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Proceedings of the Standing Senate Committee on
National Finance

Issue 16 - Evidence

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OTTAWA, Tuesday, June 12, 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 9:30 a.m. to give consideration to the bill.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: Honourable colleagues, we have before us Bill C-18, to amend the Federal-Provincial Fiscal Arrangements Act, which bill was referred to the committee on May 31. A week ago today, we heard from officials from the Department of Finance. On Thursday afternoon we heard from the minister, the Honourable Paul Martin. Today, we have the pleasure of welcoming representatives from two provinces: first, the Minister of Finance of Newfoundland and Labrador, the Honourable Joan Marie Aylward. I am informed that the minister is, I dare not say a veteran member of the House of Assembly of Newfoundland, but has been there for several terms from one of the St. John's constituencies. She has been the Minister of Health in that province, a nurse by profession, and she is now serving in the hot seat as Minister of Finance.

Ms Aylward is accompanied by Mr. Terry Paddon, Assistant Deputy Minister, Taxation and Fiscal Policy.

We will also hear from the Government of Manitoba today. With us is Mr. Ron Neumann, Director of Intergovernmental Finance in the Department of Finance of that province.

To expedite matters this morning, I will call on the minister from Newfoundland and Labrador to make an opening statement, after which I will ask Mr. Neumann to make his presentation. We will then open the floor for questions and discussion.

Minister, please proceed.

Ms Joan Marie Aylward, Minister of Finance and President of Treasury Board, Government of Newfoundland and Labrador: Thank you. I am pleased to be here. It is nice to see Senators Rompkey and Doody from the Newfoundland and Labrador contingency.

I am pleased to have the opportunity today to present to you the views of the Government of Newfoundland and Labrador on Bill C-18, which amends the ceiling provision on the equalization program. I will speak to two issues today with respect to the equalization ceiling. The first is the overriding issue of whether a ceiling provision should exist at all. The second is, if the ceiling is imposed, it must be a fair and reasonable one.

The Province of Newfoundland and Labrador is fundamentally opposed to a ceiling, which provision was first imposed in 1982. This is our longstanding view and it is consistent with the views of the other equalization recipient provinces. We have maintained this view since 1982. All calls to remove the ceiling have gone unheeded by the federal government. This forces the recipient provinces to fall back to the second issue, which is trying to ensure that any ceiling imposed by the federal government is fair and reasonable.

To be clear, the ceiling, either as imposed at the 1999 renewal of the equalization program or as amended by Bill C-18, does not have the support of my government. The ceiling should not be a mechanism used by the federal government to constrain and suppress normal program growth. This is what the ceiling provision has deteriorated into in its most recent incarnation.

The purpose of equalization, as stated in the Constitution, is to ensure that all provinces have sufficient revenues to maintain reasonably comparable levels of public service and reasonably comparable levels of taxation. This can only be achieved if recipient provinces receive, on a consistent basis, revenues that match a reasonable standard.

A fully functioning equalization program is of critical importance to my province. Much has been said in recent years of the importance of an increased federal contribution through CHST, the other major federal transfer program, to fund the burgeoning cost of health care across the country. I feel quite able to discuss that, having served in the ministry of health for three years. The need for this has been very real. The CHST will provide our province with an entitlement of about $300 million this fiscal year. This is all relative to total budgets, but when you match this $300 million to the $1.4-billion cost of operating our health care system this year, and the three-quarters of a billion dollars that it costs to operate our education system, the importance of a fully functioning and robust equalization system becomes obvious. It is the equalization system, with an entitlement this year of $1.1 billion, that allows us to put the meat on the bones of the public services in our province.

I will turn my attention to the ceiling. Each year, the equalization program determines a normal level of entitlements that are based, in the federal view, on a fair average of the revenue generating potential of provinces and in keeping with the constitutional commitment. In effect, the ceiling second-guesses what this should be by some arbitrary measure, whether or not the level is too high for the federal government to pay. If the ceiling reduces entitlements, that results in the recipient provinces being underpaid, to a level lower than the standard. By definition, this means that they are not able to maintain reasonably comparable services at reasonably comparable levels of taxation. The more restrictive the ceiling is in limiting program growth, the more at risk we are with respect to services and the taxation levels in equalization recipient provinces.

If the equalization standard is rising and thereby driving higher equalization payments, this generally reflects strong tax base expansion and revenue growth in the provinces that comprise the standard. This reflects a buoyant economy which, in turn, will lead to strong federal revenue growth. The federal government will have the financial resources to sustain the growing equalization entitlements.

This raises the likely possibility that a restrictive ceiling, such as was imposed in 1999, could lower equalization payments at a time of buoyant federal revenue growth, diverting money from the equalization program into an already swelling federal surplus. This means that money is being denied to the poorer provinces, potentially lowering service levels and keeping taxes high in these jurisdictions to give the federal government an even bigger surplus.

As a recipient province, we cannot accept that this in an appropriate exercise in either nation-building or cooperative fiscal federalism. If we cannot convince the federal government to do away with the ceiling, our objective - and my objective today - is to ensure that any ceiling imposed is fair and reasonable.

I am here today to make a case that the ceiling, even after Bill C-18, is not fair and is not reasonable. Furthermore, it is a rather unsettling precedent for the future of the program. This raises the question of how we would define "fair and reasonable" when the federal government insists on maintaining a ceiling.

Entitlements may be growing rapidly in times of strong economic performance, but federal revenues are also growing at a similar pace, meaning that federal exposure to a fiscal shock is largely eliminated. The need for the federal government in this kind of environment to protect itself from significant and unanticipated increases in program costs would be open to some question, and has the appearance of not being a real issue.

The second way program payout could run up rapidly would be through rapid and significant tax increases, particularly in the larger standard province. This is unlikely in today's tax-cutting climate. We heard only a few days ago about major tax cuts in B.C. That, alone, will have significant impacts for equalization receiving provinces.

The federal government says that this would represent a significant risk to the federal government. In fact, the opposite is true. Tax cuts by standard provinces, particularly in personal income tax, are lowering program payouts to recipient province.

In essence, Bill C-18 removes the ceiling for one year only, the year 1999-2000. This returns $36 million to the people of Newfoundland and Labrador, money which the normal equalization calculation determined should have been paid out in the first place. This $36 million is money that will be used for health care, education and to ensure that our tax rates, already among the highest in Canada, do not get any higher.

To give you an idea of what $36 million represents for us, it represents nine days of health care funding in Newfoundland and Labrador. Thirty-six million dollars represents 13 teaching days for the youth of our province; Thirty-six million dollars is equivalent to 6 per cent of our personal income tax revenues. Undoubtedly, without this money, hard choices would have to be made regarding our spending levels for critical social programs and tax levels.

Bill C-18 also maintains the ceiling after 1999-2000, but at a starting point of $10 billion, a point which is already lower than the current entitlement levels. The ceiling that will be in place, even if Bill C-18 is enacted, could likely constrain normal program growth; growth that would have to be matched, more or less, by offsetting federal revenue growth.

Under modest economic growth scenarios throughout the period to the next equalization renewal in 2004, it is quite conceivable that the program entitlements could consistently ride up against a ceiling, a false ceiling. This situation is neither fair nor reasonable for recipient provinces that, for the most part, are struggling to maintain responsible fiscal positions.

In my view, the situation is straightforward. The ceiling for 2000-2001 and beyond is based on a starting point that is well below the actual entitlements for 1999-2000. Starting from a point well below the most recent entitlements and growing that base by GDP to establish a ceiling is not protecting the federal government from, to use federal words, "unduly rapid growth in program entitlements" or "significant and unanticipated increases in program costs."

Taking the approach that the federal government has adopted and is perpetuating with Bill C-18, the ceiling now appears to have the capability of frustrating program growth that is well within the fiscal capacity of the federal government to fund. At a minimum, the ceiling should be re-based to a more realistic starting point so that, in application, it would fall within the parameters of its stated objective.

The Government of Newfoundland and Labrador is of the view that, at a minimum, this new starting point should be the actual total entitlement for 1999-2000. I would note that even this minimum is more restrictive than a ceiling provision should be if it is to be consistent with the federal statement on ceiling objectives and what we believe is fair and reasonable, given the current fiscal circumstances of the federal government versus provinces like ours.

The Canadian Constitution commits the Parliament of Canada to making equalization payments such that provinces will be able to have reasonably comparable levels of public services at reasonably comparable levels of taxation. The Constitution places a duty on the federal government to ensure for the people of Canada that this commitment is honoured and fulfilled. I assert to the members of this committee that the equalization ceiling in its present form, even as amended by Bill C-18, works to frustrate the federal mandate to deliver on this commitment. Further, the only fair and reasonable recourse is for the ceiling to be changed, if it cannot be eliminated, to protect the federal government from significant, unanticipated, unduly rapid growth in program entitlements but not from normal growth, even if this entails strong growth and entitlement that arises as a function of the equalization program working for Canadians, as it is designed to do.

Mr. Ron Neumann, Director of Intergovernmental Finance, Department of Finance of Manitoba: I want to thank the committee for inviting me to speak on behalf of the Government of Manitoba on the matter of the equalization ceiling.

Equalization is an important cornerstone of the Canadian federation; so important that it has been recognized and incorporated into our Constitution. It is incumbent upon all of us to defend the principle of the program, and to ensure that actions taken are consistent with the letter and spirit of the provisions of section 36 of the constitution.

Mr. Selinger, the Manitoba Minister of Finance, asked that I speak before this committee concerning the provisions of Bill C-18 and the potential effects of the ongoing ceiling on equalization payments. It is an unusual procedure for the Province of Manitoba to appear before a committee of Parliament, but this should underscore the importance of the issue to my minister. In fact, the ongoing ceiling on the equalization program has been a matter of concern to all provincial and territorial ministers of finance, and indeed all premiers. At a meeting in Winnipeg in December 2000, all provinces and territories reiterated their support for the position that the equalization ceiling should be removed from the program. The full communiqué from that meeting is contained in the package of materials that I am providing today.

This support for removal of the ceiling is not new. Provinces and territories, recipients and non-recipients alike, have consistently supported such action. This position is clear. We believe that the ceiling on the equalization program is an impediment to its adequacy and must be permanently removed.

I would like to highlight a few of the points tabled in the Manitoba Legislature recently as a budget paper. This paper is also contained within the package of materials presented today. In particular, I would like to emphasize the important role that equalization plays in contributing to the strength, vibrancy and unity of Canada. Equalization works to provide greater opportunity and economic growth across our country, a fact that has often been denied or distorted in the public press. The purpose of equalization is clearly stated in our Constitution. Parliament and the Government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

With the ability to provide comparable services at comparable tax rates, all provinces can compete effectively for economic growth and jobs, which all Canadians desire. Without comparable services, some Canadian citizens will be less prepared to take on available opportunities. Without comparable tax rates, business location decisions will be made on factors other than the fundamental economics of those decisions.

There is evidence that the equalization program has served the nation well. A recent longitudinal study by Professors Richard Bird and Francois Vaillancourt shows that since the equalization program was introduced in 1957, per capita economic growth in the recipient provinces over the past four decades has been slightly higher than the growth in the non-recipient provinces. This is a remarkable result which refutes the commonly held notion that equalization is a detriment to economic growth.

The growth has not been strong enough, either, to prevent net migration from recipient provinces nor to completely eliminate the differences in per capita disparity. However, we are making progress. Recently, the situation with respect to migration in Manitoba has turned around such that we now have net in-migration. We need that to occur because a shortage of skilled workers is one of the factors inhibiting our economic growth. Maintaining comparable personal tax rates and costs is important to attracting and keeping people in Manitoba. Equalization payments help to level the playing field for provinces seeking to compete, not only in Canada but also in the increasingly global economy.

The other way in which we are taking direct action to increase the supply of skilled workers is to increase education and training opportunities. Once again, the equalization program plays an important part in our ability to provide necessary public services.

The Manitoba government recently made the largest investment in post-secondary education facilities in the province's history. We will need to keep making such investments to ensure that the province has a well-trained work force that is equipped with the necessary skills to keep our economic growth strong.

These are a few examples to demonstrate the importance of the equalization program to Manitoba and to Canada as a whole. There are many more. However, most members of this committee recognize the value of this program. That is why my government is encouraged that the federal government has tabled Bill C-18, which will remove the ceiling for 1999-2000 fiscal year entitlements under the program. It is also why we are perplexed and disappointed that the Government of Canada has not yet chosen to remove the ceiling for 2001 and subsequent years. The ceiling will impact on recipient provinces unless further action is taken. However, I would argue that this does not demonstrate a failure of the program. In fact, the narrowing of per capita fiscal disparities over the year has allowed the program costs to decline as a proportion of GDP.

The ceiling is impacting because it has been lowered arbitrarily three times during the past two decades, and most recently in 1999. The lowering of the ceiling is outlined in the materials presented to you, including in a recent communication to Mr. Martin and in the budget paper that I mentioned tabled in the Manitoba legislature. The ceiling has been lowered from an effective rate of 1.33 per cent of GDP in the period 1982-1987 to 1.04 per cent of GDP today. Ceiling reductions have been made without due regard to the level of entitlements necessary to fulfil the program's mandate.

The equalization program formula is designed to calculate entitlements in an objective fashion. Technical improvements are always being proposed, but these are matters for discussion as the program is being renewed at regular five-year intervals.

Unless the ceiling is removed for the 2000-01 fiscal year and beyond, equalization payments will be flat, and could well decline from the 1999-2000 levels. This result is not in keeping with the offer made by the Prime Minister to premiers just last September. That offer stated that the ceiling on 1999-2000 entitlements would be lifted, and that entitlements would be allowed to grow at the rate of GDP growth after that.

In the documents provided to you there is also a table that shows the combined effect of the increases in CHST from the September offer, against the potential clawback of the equalization ceiling for 2000-01 and subsequent years. The table shows that the offer made by the Prime Minister in September would provide net benefits solely to the three most affluent provinces unless equalization is allowed to grow and not be clawed back by the ceiling provision.

No one should be under the illusion that the current ceiling will allow equalization entitlements generated by the formula to be safe for 2000-01 and subsequent years. All the economic and fiscal data that has yet to be factored into the calculations point to the effect of the ceiling being greater in 2000-01 than in 1999-2000. The potential loss of revenue to Manitoba for the 2000-01 fiscal year entitlements alone has been estimated at about $100 million. That is a significant sum in Manitoba. One hundred million dollars in lost revenue inhibits our ability to provide better health care, to improve access to education and training, and to continue to lower taxes to be comparable to our neighbours to the west, east and south.

I would add one further comment: When the equalization ceiling was first introduced, the federal government had a large and growing deficit. In the past year, the federal government has had a surplus exceeding $15 billion. The federal government should not be amassing surpluses by clawing back entitlements from the seven least affluent provinces in Canada.

I have been given to understand that members of this committee may reflect further on the importance of the equalization program this fall. My government urges you to consider our collective commitment to equal opportunity for all Canadians, which resonates in our Constitution, and on the fact that we are stronger as a nation when all regions prosper. The equalization ceiling should be removed.

Senator Stratton: Mr. Neumann, I know you are an advocate of the permanent removal of this so-called ceiling. What I am always interested in is the long term future and direction of the provinces. As you are aware, there was an article recently by the Canada West Foundation dealing with what is happening in the west with respect to the four provinces. It indicates that Alberta and British Columbia are growing exponentially, while Manitoba and Saskatchewan continue their long term decline, that long term decline being now of 40 years' duration. They view it as starting in 1961.

While there is help through equalization, my concern is that, in relation to this report by the Canada West Foundation, you do not see anything changing. As a matter of fact, you see it becoming worse in the sense of us having a difficult time in obtaining and retaining a skilled work force.

Do you believe there is a possibility of this gradual decline accelerating as a result of what is taking place in Alberta and British Columbia? On the other hand, are you an optimist in seeing a change or a turnaround to what is taking place now such that Manitoba, which has the second lowest or the lowest unemployment rate in the country, may actually become more economically independent, as it were?

Mr. Neumann: I am on the optimistic side. I think the Canada West Foundation study went to about 1997 or 1998. Since that time we have experienced a bit of a turnaround, and we now have some net in-migration which, as you point out, we desperately need because we have the lowest unemployment rate in the country. We are doing all that we can to attract the skilled workers we need for our economy to continue to grow.

We are doing two things: One is that we are lowering taxes as much as possible; the other is that we are training the work force that we have in Manitoba to be more skilled. Both those things require that the provincial finances not be so squeezed that we can do neither. We must compete against new strength in the far west, in Alberta and, it is hoped, in British Columbia as well, because we always want to see prosperity everywhere.

I am an optimist, but the one dark cloud that I see gathering is this growing fiscal disparity. Should resource revenues continue to drive greater fiscal disparities in Canada, then it will be a more difficult path for Manitoba to retain people as opposed to their going to Alberta. I would say that people moving to Alberta do not contribute any more to the economy in Alberta than they would contribute in Manitoba. It does not make any more sense to build buses in Calgary than in Winnipeg. However, the companies may decide otherwise if our corporate tax rates are out of line. These could be uneconomic decisions for the country as a whole if they are driven by fiscal disparities rather than economic fundamentals.

I am a bit of an optimist because I have seen a bit of a turnaround in migration to Manitoba. We do have the lowest unemployment rate in the country. We need more workers. We need immigrants and we need people coming from other parts of the country. We have to slow the outflow that was documented in the Canada West study.

Senator Stratton: If this committee looks at the equalization program in the fall, I ask all of you whether there is any particular area that we should be looking at that would be a favourite area of yours to be examined, as persons from Newfoundland or Manitoba?

Ms Aylward: As Atlantic health ministers, we have had a good discussion about that matter. I am sure other regions have as well.

As you know, in a region like Newfoundland, being a part of Atlantic Canada, our GDP is about 69 per cent of the rest of the country. We would look at something from a regional perspective that would be able the drive the economics of the whole region, and that generally takes a significant injection of funds. It takes commitment to infrastructure.

I would like to be on record as saying that the equalization program we have is a good one. It is one that we all wish we did not need. It is a safeguard, yet in some ways it is a deterrent. It is a safeguard for us that we value. In a province like ours, as I said to the Finance Committee, it would take six Hibernias coming on every two years for us to even consider coming off equalization. There would need to be a peak in one year, and a decline, and then another peak, and that would be our first inkling that we could come off equalization.

To get the point across, equalization is very important to us. While we are hopeful, we will probably need to look at regional approaches to deal with the issues. Manitoba and the west have their issues. We do have a high level of out-migration. We also have some of the highest aging demographics in the country and, realistically, older people cost more. The older one gets, the more dependent one becomes on services, and that is the way it should be. We must be able to provide those services.

We are pleased that a review will take place in the fall. That is a positive step. We hope to have a chance to look at the equalization program in a different way so that we can try to level the playing field and look at it from a regional perspective.

Mr. Neumann: From my perspective at least, a few things should be examined. What are the drivers to the program? I have long held that the program is largely self-contained. It will only increase when federal government revenues are increasing, and it will decline during periods of relatively slow growth. I would like to see that, and I think it would lead you to the conclusion that the equalization ceiling is unnecessary.

Second, the equalization of resource revenues should be examined. All revenues should be included in the equalization program and not just resource revenues. Some miscellaneous revenues have been excluded from the equalization program. We believe in full revenue inclusion. That is another important issue for us.

We continue to look at the appropriate standard. The equalization program has served the country well. Perhaps the standard is falling a little too low now with the five-province standard. It should be raised a bit, and perhaps the benefits of equalization would increase a bit. Equalization is an excellent program, not only for the recipient regions but for Canada as a whole. Perhaps we should examine whether the standard is adequate, given the task that is there, and see whether a stronger equalization program might make more sense.

Senator Rompkey: For those who were not in the chamber yesterday, I gave notice that I will introduce a motion today to call on this committee to study the equalization program at its earliest convenience and whether it has met the standard of providing reasonably comparable services to provinces, having regard to reasonably comparable levels of taxation. It is to be hoped that we will get into a more in-depth study of the equalization program. This morning, I am not sure what we can do except to underline the difficulties that the program presents in its current form.

I circled a phrase in Minister Aylward's remarks: frustrating normal program growth. Perhaps it is worthwhile to point out again the difficulty Newfoundland is facing at the present time.

Yesterday morning, the doctors of Newfoundland were telling us they are the lowest paid doctors in Canada. They want to know why they should stay. Why should they not go elsewhere and make what other people make? What attracts us to Newfoundland? Is it the fog? Is it the fish? Is it the generosity and the hospitality of the people? What is it that keeps us in Newfoundland when we can make more money elsewhere? Yet 40 per cent of the provincial budget is going into health care.

I laid on the table the last time the situation in education. It cost us last year 120 per cent of the national average just to stay where we are. That does not mean our people are 20 per cent smarter or our schools 20 per cent better. It costs us that much more to maintain what we have now in the face of possibilities for change. Where I live, we see the possibility of Voisey's Bay, the richest nickel mine in the world, coming on line. We see the lower Churchill, and more Hibernias, White Rose and so on, slated for future development. These things will happen.

The minister made the point last time that people will get jobs, and that is good. That is true. The question is, who will get the jobs and what jobs will they get? I have lived through this. I lived in Labrador in the 1960s during the construction of the Upper Churchill Falls project and I know who got the jobs there. Some of our people got jobs but they were not good jobs because our people did not have the skills. The reason they did not have the skills was the lack of appropriate education levels. I do not want to see that happen again, but I am beginning to see it happening again.

We have an out-migration now. If we cannot afford to give our people the education that will give them those skills, then somebody else will get the jobs. The jobs will be created and the tax base will be increased, but who will pay the taxes? It will not be our people if we cannot educate them. That is the critical point that we must address in terms of need. "Frustrating normal program growth" is a problem at the moment, as I see it.

We have heard some possible answers about bringing various things in and leaving others out of the mechanism. If it is a good program, and you have said that it is, then we must come to grips with how to modify the program to make it effective. It is clearly not effective at the present time. It is clearly not enabling receiving provinces to maintain normal program standards. That is obvious.

The minister last time said that perhaps equalization was not the only answer; that perhaps there were other ways. He did not say what those other ways were. We might want to get into that, too. This morning, it seems to me that perhaps the best we can do is to underline the need and underline the difficulty in meeting that need.

That is not a good question, but perhaps it gives you the chance to elaborate on some of the points you have made.

Ms Aylward: You are accurate in terms of what it means to provide the services and to have the skill sets to prevent the out-migration. I talked about frustrating the growth and going back to the 1999-2000 ceiling level. Last year, the level was $10.8 billion. This bill will reduce it to back to $10 billion. Already we have frustrated the capacity to grow.

That is what we are talking about: That drop has a significant impact on us. I talked about $36 million. In the grand scheme of the federal budget, $36 million is a drop in the bucket, but for us it means service delivery, and teaching days, and choices that we must make in the next year. That is what it comes down to.

I do not have a surplus on which to draw. We spend the most per capita on health care, more than the richest provinces in the country. Why are we doing that? We have a population of 550,000 over 10,000 rugged miles of coastline, and we are trying to maintain our culture and our identity. We will not move everyone on to the Avalon Peninsula and resettle them in St. John's. The population of our province is the same as the city of Winnipeg. It would be easier to deliver those services in one location, but we live in small communities. The fabric of our culture must be protected in the way we deliver those services, though the costs are higher to deliver in that way.

Out-migration is another factor, but out-migration has always been a part of our culture. People say it is terrible but, in the last year, less people have migrated out of the province than migrated out prior to the cod moratorium. It is not unusual for Newfoundlanders to leave and go to Toronto. Out-migration has been a way of life and, quite frankly, there is nothing wrong with moving around your own county. It is a good country. We should feel proud of doing that.

This year, our out-migration was reduced to a net of 2,000, with 16,000 moving out and 14,000 people moving in. That statistic makes some people think that 2,000 people put on their backpacks or loaded their U-hauls and moved out. However, there is movement and activity, and we are hopeful about our economic growth. We will be second in the country in economic growth next year. We are doing what we can, and we are not relying solely on the federal government. We are not sitting back and just letting it roll in. We are doing our best, but we need a hand up; we do not need a hand out.

This program allows us to do this, if it is administered properly. We have good prospects for the future, and our economic growth looks favourable. We have the ability to grow more, but we need help to grow the economy. The real answer is to allow us to grow the economy through good skill sets, education and the provision of services.

For the purposes of this meeting, I will focus on the ceiling, because that is the important issue. The ceiling is very frustrating in terms of growth because we are heavily dependent on equalization. We could talk about many other components such as the five-province standard, including a much larger tax base to determine the equalization rates.

However, for today's purpose, I urge you to use your influence to eliminate the ceiling, if you can. It was well received when it was done by the Prime Minister. It is something that is quite viable, because if the economy is strong, then the federal resources will grow. If the economy is weak, we will not receive as much equalization. There is a built-in mechanism for the system. I urge you to recognize that and allow us to stop this frustrated growth.

Senator Doody: I have more than a passing interest in the area that you represent. I fully appreciate the importance of transfer payments, generally, to the Province of Newfoundland and Labrador. Could you please tell me what percentage of total provincial revenues is represented by transfer payment equalization in the CHST?

Ms Aylward: Our total budget is about $3.7 billion, approximately. From equalization payments, we receive $1.4 billion and we receive $300 million from CHST. Over 50 per cent of our revenues come from provincial sources.

I was surprised to realize that. I always thought that the lion's share came from the federal government, but the lion's share actually comes from our own provincial resources and tax base. We are heavily dependent on growing our own economy, so that we can provide the resource base to deliver the programs.

If you look at the programs and the services we provide, we receive $300 million from CHST for health, education and social services. We spend $1.4 billion on those items. We spend $750 million on education alone, and about $300 million on human resources, employment and social services programs. You can see the percentages.

Senator Doody: That percentage of federal transfer payments is less than it used to be. That is an improvement in the ratio; the federal transfer payments are less than they used to be.

Ms Aylward: It is about 43 per cent from the federal government. You have read it. You have seen that we have been growing our economy. In particular, some sectors, such as the St. John's Capital City Region and Eastern Avalon, are very strong.

We have had some real challenges since the collapse of the cod fishery; the difficulties have been numerous. We have done some good work in revitalizing rural Newfoundland with regional centres. As you know, communities survived on the fishing industry, and that no longer exists. There has been much difficulty in that area, but the economy has grown. Our dependence has decreased, but that decrease depends on how successful we are with our economic growth.

Senator Doody: We hear quite a bit in the news these days about the effect of the clawback on the equalization payments in Nova Scotia and Newfoundland. The premier has brought it to the public attention more forcefully, recently. I appreciate the fact that you prefer to talk about the ceiling. However, do you have any comments on the clawback provisions, not only in terms of the offshore but could you give us some idea of what the effect would be on projects such as Voisey's Bay? Would a new revenue source such as Voisey's Bay have a negative effect on your transfer payments, particularly on equalization?

Ms Aylward: Absolutely. For every dollar we make, 70 per cent of it would be clawed back.

Senator Doody: Would that happen even with an onshore resource, which is clearly the property of the province?

Ms Aylward: That is right. Historically, whenever we have undertaken major projects, and Senator Rompkey spoke about that, such as the Churchill Falls arrangement, the focus was on jobs. Many of the jobs never materialized in St. John's. However, once you hit revenue, you get the clawback; you know how it works. We are clawed back on the basis of the money from these offshore revenues. That is why we are trying to change the ratio of 70-30 to a more lucrative figure - we would obviously prefer to keep 100 per cent.

We recognize that we are part of a good federation, one that has helped us over a period of time. Our GDP is 69 per cent of the rest of the country, and it would be an excellent way to give us a hand up, given that we have some strong resources in the offshore. It has a major effect in terms of "the more we make, the more we lose" on equalization. It is as simple as that.

Senator Doody: That does not give you great incentive to start these projects. The amount of value to the provincial revenue is diminished considerably by the clawback. The public does not get that sense; they think that 100 per cent revenue from Voisey's Bay would go to the province. Obviously, the effect is different.

Ms Aylward: Through the Atlantic Accord, it was originally 100 per cent. It was re-negotiated to a ratio of 70-30, which we would like to improve. The public, particularly, would like to see that happen.

When I spoke earlier about the equalization program, I mentioned that it is a stabilization program for us, but it can also serve as a deterrent. We are undaunted in that we know we have some strong resources that can be developed. We will continue to make our case to the federal government. We believe that this would be an excellent opportunity to help a region that needs to be helped, such as the Atlantic provinces, in particular. Nova Scotia and Newfoundland have the most to gain and obviously the most to lose. If it does not work out, it is still an important issue for us, one that we could spend the whole day talking about. We would lose significantly if we do not change the current ratio of the 70-30 clawback.

Mr. Neumann: I wish to briefly comment on this issue. I have been kicking around finance for a long time in the area of equalization, and this argument has been raised often. In my experience, there is not a provincial government in Canada that has ever turned down the jobs, the prosperity for its citizens, the economic growth and the tax revenue that comes with a development, just for the sake of retaining equalization payments. The incentives are all on economic development. I do not know of any significant situation where an opportunity was foregone just because equalization payments would be reduced.

There may be situations where equalization provides a better bargaining vantage point for a province than they would have in the absence of equalization, if they were desperate to begin a project immediately. It does give a bit of a better bargaining position. A province could probably strike a better deal for its citizens and for Canada than in the absence of equalization. However, I do not think projects are stopped because of equalization.

Senator Doody: I think you are absolutely right, but it is a point.

Senator Taylor: The prior speakers established their ties with Newfoundland very quickly, so I will tell you that I have two Newfoundlander grandchildren. Therefore, I am very interested in the Newfoundland education system.

Should natural resource assets, such as oil, gas and mining, be included in income? They are sales of capital. You would not charge a farmer if he sold some loam or sold his farm. Maybe oil and gas should not be in the equalization formula at all.

Ms Aylward: That sounds good to me, senator. I would support you 100 per cent on that. I think you are right. It is an area that we would like to have excluded, obviously. However, as I keep saying, we are part of a federation that has been very stabilizing for our province. It has brought many benefits to our province, and we would like to have it improved upon.

Although I am here today to make a case about how unfair it is for the federal government to impose a cap on the ceiling, it is important to say that the program is critical to provinces such as mine.

Having said that, we would be very open to having that revenue outside the equalization program. We will be having discussions to see whether that is possible. We want it to be possible because, as I said earlier, that could be a way to form a regional approach to correct some of the long term inequities. It will require a significant infusion of cash to create the economic infrastructure that is required to move the economy.

Senator Taylor: When I was in the provincial legislature in Alberta, we had the same problem, albeit on a much smaller scale, in equalization. We had a foundation plan based on children to be educated and on health. The equalization plan was surplus to that.

Could we do something like that on the national scene? A certain quality of education, health and transportation are necessary, and they are not part of the grand system.

Ms Aylward: That is probably the basis of what we are saying with regard to "reasonably comparable." Our argument is that it is very difficult to provide reasonably comparable services with the challenges we have.

I know that in Alberta, with their oil industry, they will generate exploration under a much looser regime just to generate the economic spin-off that comes from it. They are sitting on a gold mine in the form of an oil mine. It is a different perspective. It is a much cheaper process because it is on land. We have some resources on land, but the majority is in the deep Atlantic.

Those are all things that we would be interested in talking about. Premier Hamm and Premier Grimes have been speaking to each other and also preparing to speak to the federal government on that issue in a very strong way.

Senator Comeau: Ms Aylward, you mentioned in your presentation that much had been said in the past year about the increase in CHST, which now stands at $300 million for Newfoundland. If I recall correctly, there were large cutbacks in the CHST in 1992-93. Have you calculated whether the level has returned to a level comparable to 1992-93?

Ms Aylward: No, it is not comparable. We are still not back up to where we were. We all had major cutbacks and rollbacks in our own provinces. The federal government did what it had to do. Of course, we had a significant population decline, so it is very difficult to compare from 1990 to now because we are closely linked with population on the CHST. However, it is our view that we are not receiving as much as we would have under the old formula. That could be said for every province.

Senator Comeau: Out-migration would aggravate the numbers even further.

Ms Aylward: Absolutely, because it is based on population.

Senator Comeau: I asked officials last week whether the federal government had returned to the level of 1992-93. I believe that the answer was that it will reach that level in 2002-03. My understanding is that that is nation-wide, and not per province. Because it is based on population, your funding will not reach 1992-93 levels until approximately 2005-06.

Ms Aylward: Yes, we predict 2006.

Senator Comeau: That brings me to a question on the out-migration that you and others have mentioned. Has any consideration been given to having out-migration become a part of the equalization formula? From a national perspective, out-migration could be seen as a sign that something is wrong, and it could be factored into transfers coming back to the province.

Ms Aylward: Yes. We were pleased to hear this morning that Senator Rompkey has given notice of an intention to speak on equalization this fall in order to get that discussion going. I mentioned earlier some of the issues we have with respect to our aging population and out-migration. With that, population ends up being an inverted triangle. Ideally, you want many more young people to take care of the elderly. Our population is the other way around, and that is quite disturbing.

We would be very interested in have out-migration considered a separate entity. From a regional perspective, it becomes very difficult to do two things to maintain the services. Heads mean money. Therefore, as people leave, you are losing money. The other piece is trying to grow the province to entice people to come back. We have had some success with that in regions, but we have not been as successful as we would like to be. People are leaving, and they are generally well educated people. We are educating people for other provinces. We get great reviews, but it is a very difficult situation.

Mr. Neumann: On the issue of CHST and the interaction with equalization, on page 35 of the materials that we have provided there is a table that shows the CHST gains from the offer of the Prime Minister of last September versus the impact of the equalization ceiling. That shows that if the ceiling had not been lowered for the equalization while CHST was increased in 1999 and 2000, equalization recipient provinces would actually be better off.

There has been a shift between the programs. The equalization ceiling is causing a potential decline in equalization entitlements, lower than it would have been if the ceiling had not been lowered again in 1999. That more than offsets the gains in CHST that had been given to the recipient provinces. The additional $4.5 billion provided in 1999 and 2000 to CHST and equalization is all going to the more affluent provinces. It is a perverse result and an unexpected result, but if the impact of the 1999 ceiling is as strong as we believe, that is exactly what will happen.

Senator Comeau: I would like to return to the out-migration question. We look forward to the comments of Senator Rompkey this afternoon in the house and we expect it will be a great deal more than just a discussion on the floor of the Senate. In fact, I believe the intention of Senator Rompkey is to request that this committee do a major study of equalization.

Coming back to out-migration and to the formula, the way I view it is that those provinces that are seeing a decline in their population are, in fact, contributing to the building of Canada because we are teaching, we are giving the skills to our youth, getting them prepared to move to the contributing provinces. In fact, should that not also become part of the formula, that provinces that are recipients are contributing in their own way to nation-building?

Ms Aylward: I am not sure about that, quite frankly. Out-migration has been a part of the culture of this country. People should not be penalized for moving within their own province and country; it is not the salt mine, so to speak. It is not necessarily a bad thing because, when people return, they do so with a whole different view and with good experience.

It is the same as moving from Newfoundland to British Columbia and not being able to benefit from the services out there for three months. We know what happened with respect to the residency rule. The federal government had to penalize the province and say "No, you cannot treat people like that." I am not sure I would go that far. I would be more interested and I would encourage my colleagues to pay more attention to growing our economy rather than penalizing other colleague provinces for the benefit.

I also like to have people from other provinces come to Newfoundland and bring their expertise. We must find a way to do it that is not too insular. We need to be able to grow our economy, make the reasons right for people to stay, make the reasons right for people to come back, and not penalize people for wanting to explore and live in other provinces.

Senator Comeau: Recently, Premier Hamm referred to the question of a campaign of fairness. He went to a number of provinces and came to Ottawa to meet with parliamentarians on the Hill. A number of members of Parliament in the House of Commons said that Premier Hamm was all wrong, and that his problem was the debt in Nova Scotia. It was referred to as the monkey on Nova Scotia's back, that equalization was not the problem; that the provinces were the problem. This is coming from our own members of Parliament from Atlantic Canada.

Is there any hope of proceeding on this dossier if a number of our own members of Parliament from Atlantic Canada are saying that the problem is with the province and not with equalization, which would therefore include the ceiling as not being the problem?

Ms Aylward: The ceiling is part of the problem, and again, that is why I am here today to speak about the ceiling specifically. I have not heard that, and I will admit that the equalization program is a double-edged sword. It is an excellent program for stabilization but it can serve as a deterrent, and it was from the deterrent perspective that our premiers, both Premier Grimes and Premier Hamm, were speaking. It is true, if a province wants to develop a resource and knows 70 cents of every dollar will be lost, it becomes a deterrent and the question has to be asked, realistically, is it worth doing it? As my colleague from Manitoba said, we should always try to find a way to grow the economy and to create jobs, but that is not enough any more.

When you are at 69 per cent of the GDP for the country and you have been following that mantra for all of those years, it is not enough. We have to find another way to do it. It disturbs me that people would say it is a form of welfare. People would prefer not to receive equalization. We would love to have Alberta's problem. We would love to hold an election to try to figure out how to spend our money, and we hope to live long enough to be able to do that. None of us wants to be there. I have not heard the mean-spiritedness you have spoken of. Anyone who speaks to the people and gets to know them at the cultural level would know that there is a great interest in growing our own economy. No one wants to be dependent. We want to be able to contribute. We do contribute through our people and our culture and through the other contributions that we make.

That is a little disturbing to hear, I have to admit, but I think, by and large, most people believe that we will do whatever we can to overcome the tax-back on resource royalties. We need them if we are to truly change Atlantic Canada.

[Translation]

Senator Ferretti Barth: I completely agree with your proposal. Incidentally, I read Senator Rompkey's press release and I share his perspective.

From what I've heard, the current equalization program does not go far enough in fulfilling the mandate of a program designed to ensure that public services are more or less comparable in terms of quality and funding.

First, you seem to agree with eliminating the ceiling for equalization payments for 1999 and 2000. Would you agree with the idea of eliminating this ceiling and reassessing all equalization programs in order to truly define your needs?

Second, have you had an opportunity to discuss the problem that you brought up at the Cabinet meeting? Finally, when was the last meeting that you had with ministers from the other provinces? Are your concerns shared by other provinces that are in the same situation as you?

[English]

Ms Aylward: You have many questions there.

We have had a fair bit of discussion on the equalization piece over the years. There are many things we would like to change. The ceiling is obvious. If the ceiling were removed, the economy would take care of what the equalization rates would be. When the economy is robust, there would be more equalization payments, but the federal government would be in a better position to provide that, and likewise the opposite would occur. That is one perspective.

How would we like to see it changed? We would like to see the ten province standards added in. As you know, Alberta is not added right now into the five-province standard. Alberta, with its tax base, would make a huge difference. One can look now at what is happening with the reduction of taxes in B.C. That will have an impact on us. We need to look at that average. Not all of the taxes are included in the formula, the 33 taxes that are used to determine the equalization piece. That is one thing we would like to change.

The other questions that were raised by your colleagues, in terms of tax back on resource royalties offshore, is something we would particularly like to change from the current formula of losing 70 cents of every dollar. The notice of motion that Senator Rompkey put forward will give us - if it happens - an opportunity and a platform to look at it.

I want to say again that the equalization program is a good program. Like everything that is good, you do not have to destroy it; you can always make it better. That is our intent.

My perspective comes from sitting at a number of different tables. I was the negotiator on behalf of Newfoundland for the social union framework agreement. I have sat as a health minister; I have sat as a minister of housing and social services and, more recently, as a minister of finance. I do not always like what I hear from my provincial colleagues. Sometimes I think that some provinces are not as open as others to supporting the principle and the concept behind the equalization program. However, to throw it away and start all over again would be similar to throwing away the Canada Health Act and starting all over again. I would be nervous about that. I would be afraid of what would happen. My perspective would be to build on the strength of the equalization program and change the weaknesses. That is something we should focus on. That is where I am coming from with respect to your questions.

[Translation]

Senator Ferretti Barth: Have you raised your concerns with the Minister of Finance, Mr. Paul Martin, during Cabinet meetings? Have you talked about the equalization ceiling? Do you have meetings every year, and when was your last meeting?

[English]

Ms Aylward: Yes. We do meet. We met regionally. We met as Atlantic ministers with Minister Martin and raised our views very clearly. As four of the equalization recipient provinces, I believe we made a very strong case.

Unfortunately, we are where we are with Bill C-18. The premiers have also spoken about it at their table. The ministers of finance will be meeting tomorrow in Montreal, where this issue will be raised again. It is a very important issue for us.

Obviously, when you are Minister of Finance, you are charged with the responsibility of ensuring that the money and the services go hand in hand. When we all stand up every year and deliver a budget, it is based on a certain amount of money that we can depend upon. One of the most uncertain aspects is that this ceiling being imposed means that we will receive less money. For me, it means we will have to make some tough choices.

Senator Ferretti Barth: In order to meet to talk about this requisition tomorrow in Montreal, why did you not insist at the last meeting with the Minister of Finance, all the provinces -

[Translation]

You will have to be persistent with the minister in order for him to take your particular situation into consideration. I do not understand why you waited so long.

[English]

Ms Aylward: Perhaps I have not been clear. We have not waited so long. We have talked about the implications of this ceiling for a number of months. I met individually with Minister Martin. My colleagues have met with him. We have put our case forward. Perhaps I need to bang on the desk to get my point across to you, but we have made our case. I assure you that we have made our case.

Senator Tunney: You do have to get tough with us. I will tell you a little story. One time the police stopped Joey Smallwood when he was speeding. The policeman got up to the window, looked in, and said, "Oh, my God." Joey said, "And don't you forget it."

I am from Ontario, and from agriculture. Do you see possibilities of a substantial expansion in agriculture in your province, not just in production but in processing as well?

I would like to know whether your GDP is increasing, and by how much. Do you see economic or industrial expansion either within the province or from offshore, and what is its nature?

Ms Aylward: The agricultural industry is a relatively small but growing industry. As with any of our industries, we always try to enhance secondary processing.

We have two regions that are agriculturally based, for the most part. We have an east coast and a small area on the west coast as well. I would not call it one of our main growth industries, but we have been fairly successful in growing the industry. We would love to have more money to inject into it, but we have made it clear that our number one priority is health care.

This year alone we put $50 million extra into our health care, bringing our budget up to $1.4 billion. When you make that kind of an allocation, you make choices. You all know about choices; you cannot put the money everywhere. We made a choice to put $50 million extra into our health care budget. We did not have any teacher layoffs, even though we have declining enrollments.

We focused on an infrastructure program for rural Newfoundland, to help municipalities improve their water and sewers, and in particular, municipal infrastructure. Those were our three main priorities in the budget.

We do have a department specifically for agriculture. We see it as an important component of our economic growth, but I have to say that it is not one of our key industries.

Our GDP has been growing positively. This year, growth is predicted to be about 3 per cent. We are more modest in Newfoundland than some of our outside indicators suggest, but GDP is growing. We believe that the following year, when we get White Rose and Terra Nova producing, we will be up around 4 per cent. If we all live long enough, for the next few years we will probably stabilize at 5 per cent. My famous line is, we live in hope, for fear of dying in despair.

In terms of our economic and industrial expansion, our best-kept secret has been our ecotourism and our IT industry. We have seen our small IT industry grow by leaps and bounds. We have a very strong, young IT industry, which proves you can work anywhere in the world with IT.

Our tourism industry has taken off, increasing 30 per cent from five years ago. Major events have been held in competition with other provinces, such as the John Cabot celebration, the Soirée and the Viking celebration. This year we are celebrating Marconi and the invention of wireless communication.

We have a new Department of Industry, Trade and Rural Development which will focus on industrial benefits, growing the film industry, trying to support local industry and economic growth. That has been our focus in terms of industry.

We have done well in some areas. In other areas, we need to continue to improve. Our GDP has been on the incline, and I think that is as much as anyone can hope for.

Senator Tunney: It is good to hear that.

Senator Robertson: This is confusing. I am glad that Senator Rompkey has brought his position into the chamber so we can perhaps look at this question in great detail and pray that someone will listen to us. Many of us around this table have been involved in these discussions for a very long time and in different capacities.

I understand that you want the resource industries excluded from the cap. I would hope that all progress would be excluded because, although in my province we are not potentially gas- and oil-rich, we do have many things going on and we would like a general exclusion, of course, of those issues.

I must clarify something. I am not a member of this committee but, if you have this study, I may just come.

One of the witnesses mentioned that, at one of the numerous meetings with the Minister of Finance or the Prime Minister, you were assured that the cap would come off. Was that assurance given for one year, or were you assured that the cap would come off? I am having trouble with this.

Mr. Neumann: The Prime Minister's offer was contained in a statement which said that the ceiling would be removed for the 1999-2000 the fiscal year and that the program would then revert to the formula which allowed for GDP growth after that.

The interpretation amongst federal finance is that the commitment was to revert to the old base and go back lower again after being off for just one year. That was not the interpretation of the premiers at the first minister's meeting. I think I can speak for most of them. I canvassed them, and that seemed to be the consensus.

A little earlier, there was a comment about the discussions that have been had. We have not engaged the federal government as vigorously, lately, as in previous years, largely because of the reluctance of Mr. Martin to meet with provincial and territorial finance ministers together. Regional meetings and one-on-one meetings were held, but there has not been a federal-provincial-territorial finance ministers' meeting since December of 1999.

The positions taken have been vigorously pursued in a provincial-territorial forum where we have constantly been pleased that Premier Harris, Premier Klein, and the premiers from British Columbia have joined the equalization recipient provinces in asking for removal of the ceiling. We did make some progress in 2000 when the Prime Minister made his commitment, but it is unfortunate that the understanding of the commitment was not clear.

We do have further to go. We do believe that the federal government will reconsider the ceiling again. We hope that they will look at either removing or re-basing the ceiling, once they see the effects that it will have. There is no way that a plain reading of the commitment given by the Prime Minister should lead to a situation where we have equalization entitlements of $10.8 billion, or perhaps a little bit more when the final numbers come in for 1999-2000, and less for 2001. We understood that it would be allowed to grow by GDP growth, which would be about 8 per cent for that particular year. That is the situation right now.

Senator Robertson: Thank you for that clarification. The rest of the senators may have understood that completely, but I had not. I listened to your premier and others on this issue and it was never particularly clear.

Agreeing to removal of the cap shows that a generosity is being extended by the other provinces, in particular Ontario, Alberta and British Columbia. That shows that they have an interest in strengthening our country. I agree with the ministers; as long as the cap is stuck there, it will be difficult to make progress.

Those of you who come from other provinces raise your eyebrows about this so-called welfare transfer, as some residents refer to it. Thankfully, your premiers and ministers do not do that. If you want that referral, go to your welfare recipient and say, "Okay, when you got a job, you are only allowed to keep 20 or 30 per cent of what you earn. Otherwise, you go off social assistance." It is hard to come off social assistance unless you can keep what you earn for a while in order to upgrade your standard of living and get your feet on the ground. We need to get our feet on the ground. We are doing well, but our progress will be limited, I suggest, until we get this matter straightened out. We cannot continue to live with a challenged progress. We cannot do that. It has been too long.

I look forward to Senator Rompkey's proposal and his motion being seriously considered. Otherwise, some of us from those provinces will not sleep well. Good thing are going on in those provinces, and we can work our way out of this. We came into Confederation as the richest area in the country, and we will get back there one of these years, but it will take a little more cooperation.

Equalization is a good program, but we need to get our people in the House of Commons on side. I am shocked that members of the House of Commons are not on side. The minister was here last week, and I will have to read his excuses for not wanting to move on this point. I am sorry to be grumpy, Mr. Chairman, but it is such a repetitious thing.

Senator Banks: Senator Robertson, I do not know if you have heard any churlish remarks from either Ontario, Alberta or B.C., but such comments certainly have not come from anyone who understands anything about Canada, because this is how it works.

The only province in Canada which has not, so far, been a recipient of equalization payments is Ontario. Every other province, including mine, has received equalization payments. We know we have been on both sides of the fence.

Minister, could you confirm something that Senator Doody asked and which I did not understand. The clawback amount with respect to your resources is the same for onshore as it is for offshore resources?

Ms Aylward: No, it is not. The offshore rate is 70 cents of every dollar. The onshore rate is based on a mix. We do not know what it would be. It is 33 per cent, I presume.

Mr. Neumann: It would depend on where the revenues come from.

Senator Banks: From Voisey's Bay, for example?

Senator Doody: Is the revenue from royalties or taxes?

Senator Rompkey: They are a combination of royalties and taxes - 80 cents of each dollar coming from Voisey's Bay.

Senator Banks: I hope so, Senator Rompkey, because the two things seem to be inextricably linked. I can tell you from the standpoint of development in Alberta in the early 1960s that they are indeed linked. I hope that your reference and motion will include consideration of the clawbacks, because the two things scratch each other's backs, as it were.

I guess it falls to me, gentlemen, to ask the rude question. One of the reasons for the imposition of the ceiling and the floor, in respect of equalization payments, is to take into account the wild fluctuations that occur sometimes, and have occurred over the last few years, in oil and gas revenues. It was not long ago that oil and gas revenues were not far above the $9 that you now receive, give or take a nickel. Those oil and gas revenues will not always be in that $30 range, because at some time in the future, they will decrease.

My question is three-fold: If you are in favour of the removal of the ceiling, which sort of put a safety parameter on the determination of equalization payments, are you also in favour of the removal of the floor? If yes, are you in favour of the inclusion of Alberta in the calculations of transfer payments? Are you also in favour of the inclusion of the other province at the other end of the stick, which is also, for the moment, left out of the calculations? If you are in favour of the removal of oil and gas revenues, in respect of the clawback, would you also be in favour of the removal of oil and gas revenues from the calculations for Alberta, should it be taken into account?

My last question is a request: Currently, there are 33 elements that are taken into account in the calculation of equalization. It would be useful for us to have that information, in advance. I have no idea what those elements are, and it would be helpful to us to have that information for the study which we will undertake in the fall. Could we know your suggestions that might be added to that list of 33 elements for the calculations?

Ms Aylward: I do not find your questions to be rude. Our legislatures must have been different, at one time.

Senator Banks: In the Senate, those questions would be considered rude.

Ms Aylward: When you talk about the floor, the ceiling and the fluctuations, oil and gas are used as good examples. We all know right now that the oil and gas revenues from the Alberta pipelines are not added in. That minimizes the fluctuation portion of that revenue. Would I like to have them included? Absolutely: All ten provinces, the good with the bad, if that is how you want to put it.

I will be blunt about the floor. I would like to keep the floor, because I am the one delivering the services - the health care and the day-to-day application of Band-Aids, counting the chest tubes and performing the cardiac surgery, and we need to have security in doing it. That is what Canada and our Constitution are about. I do not have any hesitation in saying that. You could call it having our cake and eating it, too, but I prefer to call it being a Canadian, proud of the program and confident to deliver the services. I have no problem with that.

Senator, you asked what other programs we would like to include. We have been asking to have other tax revenues included in the 33 elements, and I am certain that each province will provide its list so that we can have a much fairer view of what those taxes are.

The most important point is that Senator Rompkey had the vision to put this on the table. It is a current issue that is important to us. Equalization has become a household word in Newfoundland. It is important for economic development, resource royalties and revenues, whether we lose 70 cents for each dollar, which we would like to reverse. We would like to keep the 70 cents and send back the 30 cents. As one side of a good partnership, we would settle for that. Obviously, we would prefer to keep it all, and have it out of the formula altogether.

It is important that this has been put on the table so that we can have an open and frank discussion, and so that we do not throw out the baby with the bath water. We must recognize the good components and that it is not a welfare program. I take great exception to people who believe that it is. They say it because they do not have enough information and knowledge, and perhaps they have not experienced both sides of the issue. We look forward to being on the other side of equalization.

I also need to say that Alberta, B.C. and Ontario are not being good provinces. One is no better nor worse than the other seven plus three territories. We all contribute to the pot - even Newfoundland contributes. We receive more back than they do per capita, because we need it right now. However, we need a hand up, not a hand-out.

I look forward to the discussion about our needs. We will fight hard over the resource revenues and the tax back, because it is important to us. We want to be off equalization, and we want our economy to grow. People talk about the Irish model and staying on it for a period of time. There are all kinds of ways to look at it, and we are open to discussing those ways.

Senator Banks: I asked the question about ensuring the inclusion of the clawback because, as Senator Comeau reminded us, in the days when Alberta was making the transition from a have-not province and trying to diversify its economy, those revenues were kept entirely in Alberta, except when it came to sharing the export portion of it.

The Chairman: Why is it called "clawback?"

Ms Aylward: Usually when you make one dollar, you keep one dollar. When you feel you have earned something, you keep it and spend it as you see fit. The word "clawback" comes from the fact that you earn it, but 70 per cent of it is spent without your say - it is automatic.

Senator Doody: It comes from the offshore oil and gas agreements that were signed with the Government of Canada: the Atlantic Accord. The court settled the case in favour of the provincial government, and then the federal government entered into an agreement. It was with Newfoundland first, and then with Nova Scotia.

Mr. Neumann: I will add to the question that Senator Banks raised about the wild fluctuations of the equalization, which has grown 33 per cent since 1993-94. The minister, or his officials, made that reference when this matter was considered before the Commons committee.

The 33 per cent since 1993-94 compares to a growth in federal revenues of 53 per cent during the same period of time, and average growth in provincial revenues of 43 per cent. We have always taken the position that equalization will grow with the economy and with the fortunes of other provinces, and also that it will grow when federal revenues are growing. If we look at the history of it, we would find that that has been borne out.

As far as the removal of the floor is concerned, our province has said that we would be willing to have the floor removed if the ceiling is removed. We would be agreeable to that trade-off, but we are always cognizant that other recipient provinces may have different positions. We are prepared to entertain their arguments and to be persuaded. We want a ten-province standard.

On the removal of oil and gas, it is our position that the equalization program should be inclusive of all revenue sources. Other revenue sources to which Ms Aylward referred could be examined to ensure that the program is fully inclusive and therefore able to ensure reasonably comparable services at reasonably comparable tax rates.

Senator Banks: It is the fondest hope of all Albertans that every province will soon get on the right side of the fence, and that we will be able to eliminate equalization. Everyone is in favour of equalization.

Senator Bolduc: I should like to put on the record some statistics from the 2001 Manitoba budget implementation. First, in 1961, the federal and the provincial governments shared about 50 per cent of total government program expenditures. In 2000, 30 per cent came from the federal government and 70 per cent came from the provinces, as indicated on this first table.

The second table I have here relates to the cash transfer as a share of provincial-territorial government revenues. In 1980, the federal tax transfer was 23 or 24 per cent. Today, it is about 15 per cent.

The third table shows the federal government expenditure as a percentage of GDP. In the 1950s, it was about 12 per cent. You will remember that very well because that was before the great legislation on the welfare state. In 1960, which is more normal, it was something like 17 per cent, and now it is about 10 per cent.

We see that there is a decline in the federal role in delivery and support of public programs, particularly health and education, as transfer and equalization are related. On the other hand, the federal government has given up some tax points. Also, the federal government has incurred a huge debt, as we know. We have on balance those three trends and those two trends, which are a bit contradictory. The federal government will use those arguments to counter the provincial arguments.

From that, we can see that, in the last few years, the federal government program has been expanding. That means that, on the one hand, the old formula of equalization and cash transfers is diminishing. The provincial governments have the heaviest responsibilities in health and education and the federal government is increasing its program at the same time, with the result that, in the last six or seven years of prosperity all across North America, the ratio of the federal debt to GDP has diminished by only 3.6 per cent.

Therefore, the federal government has spent much money outside of what we are talking about, although it is not really outside. On the one hand is the trend that I have explained, and on the other hand you see many ad hoc budget programs of the federal government in various areas, including health. We do not speak about that, but every day I see communiqués telling about the Minister of Health giving money for various projects. That troubles me greatly because when the federal government does that in a multiplicity of programs, it is very costly.

We see that the basic trend of the 1960s and 1970s is changing by specific insertion of the federal government in various specific programs here and there. That means that the federal government believes that the system that was built in the 1960s and 1970s is no longer any good. The government prefers to intervene directly, deciding what the new priorities for Canada are, rather than waiting for the priorities to be established by the provinces in their own field. That troubles me greatly.

Perhaps the two distinguished representatives from the provinces could say a few words about my comments? I may be biased, but I try to be reasonable.

By the way, the equalization program represents 1 per cent of the GDP of Canada. It is not the end of the world.

The Chairman: The minister way want to comment. The official may decide to be more discreet.

Ms Aylward: Clearly, we would love to have more money. However, Newfoundland views some of these things a little differently. My colleague in Quebec would say that they do not want the federal government involved; that those are their programs, and they should be given the money and allowed to do their thing. In Newfoundland, we have a much more collaborative way of dealing with the federal government. We do not see it as downloading. Often we use it as uplifting. We use federal facilities and programs to expand our own.

That may be one benefit of being a small, closely-knit province. I will use the example of the National Child Benefit, a program that the federal government recently implemented. I chaired the provincial ministers when we came up with that agreement. One of the best things about the program was that each province had its own flexibility to put that money into the programs they chose. We built on the strength of our own programs, some of which were federal programs and some of which were community development programs that were very effective in a province such as ours.

I hear from some of my colleagues in Ontario that they are disgusted with some of the things the federal government is doing. We do not feel that way. We use the facilities and the resources.

I think that both Senator Rompkey and Senator Doody will agree that we are small enough to be very appreciative of the extra infrastructure. We do not like the idea of the federal government introducing a three-year program and then bailing out financially, but the flexibility of allowing the provinces to decide into which programs they want to put the money is a very good way of building on federalism.

We do not agree with all of the programs, and we would like to have more money, as I have said many times. However, even on the devolution of housing, we are pleased to see the federal government wanting to get back into national housing. It is very important. We are looking forward to working with the federal government on that. We hope they do not forget that Canada continues all the way to Newfoundland and does not end in Halifax. That is our challenge.

I like the new trend of being given the money and having the confidence to know where to spend it. We just want to ensure that the money continues, particularly for the National Child Benefit program, which I now know is rolled in with the CHST. Quebec would not agree with me; Ontario would not agree with me, but that is how it is for us.

Senator Bolduc: May I point out, Mr. Chairman, that in my previous statement, I forgot one aspect that is quite important, and that is the fact that, in that process of giving up a bit of the cash transfer and equalization and going up to various other programs. Something that also troubles me is the fact that the so-called have-not provinces do not have a good deal in that situation because all those programs are based on population, so the money goes back, as Mr. Neumann said. For example, in his table on page 35, if equalization and the CHST is added, the net cumulative loss in Manitoba in the next three years would be something like $272 million a year - and perhaps more than that, because I suspect that because Quebec has a population of about 25 per cent of Canada, they will be included in the calculation of what might be $4.5 billion in additional money. That means that, in that process, the idea of equalization is eroding, actually. I am not sure that the new equity perspective of the federal government is a sound one.

Ms Aylward: Newfoundland was the only province originally that was opposed to the per capita CHST funding. There is no doubt about that because we knew we were facing a declining population and an aging population. We all know that 80 per cent of the services and the cost of health care is given in the last 20 per cent of a person's life.

We know the challenges. I do not want to give any impression that we agree with it, but that is the way it is. I am saying that, in terms of the other parties in question, we do try to build upon what is there. We cannot afford to duplicate. That is my point. Would we like more money? Yes. Would we wish it were not based on population? Yes.

Mr. Neumann: I have been around a long time so I am not shy about entering into these debates. We have had enough of them in Manitoba that I am reasonably comfortable that I will not be speaking too much out of line. This is a question of decentralization versus centralization. We are one of the more decentralized federations in the world.

Senator Bolduc: Legally speaking.

Mr. Neumann: Legally speaking.

Senator Bolduc: Factually speaking, it is not true.

Mr. Neumann: It is less certain because you can look at various indicators of decentralization, it is true. It depends how integrated the operations of the provincial and federal governments are. Legally, and probably by most measures, we are one of the more decentralized federations of the world. Germany or Switzerland are perhaps more or less.

With decentralization to this degree, we must examine the appropriate role of the federal government. We must do that with more thoroughness than we have lately. We also need to examine a second question, and that is when we have a decentralized federation, there will be problems with differences in fiscal capacity and therefore those must be adequately addressed. Are we addressing those adequately at the present time? I know Manitoba will welcome the Senate's review of this issue, and they should look at the degree of decentralization. It has been growing in terms of provincial responsibility versus federal responsibilities for program delivery. They should examine whether or not that is appropriate or should be accelerated, or if there should be some slowdown in that and some rebuilding of the federal role.

We must look at whether or not the transfer system takes care of the fiscal capacity disparities adequately. We have some concern in Manitoba, as do other provinces, about what we call "boutique programming." It was referred to as the federal government coming in with relatively small programs but which add up to significant activity over a period of time. Our biggest problem with that is that it is ad hoc, uncertain. Where do those programs go after a while? Who will finance it? What expectations are built up? We do have a concern with that kind of activity as opposed to looking at programs with long term, assured funding. Our minister has spoken out about that.

The Chairman: We will invite you back in the fall to elaborate on that.

Senator Rompkey: I wanted to react earlier to Mr. Neumann's response to Senator Doody that provinces would not choose to go ahead with resource development because of equalization. Of course that is true, and we will go ahead with Voisey's Bay, even though we make 20-cent dollars out of it. It will provide some jobs. The question still remains: who gets the jobs? The minister mentioned earlier the Irish situation. I would hope in the fall we can make some comparisons because, with the exception of Labrador, we are an island off the east coast of North America; they are an island off the west coast of Europe. The Atlantic ocean separates us or joins us, whichever perspective one takes. We are not dissimilar. We even talk something like them in a language that others do not understand. Taylor is an old Irish name, but he let the Albertans rid him of his accent. They are part of a federation; we are part of a federation. Why have they been successful? Education is part of it. They invested in education. We are not investing in education, mainly because we cannot afford to. Thereby lies the problem. The question is, what are some of the answers? That is what we have to find.

Mr. Neumann: I agree. The benefits of the economic growth have to be used as a way of reducing the reliance on equalization over the longer term. A former secretary of state in the United States said it is easy enough to create jobs, but to create good jobs is difficult. We have to look at that aspect as well. Who is getting the good jobs and whether or not there are equal opportunities for all Canadians to receive good jobs.

The Chairman: Mr. Neumann, you said you have been around finance for a long time. Are you old enough to remember the days when oil and gas revenues in Alberta went up so high that Ontario was on the verge of becoming an equalization recipient province? How will your ten-province standard guard against that?

Mr. Neumann: Yes, I am old enough to remember that, and perhaps an implementation of an Ontario standard to take care of that was considered at the time. Provinces and territories are actively looking at this situation. They have been doing some good work, led by officials in Alberta, New Brunswick and Quebec, to look at ways of smoothing out fluctuations that occur in the equalization program due to natural resource revenues should they all be included in the equalization program. There are ways of smoothing revenues so that the severe spikes and downturns do not destabilize the program. There is some good work going on.

Perhaps it will be ready to share with the Senate if it should proceed on this issue, and the discussion of a ten-province standard is acted on at that time.

The Chairman: There will be another opportunity to deal with the CHST. Some of you have mentioned that you, the provinces collectively, cut a deal with the federal government. The federal government, I think it is fair to say, wanted the issue off the table with an election coming up. The provinces wanted an immediate infusion of cash, so you took the money and ran.

Now you are back demanding changes to the equalization program, citing your costs of education and health. CHST was designed to take care of or to provide for the sharing of the costs of health, welfare and post-secondary education.

Did you not miss your opportunity when you went for the short-term fix less than twelve months ago? When will you get another opportunity to deal with these programs under the CHST?

Mr. Neumann: I could answer that, in part. What you call "striking a deal" was an offer from the federal government that was accepted. There was not much negotiation, but it is a fine point. Nonetheless, within that offer is the final two years of the CHST over a five-year program. I understand that by 2003-4 a decision has to be made as to what the levels will be on CHST payments for the subsequent two years.

To answer your question directly, I think it is 2003-4 that the decision has to be made. Whether that is soon enough is moot.

The Chairman: Perhaps you should have cut a longer term deal at the time. Ms Aylward, were you minister of health at the time?

Ms Aylward: I was minister of health at the time.

The Chairman: What did you say to your minister of finance when he came back with that deal?

Ms Aylward: I do not want to put that on the record.

The Chairman: I do not blame you.

Ms Aylward: There were many things happening at the time. I think the point is that every province signed up, even the ones principled enough that had much difficulty with it.

We were not principled. We wanted the money. There was no doubt about it. Everyone took the money. Nobody was so principled that there was a pot of money left behind. That is important for the record.

The other thing is that we were all interested in the equalization aspect. Tomorrow we have a provincial-territorial finance ministers' meeting and we will be talking about CHST again. The per capita piece is problematic for us. Beyond that, we got $300 million from CHST, and our health care program alone is $1.4 billion. The situation is not getting better; it is getting worse. Our aging population is there for all to see and the demands are growing. We will be talking about it more.

There are pieces to it that we need to very seriously talk about. We will be talking about it over the next while with my colleagues in finance, as well as equalization. As I said in my opening comments, the stabilization factor for us is the equalization program. We got $1.1 billion from equalization this year. We need it. If we are to shape and change anything, even a small percentage of that $1.1 billion will be more beneficial to us than a small percentage of the $300 million.

The Chairman: Strategically, you may be making a mistake there. What the federal government answers, when you reproach them for not allowing CHST to grow fast enough or for having inadequate transfers under CHST, is, "Yes, but look at equalization." Perhaps you should focus more on the CHST problem in terms of health, welfare and post-secondary education. That is free advice.

Ms Aylward: I appreciate your advice. We take all advice freely. You must keep in mind the per capita issue for us.

The Chairman: The forecasts are that over the next 25 years - who knows whether it will turn out - Newfoundland and Labrador will lose population year after year.

Ms Aylward: That is true of Atlantic Canada. Nova Scotia is also looking at an aging population.

The Chairman: Their proportion of the overall Canadian population will decline. I thought yours was the only province that, year after year, is forecast to have an absolute decline.

Ms Aylward: It is important, for factual information, to know that we went from having the highest birth rate in the country a decade ago to the lowest. We have a problem with replacing ourselves with respect to the birth rate alone. My family and my husband's family had from 10 to 16 children. That is such an anomaly now. That is one of the main factors. It is not just people packing up and moving out. It is the birth rate.

The Chairman: As a Cape Bretoner who went down the road and got to be an Ontario senator, I have to keep this discussion within civilized bounds.

I thank you very much, minister. Thank you, Mr. Paddon and Mr. Newmann. It is important to get these perspectives on the table, especially with what we hope will be a general study of equalization to take place in the fall.

Colleagues, are you ready to proceed to clause-by-clause consideration of this bill?

Hon. Senators: Yes.

The Chairman: Is it agreed to stand the title?

Hon. Senators: Agreed.

The Chairman: Shall clause 1 carry?

Hon. Senators: Agreed.

The Chairman: Shall the title carry?

Hon. Senators: Agreed.

The Chairman: Is it agreed that this bill be adopted?

Hon. Senators: Agreed.

The Chairman: Is it agreed that I report this bill at the next sitting of the Senate?

Hon. Senators: Agreed.

The Chairman: Thank you, senators.

We will now go in camera for a discussion of the draft report of the committee on the Main Estimates.

The committee continued in camera.

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