Following consultations with the provinces, the 1996 budget extends the CHST beyond 1997-98. This measure completes the government's commitment to restoring stability and predictability to provincial transfer payments. Long-term funding arrangements are already in place for equalization.
In designing the new CHST arrangement, the government was guided by four principles: first, to safeguard Medicare and social programs; second, to resume growth in transfers and stabilize the cash component; third, to restore stability and predictability to provincial governments; and, fourth, to provide provinces with more comparable funding support. Bill C-31 delivers on these principles, and I want to explain how.
Under Bill C-31, funding to provinces through the CHST will be stabilized and then grow over the course of a new five-year funding arrangement covering the period 1998-99 to 2002-03. The CHST funding levels announced in the 1995 budget for 1996-97 and 1997-98 will be maintained. Funding in 1997-98 will total $25.1 billion, of which almost half is tax points and half cash. Total entitlements for 1998-99 and 1999-2000 will be pegged at $25.1 billion annually, equal to next year's level. A cash floor of $11 billion will ensure that the cash component of the CHST will not fall below that amount. A new formula will determine the allocation of CHST entitlements across provinces for 1997-98 through to 2002-03.
I believe that this bill cements the federal commitment to assisting provinces in health care, education and social assistance for those in real need. Even as we continue to cut back federal program spending, total CHST transfers to the provinces will not fall in that period. In fact, in the three fiscal years beginning in April 2000, it is expected that CHST levels will rise. By 2002-03, total CHST entitlements should be $12.3 billion higher than the level set for next fiscal year, 1997-98.
It is important to note that this funding arrangement will mark the first time a budget has taken action to increase growth in transfers to the provinces for social programs since the era of restraint began in the mid-1980s. By this I mean the first additional funding for Medicare, higher education and social assistance - something of which we are proud.
To ensure that cash remains a large component of the CHST, Bill C-31 provides for an $11-billion cash floor, as I mentioned a few moments ago. This means an ironclad guarantee that cash will never fall below $11 billion throughout the five-year arrangement.
The federal cash contribution to health care and other social programs will remain a very large part of the CHST. In fact, as I also said, we expect the cash transfer to grow throughout the period covered by the bill. However, if GDP growth were less than forecast, resulting in lower entitlements in the later years of the fiscal arrangements and/or the value of tax points were higher, cash could be lower than forecast. If this were to happen, the floor provisions will still ensure a minimum of $11 billion in cash transfers, regardless of how the economic outlook unfolds. I should also mention that the cash floor applies to the country as a whole, not to individual provinces.
With respect to allocation, Bill C-31 provides a new formula for allocating the CHST among provinces, which will be phased in during the five-year period. The current system of transfers has evolved in a way that has created growing disparities in per capita entitlements. These disparities were created, for the most part, by the so-called cap on CAP funding to certain provinces, which was imposed by the previous government. Under the new allocation formula, disparities in per capita funding will be cut in half, putting CHST transfers to all provinces on a more comparable basis. The new allocation will also reflect mobility and provincial population shifts, and provinces with growing populations will receive additional federal support.
Change will not happen overnight. The gradual five-year phase-in gives provinces time to adjust and the capacity for planning which they have requested.
We recognize that this is a compromise approach. Similarly, we realize that no allocation formula will please everyone. However, we believe that this is a reasonable compromise. While there was no consensus among provinces on the allocation issue in our consultations with them, all governments did agree on the need for a decision. No one wanted more delay, more uncertainty and continuing growth and disparities. Let me emphasize that the gradual phase-in, combined with the five year duration of the CHST funding arrangement, gives provinces both time to adjust and maximum certainty in their planning.
What happens after five years? No decision has yet been taken with regard to CHST allocation beyond the five-year fiscal arrangement. The new allocation rule narrows but does not eliminate differences in per capita CHST entitlements across the country. Provinces that were receiving more than the average share of CAP will continue to receive a more than average share of CHST transfers. The federal government remains willing to examine with provinces further refinements to the allocation that may be appropriate beyond the five-year period we have been discussing.
Let me also remind members of this committee that in addition to CHST transfers in 1996-97, the federal government will provide nearly $9 billion in equalization transfers to the less wealthy provinces to enable them to provide reasonably comparable levels of service at reasonably comparable levels of taxation. These payments are totally unconditional. Provinces can and do use them in support of their highest expenditure priorities, including health and other social services.
The equalization program remains untouched and payments will continue to grow according to the formula, ensuring that all provinces can provide comparable levels of service at comparable rates of taxation.
[Translation]
Concern has been raised about how the changes in transfers through the CHST would impact the operation of the Canada Health Act, and the prohibition against applying residency requirements for social assistance.
Let me assure you that the government remains committed to the principles of the Canada Health Act. And we will continue to enforce the rule that social assistance be provided without minimum residency, by withholding funds if necessary.
We are convinced that this is what the majority of Canadians want - that they favour a real and reliable national commitment. However, it is also clear there is always a need to examine how to let the application of aspects of policy evolve with the times.
So the government will work with the provinces and Canadians to develop by mutual consent the values, principles and objectives that should underlie the CHST. The Minister of Health has emphasized his commitment to a constructive partnership with the provinces in securing and enhancing medicare.
[English]
On a related issue, committee members may be interested in the 1996 budget announcement that new funding will be provided for research to make the health care system work better. To make a practical contribution to help identify what works in our health care system, Canada is establishing a Health Services Research Fund. The fund's immediate objective is to bring together provinces, joint institutions and the private sector interested in jointly setting priorities and pooling efforts to build a shared research fund. The federal government will provide $65 million over five years for research activities and also to establish an endowment so that research can continue beyond five years.
The 1996 budget responded to the concerns of Canadians about the future of Canada's health care system, post-secondary education and the security of funding for the social safety net. The evidence is in Bill C-31. Under the five-year CHST arrangement, provinces will receive large and growing federal support for Medicare and other social programs. They will continue to make their own decisions on how to allocate federal funding to these priorities, and all Canadians will be the beneficiaries of this national partnership.
The CHST is intended to be an ongoing feature of federal-provincial fiscal arrangements in Canada. As with other pieces of federal legislation, including the Bank Act and the legislation governing equalization, the legislation governing the CHST covers a fixed period of time. At the end of that period, both the level and growth of entitlements and the allocation of entitlements across provinces will be reviewed.
This government has set out its fiscal targets and we are meeting them. Transfers to provinces were on a track that simply could not be sustained. We have put them on a more sustainable track. The new five-year funding arrangement for the CHST provides certainty, stability and predictability - all protected by legislation.
The second measure that you have asked me to discuss with you today flows from an announcement made last month by the Minister of Finance. As you know, the federal government has concluded an agreement with Newfoundland, Nova Scotia and New Brunswick to work towards harmonizing the federal and provincial sales tax regimes by April 1, 1997. Bill C-31 provides for $960 million to be paid out over four years to these provinces as adjustment assistance to offset about half of the initial provincial revenue losses under the new integrated value-added tax regime to which they have agreed.
Mr. Chairman, this payment is in keeping with the firmly established practice of providing assistance when federal initiatives result in major structural change for provinces. You will recall that the federal government made payments to provinces to address revenue losses incurred under the major tax reform in 1972. We also provided adjustment assistance last year to facilitate the adjustment flowing from elimination of subsidies under the Western Grain Transportation Act to the western provinces, as we did with the Atlantic freight rate subsidies to Quebec and the Atlantic provinces.
The adjustment provided for in Bill C-31 means that the federal government will be sharing the cost of harmonization about 50-50 with those provinces experiencing revenue losses in excess of 5 per cent of their current retail sales tax revenue at a 7 per cent or 8 per cent harmonized provincial rate.
If anyone is wondering about the other provinces that have not harmonized, let me say this. Should Prince Edward Island, Manitoba and Saskatchewan enter into harmonization of the 7 per cent or 8 per cent provincial rate, they would also be eligible for adjustment assistance. British Columbia, Alberta and Ontario would not be included, however, as they would either be revenue neutral or they would make money under harmonization.
Quebec, as you know, is already substantially harmonized. Because Quebec would not incur a revenue loss of greater than 5 per cent of its pre-harmonization revenues at a 7 per cent or 8 per cent provincial rate, that province would not be eligible for adjustment assistance. In fact, Quebec sales tax revenues have grown substantially since it signed the harmonization memorandum of understanding in 1990. This is a result of the manner by which the province chose to phase in its harmonized value-added tax over a number of years.
The formula provided for in Bill C-31 is an equitable one. The federal and provincial governments will be sharing about equally in the adjustment costs over four years. By the time the assistance ends after year four, the provinces also have had adequate time to adjust while avoiding serious fiscal and economic disruptions as a result of the transition.
The Minister of Finance has stated that this government has consistently acted on the principle that the people of Canada and governments need to be able to plan and adjust to structural change. Where required, as you know, we have been prepared to provide help to those who face adjustment costs up front. Bill C-31 is consistent with this principle.
Adjustment assistance is not a reduction in federal tax rates in Atlantic provinces any more than the compensation paid under elimination of the Crow rate subsidy was a lowering of effective federal tax rates in Western Canada.
Mr. Chairman, I ask you to keep in mind that this is a one-time expenditure payment, not a federal tax rate cut. Adjustment assistance is a federal expenditure measure fully consistent with the long standing federal policy of helping individuals and regions adjust to major structural change no matter where in the country the need arises. Given the benefits that will flow from harmonization, we believe that the total cost to the federal government is a responsible and reasonable investment.
Despite all the rhetoric which has inevitably accompanied this and any other initiative involving the GST, harmonization is sound tax policy. In fact, sales tax harmonization is probably the single biggest tax policy initiative which governments in Canada can realistically take to improve the competitiveness of our economy. The need to maintain and enhance competitiveness is a basic economic fact of life. It is this objective, above all others, which the federal government is pursuing through harmonization as well as through various other initiatives.
I want to thank you again for the opportunity to appear before you today. I hope I have addressed your concerns with respect to the Canada Health and Social Transfer and the adjustment assistance provided to provinces harmonizing their sales taxes with the goods and services tax. I reiterate that Bill C-31, while it deals with the adjustment assistance, does not deal per se with harmonization. That will be the subject of separate legislative action which, undoubtedly, we will be discussing in the months to come.
Mr. Chairman, I look forward to questions from committee members. With which of the two areas should we begin?
The Chairman: That will depend on the interest of senators.
Colleagues, please feel free to go where you wish. That is the way we will conduct our questioning, rather than step by step.
Mr. Campbell: That will necessitate a shuffling of chairs at this end as officials responsible for one or other of those areas will come to the table or leave the table as required, if that is acceptable.
Mr. Peter Gusen will deal with the CHST, and Mr. Samy Watson will deal with adjustment assistance under harmonization. They may call on other officials as required.
Senator Stratton: I want to harken back to the $5-billion fund for UIC. That fund was in a negative position. You could not tell me how much that fund should grow or when you would cap it. When I hear about the CHST fund growing and the long range projections for it, I am curious as to why you could not do the same with the UIC.
I know you have the model somewhere. You must have a cap. What makes your forecasting on the CHST so radically different from the UIC bill? I am sorry if I harken back, but something does not ring a bell here.
Mr. Campbell: Senator Stratton, after three appearances before this committee and three questions from you on the surplus in UI, I would indeed be disappointed if the subject did not arise again.
You are entirely consistent, and so am I, because today, on behalf of the minister, I signed a response to some questions that you asked on the same topic. I have been consistent in my response, as I will be now.
As you know, we have made some assumptions for planning purposes. They are reflected in the last budget. I indicated to you that the next critical time for visiting this issue is in the fall when we set the upcoming premium rate. You will get more information and some indication at that time as to where we are going with this fund.
You and I have been around this several times, and I have explained to committee members that we have moved to a surplus after many years of deficit. We want to ensure that there is a sufficient surplus so that we are not required to raise premium rates should we find ourselves in another recession.
I cannot give you the precise level. These issues are still in discussion and under consideration. I suggest that in the fall there will be more discussion of this matter.
Senator Stratton: The perception I have is that with the surplus you could have a nice little tax break. You will have a nice cushion there by 1997. Having achieved that cushion, you will be able to reduce the surcharge or employee tax or employer tax on people on UIC. Would that not be logical?
Mr. Campbell: I thought, from your questions on previous occasions and the one today, that you were interested in seeing a rate reduction.
Senator Stratton: I am interested in seeing a rate reduction. I will not flog this to death. When I see your forecasting on CHST, I am bothered that you would not have a number in mind. I am amazed you would not have a number in mind. I bet that when you come here in the spring of next year, you will have that number, and there will be a reduction.
Mr. Campbell: I look forward to that discussion, senator.
Senator Stratton: So do I.
There is a cash floor of $11 billion. If Manitoba, with 4 per cent of the population, gets its proportionate share of the $11 billion, that would be about $440 million. What does Manitoba achieve now in the way of cash from the federal government? Have you a number?
The Chairman: Under the CHST?
Senator Stratton: Yes.
Mr. Peter Gusen, Senior Chief, Federal-Provincial Relations and Social Policy Branch, Department of Finance: The programs that preceded the CHST, that is, the Established Programs Financing and the Canada Assistance Plan, were running up until April 1, 1996. The last fiscal year for programs that involve cash components and tax components is 1995-96. That is not CHST but the predecessor programs. Under those programs, Manitoba received a total transfer of $1.1 billion, of which $730 million was cash.
For the first year of CHST, which is 1996-97, we project that the total amount will be, to be precise, $1.028 billion, and the cash portion of that will be $599 million.
You mentioned the $11 billion national floor and you calculated Manitoba's share based on population. Actually, Manitoba does a little better than your calculations. Of course, things could turn out differently than we have projected, but the projections we have are that in the year 2000-01 cash will total $439 million.
Senator Stratton: I said 440, so I was close.
Mr. Gusen: That is very close. The briefing material that was distributed includes tables with our projections for the cash.
Senator Stratton: I have those. What did Manitoba receive in 1993-94 in the way of cash? Do you go that far back?
Mr. Gusen: Mr. Gregg has the historic numbers on that. We can provide them.
Senator Haidasz: I am interested in your announcement, Mr. Campbell, of new funding for what you call the establishment of a Health Services Research Fund. Could you give us some precise explanation about this Health Services Research Fund? Is that, for example, the delivery? Will it help the delivery of the health care system?
Mr. Campbell: It is an initiative that has been fairly well received, as I think it was somewhat unexpected. It is a $65 million payment over five years for research activities and to establish an endowment which, I hope, will see those activities continue over a longer period.
The fund was established in response to concerns that Canadians raised about the future of the health care system. Through that initiative, in cooperation with the provinces, we are trying to study what works and what does not work in making our system more effective, in both costs and results. It is an important look at our experience in operating a health care system across this country to ensure that we are taking note of what we need to take note of and that we are sharing with each other what works and what does not work in building an effective system, which, as you would well know, should be measured not just by the dollars spent but by outcomes and efficiencies as well.
Senator Haidasz: Could you give us a list of the components of the services that are supposed to be financed by this research fund? Where will the money from this research fund go?
Mr. Campbell: I do not have that information with me today, senator, but I would be very pleased to provide it to you tomorrow.
Senator Haidasz: Is this fund of $65 million something new in addition to what Mr. Manley in the Department of Industry announced a few of months ago about research funds in the medical field?
Mr. Campbell: I am not sure.
Senator Haidasz: That announcement included the Medical Research Council.
Mr. Campbell: This is a separate initiative, as I understand it, from the Medical Research Council. I am not familiar with Mr. Manley's specific announcement. I could have that information for you tomorrow as well.
Senator Haidasz: Will this Health Services Research Fund cover the costs of the health care system task force that is chaired by the Prime Minister?
Mr. Campbell: I do not believe so, senator. That initiative is now well under way. I would not think that this is the same initiative. It is possible that it is folded into it, but, again I am sorry, I do not have a precise answer. I could answer that question for you afterwards.
Senator Haidasz: Could you tell us what private sector components have been contacted? In other words, will you rely on donations from banks or from pharmaceutical companies? What part of the private sector of Canada has been approached to help in jointly setting up priorities and pooling efforts?
Mr. Campbell: We are not looking to the private sector for funding this initiative. As I said, we want to bring together people who have an interest in setting priorities and pooling efforts. I would only be guessing at this point as to which players in the private sector would be involved, but it is obvious to me that we would be talking about health care administrators, health care institutions and provincial health officials. Beyond that I would rather not speculate on the participants from the private sector, but I would be pleased to provide you with that information as well.
Senator Haidasz: Mr. Chairman, I will await what has been promised to us by Mr. Campbell.
Senator Lavoie-Roux: You said that the Health Services Research Fund was well received. That does not surprise me. Whenever there is more money for research, it is always well received.
What are the differences in the objectives of the Health Services Research Fund and the task force? It seems to me that they are both exploring the same things; what is not working properly in the system and how things can be modified, which is what we are hearing from every province right now. Even the task force seems to be a repetition of what has been going on in every province for the last 10 years.
Mr. Campbell: While it is conceivable that there is some overlap, the fundamental difference is that this fund will create an endowment to allow this work to go on indefinitely.
Senator Lavoie-Roux: You said it is over five years.
Mr. Campbell: That is not to suggest that we anticipate that we will continue to debate these questions forever or for that period of time. One of the goals is to ensure that we are aware of and share information on the health care front. What one province has learned in, for example, controlling costs or measuring outcomes will be shared with other provinces.
I am sorry, Mr. Chairman, that I do not have more detail in response to these questions. I was focusing on the CHST and the GST but should have brought more information on the research fund. I will be happy to provide everything I can to any interested members of the committee tomorrow.
Senator Bolduc: Can you assure us that one day someone will look at elements other than the supply side? When we look at health insurance in our system we are always looking at the production aspect; the people who work in the system, which is the supply side. We may take some measures which will slightly lower costs or stop costs from continuously rising. However, we have observed over the last 20 years that the costs are always growing.
Can you assure us that someone will look at the demand side? The incentives in the system are fundamental. The consumer does not see a separation between cost and service. The incentive of the consumer is, of course, to get good service. The incentive of the administrator is to spend his budget, I suppose. The incentive of the doctors is greater use of the "castonguette." All the incentives in the Canadian system focus on consumption. Canadians say that ours is the best system in the world. I also have said that to Americans once in a while, but I do not believe it.
Hon. Senators: Oh, oh,
Senator Bolduc: Ours is a very socialized system, similar to what they have in England. The British system is older than ours and we know that it has declined in terms of service for the people, although it is improving again now because they have made major reforms on incentives.
Can we have the assurance that someone will look at the incentive systems which are anti-economic?
Mr. Campbell: Senator, that may well be a first research project for the fund.
Senator Bolduc: I would be so happy if someone would look at that aspect. If that is not done, I am sure that some day the entire budget of the federal government or some of the provincial governments will go to health care.
Senator De Bané: To piggyback on the question by Senator Bolduc, another flaw on the system is that the newly graduated doctor receives for his services the same fee as the world renowned doctor. They get exactly the same fee, so there is no incentive for excellence.
My question is about the compensation in the GST harmonization for the Atlantic provinces. If the revenues of the Atlantic provinces relied more on a higher level of personal income tax and less on provincial sales tax, would they have been entitled to any compensation?
Mr. Samy Watson, General Director, Tax Policy Branch, Department of Finance: The structural change in this particular measure had to do with sales tax. It just so happens that in those provinces they also rely heavily on personal income tax. For example, Newfoundland's tax-on-tax rate is 69 per cent, one of the highest in the country. This structural change had to do with sales tax and was the first step in creating a national sales tax system. The short answer is no; it was more related to sales tax.
Senator De Bané: The rate of personal income tax in Newfoundland is already among the highest in the country?
Mr. Watson: Yes.
Senator De Bané: What are the rates in Nova Scotia and New Brunswick?
Mr. Watson: Nova Scotia's rate is 59.5 per cent and New Brunswick's is 64 per cent plus an 8 per cent high income surtax. They are very high.
Senator De Bané: If Quebec had relied more on the provincial sales tax for its revenues and less on personal income tax, it would have been eligible for that assistance program.
Mr. Watson: I will explain how this is done. As Mr. Campbell pointed out, there are other provinces which would be eligible to receive payments under this formula. One of those is Manitoba. Manitoba's rate is only 7 per cent, which is low compared to Newfoundland's 12 per cent. It is not so much the rate as it is the relationship of going from a retail sales tax to a value-added tax. They are very different tax structures.
There are two big factors in being able to determine whether or not a province will win or lose money under the transition from a retail sales tax to a value-added tax. Those two factors are the existing breadth of its sales tax base. The other aspect is how much of their existing provincial sales tax revenues are derived from taxing business inputs.
You will recall that a tax-added tax does not tax business inputs because of the input tax credit that businesses get for the taxes that they pay, which makes Canadian goods more competitive. Because each provincial retail sales tax is different, each transition from a retail sales tax to a value-added tax will be different.
Let us consider, for example, Manitoba. Manitoba has a very broad provincial sales tax base. It is one of the broadest in the country. Some 44 per cent of its provincial sales tax revenues come from taxing business inputs. That is a very high rate of tax for business inputs. Even when Manitoba broadens its base to a value-added tax base, it will not get that much money from the broadening aspect because it is already so broad.
Senator De Bané: Is the GST less broad?
Mr. Watson: No, it is broader than Manitoba's. Because Manitoba's retail sales tax is already so broad, the amount of extra revenue they will get from going to a GST base is not that much. In the meantime, they will lose that 44 per cent in taxing business inputs. Therefore, Manitoba loses money at the rate of 7 per cent. In fact, Manitoba will lose money at 8 per cent. Even if they went up a point, they would still lose money.
British Columbia, on the other hand, has a very narrow sales tax base at 7 per cent. Some 50 per cent of their provincial sales tax revenue comes from taxing business inputs. When they go to a value-added tax, they will gain a lot of revenue from the base broadening, enough to compensate for the amount that they will lose from taxing business inputs right now.
Senator De Bané: Mr. Parliamentary Secretary, my only comment is that it is unfortunate that such a learned explanation cannot be explained easily to some people.
The Chairman: Why did the government have such momentum to attain a harmonization in the three Atlantic provinces? Why did they do it in the first place? Were the Atlantic provinces asking for it?
Mr. Watson: There are a number of points to that, Mr. Chairman. In the last two and one-half years, the government has been involved in negotiations on a multilateral level, on a bilateral level and on a regional level. Yes, those provinces were the most interested in achieving harmonization for the economic reasons.
The Chairman: What are the economic reasons?
Mr. Watson: World tariffs are coming down. The world economy is becoming more global. One of the big determinants in terms of trade and exports right now is price because you do not have a lot of tariffs. When you have a retail sales tax, you have what is called tax cascading, a kind of poetic term. The usual example used is that you have a log, which is sold, upon which there is tax. It is then sold to a mill which will turn it into lumber and their tax will be at that level as well. The lumber goes into making furniture. That tax is embedded in the price of each good. By the time that good reaches the consumer, it has many levels of tax already embedded in it.
What a value-added tax does is remove those levels of tax so that the tax is only at the final level. That is where many industrialized countries in the world are at. As a result, Canada becomes much more competitive, not just in terms of exports but also in terms of imports from a country that has a value-added tax with domestically produced goods.
Canada is more competitive in both imported goods and domestic goods. Canada also becomes more competitive in terms of world markets. That is the reason for the interest.
Mr. Campbell: I want to reiterate that an offer to consider harmonizing was made to all provinces. Some provinces were more immediately interested than others. The option to harmonize remains open to all provinces. Clearly, as Mr. Watson has explained, some appreciated the economic efficiencies that would result more so than others.
The question arises, Mr. Chairman, and it might be implicit in your question: Why proceed with some and not all? The reality is that you have to start somewhere. We all represent various regions of the country here. We know how difficult it is if the federal government were to wait for everyone to come on board.
To give an analogy for process, we began the medicare system with only two provinces on board 25-30 years ago, namely, Saskatchewan and British Columbia. They were hardly population centres of the country at that time. It took many years for all the provinces to come on board.
There is an element of regionalism here. I suggest to you that the maritime provinces, through harmonization, will be gaining, for what I hope will only be a short time, some comparative advantage over other regions that are not harmonizing and getting the benefit of the efficiencies that Mr. Watson has described.
The Chairman: The driving force of the argument to harmonize is the competitiveness which was applied here. The manufacturers sales tax, which was removed when the GST first came into effect, did exactly what the three Atlantic provinces now want done with their own tax. Is that right?
Mr. Watson: Yes, if I understand you correctly. The retail sales taxes which now exist are very similar to the manufacturers sales tax that was replaced by the GST.
The Chairman: All the input costs were buried under that tax. When you sent out a manufactured product, that was a disadvantage to the manufacturer in exporting. The three Atlantic provinces wanted the advantage of the GST by harmonizing for the same reasons.
Mr. Watson: Yes, they are identical reasons. There are two other reasons you can add. The first is administrative savings, because this agreement is contemplating a single administration. These two taxes will operate as one tax. From a business perspective, these businesses would only have to deal with one tax collector, one set of returns and one place to take their questions and to submit their taxes. Many of those aspects could not have been achieved with the GST because it was levied on a national basis along with provincial retail sales taxes. When you harmonize, you get this added bonus of simplicity of operation.
The Chairman: From an academic and an economic argument, although maybe not a political argument, there is no question that a value-added tax has tremendous advantage over taxing up the line, as was the case with the federal GST.
Mr. Watson: That is right.
Senator De Bané: From the point of view of the producer, not of the consumer.
The Chairman: Let us talk about that. I just asked that question. This is a change in the policy of the federal government toward the GST. In other words, you have invited the provinces to benefit from the advantages of a value-added tax over a manufacturers' sales tax or tax points. Is that not a change from the Liberal policy enunciated when the GST was being instituted by the Conservative government?
Mr. Campbell: I did not bring my Red Book as a prop here but, having knocked on thousands of doors during the 1993 election, I was very clear in stating that we would address the GST, that we had to replicate or replace the revenues, and that we would do so with something that generated equivalent revenues, was easier to administer and allowed for simpler compliance. Incidentally, the sentence also went on to say that it promoted harmonization.
That is what we have accomplished. I also want to add, Mr. Chairman, that I participated as a member of the Finance Committee in the cross-country hearings which were conducted on the GST to fulfil this government's commitment to consult Canadians about important decisions. Canadians were very clear and consistent in telling members of the Finance Committee - and this is reflected in our report - that we must do something about this anomaly, that Canada is the only country in the western world that had, at that time, 10 sales taxes, nine provincial and one federal. We must do something about that. Harmonization was the response advanced by many, many witnesses who appeared before us.
The second suggestion which came through consistently and which came up here just a moment ago is that we should have tax-included pricing which is also reflected in the harmonization proposal.
In making the approach to provinces and in asking them to talk to us about harmonization and in concluding a memorandum of understanding with the provinces which are coming on board, we are being consistent with the requests of Canadians and with our undertaking to evolve a system that would generate the same revenue but which would be simpler to administer and allow easier compliance.
The Chairman: Mr. Wilson's policy was exactly that, was it not?
Mr. Campbell: With respect to achieving harmonization?
The Chairman: Exactly.
Mr. Campbell: However, he did not achieve it.
The Chairman: I am asking whether it was his policy to harmonize the sales tax across the country?
Mr. Campbell: I believe, at the time, he tried to achieve harmonization but was unsuccessful.
The Chairman: So help me through this. In the election of 1993, the Liberal government's position was to extend the GST and to harmonize the sales tax across the country? In other words, they adopted the policy of the Conservatives to achieve the harmonization, rather than to abolish the tax or to change it in any way? Was the intent just to continue the policy and hope to achieve harmonization?
Mr. Campbell: The policy was clearly stated in the Red Book. Speaking for myself as a candidate in that election, it was to replace the GST with something which generated equivalent revenues, was easier to administer, allowed for simpler compliance and promoted harmonization. Another principle on which we campaigned was to consult Canadians generally about major initiatives. That is what we set out to do immediately. It is one of the first things we did. The message came back loud and clear, that in contemplating what to do about replacing the GST we had better look at this whole "anomaly" of 10 sales taxes. Canadians also said: "Do not saddle us with something which would be brand new, untried, untested, and may have huge costs of implementation; take a hard look at the existing tax and the existing provincial sales taxes."
Senator Lavoie-Roux: I want to go back to the first issue of the transfer payments. On page 12 of your statement, you say that, in year 2002, the CHST entitlements should be $2.3 billion higher than the level set for next fiscal year, 1997-98. Is it because of the new formula, which is described at the top of the page, that you make that sort of prediction?
If so, what are the components of this new formula? It seems to me to be a large increase, $2.3 billion. Every province is making big efforts to control expenses and to ensure that their expenses are going down, and you suddenly announce that in 2002 entitlements will be $2.3 billion higher. What is the rationale behind that?
Mr. Gusen: First, the new formula that Mr. Campbell described holds the level of the transfer constant at $25.1 billion in the first two years of the five-year arrangement. Then it starts to grow. In the third year of the new five-year arrangement, it grows at the same rate as the GDP minus 2 per cent. In the next year, it is GDP minus 1.5 per cent growth. In the last year of the arrangement, it is GDP minus 1 per cent growth.
Back in the days when the government was able to afford a more rapid growth rate, the established programme financing transfer, the previous transfer that supported medicare and post-secondary education, grew originally at the rate of the economy, being the full rate of GDP. This new formula is restraining the growth but allowing for some growth in transfers as the government is able to afford it.
Senator Lavoie-Roux: If the government cannot afford it, this could disappear?
Mr. Gusen: The legislation you are looking at now locks it in for that five-year period. At the end of that period, it must be re-examined.
Senator Lavoie-Roux: I am not questioning the formula and all the discussions you described. However, to talk today about an increase in three or four years of an extra $2.3 billion, to me, seems dangerous in terms of incentive for our direction.
I know the population is aging. As the population ages, there is a demographic decrease. Both effects exist. If we increase by $2 billion or $3 billion, we must examine whether the need is there. Are we just creating a bigger appetite for the people? Everyone wants more money to spend.
Mr. Campbell: I wonder if I might respond, Mr. Chairman. The five-year program described in this legislation responds to three things which we have heard from Canadians and provincial governments. The first is with respect to the cash floor, and is to reassure Canadians that the federal government will, if I can use this expression, stay in the game.
Canadians expressed to us great fear. I know that is not the question you asked but I wanted to stress it. The federal government will stay in the game with cash, because there had been some fear prior to this most recent budget, as projections showed that the cash would diminish over time and the federal government would have less involvement with the provinces than in the past. The cash floor or cash component reassures Canadians on that point.
The second thing that it addresses is stability in planning. Provinces have complained consistently over recent years that it is very difficult to plan budgets and their revenue needs unless they know where transfers will be. The five-year program provides them with a great deal of assurance for their planning purposes, keeping in mind the warnings that you have given us. We must counterbalance that against the need the provinces have for their own planning. One would hope that they will give institutions and programs they fund the same kind of long-term stability.
The last thing that is addressed in the five-year plan is the issue of allocation. That is to say, how we allocate our spending among provinces and address the increasing disparities that existed because of the cap on CAP. As I explained in the speech, we are going well down the road in that five-year period to addressing that issue, and to responding to those provinces that felt that they had been disadvantaged by the cap on CAP.
Senator Bolduc: Would that mean that the relative proportion of the money going to Ontario, British Columbia and Alberta would increase and would decrease in New Brunswick, Quebec and the Maritimes?
Mr. Campbell: The change means that roughly half the discrepancy that currently exists will be eliminated through the way in which the formula will be applied to the provinces. This formula contains various factors. Maybe Mr. Gusen wants to speak to it. There will be greater attention, for example, to population, than in the past.
Mr. Gusen: This is a complicated formula.
Senator Bolduc: Before you explain, I should like to know if that formula has been discussed with the provincial governments.
Mr. Campbell: Yes.
Senator Bolduc: Do they agree with the formula, or have they said, "Well, that is your choice"?
Mr. Campbell: As I said in my remarks, they agreed upon at least this much: that we should get on with this five-year plan. All provinces were agreeable to beginning to address the disparities, although I do not think all provinces agreed that they should be eliminated in that five-year period.
Senator Bolduc: However, the provinces did not agree with the formula. You said, "This is our responsibility. You take it and we have the formula." You probably explained the formula to the people then. Is that not the usual approach of the Minister of Finance?
Mr. Campbell: There was a clear desire on the part of provinces, such as my province of Ontario, which has been raising the issue of the cap on CAP and the fact that it has been losing ground for several years. The motivation for starting discussions about eliminating the disparities came from the provinces that felt they were disadvantaged rather than from the provinces that might have benefitted under the prior formula. There was consensus. No one was denying that we had to begin to address this matter. The 50 per cent over the five years reflects that consensus that something needed to be done, but perhaps there was a lack of consensus on how quickly equality among all provinces would be achieved.
Senator Bolduc: What are the expected regional and industrial impacts of the unemployment insurance measures? We know that it will mean less money for people who are unemployed. I have a responsibility to look after the interests of people from the Gaspé region. I should like to know about the impact of the new measures concerning unemployment insurance.
Mr. Campbell: I am sorry - and, this is a function of the way in which we divided up the work between last week and this week - but I am not in a position to answer that question without the assistance of officials. As we addressed that issue last week, unfortunately the officials here are only dealing with the GST and the CHST. It is one of those issues that, with your concurrence, senator and Mr. Chairman, I could provide that information to Senator Bolduc.
Senator Bolduc: I would like to have a few statistics about Gaspé, for example.
The Chairman: Mr. Campbell, we appreciate you spreading out your presentation over a two-week period and being so patient with us, and we thank the officials.
The committee adjourned.