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Proceedings of the Standing Senate Committee on
National Finance

Issue 13 - Evidence

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OTTAWA, Tuesday, June 5, 2001

The Standing Senate Committee on National Finance, to which was referred Bill C-18, to amend the Federal-Provincial Fiscal Arrangements Act, met this day at 9:31 a.m. to give consideration to the bill.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we have before us Bill C-18, to amend the Federal-Provincial Fiscal Arrangements Act. This bill has to do with the federal equalization program. The bill passed the House of Commons on May 8. It received first reading in our chamber on May 9, was debated at second reading on May 15 and May 29, and was referred to this committee.

On Thursday next, at 3:30 p.m., we hope to have the Minister of Finance, Mr. Martin, here to discuss this bill,. Today, we have senior officials from his department, Ms Susan Peterson, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch. She is accompanied by Mr. Frank Vermaeten, Senior Chief, Policy and Program Operations, Federal-Provincial Relations Division, and Mr. Dominique LaSalle, Chief, Strategic Planning, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch.

I understand Ms Peterson has a brief opening statement to make, after which I will invite senators to put their questions and offer their comments on this bill.

Ms Susan Peterson, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance: Honourable senators, I appreciate your invitation to be here today to discuss Bill C-18.I will keep my opening remarks brief in order that there is time remaining for your questions.

This bill fulfils the commitment made by the Prime Minister at the First Ministers Meeting last September to lift the ceiling on the program for the 1999-2000 fiscal year.

[Translation]

Members of the committee will recall that landmark agreements were reached at that meeting on a plan to renew health care and to improve support for early childhood development. To support these agreements, the federal government is investing $23.4 billion over the next five years. This is the largest new investment ever made for health, higher learning and social services.

Most of this funding - $21.1 billion - is being provided to provinces and territories through the Canada Health and Social Transfer which is one of the three major federal transfer programs. The other two are Territorial Formula Financing and Equalization. The federal government today transfers approximately $40 billion annually to the provinces and territories through these three programs.

The CHST supports health care, post-secondary education, early childhood development, and other social programs in the form of cash and tax transfers, while Territorial Formula Financing recognizes the higher costs of providing public services in the North.

[English]

Equalization, the subject of the bill we are discussing today, provides funds to enable less prosperous provinces to offer reasonably comparable services to their residents without having to resort to higher than average tax rates.

Equalization is unique among federal transfers in that its purpose was entrenched in the Canadian Constitution in 1982. It is also unique in that it was one of the very few programs left untouched when the federal government was struggling to bring order to the finances of the nation in the mid-1990s. Equalization payments are unconditional. Provinces can spend the money as they see fit. In the last fiscal year, the seven eligible provinces received payments totalling $10.8 billion. Since 1993, equalization has grown by 33 per cent or $2.7 billion. Over the same period, program spending, other than transfers to provinces and territories, has grown by 2.6 per cent.

The latest estimates released in February indicate the payments this fiscal year will be about $1.8 billion higher than estimated last October. This is due in large part to strong economic growth in Ontario over the last two years, not to poor economic performance in the receiving provinces, whose economies have also been improving each year. Of the $1.8 billion, approximately $1 billion is being paid out now. The other $800 million depends on passage of this bill.

[Translation]

Equalization is reviewed on an ongoing basis by federal and provincial officials to make sure that differences in the abilities of the provinces to raise revenues are measured as accurately as possible. It is renewed legislatively every five years, most recently in 1999. Work is underway on the 2004 renewal.

Payments are based on a formula that measures the relative performance of provincial economies. The formula is applied in exactly the same way to all seven provinces which currently receive Equalization, and adjusts automatically in response to economic developments in the provinces.

[English]

When the economy of a province improves more than other provinces, its equalization payments automatically decline under the formula, reflecting the increased wealth of that province. Conversely, when a province's economy experiences a slow down relative to others, its equalization payments automatically increase. In this way, the program acts as an automatic stabilizer of provincial government revenues.

Provinces do not all receive the same amount of support from equalization because they do not all require the same amount of support to bring them up to a common standard. For example, Saskatchewan needs $230 per person to be brought up to the equalization standard this year, while Newfoundland requires $2,000 per person.

In light of Bill C-18, another aspect of equalization that deserves mentioning is the fact that payments are subject to both ceiling and floor provisions. The ceiling protects the federal government against unexpectedly large increases in equalization payments that may occur, for instance, when Ontario experiences much stronger growth than most of the rest of the country. The ceiling ensures that the program can continue to grow year by year, but at a pace that remains sustainable over time.

The floor, on the other hand, protects a provincial government against large and sudden decreases in equalization payments that would otherwise be warranted by the straightforward application of the formula. That can occur when there are large fluctuations in a province's revenues due to the volatility of the oil and gas sector.

When the program was renewed for five years in 1999, the ceiling for 1999-2000 was set in legislation at $10 billion and, except for the provisions in this bill, grows at a rate equal to the growth of GDP in the subsequent four years covered by the legislation. Based on the forecasts for economic growth outlined in the May 17 economic update, the ceiling will reach $12.5 billion in the fifth year. Therefore, it does keep growing.

Bill C-18 lifts the ceiling for the 1999-2000 fiscal year - and only for that year. While the final cost of removing the ceiling will not be known until the fall of 2002 when the final estimates become available, it is currently estimated to be $792 million.

That amount will be allocated among the seven receiving provinces on an equal, per-capita basis, approximately $67 per capita. In total, Newfoundland will qualify for an estimated $36 million, Prince Edward Island $10 million, Nova Scotia $62 million and New Brunswick $50 million. Quebec`s estimated share will be $489 million; Manitoba`s will be $76 million, and Saskatchewan will receive about $469 million.

My colleagues and I will be happy to answer your questions.

The Chairman: Thank you, Ms Peterson.

Senator Comeau: You noted that the program was renewed for five years in 1999 and that the ceiling for 1999-2000 was set in legislation at $10 billion. In previous revisions, there was no cap in the first year of the five-year programs. There was no limitation on growth over the next five years, except for growth in GDP in each of the next four years.

As I understand it, without the legislated cap of $10 billion for 1999-2000, entitlements would be $10.8 billion. Am I correct that this effectively removes an estimated $4 billion from transfers over the five-year period?

Ms Peterson: In the past, the amount of equalization that provinces received in year one of the renewal was whatever it turned out to be. In his report on equalization, the Auditor General said that that left the federal government exposed to very wide fluctuations in equalization payments. Therefore, when we renewed equalization this time, after long discussions with the provinces, both to ensure that the federal government was not exposed to the possibility of wide upswings in equalization in the first year of the legislation and to give the provinces assurances of how much they would receive in the first year, $10 billion was selected as the amount.

That provided two advantages. First, it dealt with the Auditor General's comment. Second, it gave the provinces a sense of stability. They knew how much they would get in year one. Previously, Estimates were revised for a number of years after, and therefore the provinces never knew exactly how much money they were going to get in year one.

Senator Comeau: Am I correct that the recipient provinces will receive $4 billion less over the five-year period?

Mr. Vermaeten, Senior Chief, Policy and Program Operations, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch, Department of Finance: It is very difficult to predict what will happen to equalization. It depends on the growth in each province, population movements, the size of tax cuts or increases, and resource prices. Equalization is notoriously difficult to predict. We do know, based on current projections, that the ceiling will rise to $12.5 billion. The program will be allowed to grow at the rate of GDP.

Senator Comeau: Recipient provinces are being blamed for not offering wage increases to medical personnel and school teachers similar to rates in Alberta and Ontario. There is a very real danger of recipient provinces losing nurses and teachers to more prosperous provinces. By continuing to reduce the amount of transfers offered to these provinces, the risk becomes even greater. I read in the press the other day that nurses in Nova Scotia are asking for wages similar to those being offered in Ontario and Alberta. I do not blame them, because they could move to those more prosperous provinces and earn those wages.

By legislating a $10-billion cap in the first year, we are reducing transfers to the recipient provinces. Will we tell the nurses that the federal government is reducing transfers to the provinces and that they will, therefore, have to wait for the next transfer calculation?

Ms Peterson: It is incorrect to suggest that the federal government is reducing transfers to provinces. The ceiling only becomes operative because equalization is growing so much. If equalization were not growing faster than the rate of growth of the economy, the equalization ceiling would never come into effect. In fact, it has only come into effect four times in the past. It is only in situations of fast growing transfers to provinces that the ceiling becomes operative.

Senator Comeau: You mentioned that one of the purposes of the ceiling was to protect the federal government from wide fluctuations caused by growing economies in certain provinces. It is been suggested that oil and gas resources was one of the things that caused the Auditor General to suggest a ceiling.

Ms Peterson: He suggested a fixed ceiling.

Senator Comeau: Since Alberta is no longer a part of the calculation, why have a ceiling? The impact of oil and gas in Alberta is no longer factored into the calculation so why have a ceiling at all?

Ms Peterson: The ceiling is in place to ensure that the program grows at a rate that is sustainable by the federal government on an ongoing basis. Federal revenues tend to grow at the same pace as the growth in the overall economy. That is why the ceiling allows for growth in line with growth in the overall economy.

Ontario is a big province that is part of the standard and therefore has a very heavy weight in the standard. Occasionally, growth in Ontario outpaces the growth of the overall Canadian economy. If it were not for the ceiling, that would drive up the cost of equalization beyond the growth in federal government revenues. On a long-term basis, it is impossible for the federal government to continue sustaining payment for programs that are growing faster than the economy and its own revenues.

That is the link. Even though Alberta is no longer included in the standard, if Ontario's economy grows very strongly compared to the rest of the country, that can make equalization grow faster than the ability of federal revenues to support it.

Senator Comeau: Although clawback is not a part of this bill per se, the issue of recipient provinces increasing their revenues in order to make them prosperous provinces has been raised in some quarters. As I understand it, there is a willingness on the part of all first ministers and ministers of finance in Canada to discuss clawbacks. The recipient provinces that would benefit most at this time would be Newfoundland and Nova Scotia.

Given that there is an eagerness on the part of some ministers, and a willingness on the part of all first ministers, to discuss clawbacks, and given that you are part of the Federal-Provincial Relations and Social Policy Branch, why not just do it? Why not discuss this clawback provision and see if you cannot turn these provinces into prosperous provinces?

Ms Peterson: Perhaps you can put that question to the Minister of Finance when he is here on Thursday. I know that in his recent visits to the provinces he met with finance ministers, and the issue of clawback was indeed discussed among them.

The clawback issue is a very central one.

First, some commentators and some newspaper articles I have read suggest that Newfoundland and Nova Scotia do not keep their offshore revenues. Although the ownership of offshore revenues is something that is disputable, the federal government agreed that both Newfoundland and Nova Scotia could levy whatever royalties they wanted on those offshore revenues, and those revenues would accrue to the provinces. Thus, the federal government does not take any revenues from the offshore itself.

When the revenues of any province which receives equalization increase, for whatever reason, and to be fair to all provinces, its equalization payments decline. Indeed, they decline 100 cents on the dollar. The reason for that is to ensure that equalization brings every province on a per-capita basis up to exactly the same standard. If you ignore the fact that some provinces are doing better than others, that would bring some provinces up to a higher standard than other provinces.

Senator Comeau: That is the crunch of the problem with the clawback. That is exactly what the recipient provinces are trying to get across to the federal government. There is no incentive. As a matter of fact, there is a disincentive to develop offshore resources for provinces during the transition stage, that is, from becoming a recipient province to a contributing province, if the federal government says, "We will take back, dollar for dollar, every dollar you earn." There is a disincentive for those provinces to develop the offshore resources as they should. What these recipient provinces are saying is that they should be encouraged to stand on their own feet and to get to the stage where they can become contributing provinces. Then they say that they will contribute as the federal government sees fit.

I know it was a different regime back in the 1950s and early 1960s when Alberta was developing its resource. In fact, the regime at that point allowed Alberta to use its revenues to reinvest in other sectors. As a result, it became a contributing province, something for which we thank Alberta.

We have provinces in Atlantic Canada which have the potential to become contributing provinces. We may be limiting their capability to do so.

Ms Peterson: It was for reasons like the ones you just articulated so well that, when Nova Scotia and Newfoundland were anticipating the development of offshore resources, two special accords were put in place, one for each province. They were to deal with exactly this issue. The result was that, on a transitional basis, the revenues received from offshore development would be partly ignored on a declining basis over the transition period for the very reason that you mentioned. As well, there was special economic development money that the federal government gave to those two provinces as part of those accords. Transitional arrangements were put in place.

Subsequent to that, the federal government put in place something that is known by the peculiar name of the "generic solution." It is the special treatment, if you wish, that Newfoundland and Nova Scotia are now taking advantage of with respect to their offshore developments. Instead of increased revenues in provincial coffers decreasing equalization 100 cents on the dollar, the generic solution provides that the decrease be only 70 cents on the dollar. I say "only 70 cents on the dollar." People could argue that it should be much more than that. You would have to speak to other provinces who receive equalization and ask them what they think of a province which, because it happens to have offshore revenues, only sees their equalization go down 70 cents on the dollar, whereas they, when they attract economic development of other types, see their equalization go down 100 cents on the dollar.

That would give you a different picture. Indeed, I am sure you will have the opportunity to find out how other provinces look at this issue of the clawback.

Senator Comeau: We certainly will. It has been suggested by certain provincial Liberal members of Parliament that the problem in Nova Scotia is not with equalization. They say that, in fact, the problem is the debt that the province has accumulated over the last many years. Is that the position of your branch of the Department of Finance? Is the position of the Government of Canada that the problem in Nova Scotia is a debt problem rather than what might be considered an equalization problem?

Ms Peterson: Nova Scotia has high debt servicing costs. However, the equalization program brings every province that is below a certain standard up to that standard. Provinces then make their own choices about how they spend, how much they spend and how much debt they secure. I really have no comment on that.

Senator Bolduc: The CHST and equalization programs amount to approximately $34 billion. I understand that the total amount of transfers to the provinces and territories amounts to something in the order of $40 billion. The remaining $7-billion accounts for grants given by the federal government for agriculture, or other types of grants.

Ms Peterson: When we give figures on transfers to provinces, we always include the value of the CHST tax points. The numbers you have cited do not.

When I talk about the major transfers, I am talking only about CHST, equalization and territorial financing, not agriculture or anything else.

Senator Bolduc: That is what I meant. The total of what you are talking about is approximately $33 billion. I understand that the federal government gives about $40 billion to the provincial governments. For which purposes are the remaining $7 billion given?

Ms Peterson: The total cash transfers of the three that I mentioned this year are about $30.4 billion.

Senator Bolduc: Another $7 billion is transferred.

Ms Peterson: There is another $1.8 billion in small transfers, but that does not bring us up to $40 billion.

It is $44 billion with tax points. I do not end up with a 40 number.

Senator Bolduc: You mentioned it in your own presentation. You stated that the federal government transfers approximately $40 billion annually to the provinces and territories.

Ms Peterson: That includes tax points.

Senator Bolduc: Why is it that the basic standard for comparison in the calculation of transfer payments includes only five provinces? Why not all ten?

Ms Peterson: There used to be a ten-province standard for equalization. However, because of the volatility of revenues in Alberta, the standard would swing up and down. The provinces want to have some stability in their transfers. While it was nice when Alberta's revenues went up and therefore equalization went up, it was not so nice when Alberta's revenues went down and equalization went down. The lack of stability with the ten- province standard, because Alberta was in it, was one issue.

The other issue was, in the late 1970s, because Alberta was in the standard and oil prices were sky high, Ontario was close to becoming an equalization-receiving province. They did not want to be an equalization-receiving province. It did not make sense in the Canadian economy for that to occur. The way to get around the huge volatility of revenues in Alberta was to take Alberta out of the standard. Once you took Alberta out of the standard, then the other provinces wanted to balance it and to take some of the low-revenue provinces out of the standard. That resulted in the four Atlantic provinces being taken out of the standard, and you had the five middle provinces left. It was a balancing that ended up with five provinces out of the standard.

Senator Bolduc: That is a good rationalization. Why is it that the property tax contribution is taken into account in establishing relative wealth? Among the 30 or 25 various types of revenues, you include property tax. You do not include it at the market rate.

Ms Peterson: Thirty-three different tax bases enter into the equalization program to ensure that we are measuring the relative capacity of the provinces to raise revenues on as fair a basis as possible. It has to be as comprehensive as possible.

Senator Bolduc: This is a municipal tax.

Ms Peterson: We include municipal taxes in equalization, along with provincial taxes. Provinces could decide whether it is the municipalities that collect property taxes or the provinces that collect property taxes. We make no distinction. Again, in the name of comprehensiveness and fairness, property taxes can be collected by either level of government and can be used for various purposes. To be fair, it has to be taken into account. It is in the name of comprehensiveness and fairness that property taxes are taken into account.

The Chairman: We heard from senators from Nova Scotia and Quebec. To go to another recipient province, I would introduce Senator Doody who used to be treasurer of Newfoundland.

Senator Doody: I would like to ask a supplementary to Senator Comeau's question on the clawback. The discussion centred on the offshore revenues. It can be argued that the federal government had been overly generous in allowing the provinces to take anything because of the Supreme Court decision, for which I have no sympathy at all.

I think a bigger problem relates to the on-shore resources that have the same negative effect on the revenue of a province. It is probable, in my opinion, that the Voisey's Bay project would now be underway if the Province of Newfoundland had sufficient incentive to come to a deal with the owners. The loss in equalization would be in excess of 80 per cent of the revenues they hope to obtain from the resource. It is hardly worth getting into the political nightmare of passing over an unrefined resource to an outside company for a relative pittance in terms of the aggregate accrual to the treasury. It is not that the federal government would take the revenues from the Voisey's Bay project, but the decrease in equalization would be dramatic. I think an argument can be made, from a legal sense, that the offshore is a federal resource, but the same cannot be said for on-shore natural resources. I suppose this discussion would be better held when the minister is here because this is more political than administrative. If the witness does not wish to comment on that, I understand, and we will leave it where it is.

I seem to remember that there were a great deal fewer components in the equalization formula when it was first introduced and even subsequently. Something tells me that there were 14 components in it at one point. I understand there are now more than 30. I do not expect you to have it in front of you right now, but I would appreciate seeing what additional components have been added to the formula. It seems to me that they have just about everything in there now. I cannot think of 33 different revenue items that the Province of Newfoundland collects.

Ms Peterson: Mr. Vermaeten is preparing a list for you. There are new sources of revenues, like gaming and video lottery terminals.

Senator Doody: I think the formula was based not actually on the revenues that accrued to a province but the capacity of the province to raise revenue. The formula was used to determine whether Nova Scotia or Newfoundland, or whoever is taxing this, was obtaining sufficient revenue from a given resource, or whether they had been too generous to the citizens.

Ms Peterson: You are right.

Senator Doody: Could you explain some of the basics of this esoteric formula known as equalization?

Ms Peterson: I will explain the principle behind the point you made. The equalization program is meant to bring a province up to a certain standard based on what revenues they can raise if they apply average tax rates.

Senator Doody: It is not an equal standard. It is a reasonably comparable standard.

Ms Peterson: No, it is an equal standard so that reasonably comparable services can be provided across the county. It is an absolutely equal, per-capita standard.

You do not just consider what a province collects in taxes or how much it raises, because then you could, through the equalization program, penalize high tax effort and reward low tax effort, and that would not be fair. If an equalization-receiving province imposed lower-than-average personal income taxes, you would not want the equalization program to top that up. That would not be fair.

Senator Bolduc: You assume a reasonable taxation rate by the provinces.

Ms Peterson: An average.

Senator Doody: Does the federal Department of Finance decides what is reasonable?

Ms Peterson: No, we do not.

Senator Doody: Who decides that? What if a province wants to use a tax break as an incentive?

Ms Peterson: This is the magic of the equalization program. No value judgments like that are made. We look at what provinces actually do tax and take an average. It is an objective, certifiable fact that we use. No judgments are made.

Senator Doody: The average of the five provinces?

Ms Peterson: No, of all the provinces.

Senator Doody: All ten provinces?

Ms Peterson: Yes. The norm is what is happening in the country. No judgment is involved in that at all.

If an equalization province wants to apply higher tax rates than average, they will still get equalization as if they had average rates. They will get equalization, and a little bit more from their higher tax rate; and the reverse applies as well.

Senator Doody: If you use the average for equalization purposes, how does the generous tax regime of Alberta impact on the far more Draconian tax regime of a province like Newfoundland?

Ms Peterson: It all enters into calculating the average; and that is that.

Senator Doody: There is no provincial sales tax in Alberta. Is that correct?

Ms Peterson: That is right.

Senator Banks: Never has been. Never will be.

Senator Doody: You may see it in the Red Book sometime. Then we will know it has changed.

Ms Peterson: Do you want to know what the 33 tax bases are?

Senator Doody: You need not read them out.

Ms Peterson: It is what the provinces choose to tax. We only measure what they choose to tax.

Senator Doody: It is not their capacity really, it is their actual tax.

Mr. Vermaeten: It is their capacity, based on what they are actually doing. For example, right now we do not have a base for an inheritance tax or a wealth tax because provinces do not tax that. If one day they choose to do so, then that would be an additional base that we would need to add. It is based on what provinces are actually doing. There are different ways to categorize it, but it works out to 33 taxes. The major taxes such as personal income tax, corporate income tax, sales tax and property tax make up a large part of the entitlements. Then there are other items, some of which are prevalent in some provinces and not in others.

For example, we now have 11 oil and gas bases. Each one takes into account the different types of taxes because provinces are levying different royalties on old oil, new oil, heavy oil, mined oil, natural gas, and so on. There are two offshore bases, four different kinds of mining bases for asbestos, potash, metals and coals. There are 17 bases for natural resources. Some of the new ones are gaming and ticket lotteries. Just about everything is there, including insurance premiums, tobacco taxes, diesel taxes, gas taxes and vehicle registration. It quickly adds up to 33, and it will change over time as provinces adopt different taxing practices.

Senator Bolduc: How do you calculate the relative weight of each?

Mr. Vermaeten: It is based on the revenues. The basic equalization payments will come from the large tax bases, like the personal income tax, the sales tax and the property tax base, which I am sure make up two-thirds of the entitlements.

Senator Bolduc: The relative weight is different for each province. For example, I gather that Saskatchewan does not have the same relative weight of the various taxes as Ontario.

Mr. Vermaeten: That is correct. We measure the capacity of each base independently. For example, with oil and gas, we estimate that provinces can raise $100, which is the national average per capita, and then we consider each province. A province like Saskatchewan can obviously raise much more than $100 - or whatever the number is, $1,500 per capita - so we take that into account, while a province like Prince Edward Island does not have oil and gas revenue so their capacity would be measured as zero.

Senator Doody: All the provinces do not have the 33 bases though?

Mr. Vermaeten: We measure the capacity of all bases but, for many it is zero. You do not find asbestos in every province, and the same is true for sales tax. We always measure their capacity. When we measure the sales tax capacity in Alberta, we calculate how much they could raise if they levied the national average tax rate. It is always based on average taxing practices. We measure each base.

Senator Doody: It is a value judgment to that extent. For your calculation purposes, you decide how much Alberta could raise if it put in a sales tax.

Mr. Vermaeten: It is based on a formula. It is not officials making value judgments. We discuss how to measure that capacity with the provinces. Statistics Canada provides the sales figures, and it is simply a matter of taking those sale figures and calculating that at, say, 7 per cent, they could raise a certain amount.

Senator Doody: You can call it what you like but the fact remains that you still imagine that Alberta could raise a certain amount in sales tax if it applied a certain rate.

Mr. Vermaeten: We use the word "simulate" rather than "imagine." We simulate a national average tax rate that is determined, which is the simple average of all the provinces. If the national average tax rate is 7 per cent, we calculate how much Alberta could raise, or Saskatchewan, regardless of their actual rate. That is true for all provinces. We take one uniform rate and calculate, if they levied a certain amount, how much they would raise. That is based on the data Statistics Canada provides.

Senator Bolduc: The underground economy is believed to make up 15 per cent of the Canadian economy. Do you think that operates in every province? Do you take account of that? We know that it exists. What do you do about that?

Mr. Vermaeten: We only work with the data provided by Statistics Canada.

Ms Peterson: I receive delegations from various countries that come to Canada to learn how the equalization program operates. Unless you have a very good statistical agency that is respected by all parties, there cannot be an equalization program because it is not based on a whim, imagination, or any such thing. Statistics Canada is respected not only by all the provinces but also worldwide. It produces the data upon which the calculations are made. We know the average from their data, and we know the sales, from their data. It is thanks to this that we can run a sophisticated program like equalization in Canada. It is very complex and sophisticated, and this is all done in an effort to be fair and objective.

Senator Stratton: How many people understand equalization in this country? Does anyone else understand it other than you three? I am joking, of course.

Ms Peterson: Yes, but I think that many people understand the principle. It is a highly regarded program, and when you get down into the 33 tax bases and how they function, two people at this end of the table understand that, not three.

We do all this in a goldfish bowl. This is approaching an $11-billion program, and the provinces are there every step of the way, obviously with their eyes glued to the program because it means so much to them financially. We do all this in a goldfish bowl. They have their experts, and we have ours.

Senator Stratton: Many people seem to be making forecasts of the economies of Nova Scotia and Newfoundland. Do you, as a matter of policy, do any forecasting to evaluate the various scenarios? Do you consider variations?

Ms Peterson: It is mainly the private sector that does the crystal ball gazing.

Twice a year we estimate what we anticipate equalization will be. The official Estimates come out twice a year, and they change all the time.

Senator Stratton: How far into the future do you try to forecast? Is it a year-to-year basis? Is it five years, two years?

Mr. Vermaeten: Regulations stipulate how we shall do our official forecasts. Official forecasts go out usually toward the end of the five-year legislation. In this case, it would be to the end of 2003-04. That is based on a precise methodology that we have discussed with the provinces. That does not necessarily incorporate all the information, nor does it allow you to do simulations.

We do what-if scenarios and try to anticipate what may happen. Equalization is notoriously difficult to estimate, despite our best efforts and provincial best efforts. It is something that we have been working at for a long time with the provinces. So many factors change. If I knew what the price of oil was going to be, I would not be working here. That is just one of the factors that we must try to determine.

Senator Stratton: As we move down this road, hopefully one of the policy initiatives of the federal government or any government will be to try to make each and every province self-sustaining in one form or another. You can see it happening in Nova Scotia and Newfoundland, particularly with oil.

Is that actually happening, or is that just talk? One gets the sense that that is happening. Hopefully, the governments is working towards the day when equalization is a thing of the past, or is required less and less in each province.

Ms Peterson: If you look back over the last 20 years, the disparities among the provinces have narrowed somewhat. Although they have narrowed, they still exist.

Mr. Vermaeten: Disparities have been reduced. Since we have a moving standard, it is not absolute. We expect to always have a number of provinces, whether it is five, seven or eight, receiving equalization because there is an effort to try to ensure that provinces are able to provide comparable services.

We want provinces to do well, and we do not see equalization as an impediment to development. We do not say we are searching for some kind of end where no province is receiving equalization. In our discussions with the provinces, the provinces are very supportive of equalization. It helps economic development. The provinces have the ability to provide good education, training and health care systems. That leads to more growth in all provinces.

Senator Stratton: The only reason I am suggesting that is that if you try to elevate other provinces and they become have provinces, instead of have-not provinces, then the folks carrying the load will be less outraged at the amount of money they must contribute. If that could possibly happen, that would help everyone.

The Chairman: Ms Peterson mentioned the great importance of the equalization program to the provinces. In a previous life I was an adviser, an official, albeit a highly political official, in one of the provincial governments, that of New Brunswick. From time to time, I would accompany the Minister of Finance and officials to New York and such places when we were launching a bond issue.

We participated in due diligence meetings with the bond houses and prospective institutional purchasers of our bonds. Senator Doody also has significant experience as a former provincial treasurer. A question that frequently asked by prospective institutional purchasers concerned the federal equalization program. They attached some importance to the equalization program in terms of their ability to judge our solvency. They would ask about this federal equalization program and how long it would last. They pointed out that it was just a piece of federal legislation.

I suspect the constitutional amendment of 1982 has been helpful to the provinces in that they can indicate to prospective purchasers of their bonds that there is some security beyond mere legislation in terms of the federal government's commitment to equalization.

Ms Peterson, I wanted to ask you how the floor works. What is the formula? We know how the ceiling works. How does the floor work?

Ms Peterson: It protects provinces whose revenues may go up suddenly from one year to the next, usually from some volatile revenue source such as natural resources. As that occurs, and their equalization is supposed to go down dollar for dollar, the floor allows for a transition. If, from one year to the next, your equalization, because of your own increasing wealth in a province, would naturally fall by too much, then the floor will come in and guarantee that equalization will not go down too much. It is a pure transition measure for one year.

The Chairman: When you were at the House of Commons committee, I noted that somebody asked you whether British Columbia was getting close to the stage where it might be an equalization recipient province. I do not want to rain on premier designate Campbell's parade, he is being sworn in this afternoon, but would you care to comment on that issue?

Ms Peterson: British Columbia is getting closer to becoming a recipient of equalization. It is still about $300 million away from doing so. We will have to wait and see.

The Chairman: What is the significance of the $300-million figure, Ms Peterson?

Mr. Vermaeten: When we look at their ability to raise revenue, they are at a level which is $300 million above the five-province standard at which point they would start receiving equalization. If their revenues were to drop significantly relative to other provinces, then they would be entitled to equalization.

The Chairman: As a matter of curiosity, what other federations that you know of, Ms Peterson, have programs similar to our equalization program?

Ms Peterson: For historical and constitutional reasons, there are variances across countries. Nothing looks quite like equalization. However, every country has different ways of trying to ensure that the less well off parts of their country get some redistributional aid from the central government.

Mr. Vermaeten: Probably Australia is the country we look to most, in that it provides a fairly comprehensive measure of capacity. Their system is similar to ours in that respect. Germany has a very comprehensive equalization system where they actually share the revenues that are collected. Forms of equalization are found everywhere.

The U.S. has ways to distribute grants. It is not a formal equalization system but they look at programs, measure capacity, and distribute grants based on that. It is certainly not as comprehensive as ours.

[Translation]

Senator Ferretti Barth: What are the main reasons why the government would decide to eliminate the equalization ceiling? Once that is done, would the provinces have a good leeway in terms of using these federal funds?

[English]

Ms Peterson: There are absolutely no strings attached to equalization money that flows to the provinces. It is obviously intended, as per the Constitution, to allow provinces to provide reasonably comparable public services, but Canada is a very mature federation, a very decentralized federation, so the provinces use the money according to their own priorities. They make their own judgments.

On the question of why the ceiling was removed for 1999-2000, that decision was taken by the Prime Minister as part of a First Ministers' meeting where lots of other matters were being discussed. Decisions were made at that meeting to increase transfers to the provinces through the Canada Health and Social Transfer. The decision with respect to the equalization was to remove the ceiling for one year.

Senator Comeau: You referred to the constitutional requirement that there be reasonably comparable levels of public services at reasonably comparable levels of taxation. Have you been given the working definition of this by the government in order for you to translate what is reasonable?

Ms Peterson: If you wish, the five-province standard is the definition of "reasonable." In other words, the purpose of the equalization program as designed is to ensure that every province has the wherewithal, the revenues, to provide reasonably comparable services. As I just said, the federal government does not go out to see what the money is being spent on, but it makes sure that the provinces have the wherewithal to provide reasonably comparable services.

The definition of "reasonably comparable fiscal capacity" is the five-province standard.

Senator Comeau: I was driving by a hospital in my region of western Nova Scotia a few weeks ago when I saw a sign on the front of what is now more of a health centre due to CHS cutbacks over previous years. That sign said, "Doctors on call this weekend." That health centre takes care of a large number of people over a rather large geographic area. I wondered how many people in central Canada or other parts of Canada would like to see a sign in front of their hospital saying, "Doctors on call this weekend."

It hit me just how far we have gone with cutbacks to recipient provinces. As I understand it, those provinces are projecting negative growth over the next few years. In other words, the population is aging and is being served by hospitals that may or may not have doctors on call on weekends. Meanwhile, we are sending our most educated, our best and brightest, to the more prosperous provinces because we cannot afford to keep those people in our provinces.

This question would be more for the minister, I suppose, but would you care to comment on that?

Ms Peterson: As soon as the nation's finances were in order, the federal government increased transfers to the provinces under the CHST. In fact, in the Budget, 1999-2000 and as a result of last September's First Ministers' agreement, $35 billion over five years in additional resources was transferred to the provinces under the CHST.

As well, during the restraint period, equalization, as I mentioned, was never touched. It kept on growing. The federal government has put a high priority on increasing transfers to the provinces and has done so.

Because of the maturity of our federation, the federal government does not tell the provinces how to spend that money.

Senator Comeau: Has that $35 billion which the federal government placed back into the CHST brought the program back up to 1992-1993 levels?

Ms Peterson: Yes, it has. The provinces dispute that and say next year's levels will finally get there because they ignore the value of the tax points.

Senator Comeau: In the year 2002-2003, will we be back up to the level where we were in 1992-1993?

Ms Peterson: In terms of the cash portion only, in 2002-2003, transfer levels will get up to and will even slightly exceed where they were. In terms of the growing value of the tax points, levels have already exceeded previous levels.

Senator Comeau: Over a 10-year period, the provinces had to absorb whatever deficiencies or whatever growth in costs were associated with the delivery of programs during the period of federal restraint; is that correct?

Ms Peterson: That is so, except for the growth in equalization which continued during that period.

The Chairman: These are some matters that we will pursue when the minister is here on Thursday afternoon.

Senator Cools: I was reflecting on the enormity of these programs and the enormity of the standards. The task of arriving at a formula must involve a fair number of equations. From what I gather, you employ simulation models to arrive at these numbers. In your presentation, you state the example of Saskatchewan where equalization payments are roughly $230 per person, whereas in Newfoundland payments are $2,000 per person.

This question may not be pertinent here but, in comparing the Saskatchewan number of $230 and the Newfoundland number of $2,000, I am curious about the individual tax burdens in those particular provinces? What is the average tax per individual in Newfoundland and Saskatchewan using your formula for calculating all of the taxes?

Ms Peterson: The equalization standard on a per-capita basis states that every province should have revenues equal to approximately $6,000 per person.

The $230 per person that the Saskatchewan government receives brings it up to $6,000, and the $2,000 that the Newfoundland government receives brings it up to $6,000. There is a bigger gap to be filled in Newfoundland. It cannot raise as many revenues per capita as Saskatchewan. We look at the size of the gap, and the gap in Newfoundland is bigger, so it takes $2,000 to fill it. The gap in Saskatchewan is smaller, so it only takes $230 per capita to fill it. Therefore, that explains the $2,000 and the $230.

The Chairman: Let me thank the witness for coming. As always, we had a stimulating and informative exchange, and it will form a good basis for our discussion with the minister on Thursday. You may be back with him on that occasion. In any case, thank you very much for your appearance today.

Colleagues, tomorrow at 5:45 p.m. we will have as our witness the Secretary of State for Finance, Mr. Peterson, with regard to Bill C-17, to amend the Budget Implementation Act, 1997 and the Financial Administration Act, Canada Foundation for Innovation.

On Thursday at 3:30 p.m., assuming we have the permission of the Senate, we will hear from the Honourable Paul Martin on Bill C-18.

The committee adjourned.

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