---

Proceedings of the Standing Senate Committee on
National Finance

Issue 15 - Evidence

---

OTTAWA, Thursday, June 7, 2001

The Standing Senate Committee on National Finance, to which was referred Bill C-18, to amend the Federal-Provincial Fiscal Arrangements Act and to make related amendments to other Acts, met this day at 3:31 a.m. to give consideration to the bill.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: Order, please. Colleagues, we have before us Bill C-18, to amend the Federal-Provincial Fiscal Arrangements Act, which was referred to this committee after second reading on May 31.

We began our consideration of this bill on Tuesday morning when we had officials from the Department of Finance before us. There was a discussion at that time about federal transfers to provinces of cash and tax points. This afternoon, the department gave me some figures that are more recent - indeed, they are current - than the ones we were bandying about on Tuesday morning. I will put them on the record. They are for the current fiscal year, 2001-02.

CHST total entitlements are $34 billion, of which $18.3 billion is cash and $15.7 billion is tax transfers. Equalization, the subject under discussion today, is $10.6 billion. Territorial formula financing is $1.5 billion. All of this totals $44.9 billion, of which $30.4 billion is cash and $15.7 billion is tax transfers.

We have the pleasure this afternoon of welcoming the Minister of Finance, the Honourable Paul Martin, Member of Parliament since 1988 and Minister of Finance since 1993.

Mr. Martin is known to us all. He is accompanied by officials who are also known to us: Susan Peterson, Frank Vermaeten, Barbara Anderson, Francois Cadieux and Dominique LaSalle.

Please proceed, Mr. Minister.

Hon. Paul Martin, Minister of Finance: I am pleased to meet with your committee to discuss Bill C-18 and to reaffirm how important the federal government believes that the equalization program and the principles enshrined in the Constitution that underpin it are to the Canadian fabric.

[Translation]

Within our federation, the role of equalization is to ensure that all the provincial governments have the fiscal capacity to provide fairly comparable public services to Canadians, regardless of the wealth of the various regions of this country and the economic fluctuations that may affect them. Equalization is important not only because of its role, but also because of its size. Since we came to power in 1993, it increased by about 33 per cent and it currently accounts for nearly $11 billion.

We must note that its growth was not slowed by the restoration of our fiscal health. It continued adapting to the evolving economy everywhere in Canada. More recently, it had a growth spurt on account of the vigorous Ontario economy. Moreover, the $11 billion transferred to the provinces under the Equalization Program are paid unconditionally. The provinces that benefit from these payments can spend them on road repair, hospitals, schools, persons with disabilities, young children, services for elders, immigrants, legal aid, economic development or anything else. They have a choice.

[English]

As you know, Bill C-18 removes the ceiling on equalization for the 1999-2000 fiscal year, thus providing the seven equalization-receiving provinces with an estimated $792 million in additional funding. It is important to note that under no circumstances does the ceiling prevent growth in the equalization program. It simply limits it in the unusual situation when it would otherwise outpace growth in the economy. In other words, the cap goes up every year.

The equalization program also has a floor that protects the provinces from any sizeable declines in payments from one year to the next that could be caused, for instance, by exceptional economic growth in an individual province or a decline in population in an individual province.

When Bill C-18 was before the House of Commons Finance Committee, the Finance Minister of Manitoba remarked, in part, as follows:

The equalization program has proven historically to be a very thoughtful, forward looking transfer program that has allowed the Canadian federation to reduce disparities across the country and allow all regions to grow very successfully.

He went on to say:

Equalization does not create dependency. It provides the resources for provinces to grow and diversify their economy, to become less dependent on federal transfers.

The Finance Minister of Prince Edward Island commented as follows:

The Canadian equalization program is the envy of the world ... We have all kinds of evidence that our economy is growing stronger.

He also said:

... it is not a disincentive, it is an equalizer.

Furthermore, I am pleased that the economic data covering the last 20 years confirms the effectiveness of the equalization program in helping to reduce disparities among provinces. Economic gains have been above the Canadian average in most equalization-receiving provinces, and the same is true for gains in real disposable income. This is especially true, although it is not widely known, in the Atlantic provinces. Gaps remain, of course, but those gaps have grown smaller and not larger over time.

I will now turn to the claim that is sometimes made that equalization can stand in the way of economic development. As we have seen, the finance ministers of Prince Edward Island and Manitoba clearly do not hold that view. My own perception is that those who claim that equalization can be a disincentive focus on the wrong part of the picture.

[Translation]

It is true that a province's equalization payments decrease proportionally to the increase of its income from natural resources or any other economic activity. However, we must focus on the citizens and the enterprises in the province. Those are the real winners, those who benefit from the jobs created by economic development.

[English]

I should like to make a second observation on this matter. In the 1980s, the federal government recognized the opportunities presented by the development of offshore oil and gas in Newfoundland and Nova Scotia. The development, it was recognized, would be costly. For that reason, special agreements were signed with both of provinces that in effect suspended the normal workings of equalization for a transition period of 12 years in Newfoundland and 10 years in Nova Scotia.

In 1994, another arrangement was legislated that meant Nova Scotia, Newfoundland and other provinces with unique tax bases received special consideration under the equalization program on an indefinite basis. This is not a temporary measure. As the revenues from these sources increase, equalization declines less than is the case for other provinces. This illustrates the reality that the equalization program has already been adopted to reflect special circumstances such as those in Nova Scotia and Newfoundland.

Thus, in certain circumstances, there is leeway for special consideration. That being said, let me emphasize that in the end the program must be fair across all provinces, for the core of the equalization program is that it raises all seven of the less prosperous provinces to a common standard.

Finally, Mr. Chairman, I would like to turn to the view that while the equalization program does a good job of equalizing provincial revenues, it should also reflect the differing costs of providing public services in the provinces. This is called the expenditure need issue. My officials, those who are here at the table with me, have worked on this with provincial officials consistently and constantly over the years.

Some provinces believe that circumstances particular to them require higher public expenditures than the norm. However, in the end, all of the analysis that has been done on this issue has foundered on the difficulty - I would almost say the impossibility - of measuring in any objective way which provinces have higher needs for public services or which provinces must incur greater costs in incurring public services.

To illustrate, some provinces have more seniors, implying higher health care costs than the norm. Over provinces have more low-income families, immigrants, Aboriginal Canadians, children or students. Sometimes the view is that it is more costly to provide services to dispersed populations. Sometimes the view is that it is more costly to do it in densely populated urban areas with high salaries. That would not be the end of it. Distinctions would have to be made between cases of higher spending caused by higher needs and cases of higher spending reflecting the policy choices of individual province governments.

You can see the impossibility in practice of an approach that would require that an infinite list of such differences be objectively measured and added up.

[Translation]

To conclude, our government always considered the equalization program as an essential aspect and even as a determining factor of Canada today. It is a fair progrtam and Canadians all over Canada are benefiting from it.

[English]

Equalization is a program that works. It works to support needs, health care, education and social services that are special to the Canadian quality of life. It works to put into action the principle of fairness that is so important to being Canadian. I would encourage and hope that all honourable senators would support the bill.

The Chairman: Colleagues, we are discussing Bill C-18. The subject matter is equalization, and in a more general way, federal-provincial fiscal arrangements.

We do not see the Minister of Finance very often. Still, I would hope that you and he would resist any temptation to go farther afield. Out of consideration for the large number of senators who are here, I would ask you to stay within the subject matter on our agenda today.

Senator Bolduc: Mr. Minister, welcome. We are pleased to have you here. You come here once a year. It is a great benefit for the committee to have you here.

I recently read a book by Dan Usher, professor of economics at Queen's University, The Uneasy Case for Equalization Payments. He tried to measure the equality of the program with three factors, equality, efficiency and equity. In defining those words, he said that equity related to whether the Canadian program of equalization payments succeeds in equalizing the distribution of income among all Canadians. He said that efficiency could be defined as whether the national income, broadly defined, is higher with equalization payments than it would be otherwise. He said that equity, for the purpose of his work, could be defined as conformity with the community sense of what is just, right and fitting in the conduct of public affairs.

His conclusion, after 116 pages, is that, as with equality and efficiency, one cannot say definitely whether the virtue of equity is or is not promoted by the Canadian program of equalization payments. My hunch is that it is not. What is your opinion, Mr. Minister?

Mr. Martin: Essentially, the professor believes that equalization creates a dependency factor. My view is that that is incorrect, and that equalization and the necessity of providing roughly comparable services in terms of health care and education is essential to the development of the country as a whole. The wealthier provinces benefit, as an example, from the tremendous educational programs and institutions that exist in some of the less well off provinces. It really is the essence of a country that the basic services be available on a comparable basis across the country. I would disagree with that aspect of what the professor said, Senator Bolduc.

Senator Bolduc: If we put that in another perspective, that program costs something like $10 billion, or 1 per cent of the Canadian economy. If we add to that the transfer payments that fall in the neighbourhood of $35 billion, that means that $45 billion, or one quarter of the federal budget, or one third of program expenditure of the federal government is combined in those two programs.

When you develop the argument that you have developed in favour of equality of efficiency, exactly the contrary of what Professor Usher states, you imply also that the transfer payments go in the same direction. They look at the same objective; is that correct?

Mr. Martin: Yes and no, senator. The transfer payments for health, education and welfare, for example, go to all provinces on a per capita basis, and they go to those provinces regardless of their own provincial revenues. On the other hand, the purpose of equalization is very specific, and that is to bring the less prosperous provinces up to the fiscal capacity of the standard five. There is no doubt that transfers to the provinces represent a substantial portion of the federal government's spending, and for the recipient provinces, in the case of equalization, they represent an important part of their own provincial revenues. There is a difference between the CHST transfers and the equalization transfers.

Senator Rompkey: Mr. Minister, I support Bill C-18, and I will ask all senators to vote for it. It is a good bill.

Having said that, I also want to discuss the program as it exists at present and what might be done with it in the future. My understanding is that you are prepared to look at some revisions when the equalization end of the present term presents itself. I am glad to hear that because I think we need revisions.

Mr. Minister, it seems that what was considered a blessing has almost become a curse. I know you have argued that it does not create a dependency. However, for my part, I cannot see how my province, and perhaps Nova Scotia, can get ahead under the present circumstances.

I know that you have said that the gap has narrowed, but it is marginal. We are not that much farther ahead now than we were in 1949, compared to the national average. We have grown, and Confederation has been a blessing from that point of view; however, Canada has also grown. Compared to the rest of Canada, we are only marginally farther ahead than we were in 1949. Under the present circumstances, I do not see how that will change, except over a period of time.

We still have some of the most expensive costs of any jurisdiction in the country. Last year, the cost of providing education in Newfoundland was 120 per cent more than the national average. I know you have discussed quantifying, too, and the difficulty in making comparisons across the country. However, that sort of thing has been done.

I remember the study of post-secondary education that was done by Al Johnson. He was able to quantify across the country. I believe it is possible to quantify costs, if not to qualify costs.

As long as we, the poorest province in the country with the lowest per capita income and the highest per capita debt, still must pay 120 per cent of the national average to provide an education system, there will be great difficulty getting ahead.

It is important to make the point that if you look at good things happening such as Voisey's Bay, Lower Churchill and so on, without education it will be impossible for people to really benefit in the long run. In the Indian community of Sheshatshiu last year, there was one graduate from high school. They have had a high school since 1960. I know those are special circumstances, but the same thing is true, to a more or less degree, in other areas of rural Labrador, yet those people are looking at what could be a bountiful future.

Some way must be found to provide a quality education without those exorbitant costs. The resources are on our doorstep. As you say, with regard to Hibernia, as in the case of Nova Scotia, there is some consideration. Instead of a 100 per cent clawback, there is a 70 per cent clawback, or bringing those resources into the equalization formula.

It will still take a long time to get ahead if you are working on 20-cent and 30-cent dollars. As I understand it, that is what we will be working on in the case of Voisey's Bay. For every dollar we make in Voisey's Bay, 80 cents will go to the federal government, one way or another, either in clawbacks, taxes or funds in general. That is the way the system works at the present time.

I have some real difficulty with the system as it exists. You talked about not creating a dependency. We want to be independent and pay our own way. We want to do that with our own dollars. In the short term, I cannot see how that can happen within the present system. I urge you to look at some revisions. One of your last points was that it is very difficult to change the system. Perhaps we should just scrap it, start from scratch and design a new system that would be fair and equal to all Canadians. With the present system in place, I cannot see how we can begin to harvest those resources in the short term to our own benefit.

Mr. Martin: One can certainly tell, senator, that you have had experience in the House of Commons. You have asked about 15 questions. I will try to deal with them as best I possibly can.

Senator, you are absolutely right that the equalization is undergoing constant revision. The day that the first agreement is signed is the day that the officials begin to work on the next one. That is exactly what is going on. Your first point is very well taken.

I will take your points perhaps in a slightly different order than you gave them, senator. Essentially, what equalization says and what it has to say is that we are going to equalize out the fiscal capacity of the various provinces. Then there is a whole listing of sources that lead to that fiscal capacity. Essentially, there is an exception made in the case of Newfoundland and Nova Scotia for natural resources, but if you were to go beyond that you would essentially be saying that the natural resources of some provinces are more important than the natural resource of other provinces. You would likely accept that that is not fair. In fact, we have been put on notice by all the other provinces quite clearly that they would insist on equal treatment, so that concept would not be on.

I would then go on to make several other points. It is very important to understand that with respect to the benefits that flow from this great natural resource wealth in Newfoundland and Nova Scotia, while there is an adjustment in terms of the revenues received by the province, the economic benefits, the job creation is there. The citizens of Newfoundland and Nova Scotia benefit enormously from the jobs that are created from economic activity. There is not a one-for-one reduction, but there is a huge benefit that occurs.

I would like, however, to deal with what I think is your principal point. It is one, senator, that I do not disagree with at all. Where I would disagree is that equalization is the answer to the problem that you are raising.

Equalization is a somewhat blunt instrument. Its purpose is to basically equalize fiscal capacity. It ought to be allowed to do that job. It is an incredibly important job in terms of basic needs. However, that does not mean that there are not other needs in individual provinces that should not be looked at in other ways. That is really where the focus ought to lie, not through equalization but through those other ways.

I do not think the fact that some provinces have not done as well as other provinces is a failure of equalization. It may be a failure of economic policy; it may be a failure of geography; it may be a failure of history; it may be a failure of many currents, but it is not a failure of the equalization program. What we have to do as a people, rather than use a blunt instrument like equalization, is target the cause of the problem and then deal with it.

Let me deal with the two examples that you gave. With regard to education, you are absolutely right. When the government brought in both the Canadian Foundation for Innovation and the research chairs, it married those programs with what I think is a very important initiative, the Atlantic strategy. That strategy recognizes that in fact the opportunities in Atlantic Canada to benefit from the research chairs or from the Canadian Foundation for Innovation will be different from other parts of country and that a leg-up is required to deal precisely with the problem you have raised. I agree with you. I think, instead of a shotgun, we need a rapier.

The second example that you gave was in terms of the Indians. There is no doubt, senator, that this is federal jurisdiction, that we have to do a better job in terms of our ability to help Aboriginal Canadians receive education. That is not an equalization problem. That is a problem that we as a federal government have a responsibility to deal with directly.

The Chairman: We will go to one of the non-recipient provinces.

Senator Tunney: I have two very brief queries. How often do we have what we would call neutral provinces, which are neither recipients nor contributors?

My second question is this: Are you injecting further factors into the formula? I know there are 33. I am wondering if the number is increasing, will stay the same, or whether some might be some eliminated. Are there any judgmental factors that are not determined by economic information?

Mr. Martin: Senator, there is no such thing as a neutral province. There are recipient provinces. It is a seven and three split. I do not know if one could ever get that very delicate balance. There are provinces that are on the line in both ways.

With regard to your other question about the introduction of further factors, yes, there are. In every revision, officials look at the factors to ensure that they are fair. I will give one example. It used to be that they simply calculated the benefits of the forestry industry within an individual province, which was done by calculating the number of trees and the amount of fibre that was available. Subsequently, as technology improved and there was the ability to look at reality, they were able to actually differentiate between the value of the various forests and the quality of wood, which was very important for some provinces. Essentially, what can be done is to refine those numbers.

You are look looking for simplicity, Senator Tunney. I must say that I understand that. When I joined the department, there was one person who understood how the formula worked. Unfortunately, he retired. I believe that Frank is the only person in Canada who understands. We went very deliberately to a very young person so he would be around for a long, long time.

Senator Tunney: I have a further question on neutrality. I fail to understand how a province could not be neutral if it is not a recipient and if it is not a contributor.

Mr. Martin: The fiscal capacity is about $6,000. You have either to be above it or below it. If you are at $6,000, could you be neutral? What happens? Could you be neutral? There are some that are very close, but nobody has ever seemed to hit it down to the last decimal point.

The Chairman: Elaborate on that a little for the record, Mr. Martin, if you do not mind.

Mr. Martin: Essentially, you look to the five-province standard. You basically say, "Okay, the average of the ive-province standard per capita is the capacity to produce $6,000 per head. If you are above that, then you are a have province; if you are below that, you are a recipient province." The purpose of equalization is to bring you up to that level.

Senator Finestone: Is $6,000 supposed to be the level by which you live?

Mr. Martin: It is the fiscal capacity per capita of an individual within the province.

The Chairman: There was some discussion here the other day, Mr. Martin, about how close or how far British Columbia might be from becoming a recipient province. We understand that. I thought I heard you say that there may be another province that might be close to becoming a non-recipient province; is that the case?

Mr. Martin: I think that Saskatchewan is probably the closest province to going the other way.

Senator Moore: I was interested in your remarks in response to Senator Rompkey when you said that we have to look at things in different ways as opposed to just playing with the equalization formula. Some of the discussion revolved around education and the costs of education in Newfoundland. Being from Nova Scotia, I am deeply interested in that topic.

We have had programs, such as research chairs and chairs of excellence, et cetera, that have been designed on the basis of matching monies. As you are no doubt aware, the universities in Atlantic Canada are not as endowed as those in other provinces, even though we do more than our fair share of educating the youth of the country. We will not be able to participate fully in those programs. That will result in our universities having lesser facilities, the loss of students and the loss of researchers. Not only do we not participate, but we are not catching up, which I think may also have been Senator Rompkey's point.

I would like to know your thoughts on these programs being based on more general terms, where all provinces can participate in a more fair and equal way, without deflecting from the pursuit of excellence but just in fairness of opportunity. Would you like to comment on that, please?

Mr. Martin: Senator, there is great validity in the point that both you and Senator Rompkey are raising. As you know, having been one of the prime movers behind the whole idea of the Atlantic strategy, a substantial portion of the Atlantic strategy recognizes that there are parts of the country, Atlantic Canada being an example, where the ability to find private-sector partners is a heck of a lot more difficult than it is elsewhere. If you are going to have a level playing field and allow education institutions in that part of world to be able to compete with others, they will need that step up.

I am quite pleased to say that when I put that idea to the ministers of finance of wealthier provinces there was a recognition of that. In terms of all of these various programs, such as the research chairs and the Canadian Foundation for Innovation, clearly, we must be pursuing excellence. However, we have to recognize that there are parts of the country where the playing field is not level. As well, there are also smaller universities, community colleges and that kind of thing, which require special transition measures or special help. The government is in the process of doing that.

As we look at the concept of regional development, one of things that is happening is that it is being defined in terms of how to give people the educational capacity not only in the larger centres but also in the smaller centres. That is a major step forward, one that we are in the process of taking as a country.

Senator Moore: People in those centres have no less desire or drive for excellence. They just want, as you put it, an equal playing field. They want that chance.

Mr. Martin: That is the way to go at it.

Senator Stratton: I would like to turn to the cash transfers. When your government was elected in 1993-94, the cash transfers, according to the list I have, were $18.810 billion. You do not catch up because they dropped off substantially from that year. They are now coming back and we will move ahead in the next fiscal year; is that correct?

Mr. Martin: Yes, correct.

Senator Stratton: So we have been having a shortfall for about nine years from where we were when you were elected, is that correct?

Mr. Martin: Yes.

Senator Stratton: In Manitoba, which is my favourite place, we were at 761 in 1993-94. It will take us until 2004-05 to catch up to where we were in 1993-94. Is that because of a loss of population? How does it work? Why does Manitoba suffer the additional years, if I may put it that way?

Mr. Martin: I am not sure I fully understand your question, senator, but I will try to answer it. First, in the case of a province like Manitoba, you have to look at both the transfers and equalization, which are part of the package. As you know, CHST transfers were cut in 1995. I think that is fairly straightforward. Equalization was not cut and equalization continued to grow.

Second, I am not sure it is fair to only look at the cash transfers without looking at the tax points. A number of provinces are asking for tax points at the present time. Obviously, tax points are a very valuable aspect to them. The tax points have increased substantially. The value of the tax points has gone up an enormous amount since they were first transferred. In fact, if you look at Manitoba, or any other province, and if you look at the total transfers, including tax points and equalization, you will find that the transfers are at an all-time high.

Senator, I am perfectly prepared to accept that, in 1995, there were cuts in the original CHST transfer.

Senator Stratton: The Canada West Foundation has just issued a report, and that report sets out that two of the four western provinces are growing exponentially in their economies and population. Unfortunately, Manitoba and Saskatchewan are the vehicles by which the other two provinces are growing that way. There has been a gradual but steady decline from the early 1960s on. That trend is not changing, and that becomes a concern, as it does for Senator Rompkey in his province. It becomes a never-ending cycle of dependency.

While I agree with you that education is a significant issue, Manitoba has two fundamental renewable resources. One is hydroelectricity, and the other is water. Perhaps we should sell our water just for the simple purpose of putting us on a level playing field. I do not necessarily want that to happen, but there has to be a trigger to take us from that gradual, steady 40-year decline - not necessarily instantly, but over the next 10, 20 or 30 years. Do you see that opportunity? Manitoba used to be a have province.

Mr. Martin: Senator, certainly Manitoba, as you have pointed out, has tremendous hydroelectric capacity, and given what is happening in North America, there has to be a major opportunity to develop it.

I would probably not agree on the sale of water.

Senator Stratton: I did not think you would.

Mr. Martin: The fact is that only one province has not received equalization, and that is Ontario. We sometimes forget that Alberta was once a major recipient of equalization, as was British Columbia. The answer to your question is, yes, I do.

There are ups and downs. It is the essence of this country that we stand together. When some people are doing well and others are not, we stand together. Very clearly, between ourselves and the provincial governments, we have to work together to make sure that those provinces that are not growing as fast as the others are given the leg up required. It is an ongoing facet. Equalization is part of it, but it is not the major answer. The major answer has to be economic development and the multitude of packages that can develop that.

Senator Fraser: Equalization is a wonderful thing. This is not a disguised attack on equalization, but there is something I have wondered about for quite a while. It goes to Senator Rompkey's peroration, where he asked: Should we not just scrap it and do something else?

Many Canadians forget that equalization was put into the Constitution in 1982 - and as far as I know it is still there. It is probably the only fiscal arrangement this country has ever had in the Constitution, maybe the only one any country has had in a constitution. It was put there to entrench formally our sense of mutual obligation, which is surely a good thing about being Canadian.

What does that do to limit flexibility, redesign, and adaptation? To what extent does that constrain policy makers?

Mr. Martin: These are the kinds of things, senator, on which reasonable people can differ. To put the arguments into place, first of all, there is the argument originally raised by Senator Bolduc. We have to understand that there is a substantial body of opinion that is against equalization as a concept, those who say that equalization breeds dependency and is not fair to taxpayers in one province versus another. As I indicated in response to Senator Bolduc, I do not agree with that thesis; however, there is a substantial body of opinion out there that holds that view.

On the other side, there are those - and I think this is more pertinent to your question - who believe that equalization ought to be changed radically in order to deal with these particular problems. Again, it is my view and the view of government that that is not the right answer. Equalization ought to be allowed to do the job it is doing.

The problems that Senator Rompkey and Senator Moore have raised and that you are raising are problems that require targeting. If you look at what Senator Rompkey raised, the problems of the Innu, those are very specific problems. If you look at the problems and the opportunities that exist in Nova Scotia or Newfoundland or Atlantic Canada, they are very different than the problems or opportunities that exist in Saskatchewan or Manitoba.

It is my belief that as a country we must treat all provinces fairly but recognize that, in fact, the problems and the step-up that is required in Atlantic Canada might be different than the one that is be required in a western Canadian province.

The best example I can possibly give you is this: There is a tendency on behalf of some of the wealthier provinces to think that treating all provinces equally means you do the same thing everywhere. If you help the Port of Halifax, the same answer would not necessarily apply to helping the Port of Regina. In Senator Stratton's province, the situation with respect to Aboriginals is different from the problems that exist in Newfoundland. We have to deal with those problems as they are, not as they are in some theory.

Senator Fraser: Given this constitutional provision, what I am asking is this: Do we find ourselves constrained to continue an equalization program that is not targeted in the way you are talking about at approximately its present level of GDP, or whatever measure one might choose? Could one redesign something that would still be called equalization and would be far more targeted?

Mr. Martin: There are two things here. It comes down to your definition of "constraint." The fact is that a program growing at the rate of GDP is the fastest growing government program of all. The constraint is not nearly as great as it would appear. None of our programs is growing at the rate of GDP. It is important to put that in context.

By definition, targeted equalization is impossible. Essentially, what the provinces are saying is measure our fiscal capacity, provide us the money and let us do with it as we see fit. That is what the provinces are saying. They do not want targeting and equalization. The provinces are saying: "Measure the fiscal capacity, give us the money, and we will decide how to spend it." My view is that we should allow equalization to be modified by officials on the ongoing negotiations, but we should look to the targeting elsewhere.

The Chairman: I am going to come at this issue somewhat differently than Senator Fraser. Several times, you made what I believe is an important point, that is, the vastly different social conditions that exist from virtually from one part of Canada to the other. For example, there is more of an aging population in one place, more Aboriginals in another, more immigrants somewhere else, and English as a second language in another. The conditions are vastly different, and it follows that the needs and, therefore, the priorities of provincial governments in those social areas within their jurisdiction are considerably different.

Does that not argue for more programs like equalization with no strings attached rather than federally designed social programs?

Mr. Martin: It probably calls for a greater level of partnership between the two levels of government, senator.

First, we are looking at several of the problems, such as Aboriginals on reserve and the whole question of research - an important part of the new economy. The federal government has played the predominant role. If you look at the answers to a number of questions raised, you will see that these are areas where the federal government either has full jurisdiction, has the lead role, has taken it on, or where the provinces are looking for partnerships.

The Chairman: As you have said, it is difficult for the federal government to tailor different programs to different provinces. One of things we tried sometime ago, which made fiscal sense but bad political sense, we put a cap on the federal contribution, under the old Canada Assistance Plan, to the richer provinces. In the broadest sense, it was a political mistake, because it almost jeopardized their support for things such as equalization.

I do not quite see how you will have different strokes for different folks on the social programs within the provincial jurisdiction.

Mr. Martin: I do not think we will have that on the social programs. For example, there is the $45 billion in the CHST that is transferred to the provinces without any federal preference. It is totally at the discretion of the provinces, except, I guess, most recently where the provinces and the federal government agreed that the bulk of that $21 billion would go to health and childhood development. Overwhelmingly, our transfers go to the provinces with no strings attached. We are talking about the areas where partnerships are required.

The Chairman: Do you think the social union agreement has increased the bargaining clout of the provinces in federal-provincial negotiations?

Mr. Martin: It has provided a very healthy context within which both governments can operate.

Senator Banks: Before I ask my question, I want to compliment members of your staff who were here before. They were extremely informative.

Mr. Martin: They appreciated it, and they keep sending me notes to tell me not to mess up.

Senator Banks: You are in the hot seat, sir, because they did not mess up.

There must have been much pressure on the government and on you and the Prime Minister to remove the cap. The cap is there for reasons of prudence. I notice that it has been removed in three successive, previous, fiscal years and then on a fourth occasion in 1993-94.

Is not removing the cap rather like opening Pandora's box? Does it not work an extraordinary hardship on planners when we slam the cap back on in the next year? That is not withstanding that the provincial planners must now assume that because this bill lifts the cap for one year that is all that will happen.

I assume that there a bit of targeting in this cap removal in a way that we must be answering some specific, urgent need, which at the moment we perceive will cease to exist at the end of the next federal year, when it becomes payable. I am confident that you understand the gist of my question.

Mr. Martin: It is important to understand that the cap moves.

Senator Banks: I know the cap moves.

Mr. Martin: That is right. It keeps going up, so they can count on it. I have heard a complaint from the provinces. There is no doubt the provinces would clearly like to have no cap; and they would also like to keep a floor. There is no doubt that one hears that complaint.

The point you are talking about in terms of the inability to plan is one that they make, but it has nothing to do with the cap. They made that complaint even when there was no danger of hitting the cap. Equalization represents a substantial portion of provincial revenues. In fact, equalization is based on the state of the economy and the state of the economy of individual provinces.

Equalization has grown over the last three or four years because of the incredible growth that Ontario has had. No province was able to plan on that; nor were provinces able to plan on the possibility of a downturn in Ontario. They complain about the fact that they cannot plan ahead when there is such a fluctuating revenue. Planning is such an important part of the total package.

That has nothing to do with the cap, senator, but rather with the measuring of the respective fiscal capacities.

Senator Banks: What happened?

Mr. Martin: Thus far, since we have been in office, we have had a strong period of growth. All of the surprises have been beneficial, so it has not been a problem for the provinces. Depending on what happens in the future, if we do not have continued strong growth, we could find ourselves in the situation that the provinces found themselves in the 1980s and early 1990s with bad surprises.

Senator Banks: Since we have already bitten the bullet of transfers, including the CHST being a combination, we have said that some of it will be money and some of will be tax points. Have the provinces asked, or would it be more practical, to transfer many more tax points and to stop messing around with sending the money - in other words, change the tax balance?

Mr. Martin: In my view, senator, no, it would not be more practical. First, tax points have a very different effect in different provinces. A tax point in Ontario is worth a great deal more than a tax point in Quebec or in Newfoundland, simply because of the fiscal capacity of the province. The provinces will agree that it is fine, but you can equalize that off.

When you transfer tax points to Ontario, it can be different than sending tax points to Newfoundland. The problem is that you can do that once, and after that the gap increases. In fact, over the years, Ontario will have received a much higher transfer, even if the adjustments were made at the outset.

That is one reason that the transfer of tax points does not make much sense. We also have to look at the fiscal capacity of the federal government.

I do not want to go beyond the bounds that the chairman set out, but if I could take 30 sections on this, please.

The federal government spends 25 cents of each dollar on interest. The provincial average is about 12 cents of each dollar. The federal government has a debt-to-GDP ratio of about 54 per cent, whereas the provincial average is about one half of that. The provinces have the same revenue source that we do, and on top of that they have the lotteries and gaming.

The provinces actually have more money to spend than we do. On the other hand, it is the federal government's balance sheet that sets the tone for interest rates in the country. Those interest rates are incredibly important, not only for economic development but also for every province and the federal government that is borrowing.

In fact, the transfer of tax points would not be a good idea because of the unfairness to individual provinces and because of what it would do to federal government revenues and ultimately the economy of Canada.

Senator Banks: Why do we not take them back, because it seems to be a better way to do it - get the money and then spend it?

Mr. Martin: The problem is that the transfer tax points ultimately mean that you have vacated tax room. The way to do that, of course, would be to increase taxes - and we would not want to do that, senator. We would like to see taxes going in the other direction.

Senator Banks: I am not suggesting anything that would increase taxes.

Senator Finestone: Is the payment formula based purely on a per capita calculation? Are there no conditions for equalization payments or transfer payments or social contract payments? Are they all based strictly on a per capita payment?

Mr. Martin: Yes, they are.

Senator Finestone: Are you a little concerned about that response, Ms Peterson?

Mr. Martin: You would like to correct the minister.

Ms Susan Peterson, Assistant Deputy Minister, Federal Provincial Relations and Social Policy, Department of Finance: If it is leaving the impression that everyone gets the same per capita payment out of equalization as everyone else, then that is not right. That is true of the CHST.

Senator Finestone: That was not my suggestion. It is based on population?

Mr. Martin: Yes.

Senator Finestone: On the question of not wanting to have specific criteria, I understood what you said about all the different problems. That does not change the fundamental problem that Canada is made up of men and woman, boys and girls, and that there is a gender issue. Where a province has uneven gender levels - whether it is too many men or too many women - there can be a significant impact on equalization or social transfer or social contract. Why is that not considered a criteria to be examined before you do anything else? You should have a good picture of how many men there are, how many women there are, how many people have pension plans, how many people have some support as they grow older, and how many children require some kind of support when they are young. I cannot understand why a gender evaluation is not inherent in public policy before any balance or distribution is done based on population.

Mr. Martin: This is the difficulty faced by Mr. Vermaeten and others who understand the formula as it is designed.

Senator Finestone: So do you walk away from it?

Mr. Martin: There are an infinite number of differing characteristics. It becomes virtually impossible to bring them all into account. That is why we go basically on the basis of population.

There is no doubt about the importance of gender analysis, an issue with which you have been identified throughout your whole career and especially in Beijing. Essentially, gender analysis should be applied to public policy; there is no doubt.

Senator Finestone: How and when are we going to reach that nirvana?

The Chairman: Senator, we have getting a bit far afield. We have an equalization bill before us.

Senator Finestone: I may be out of order, Mr. Chairman, but it strikes me that if we are doing equalization payments we must know the population to whom we are paying them.

The Chairman: I think they know.

Senator Finestone: The population of any country that I know of is made up of two genders, men and women. Without the women, you cannot have the men.

The Chairman: I think you made that point, senator.

Thank you, Mr. Martin and officials, for your appearance here today. As always, it was extremely interesting.

Honourable senators, we will hear from the provincial Minister of Finance from Newfoundland on Tuesday morning at 9:30. If all goes well, I will ask you whether you want to proceed to clause-by-clause consideration of this bill after that hearing. Until then, the committee stands adjourned.

The committee adjourned.

---