Proceedings of the Standing Senate Committee on
National Finance

Issue 25 - Evidence

OTTAWA, Tuesday, October 30, 2001

The Standing Senate Committee on National Finance met this day at 9:37 a.m. to examine the effectiveness of and possible improvements to the present equalization policy in ensuring that provincial governments have sufficient revenues to provide reasonably comparable levels of public service at reasonably comparable levels of taxation.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: We are meeting to continue our study of the federal equalization formula. We are required to report on this matter no later than December 21, 2001. This is our fourth meeting on the subject.

For the first half of our meeting this morning, our witness is professor Dan Usher of Queen's University. He is Adjunct Emeritus Professor at Queen's University. He is the author of the book entitled, The Uneasy Case for Equalization Payments published in 1995 by the Fraser Institute. Colleagues may recall that at one of our early meetings on this subject our friend Senator Bolduc reached into his briefcase and brought out a copy of Professor Usher's book and proceeded to quote from it and to demand comments and explanations from the witnesses who, as I recall, were officials from the Department of Finance.

Professor Usher has also prepared a paper entitled, "The Case for Switching to a Macro Formula." It was circulated to members of the committee last week. He will present highlights of the arguments presented in that paper, after which we will open the floor for questions and comments.

Mr. Dan Usher, Queen's University: Mr. Chairman, I take it that my task this morning is not to discuss the equalization program in any generality at all but, rather, to discuss the relative merits of the present formula, which is known as the representative tax system formula, and an alternative which has been proposed by a number of economists and is being considered now by the Department of Finance, although what the department will think when the consideration is over, I have no idea. In any case, I understand that my task is to explain the difference between these two formulas and to discuss very briefly some of the advantages of the macro formula, that is, the alternative, which I tend to prefer.

My first point is that section 36(2) of the Constitution is necessarily vague in what it actually mandates. It mandates that provinces should be able to get average revenues with average taxes, or a phrase like that, but it does not actually say how that average ought to be constructed.

Under the representative tax system, provinces would have the national average provincial revenue per head, if every recipient province levied the average provincial tax rate on each and every tax base. That is the system we have now.

Under the macro formula, provinces would end up with the average revenue per head if each recipient province raised enough revenue by taxation to supply itself with the average ratio among all provinces of provincial revenue to provincial income. Thus the macro formula says: We will give provinces whatever the shortfall will be to acquire average revenue per head as it would be, not if they levied the average mix of taxes, which provinces levy now, but if they acquired all revenue from a provincial personal income tax. That is the basic idea. There are an infinite number of bells and whistles in the present equalization formula that is absurdly detailed and complex if you look at it closely. However, that is the general idea.

I turn now to a number of general aspects of equalization payments. First, in making any judgment about equalization payments, the ultimate question is not what the federal government pays to certain recipient provinces but what transfers in Canada are being made from whom and to whom. Ultimately, any system of transfers benefits certain people and harms certain other people who have to pay for them.

In order to evaluate a program or to evaluate changes in a program, one must figure out who the beneficiaries and who the ultimate donors of this program are. It is quite messy.

The second point is that neither the macro formula, nor the representative tax system, meet section 36(2) exactly. We have equalization up, but not down. Provinces below the national average are equalized up to the national average. Provinces above the national average are left where they are, so that there remains a gap between revenue per head in the different provinces, the rich having more and the poor having less, even with the equalization program in place. That is a whole other issue. There are people who feel that the equalization program should tax the rich provinces directly and use the money to pay the poor provinces in order to provide equal revenue per head. That is not what is being discussed today.

The slide before you, a copy of which is found on the third page of my presentation, is a page of definitions. I wish to compare two formulas. I am drawing the comparison on the assumption that there are two provinces, north and south, and there are only two goods that are produced: apples and oranges. That is to keep the formula as simple as possible and to avoid a whole pile of sigmas.

The next slide shows the actual formulas. While looking at these, I would like you to keep in front of you the set of definitions. The representative tax system pays each province the larger of zero and a shortfall. On this slide, "B" stands for the tax base. "T" stands for the tax rate. "A" stands for apples while "O" stands for oranges. "N" represents the northern province, while "S" represents the southern province. "C" refers to the average in Canada, as a whole.

Thus, the shortfall in taxes of the northern province is the average tax on apples times the difference between the average tax base in Canada and the tax base in the north on apples. It is the same for oranges. This shows the tax rate for oranges and the difference between the average tax base in Canada as a whole and the tax base in the province. This is all per head. I am assuming for the purposes of the example that the populations of the two provinces are the same. That is just to make the example work. You could easily allow for differences in population, but the formula would become more complicated. What I want to emphasize is sufficiently emphasized in these formulas as they stand.

It is the same thing for the south. It turns out that the sum of these two shortfalls is zero; one is positive, one is negative. A positive shortfall means a province does not have enough revenue, or less than average revenue. Where there is a negative shortfall, the provinces have more than average revenue. Equalization pays the province with the positive shortfall, that is, less than the average revenue, the difference in equalization payments per head. "E" stands for equalization payments per head.

That is the essence of the formula we have now when you are dealing with two provinces and apples and oranges. With 10 provinces and 33 tax bases, which was the number of tax bases when I last looked, you have to have a more complicated formula, but that is the essence of the thing.

In effect, the macro formula says: I don't care what the actual tax bases in the provinces are. Basically, the issue is this: If the income per head in the province is less than the average income per head in Canada as a whole, then on average you have to have higher tax rates to generate an equal amount of revenue per head. Equalization payments will make up the difference.

The entitlement to the northern province is the larger of the average tax rate in Canada. Basically, it is the ratio of total provincial revenue to total national income, times the difference between income per head in Canada as a whole and income per head in the northern province. If income per head in the northern province is small, then the equalization entitlement is large. If income per head in the northern province is large, then this whole term is negative and the entitlement to the northern province is zero. That is basically the way the system works.

Further down the slide, you will see that some provincial governments are entitled to tax residents out of province; for example, the big one is the corporation income tax. The provincial corporation income tax is levied on owners of corporations who may not be resident in the province. For example, let us consider a corporation is established in Ontario that does business in Saskatchewan. The Saskatchewan government is entitled to a certain corporation income tax on the profits made in the province. It is part of government revenue and should be equalized. However, it is not part of provincial income as normally defined, but it would be part of provincial income from the point of view of calculating the macro formula.

These are the two formulas.

In my opinion, there are a more advantages in the macro formula compared to the representative tax system. Please turn to page 5. First, the present formula could, under certain circumstances, transfer money from poor provinces to rich provinces and not the other way around. That is because of peculiarities of the tax system. I could go into more detail. However, peculiarities might create a situation where equalization payments are actually going to provinces that are relatively rich rather than provinces that are relatively poor. The macro formula will not do that.

Second, there is a mismatch between provincial sources of taxes and federal sources of taxes. Therefore, under the formula I have described, an increase in the price of oil would generate a transfer of income not from Alberta to the Maritimes but from Ontario to the Maritimes because of the way the tax system works. That is crazy. Essentially, the five-province average is designed to deal with that problem. It is a sort of ad hoc measure.

There are all sorts of perverse incentives on the provincial governments. To maximize equalization payments you want to levy high taxes on deficit bases and low taxes on surplus bases. From the point of view of the national interest there is no reason why you would ever want provinces to do that.

The formula is hugely complex. There is a footnote to my original paper where I quote from the Canada Gazette showing you just how complex that formula is when you look at it closely. Macro is really simple. You get your provincial income from Statistics Canada. You then multiply something or other by the average provincial revenue divided by national income, that is, the average percentage tax rate on average for the province as a whole, and you have the macro formula calculated in an instant. I suspect when you look at it closely it will not be that simple, but I am convinced it is much simpler than the formula we have.

My seventh slide deals with the rate tax-back problem. Provinces with a virtual monopoly of some tax base virtually lose tax revenue to equalization dollar for dollar. Thus, there is no incentive to raise your rate.

Then there is the base tax-back problem. The best way to think about it is to think of royalties because this is the way the subject has come up. If Nova Scotia acquires a dollar in oil royalties, it loses almost equal to that dollar under the present system because equalization payments under the present formula are reduced dollar for dollar for every increase in royalties a province receives. You just do not want a formula that does that; and the macro formula does not do that. Basically, in terms of the macro formula, if a province acquires an extra dollar of royalties, or has any other source of income, then the province loses essentially 25 cents in equalization payments. That is what you would want. Twenty-five cents is roughly the ratio of provincial revenue to national income for the country as a whole. So you would lose 25 cents on the dollar to new oil revenues, just as you would lose 25 cents on the dollar to new income in the province from whatever source it may be.

The macro formula seems to me to be a much simpler formula. It seems to me to represent the spirit of section 36(2) pretty well. It strikes me as a rule that we can follow very easily and with fewer adjustments at the margin. These adjustments can be very divisive because. For example, if you go from a 10-province average tax rate to a five-province average tax rate, some provinces gain, other provinces lose, and there develops a kind of food fight over these changes. On the other hand with the macro formula, you have one rule that ideally admits of almost no exceptions. It is a simple, direct rule. On the whole I think it would be more conducive to whatever it is that we want to obtain with a system of equalization payments.

I will stop there, Mr. Chairman.

The Chairman: Thank you, Professor Usher.

Senator Bolduc: You call your formula a macro formula because you use national income statistics.

Mr. Usher: Yes.

Senator Bolduc: You say on page one of the short document:

Each recipient province raises enough revenue by taxation to supply itself with the average ratio among all provinces of provincial revenue to provincial income.

I would like to have some precision with regard to the first line where you state that every recipient province raises enough revenue by taxation. Do you mean personal income tax?

Mr. Usher: No, sir, I do not. It is anything whatsoever.

Senator Bolduc: Including corporations?

Mr. Usher: Yes, sir.

Senator Bolduc: It is by government taxation.

Mr. Usher: That is right. Please look at the definition of the macro formula on page four where you will see the total income from all sources.

Senator Bolduc: On the second line it states;

... average ratio, among all provinces, of provincial revenue to provincial income.

Do you mean provincial revenues of the people in the province, or government revenues?

Mr. Usher: Government revenues. I should have made that clear.

Senator Bolduc: Through provincial income, do you mean provincial government income or personal income?

Mr. Usher: Here we must refer the formula at the bottom of page four. I mean total income as defined at the bottom of page four, which is essentially before tax personal income, but it includes revenue from provincially owned enterprises that are like personal income and revenue out of province. That is what I meant by that.

Senator Bolduc: All that, of course, takes for granted that the national income statistics are good.

Mr. Usher: Yes, sir, at least not worse than other statistics.

Senator Bolduc: I prefer that. I come from a small village in the Province of Quebec that is about 25 miles south of Quebec City. If you could get the average income of the people living in that 2,000-people village, the federal statistics would probably show that they are poor. However, I invite you to come to my village and see the quality of the homes and the kind of cars that the people are driving and realize that they are not poor at all. They live very well. However, according to the federal statistics they do not live well. Coming from where I come from, I can tell you that I have my doubts about federal statistics for income purposes, including taxation.

I would like you to comment on the quality of our income statistics.

Mr. Usher: It has been proposed that the base of the macro formula be extended to include a broader definition of income that includes do-it-yourself activities.

I would be reluctant to advise that simply because to try to put numbers on these things is a real problem. I would be inclined to live with the federal statistics we have, hoping that the biases across provinces are not too bad. After all, senator, undoubtedly, what you say is true.

The same sorts of problems arise in the statistics we use for the representative tax system. For example, the representative tax system also makes use of income statistics. The base of the personal income tax is personal income. That is a very large part of the calculation of the representative tax system that we have. Of course, like the national statistics, it is subject to precisely the set of problems you are talking about.

My guess is that the problems you are talking about, are no worse under the macro system than they are under the representative tax system. I think that is the best case I can make for it.

Senator Bolduc: I agree with you entirely on that aspect.

Would you say that the system has to be changed?

Mr. Usher: I would not actually put it that way. First, I am not all that enthusiastic about equalization payments. The question is not whether the present system has to be changed, but, whether, Canadians would be better off under what is called a macro. By the way, it is not my macro formula. I did not invent the term. Many people have used it. It is a fairly general idea. As I mentioned, the Department of Finance is looking into this formula.

It is not so much that the present system has to be changed, but that there are many faults in the present system. If we have a better system at hand, why not use it? As well, the fight over petroleum resources is indicative of some of the real problems with the present system. I think that fight would go away completely under a macro system. I think both Mr. Harris and Mr. Hamm would accept the implications of a macro system for any increase in petroleum revenue. I do not know what the resolution of that particular problem will be if we maintain a representative tax system.

Senator Bolduc: With regard to the politics of equalization, I think the formula is complicated. It enables individual accommodation for each province. However, when you look at it carefully, we see that there are general rules. However, after that, the minister is ready to hear each of them so that he can make a little change here and there to accommodate them in terms of politics. For example, most of the Maritime provinces are negative about the system. I suspect that with the 33 tax bases a little arrangement can be made with Nova Scotia so that province will be happy. It is partly because of those kinds of arrangements that we have a complicated formula. Instead of making a global deal with each province the formula becomes complicated with various accommodations. Is that a reasonable explanation?

Mr. Usher: Senator, let me say that on Mondays, Wednesdays and Fridays, I agree with you completely. On Tuesdays and Thursdays, the government follows fixed rules and is not influenced by anyone at all.

Accommodation of that sort is inevitable, but very dangerous. Wherever possible, we should employ rules that have as little ambiguity as we can get away with. Yes, there are these little accommodations, but these little accommodations invite the provinces to be nasty in the hope that they will be accommodated. Public policy cannot completely avoid that situation. However, I think it should try to avoid that situation wherever possible.

If we can design a system of equalization payments that makes these accommodations very much more difficult, then that is something of an advantage, precisely because of the accommodations that you are talking about.

Senator Bolduc: You would like to limit the perverse effects?

Mr. Usher: Yes, I would.

The Chairman: Professor Usher, practical politicians want to know about winners and losers in any contemplated change of the formula. I suppose it would depend on exactly what the macro formula is, but someone must have done some models somewhere to indicate how this formula might work over a period of time as compared to the present system.

Mr. Usher: I wish you had telegraphed that question to me because the Department of Finance has tried to make such calculations.

The Chairman: We will have them back and we can ask them.

Mr. Usher: I would ask them that. There was a conference on the subject in Charlottetown about a month ago. My impression is that their numbers suggest that the effects from one province to another are rather small, that there is not much in it from a purely financial point of view.

Second, as time goes on, it becomes increasingly difficult to predict who will be the winners and who will be the losers because one cannot predict what will happen to the different provinces.

The Chairman: What about the federal fisc, which is always uppermost in the minds of the Department of Finance.

Mr. Usher: My guess is that the federal fisc will not be affected very much. They will give you fairly precise estimates. The reason it will not be affected very much is because the formula makes reference to average provincial tax and average provincial incomes. These are averages of the tax bases and the tax rates we are now using. Therefore, I do not think there is a whole lot in that. However, the Department of Finance will give you the best available information on that question. I am sorry, but I really cannot do any better than that.

The Chairman: The conference at Charlottetown about which you spoke, was it a private conference?

Mr. Usher: It was arranged by the Department of Finance.

The Chairman: Was it public?

Mr. Usher: No, it was private.

The Chairman: It involved people from the Department of Finance and who else?

Mr. Usher: People from the Department of Finance, people from the provinces and academics.

The Chairman: The people from finance did not indicate to us that they had any changes in mind. However, we will talk to them a bit later.

You suggest here that there is some question as to whether equalization payments are mandated by section 36(2) of the Constitution Act. You go on to point out that the clause contains a tricky phase:

... are committed to the principle.

This is sometimes claimed to mean that section 36(2) is not justiciable, that it is no more than a vague expression of preference by the writers.

Those of us who were around here at the time have a somewhat different opinion of it. The campaign to put equalization into the Constitution started around 1968-69. It became a recurring demand by some, if not all, of the recipient provinces whenever there were discussions of the Constitution.

By 1982, Mr. Trudeau recognized that in order to get nine provinces on board, they would have to accept something like this. I would have to look at the record, but I do not recall that the federal government resisted it very ferociously. They agreed on a form of words. I can tell you that those present at the time were convinced, and remain convinced, that the federal government could not do away with the equalization payments altogether and get away with it. They might change the formula. They might reduce the payments. They might do all kinds of things. I think they have that flexibility under the constitutional provision. However, the provinces believe they could not do away with them. I would want to look up the record again and the transcript of the discussions, but I bet that Mr. Trudeau would have made some careful comments to that effect when he was presiding over the conference.

Mr. Usher: I have to defer to you on this matter, Senator Murray. This is a legal matter and I am not a lawyer. I really have no insight into the matter. However, let me tell you a strange story.

I was also around in 1982, although I was not involved in those events. On the other hand, when I saw the proposed Constitution, my first reaction was that it was a very strange thing to put in a constitution. It was so unusual. I phoned up a chap who was then in the economic council and asked him if he was surprised that they were putting such a thing in the Constitution.

Until the Supreme Court of Canada comes out with its decision in the next few months, we do not mandate welfare payments. We let people starve. There are all sorts of things we do not put in the Constitution.

My friend phoned up someone in the Department of Justice and the word from the person in the Department of Justice was that we shouldn't worry because it was not justiciable. At that point, I had never even heard the word justiciable. It did not know what it meant.

I have heard both sides of this case. I am not in a position to make a judgment on it. By the way, what I said there has nothing to do with the macro formula. It has to do with equalization in general.

I have heard different stories. I am not in a position to say anything definitive. I think I hedged my bets in writing this; perhaps I did not.

The Chairman: My comment is: just let them try to do away with the program and we will see how justiciable it is.

Senator Bolduc: The main thrust of your document is that between the constitutional commitment and the reality of equalization payments and formula there is no connection. Is that your main thrust?

Mr. Usher: Not quite. It will say that it connects imperfectly.

Senator Bolduc: You say that the objective that is contained in the Constitution is not attained through that formula.

Mr. Usher: It is not attained completely. It is contained at least as well in a macro formula as under a representative tax system. All I am really concerned with is to counter the argument that the present representative tax system is mandated by section 36(2) as against any other form of equalization payments. I would object to that very strongly.

The correspondence between the content of section 36(2) and the content of equalization payments is not absent, but it is not perfect.

Senator Banks: I actually think I understand some of what you said, and that terrifies me. Do I understand that one of the distinctions is that the macro formula would be using real numbers, that is, actual demonstrable tax revenues and personal revenues, in its calculation, whereas the present formula uses deemed numbers in terms of the capacity to tax? Would that deemed aspect of it, the arbitrary judgment of a capacity of a province to tax, whether or not they do, be absent in the macro formula?

Mr. Usher: No, sir. Both formulas have to do with capacity-to-tax. However, one formula measures capacity-to-tax by the actual tax bases that are used, weighted by average tax rates in all provinces. The other formula represents capacity-to-tax by the provincial income.

The argument is that the macro formula is a better indicator and a less manipulatable indicator of capacity-to-tax, but they both use real numbers. The tax bases are real numbers. The provincial income per head is also a real number. These are real numbers obtained from Statistics Canada and such places. They both involve capacity-to-tax. They both use real numbers to measure capacity to tax.

I am trying to make the argument that a macro formula gets at that better and that it has fewer nasty side effects, unwanted side effects, than the present representative tax system.

Senator Banks: In the way you contemplate it, would it deal with the same 33 tax bases?

Mr. Usher: No.

Senator Banks: What would the significant differences be?

Mr. Usher: The macro formula and the representative tax system would be almost the same, if provincial governments levied all of their revenue from a provincial income tax. Under those circumstances, the two formulas would be almost the same thing because the base of a provincial income tax is provincial income. Provincial income would be capacity-to-tax under a representative tax system, or under a macro formula. However, under a representative tax system, you look not simply at provincial income, but you look at all the different taxes, such as tax on wood, gambling, power and so on. You treat these things separately. Treating them separately strikes me as not a good idea, particularly because provinces have a capacity to adjust the rates on the different bases in order to maximize their equalization payments. On the other hand, is you use one base, which is the real capacity of a province to tax then it is its provincial income per head or its provincial income. Both systems use numbers as measures of capacity- to-tax, but they use different numbers.

Senator Banks: I could make sure that I always show up in the red using the macro system, could I not?

Mr. Usher: No, you could not. Under the macro system, if you were a province, your civil servants would go to Statistics Canada to pick up the measure of provincial income and your national income. You would then look at all the revenues of all the provinces and divide those by the national income to get the average provincial tax rate. Then you work out the formula. There is very little room for manipulation here.

Senator Banks: If you use income as a base, is that not changing the stated intent to the extent that it is clear of the Constitution, which does not talk about equalizing income? It talks about equalizing the provision of services at comparable tax rates. They are two different things.

Mr. Usher: Yes, they are. One of the features of the equalization program is that it equalizes revenue per head. It does not correct for differences among provinces in needs for different services. That is true neither of the macro formula nor the representative tax system.

I refer to an article in the larger paper where there have been proposals to correct equalization payments for differences among provinces in needs. For example, British Columbia might be entitled to more equalization payments under this rule because lots of old folks go to British Columbia to die and, in the process of dying, they use up huge medical expenditures. There are other sources of differences among provinces in needs.

These are not taken into account under the representative tax system, and they would not be taken into account under the macro system as it is proposed here. Under either system, you could make an adjustment for needs. The problems of doing so, so far as I can tell, are neither greater nor less under one system than under the other. There are problems, but they are problems common to both systems of equalization payments that are being discussed.

Senator Banks: Is it fair for me to think that the difference that the macro system is a little more concerned with the equalization of income as opposed to the capacity to deliver comparable services at comparable tax rates? Is it income equalization? Is it revenue equalization?

Mr. Usher: Not really. The present system, which uses the actual tax bases in the different provinces, does not make any allowance for differences in services. The present system has no such allowance. It only makes reference to different taxes.

Senator Banks: Does the present system not say that whether or not it does so this province could, we think, raise this much tax from this source? Is it deemed, perceived or notional?

Mr. Usher: The analogy you are drawing is one between a province and a person. Suppose a person holds five different jobs and that he receives money from each job. If there were a firm rule that everyone must work 10 hours a day and two hours at each job, you might want to look at the jobs one at a time. However, in deciding whether a province should be entitled to equalization payments have to ask: What is it to be used for? It is to help out provinces with relatively poor people in deferring the expenses of their provincial governments. So why not use income as a base, namely, use evidence about which province is relatively poor and which province is relatively rich as a basis for deciding what the appropriate federal assistance ought to be? I say this especially as provinces have a great deal of leeway in which bases they tax. One province taxes personal income very highly. Another province makes use of a sales tax. Alberta does not make use of a sales tax at all.

Provinces have a lot of scope in terms of choosing what taxes they wants to levy. Provinces do not have a lot of scope in deciding what their incomes per capita are.

Senator Banks: That is the difference.

Mr. Usher: That is a major part of the difference.

Senator Furey: The committee has heard that the present system of equalization payments fails because it is unable to reduce the economic disparity between provinces, that is, the recipient provinces appear to be the same year after year. Given your comments about alterations to royalty regimes with non-renewable resources, how does the macro system address that particular criticism, and can it correct it?

Mr. Usher: The general view is that transfers are corruptive. If transfers from the federal government to provinces are corruptive, then a transfer generated by a macro formula will be just as corruptive as transfers from a representative tax system.

As a first approximation, there is not much in it. I work under the assumption that transfers are not corruptive. It does not hurt anyone to inherit a bit of money to get a start in life. I do not think it really is harmful to a province to receive a certain payment from the federal government.

The Maritime provinces are not poor. I was surprised to learn some years ago that the status of the Maritime provinces over the last 50 years or so has risen very substantially relative to the rest of Canada. However, I do not attribute this to equalization payments. These large changes with regard to which provinces will be prosperous and which will be not take place over long periods of time and will not be altered hugely by a system of equalization payments.

On the other hand, there is one point on which I am inclined to agree with the AIM folks, and that is that if a system of equalization payments creates a situation where a provincial government has nothing to gain from extra resource royalties, then under those circumstances the macro formula is indeed an improvement, because the macro formula lets provinces keep roughly 75 per cent of their oil royalties as against a much smaller number, maybe 25 per cent, as the standard estimate is now.

Therefore, on balance, I think the macro formula is preferable from the point of view of provincial incentives and provincial growth.

With regard to the major premise that transfers are corruptive, if they are, we ought to stop all equalization payments immediately. However, I do not think they are.

Senator Furey: I certainly agree with you. I do not believe they are, but some Atlantic provinces have suggested that this particular view about recipient provinces appearing to be the same year after year is wrong because the system is designed to provide a comparable service. If we take that one step further, and I would like your comment on this, are we getting into an area that is more one of regional development than national sharing of resources?

Mr. Usher: I cannot see that equalization payments will harm regional development. If all we were concerned with was maximizing the national income of Canada regardless of where the national income of Canada generates, it would probably not be a bad idea to eliminate the equalization payments and just let things flow. One of the reasons for equalization payments is because we are not prepared to do that. We do want people to have equal services in equal provinces.

If we are going have medical care under the control of the provinces, we do as a nation want equal medical care more or less across the country. That means that the provinces must have more or less the same revenue. Equalization payments will help, although they will not do the job completely.

Equalization payments help somewhat better under a macro formula than under a representative tax system, but that is the most I can say in answer to your question. I have a feeling I have not gotten to the core of what you are concerned with.

Senator Furey: I think you have.

You made the comment in your presentation that equalization among provinces need not translate into equalization among people. People may be better off on average in recipient provinces than in non-recipient provinces. Can you expand on that a little?

Mr. Usher: The example I gave in the larger paper is this: Consider the apples and oranges case. Suppose you have two provinces. Suppose the northern province grows many apples and few oranges, and the southern province grows few apples and many oranges. However, the northern province is relatively rich because its surplus in apples is greater than the southern province's surplus in oranges. Let us suppose that there is some reason why it is difficult to tax apples but it is easy to tax oranges. Suppose the apple orchards are scattered all over the place and cannot be observed very well. Your people are prosperous, although they do not seem prosperous, whereas the orange groves are in one place and can be taxed easily.

Suppose, to take an extreme case, all provinces levy zero taxes on apples and get all their revenues through oranges. Now, the poor province actually has lots of oranges, so under a representative tax system, under the system we have, the southern province, which is actually poor, will appear rich because it has lots of oranges, and oranges are highly taxed. The northern province will appear poor because it has very few oranges and lots of apples, but the apples are not taxed by the province. That is the way the formula would work in this case.

You tell me that is not very likely, to which I must reply that indeed, it is not very likely, but it could happen. You do have this possibility of a bias in the system, which could be so great as to provide equalization payments to rich provinces instead of to poor ones, or to some rich provinces rather than to some poor ones. Under a macro formula, that would not happen.

Senator Furey: It has never really happened under the present formula. It is highly inconceivable that it would happen under this formula.

Mr. Usher: It is, but it is a possibility that lies open in the formula we have. Under a macro formula, you look up the value of apples plus the value of oranges and that becomes the base of the tax system. The northern province is the rich province, and therefore the southern province receives equalization payments.

Saskatchewan is on the margin. It sometimes gets equalization payments and sometimes not. What happens under a macro formula might be quite different from what happens under a representative tax system. Again, Saskatchewan does not receive a whole lot of equalization payments because it is on the margin.

The Chairman: It remains only for me to thank Professor Usher very much for an extremely interesting, even provocative, morning.

Thank you for the material you have left with us. It will add greatly to our reflections on this important subject.

Earlier this fall, I was advised by the Canadian Union of Public Employees that it wanted to be heard on this issue. I was rash enough to ask what this subject has to do with CUPE. I soon found out. We made a discrete inquiry and they wrote back indicating they have a number of concerns, including four that they specified.

The first concern is the erosion of equalization since 1982. Second is the ceiling on equalization payments. Third is the use of the five-province standard instead of the all-province standard. Fourth is how equalization payments increase.

Their concerns could not be more suited to our agenda and our study of this matter, so we have invited them. I am delighted they could come to help us with this issue.

We have Mr. Paul Moist, General Vice-President of CUPE; Wayne Lucas, General Vice-President; Heather Farrow, Senior Research Officer; and Jane Stinson, Research Director of CUPE. I understand Mr. Moist intends to make an opening statement.

Mr. Paul Moist, General Vice-President, Canadian Union of Public Employees: Thank you. Mr. Lucas is from the Province of Newfoundland and Labrador and I am from Manitoba. We want to thank you for the opportunity to be here today. It is a timely subject, as our economy is arguably in decline, and federal-provincial fiscal arrangements are critical at the best of times and perhaps more critical when we are heading into such times as we are now.

In the fiscal transfer sense, Manitoba, irrespective of who has been in power for the last five decades, has always argued for federal transfers that allow us to provide services to the citizens we serve. I think now we are in an era of some arguably surgical federalism: targeted one-time transfers, artificial ceilings on equalization, versus predictable revenue redistribution.

As a starting point, our Constitution's reference in 36(2) that you were referencing earlier with the previous delegation, seeking to ensure revenues to provide reasonably comparable public services at reasonably comparable levels of taxation, cannot be lived up to, we will argue this morning, through an ad hoc approach to federal-provincial fiscal arrangements.

You are well aware that equalization payments refer to the funds that the federal government transfers to eligible provinces to help equalize their financial capacity. These payments ensure and enable public services to be delivered to every Canadian regardless of income or geographic area. We at CUPE are seeing this Canadian ideal being dismantled. An appropriate and renewed equalization program would revitalize equal access to public services and social programs no matter where one lives in Canada, or no matter what one's level of income.

We represent about 500,000 Canadians who work in health care, social services, municipalities and the broader public sector. We are concerned about these equalization payments. In the seven provinces currently receiving equalization payments, there are about 200,000 CUPE members and their families.

Our presentation today will suggest removal of the equalization ceiling and floor. We will suggest that the fiscal stabilization programs might be used as a form of floor. We will argue for the movement back to the 10-province standard and, finally, a renewal of the representative tax system equalization formula without using personal income taxes or one-off funding.

As you are aware, equalization was first introduced in the late 1950s, with the objective to ensure that provincial governments can provide reasonably comparable public services. The Constitution Act was amended in 1982 to include reference to this equalization principle. Every province in our federation, with the exception of Ontario, at one time or another has been a recipient of equalization.

Today, we have a situation where the federal government levies 60 per cent of our country's personal and corporate income tax. However, the provinces and local governments deliver roughly double the level of services than does the federal government.

The federal government is backing away from its commitment to fund social programs, which makes the need for a proper equalization program even greater.

Under the heading of removing the equalization ceiling and floor, in the years 1988-89 through 1991-91, three fiscal years, the recipient provinces lost over $3 billion in equalization payments due to the establishment of the ceiling. By the spring of 2001, the ceiling is 25 per cent below where it was first set two decades ago. At both the provincial and territorial ministers of finance meetings held in December of last year all the provinces and territories reiterated their support that the equalization ceiling be removed.

Fortunately for the 1999-2000 fiscal year, Bill C-18 removed the equalization ceiling, which greatly contributed to recipient provinces. That was for one year only. The equalization program floor could also be dropped since the equalization formula alone is sufficient.

Ministers of finance called for immediate work on the 10-province standard since, in 1999-2000, $3 billion in equalization payments were lost due exclusively to the use of the five-province standard and the imposition of the ceiling.

Mr. Wayne Lucas, General Vice-President, Canadian Union of Public Employees: I would like to read my opening comments, but afterward I will make a broad statement.

The Chairman: Go ahead, bearing in mind that, as you will have seen with the previous witness, the senators are pretty good at eliciting broad and even specific statements from witnesses.

Mr. Lucas: The equalization formula is the representative tax system, RTS, which incorporates over 30 variables such as sales taxes, tobacco taxes, provincial income tax, corporate income tax, proxy bases, et cetera. Measurement of the RTS is not simple and subject to interpretation. A non-tax based measure, however, is not appropriate since different income is taxed at different rates.

Including all natural resources, however, makes equalization payments more volatile. One idea is to include 70 per cent of natural resources from offshore, heavy oil, potash and asbestos. When a five-province standard is incorporated, this may be a solution. However, if a 10-province standard is used, resource revenues do not need to be given special attention; natural resource revenues would already be included in the tax base of the 10 provinces.

Next, I turn to the subject of building a better Canada, and why a proper equalization program is so important now.

Poverty in Canada is growing. Government support for social programs, however, is shrinking. One way to reverse this trend is to renew the equalization program.

If allowed to continue, the present equalization program and diminished federal-provincial transfers could lead to fiscally induced migration of people and businesses and Canadian instability. Without equalization payment, infrastructure and service delivery will vary greatly from province to province. Provinces may look to joining with other regions in order to gain.

The federal Auditor General has raised the issue of accountability and equalization payments. Perhaps some relationship between equalization payments, social programs and maximum tax levels may need to be explored.

In conclusion, given the federal surplus, changes are affordable. To build a strong Canada, we cannot afford not to make changes. The equalization ceiling and the five-province average were cost-saving measures.

CUPE is asking the federal government to remove the equalization ceiling and floor; to move to the 10-province standard; and to renew the representative tax system, RTS, equalization formula, without using personal income taxes or one-off funding.

If ever Canada needed a proper equalization program, it is now.

I would like to make a general statement. Coming from the beautiful province of Newfoundland and Labrador, I take great pride in speaking of my province to people from mainland Canada. I especially like to speak about the equalization question. I feel as though I am a full participant in Canada and its economic system, even though equalization payments are so needed in my province. Although the province has some economic diversity, it also has some great resources such as Churchill Falls and the Iron Ore Company of Canada.

Those raw resources are taken out of Newfoundland are sent to places like Ontario and British Columbia, where we make cars and refrigerators and smelt down the raw material for the finished product. We do not have the opportunity in our great province to make those finished products, but we do take the raw materials from the ground and export the raw material.

In return, equalization payments are sent to our province so that we can educate our children. As most of you know, the province of Newfoundland and Labrador has a great out-migration. In the last 10 years, our population has declined by between 10,000 and 12,000 people. We send our educated young workforce out during their early years, when they are most productive and when they pay the most taxes. The cost of education, as everyone knows, is enormous to the province. What happens is that, most people who move away to other parts of the country want to eventually resettle where they were born. That puts a further burden on the province of Newfoundland and Labrador. The highest cost that we have now is the cost of health care. The equalization payments are so vital to the rural parts of the country that we could not survive without them.

We hear news stories that provinces and states along the eastern seaboard of the United States and Canada seem to be getting together. There always seems to be someone calling open-line programs and to say we might be better off in an economic union with the United States. I always respond that this is not the way to go. I say that we have a program in Canada that works. We have a program that has provided services to the country and has built Canada to be what it is today, and we should build on that from here on in.

Senator Bolduc: The equalization program is in the area of $10 billion. If we exclude the service charge for the debt in the federal budget it means that about 8 per cent or 9 per cent of federal revenues goes to that program.

You say that the ceiling is over 25 per cent below what it was in 1982. Your proposition to increase the percentage of the federal revenues allocated to equalization payments amounts to what percentage? If it is actually 8 per cent, 9 per cent or 10 per cent, what do you suggest would raise the proportion of the federal budget for the equalization program?

Mr. Moist: Twenty-five per cent of approximately $10 billion is another $2.5 billion, which would take us into the range of $12 billion to $13 billion for this fiscal year.

Senator Bolduc: You would go from 8 per cent or 9 per cent to 10 per cent or 11 per cent.

Mr. Moist: That would be the percentage of total federal revenue, yes.

Senator Bolduc: We must be very practical here. We have an obvious requirement for defence and security. Defence and security requires about $11 billion. I suspect that they will push for more funds as well. That 10 per cent for defence will go up to 11 per cent or 12 per cent.

That would put on a added pressure of 1 per cent to 4 per cent. It is a huge amount of money we are talking about here. Will we go then to deficit financing or additional taxation? How about the idea of cutting Employment Insurance rates in the case of recession to help employees and corporations? Put yourself in the Minister of Finance's shoes. How do you see the finances being handled?

Mr. Moist: I am not sure that we will get drawn into a debate about defence and security expenditures versus a fundamental feature of our federation that has been around since Confederation - various forms of wealth transference.

Second, I met with Mr. Martin, along with our regional minister, in Winnipeg in May. I am not sure that we are not still understating revenue surpluses here in Ottawa. The last three or four fiscal years would support that comment.

Third, there are various forms of transference. One example is the transfer of money directly to workers through the EI system. The debate is whether we cut premiums. There is immense pressure on Mr. Martin to cut employee and employer premiums because there is over $20 billion in surplus in the EI fund. That would be imprudent given the economic waters we are heading into.

There is much north-south pull on our economy that has increased since we have signed our trade deals with Mexico and the United States. One east-west reality since Confederation, particularly since the Second World War, has been the redistribution of wealth in the country through various programs, one of which is equalization. If we have to have first draw on limited federal revenues, shoring up equalization is arguably defensible.

That was the reason why Mr. Trudeau housed this in the Canadian Constitution. We can debate the Trudeau record on constitutional matters, but he believed in narrowing the gap between individuals and between provinces in Canada in terms of wealth, not seeing it go in divergent directions. I believe that is where it is headed now.

My province will never compete with Alberta on the tax question, with $11 billion in resources from natural gas, coal and oil. That is before the province levies a nickel of tax. As you know, Alberta has no sales tax. The entire budget for Manitoba is $7 billion. That was the purpose for equalization, not as a one-time expansion of defence expenditure and not as a reaction to a two-year recession.

We put the principle of equalization in the Constitution because we wanted it to be here 50 years from now when, arguably, Alberta will need it. They do not have a renewable resource. They have a non-renewable resource. I must take my hat off to Alberta. It has been a supporter of equalization, including the 10-province standard.

I think if we are talking about not so much building but maintaining a federation, there must be some principles of revenue redistribution that are beyond the vagaries of everyone going across the street to lobby for their particular issue in a particular federal budget.

Mr. Martin argued in Winnipeg in May, before a group of business and labour folks, that it is too expensive to go back to the 10-province standard. He argued that he would prefer a targeted approach to distribution of federal revenue. I think that is a system that leaves too much to the lobbying efforts of respective provinces or regions and does not give enough stability to provinces to do something Canadians want.

Irrespective of political stripe or region in Canada, Canadians seem to want a health care system and an education system. I am not an expert on this, but one cannot talk about equalization in isolation from the other fiscal arrangements.

This will be the first recession, if we are in it or heading into it, where expenditure is not taken into account through the CHST transfers. The Canada Assistance Plan, as you know, provided 50-cent dollars. If Winnipeg's welfare roles swell from 17,000 to 35,000, as they did in 1990, those 50-cent dollars float.

No matter all our grievances with the government of day at that time, those federal redistribution mechanisms were sensitive to expenditures. Now, the CHST expenditure is being given to provinces and the increases, as Prime Minister Chrétien announced, will benefit the three provinces that do not receive equalization and they will not be sensitive to welfare rolls swelling in Newfoundland and Labrador, in Manitoba or in any other province.

It seems to me, without getting into any other aspects of his career, that Mr. Trudeau did a good thing in housing this principle in the Constitution. We will argue that artificial ceilings and placing current, perhaps short-term, priorities ahead of equalization keeps us from living up to that principle in the Constitution. I apologize for my longwinded reply.

Senator Bolduc: It is important to have your views. I thank you very much for that.

[Translation]

Senator Ferretti Barth: All provinces use the same formula. Some of our witnesses told us that they are concerned with the ceiling and the floor. Some talked about a new formula, a unique formula. Are you aware of the existence of that formula?

[English]

Mr. Lucas: I do not know a whole lot about the new formula, but I know about the debate that is raging in Newfoundland. It goes something like this: everyone knows that there is oil development offshore of Newfoundland: Hibernia, White Rose, and so on. And we all know about Voisey's Bay.

There is great concern in Newfoundland that if 90 per cent of tax revenues from those developments go back to the Government of Canada we will never get out of the sinkhole we are in.

I know that the Premier of Newfoundland has been in the media lately saying that we need a new formula. We need a new system so that current equalization payments that support health care, social services, education, et cetera, are maintained at a certain level. We are also saying that we need a break at this point in time so that Newfoundland can reach the level of a "have" province.

The people in Newfoundland are not refusing to develop these bountiful raw resources in order to keep the equalization payments. Newfoundland is not a welfare state and that is not how people are thinking. However, there is a need for the politicians to sit down and say to "have not" provinces, such as Newfoundland and Labrador, that equalization is so important because it binds us together as Canadians to provide the social services that we all deserve and cherish.

By the same token, we must find a mechanism so that Newfoundland can hold its head high and know that eventually it will be a contributing factor in the economy of Canada. I do not know if that answers your question.

[Translation]

Senator Ferretti Barth: In your province, does the provision on equalization pose the same problems as in the other provinces?

Are you aware of the unique formula presented by Mr. Usher today and if so, do you know if the provinces have been informed of this innovative provision set up to answer their specific needs?

We all know that the government is concerned with health and education, but we should envisage changing the old equalization formula to answer the needs of the provinces.

[English]

Ms Heather Farrow, Senior Research Officer, Canadian Union of Public Employees: In response to your question, we are not here to give you exact changes to the formula today. However, when this formula is renewed, we want labour and community groups and other stakeholders to be involved in a new kind of process that is more inclusive.

Regarding personal income tax, I am not up-to-date about your previous speaker. I was not privy to his submission. Personal income taxes are paid at different rates and it skews the formula such that it would probably be detrimental to the recipient provinces. Those are the two points that we bring to you today.

Senator Doody: I notice in your brief that you suggest a return to the 10-province average for the formula. Do you think we should continue to use the 33 tax bases in the 10-province formula, which would include Alberta's oil and gas revenues? That inclusion is probably my greatest incentive for wanting the 10-province situation. Would you change any of the rudiments of the formula when putting in the 10 provinces?

Mr. Moist: That relates back to Ms Farrow's previous answer. This question will always be the subject of discussion. You hit it on the head; the major substantive reason to return to the 10-province average is to capture the fiscal and revenue-bearing realities of Canada, which are not captured in the five-province formula given the current five provinces that are used.

It is fine, in my opinion, for Alberta to assert their provincial rights to retain their revenues from natural resources. I was not a big opponent of the National Energy Program, but you saw what happened in September when the Prime Minister was castigated for even the notion of a national energy program. The only way to capture that reality would be a movement back to the 10-province average.

The previous delegation discussed tax mix with you. The tax mix in the country changes from time to time. Various user fees are paid. My province, incredibly, gets 4.5 per cent of its revenue from gambling. I will not comment any more than that.

Senator Banks: It is disgusting.

Mr. Moist: Things are not static in our federation in terms of the tax mix that makes up total provincial revenues. Things do not change quickly around here in terms of federal-provincial relations and that would be the subject of a lot of debate: which 33 or 34 or 35 taxes get included. That is a fair debate to have because the situation should not be static. However, the only way for all regions of the country to capture the reality of Canada is to move to the 10-province average that all 10 provincial governments support.

Senator Doody: In your brief, you mention Bill C-18, the act to amend the Federal Provincial Fiscal Arrangements Act to remove the equalization ceiling.

Am I correct in saying that was for one year only? This paper is a little misleading. It sounds like the federal government did what it promised the provinces it would do, to remove the cap, but it only removed it for one year.

Mr. Moist: You are right and we are aware it is for one year. We will advocate annual federal elections and we might get it forever.

Senator Furey: I will zero in on Newfoundland mainly because I feel, in Newfoundland, every time we take one step forward we are forced to take two backward. You have made a number of recommendations to remove the equalization ceiling and floor to move to a 10-province standard and renew the RTS.

There may be some appetite in government to tinker with those recommendations. I do not know if there is an appetite to completely change them, but there may be some tinkering with them. That would generate more revenue for the recipient provinces, but would not address the issue of the huge difference between the have provinces and the have not provinces.

Would it be better if you concentrated on recommendations to government regarding the rearrangement of royalty regimes with respect to claw-backs on offshore development on Voisey's Bay? Right now we get 30 cents on the dollar, I believe. If that went to 50 cents or 60 cents, we would be light years ahead.

We have the prospect of the lower Churchill being developed. We will lose money from that. I also wish to inquire about this horrendous change in the CHST to a per capita change. As you pointed out, Mr. Lucas, in Newfoundland we have a declining population an increasingly aged population. That puts a greater strain on our health care system. Where is the fairness and equity in a per capita distribution of those monies?

Mr. Lucas: First, I believe that our recommendations are the best recommendations to maintain that we have equalization which binds the country together not just for today, but also for future generations.

With regard to revenues and taxation system where we tax the resources that we have in Newfoundland, I believe we need to have some dialogue and come to a conclusion. If we are only to achieve 10 per cent from the revenues from Voisey's Bay and the rest of revenues go back into the federal tax system well, no one believes that is good enough. We need to come to a point where Newfoundland can say that it is a contributing province.

We, in Newfoundland and Labrador, are of the mindset that we must forge ahead and develop the resources that we have as best we can for future generations. We do get one thing out of those resources; we get the few jobs that are developed; the mining jobs from Voisey's Bay and Hibernia and other projects.

Until such time that we come together and come up with another formula for taxation of those industries, you will have the people of my province knocking on the federal government's door and asking for better treatment of those areas.

Senator Furey: Do you agree that perhaps more emphasis in presentations like this should be made on the changes that were made in the CHST?

Mr. Lucas: Absolutely. We have it in the document.

Senator Day: You are recommending that all 10 provinces be included, again, and that all tax revenue sources should be included in the calculations, including non-renewable resources. Is that correct?

Mr. Lucas: Yes, that is correct.

Ms Farrow: We are asking that there be a more inclusive process to go along with that dialogue with labour, community groups and other stakeholders to review the RTS.

Senator Day: The position you would be putting forward is what I have just expressed. Is that correct?

Ms Farrow: That would be determined in those meetings.

Senator Banks: That is your opinion, your view. Is that correct?

Ms Farrow: Our view of what the RTS should include, would have to be determined. If you do include personal income tax, these are the problems that can occur. We are not here with a detailed solution to put in place. We are asking that that dialogue happen for the RTS.

Senator Day: At page 14 you indicate natural resource revenues would already be included in the tax base of the 10 provinces.

Ms Farrow: Yes, I am sorry. I misunderstood.

Senator Day: Then the revenue resource from non-renewable resources would be included. Is that correct?

Ms Farrow: Yes, that is correct.

Senator Day: We have been told by some speakers that they are excluded because that creates too much of a swing and there is a lack of predictability over a number of years to come. However, if all 10 provinces were included, you would include all sources of tax revenue. Is that correct?

Ms Farrow: Yes, that is correct.

Senator Day: Presumably, the natural non-renewable resource revenue would be a smaller percentage, therefore, and the same swings would not exist. Is that correct?

Ms Farrow: If the five-province standard is still used, we are suggesting perhaps 70 per cent, and we are asking that that be discussed further.

Senator Day: I understood from your paper that the 70 per cent was more important for the five-province scenario.

Ms Farrow: Yes, that is correct, for the five-province scenario, but ultimately the better solution would be to move to the 10-province formula.

Senator Day: With all sources included. Is that correct?

Mr. Moist: Yes, that is correct.

Senator Day: In your executive summary, you talk about removing ceilings and floors and moving to the 10-province standard for all sources of tax revenue. When you say without using personal income taxes, are you advocating that you do not want to switch to another type of system, but that you want to stay with the representative tax system with the change that we just discussed?

Ms Farrow: We are asking that the representative tax system be further discussed. We do not have the specifics in this document about that. We would like another opportunity to go into specifics of the RTS. We were asked about equalization, so we focused on the whole.

We do know that by including personal income tax in the RTS, it can cause problems and be detrimental to the recipient provinces.

Senator Day: The one-off funding or special deals for the different provinces, you do not want to see that. Is that correct?

Ms Farrow: Yes, that is correct.

Ms Jane Stinson, Research Director, Canadian Union of Public Employees: In order to have a more stable, long-term, consistent funding base, as opposed to one-off funding is what we are advocating. Let us get a formula that works better and provides continuity and stability in funding to the provinces.

There is some indication of a preference on the part of the federal finance minister to do away with equalization payments in favour of more one-off funding from the federal government to the provinces. That is not what we favour. We favour a better equalization formula.

Senator Day: At page 17 of your full report you say that perhaps some relationship between equalization payments with social programs and minimum tax levels may need to be explored. Could you expand on that and tell me how strong that position is?

Mr. Moist: That is in response to the former Auditor General Mr. Desautel's comments about the need for accountability. There is a debate that sometimes goes on between our provincial governments and the federal government: Are we using funds as they are intended?

I sort of chuckled when I heard the federal officials suggest that is a rationalization for cutting back on grants when they moved to the CHST global model. They had targeted funding such as the Canada Assistance Plan. Every nickel of those 50-cent dollars had to go to social services. I said as politely as I could to Mr. Martin that you cannot have it both ways. You cannot go to a global per capital funding formula which is a net reduction over what existed prior to 1995 on the one hand, and on the other hand argue that provinces are not using money for what it is intended for.

There has been this unproductive debate, between Mr. Harris and Ottawa, about his using federal dividends for various transfers for the purposes of cutting taxes in Ontario. We have two levels of government arguing about what they use their money for.

I agree with Mr. Desautel's comments on a number of fronts. In Manitoba, there is no question we have no problem justifying and using the money for what it was intended for. If that stops the political bickering in the country, it would be a good move.

Ms Stinson: To add to that, now we have the situation or scenario where we have different provincial governments perhaps in a bit of a tax cut race. If you have a provincial government that is willing to reduce its taxes and yet relying on equalization payments among other things in order to provide social services, it does open up the question of whether we need to look at what is happening here and the relationship between provincial government taxation, for example, and equalization payments and the level of social programs that are provided. It is part of the new fiscal reality that we are facing, and the need to re-examine some things we have not had to look at in the past.

Senator Day: You would be content to have the federal government, in making its equalization payments, attach strings to those payments from the point of view of what the funds are being used for, and the minimum levels of tax in the provinces. Is that correct?

Mr. Moist: We said the minimum level of tax is something that could be explored. I could imagine provinces will have something to say about that.

Senator Day: I suspect so.

Mr. Moist: The average Canadian wants health care, whether they get sick in Newfoundland and Labrador, Manitoba or British Columbia. Transfers, such as the one we are talking about today, are critical to the stability of the federation. Accountability to the people we serve is not a bad thing.

They will squabble like crazy about being accountable and having heavy strings to Ottawa, but Mr. Desautel made a good comment in one of his last reports. I cannot speak with any authority for any elected provincial premier, but the people of Canada have benefited from stability in equalization. Even as we think the system is in vast need of overhaul, in its present form it narrows the gap. It reduces poverty rates in Canada, which I think is what Mr. Trudeau intended.

Senator Banks: The Minister of Finance of New Brunswick argued, as you have, that the ceiling on the equalization payments ought to be moved. However, he argued equally strongly that the floor ought not to be moved. I am interested in hearing what you would say to her.

Mr. Moist: Mr. Lucas and I should both comment on this because we have had this discussion amongst ourselves.

On page 15 of our brief, we talk about using other distributive mechanisms as a replacement floor. I think we are arguing that the biggest problem for recipient provinces has been the imposition of the ceiling. The floor has only been a relevant factor for two provinces, New Brunswick once and Saskatchewan a few times.

This is my personal opinion and not a CUPE position. I think our argument regarding the ceiling is a strong one. To be consistent, we cannot argue for a floor within the equalization formula. We can argue and will argue for other distributive mechanisms. We talk about Established Programs Financing, EPF, as an alternate form of floor, but within the equalization formula itself.

Mr. Lord when speaking on behalf of the government said:

Let me be clear. My goal is to ensure that my province won't need equalization, but I am not prepared to see New Brunswickers penalized as they are now.

I think in that last sentence he was commenting about the ceiling.

I am not sure what my Finance Minister said. He appeared before you last August, but I can imagine net contributing provinces like Ontario having something to say eventually about the presence of the floor and the absence of the ceiling. There are other ways to cushion declining equalization revenue because of increased economic performance without a floor being affixed into the equalization formula.

Mr. Lucas: The only thing I can add is what the Finance Minister of Newfoundland wrote last Thursday in the paper. She talks about an overview of the ceiling and floor. She talks about the new arrangement being rearranged. She says that we have been in a quagmire for 30 years in Newfoundland and Labrador, and we have an opportunity right now to change the minds of the politicians in Ottawa. If we do not do it now, we will go through another 30 years where we are only treading water. She certainly is in favour of removing the ceiling and the floor and having meaningful discussions and negotiations about where the equalization payments are. We know they will be coming and will be coming for future generations, but once again, she is also talking about coming to an agreement with regard to the taxation of our natural resources.

Senator Bolduc: In the constitutional article, we talk about providing reasonably comparable levels of public services in Canada. Are you satisfied with the indicators of health and health care in Canada? Do you think the indicators of health care and health care are satisfactory? It is easy to rationalize and say that there are comparable levels of public services, but what is the reality of that?

Mr. Moist: It is a typically Canadian statement, because you can go where you want with it. We appeared before Senator Kirby and his committee subject of the future of the health care, and we have some very strong views that arguably we do not have a comparable system in the country today. It is not a comparable system in terms of accessibility, the use of private clinics and the so-called "jumping the queue" with private clinics.

The only statement I can make is that the provinces are all over the map on this. Alberta introduced Bill-11 to enable private clinics to be publicly funded. Manitoba, in the last session of the legislature, introduced legislation preventing public funding of private clinics and has nationalized two private clinics in Manitoba.

I am not sure what the authors of Constitutions mean when they use phrases such as, comparable levels of public services, but I must think that it is akin to that which we discussed with Senator Kirby. It gives Canadians accessibility to a universal public health system. Ottawa helped enable that after it was begun in a province a generation or two ago.

The Chairman: That was 50-cent dollars, as well.

Mr. Moist: Yes. Ottawa still retains a sort of statutory authority over the principles of health care, but retraction financially has diminished the voice of Ottawa in the shape of health care.

If there is any purpose to a federal system such as ours, it ought to be to use the strength of the national government, whether it is in times of defence or times of depression, to shore up the country and to allow the country to speak with one voice on issues.

The 1982 words in the Constitution did not exist when Ottawa asserted its financial strength and authority to enable health care. The words were housed in the Constitution and revised in 1982. I would argue that despite the financial capacity in Ottawa, they have taken themselves out of the game.

Senator Bolduc: In other words, they put in the Constitution a kind of wishful equity principle, but, in practice, they retracted it.

Mr. Moist: It was done over time and through stealth, not by any one government.

Senator Bolduc: It is curious that you say that because some of my friends have been waiting for a long time to get a hip replacement. At the same time, I see in the newspaper that some hockey player is hurt one night and the next day has an operation in Montreal.

Mr. Moist: In the absence of Senator Mahovlich, we should not talk about hockey players being injured.

Mr. Lucas: It is too bad that the finance minister from Newfoundland is not here because I led a province-wide strike less than six months ago. I sympathize with the job the provincial government is trying to do in Newfoundland and Labrador. They are trying to enable everyone to get equal access to not only health care but also education. As we all know, there are 500 communities spread around the coastline. Labrador is sparsely populated. The job is immense.

Right after signing the collective agreement with the provincial government, the premier asked us to sit down with all the stakeholders in the health care in the province. Due to the reduction in equalization payments and not knowing whether they would get the same funding as last year, they had to make $18 million worth of cuts. That was only in the St. John's area.

The health care system in Newfoundland is cut beyond the bone. Most of the professionals would tell you that it has gone into the marrow. If a person could get a hip replacement in three weeks in Toronto, you would wait three months in Newfoundland and Labrador. I do not think anyone thinks that is acceptable.

The Chairman: I doubt if you could get it in three weeks in Toronto, just for the record.

I would like you to comment on the idea of much greater use of equalization and less use of targeted and conditional transfers.

I will give you an example from your province. Mr. Lucas, your premier was here last week and was discussing this very matter. In the course of the discussion, he let drop that there is an announcement imminent of some kind of new federal-provincial roads program. I do not know where roads would fit in Newfoundland priorities. I do not think anyone in Ottawa knows where roads would fit in terms of Newfoundland's priorities vis-à-vis education, welfare, health or other provincial responsibilities. However, the premier acknowledged that the temptation to spend not 50-cent dollars but 10-cent or 30-cent dollars on this roads program would be irresistible.

I will give a larger example. Mr. Moist was talking about the Canada Assistance Plan. I remember it very well. I have been on both sides of the argument. A long time ago I was in the Government of New Brunswick, working as a political advisor. I know that we would put everything but the kitchen sink into the Canada Assistance Plan because it was 50-cent dollars. The cabinet, faced with two proposals for new social expenditures, would 10 times out of 10, decide to implement the one that could qualify under the Canada Assistance Plan, rather than the one that we would have to finance totally ourselves, whether the first was a better program and more needed in the province of New Brunswick. We would always go for the program that involved 50-cent dollars. Financially, it was fine, but whether it was the best way to proceed in terms of social policy is another question.

I was in another role in the federal government and saw perhaps not so much new programs as very considerably increased benefits being paid out, not by a Tory province, this time by the NDP province of Ontario. They jacked up their welfare payments considerably under Mr. Peterson, and certainly under Mr. Bob Rae, and all we could do was pay the bill. That led to, unfortunately, in a larger political sense, the famous cap on the cap, which in a larger political sense was a mistake. I acknowledge that fact as one who was strongly in favour of it and one of the prime movers of it at the time.

This is a long round about way of coming to the question. You agree, I think, that the provinces now can use CHST to build roads, if they like. What would be the difference in theory if they did away with the CHST and other targeted or quasi-conditional programs and did it all through equalization?

Mr. Lucas: That is a heavy question. First, I believe the equalization payments should go towards the primary social programs that we have in Canada today. Those programs are education, social services and health care. I do not think that anyone would question that.

Senator Banks: The government has questioned that.

Mr. Lucas: I am sure they have, yes. With regard to the premier saying that there would soon be an announcement regarding a cost-shared agreement with regard to roads, I have no idea what the premier is talking about.

The Chairman: It is a national thing, not just Newfoundland.

Mr. Lucas: I was going to allude to the fact that 10 years or 12 years ago, we had a program in Newfoundland called "Roads for Rails" where we traded off the Newfoundland railway system for so many hundreds of millions of dollars. By the way, many of you know that the drive from St. John's to Whitbourne is a beautiful piece of highway. I welcomed that, and I think that it was appropriate at that time.

I can also say that CUPE has talked to the provincial government about lobbying the federal government about an infrastructure program that would be separate from the Canada health and social transfer and separate from equalization payments. We believe that the water infrastructure system across the country is falling apart and is in need of tens of billions of dollars. I met with a senator last year and suggested that it was the time, before September 11, to take some of that money and invest it into the infrastructure system. I had a document at that time from the Prime Minister that said that in if there were ever a case where you could create meaningful and well-intended jobs it was to improve the water infrastructure system across the country.

Therefore, we are constantly lobbying the provincial government to get some of this seed money from the federal government to build roads and highways in order to open up the interior of some of our provinces so the entrepreneurs can get in and do business. Certainly, on the question of Canada health and social transfer and equalization payments, I believe they are safeguarded.

Mr. Moist: I view the provinces, to use a labour analogy, as being able to form solidarity when it comes to extractions from Ottawa. It is not an either-or question. The toughest thing I do as a labour leader is say no to my own members at times, and the toughest negotiations I ever have are with my own, not with any employer. If we forge our relationship every couple or three years and house it in a collective agreement, we are bound to live by that. The only truism in Canadian federal-provincial relations has been a provincial solidarity when it comes to extractions from Ottawa, be they fiscal or power oriented.

I am not of the community-of-communities view. I believe in a strong federal government, and I believe we have to redistribute in a predictable, ongoing way in the areas Mr. Lucas has talked about, notwithstanding what some premiers say they want to do with that money.

Secondly, some targeted economic investment is defensible, at times. We have the worst of all scenarios right now. We have provinces so desperate in a tax competitive way that they have their hand out for any available federal revenue, in the absence of stable federal revenue through programs like equalization.

Finally, Mr. Lucas mentioned infrastructure. Cities and provinces are clamouring for a portion of the federal taxes levied on fuel. If the federal government were to move on that in a pan-Canadian way it would have to be coupled with a decision to stop the $50 million road project. Maybe Mr. Desautel is wrong. Provinces ought to account to their constituents and spend that money the way it is intended. The way the federal government could force discipline would be to stop ad hoc targeted transportation infrastructure programs in exchange for stable funding there.

That is not the nature of the Canadian federation. It has been debates about power, more debates about money and solidarity among people who probably do not agree on many things when it comes to approaching Ottawa. The bulk of our members and the bulk of Canadians would like there to be a sorting out that had stability attached to it instead of this ad hoc approach. We need both, but the federal government could say no more easily and more often in the presence of stable programs such as equalization.

Senator Bolduc: You think the common good would be best assured from Ottawa rather than from Toronto, Montreal, Vancouver or anywhere else?

Mr. Moist: I personally have thought that since -

Senator Bolduc: I am surprised I must say that the representative of municipal employees would behave like that.

Mr. Moist: We met with the Prime Minister's task force on urban affairs last week, and there is an argument to be made for constitutional recognition of urban centres. I still believe our country, for reasons far beyond your first question about defence and security, needs the presence of a strong federal government, not just fiscally, but also legislatively to save us from ourselves in some respects.

Senator Bolduc: Because politics is purer in Ottawa than Toronto?

Mr. Moist: It is not purer in Ottawa than it is anywhere else. That will be the subject of another discourse between us, I am sure.

Senator Furey: Is it not more important to concentrate on the method of distribution rather than on the envelopes that they come in? We can call it an infrastructure program or health care program. If we continue to do it on a per capita basis, we will continue to widen the gap. We must concentrate on that more than on what we call it.

Mr. Lucas: You are absolutely right.

Senator Banks: Is it CUPE's view that CHST payments would be better directed, if they had strings attached to them, which they once had? And is it CUPE's view that constant, reliable, long term but targeted program funding would be better than the present almost block-grant system?

Ms Stinson: Perhaps I can answer that. We were quite disturbed by the introduction of the CHST and the fact that it made it harder to ensure that money was being targeted to specific programs. We have certainly called for targeted funding. We have called, for example, for more of a legislative framework to try to ensure that standards are met across the country. For example, there are none with regard to post-secondary education. We have a Canada Health Act, which is important and needs to be strengthened, in our view. We need similar acts in other areas such as post-secondary education. That has been something we have called for. It is clear that some specific needs must be met, and there needs to be targeted funding.

We have also called for a specific act in funding for childcare across this country. In terms of the question that Senator Murray raised whether it is better to consider paying everything through equalization, if I understood it correctly, I would say no. We have specific needs and we need targeted funding. It is a complex system. We must look at how those needs are best met, and it is probably through a combination of targeted funding and equalization.

Senator Banks: You know that every province disagrees with that.

Ms Stinson: It would not be the first time that we disagree with the provinces.

The Chairman: I do not in principle disagree with you. When you begin speaking about an act similar to the CHA for post-secondary education, again, as a political realist, I must say it will not happen.

A national childcare program is a very interesting idea. I used to be in favour of it, but when I started canvassing possibilities, I came up against the fact that social conditions and priorities vary greatly from one part of this country to the other. If the federal government goes to Newfoundland, for example, with a proposition for a shared-cost childcare program, it is apt to be told that the province has unemployed and undereducated plant workers and fishermen who need to be trained there. They would go on to say that they have a very high adult illiteracy rate and that if there is any extra money it should be put into training and education.

The premier of Saskatchewan will say that Ottawa has been nickel and diming the problem of off-reserve Aboriginals for goodness knows how many years. They will say that if Ottawa has the money, it should put it to use on Aboriginal programs. They do not want to hear about childcare programs.

British Columbia has illegal drugs, law enforcement, social problems and the question of English as a second language. They are concerned with Ottawa's immigration policy and what that policy is costing the people of B.C. They will say that if you have any extra money put it into matters where you already have responsibilities rather than try to inveigle us through 50-cent dollars into a new social program.

You know as well as - if not better than - I, what the argument is, because conditions and priorities are so different from one part of the country to the other.

Ms Stinson: The point that Mr. Moist made earlier is important. It is complex and there are many needs. We need to have a comprehensive assessment of long-term needs and goals. No one is saying that it is easy. It is a complicated country and these are complicated problems that we are dealing with.

Mr. Moist: We happen to agree with the provinces on the question before you now. However, the social programs that were introduced by my father's generation after the great depression would not exist if there were the lack of political courage at the federal level that there seems to be today. If you are to be dictated to by the provinces that say no to a national objective like childcare, then there never will be childcare. I am critical of the provinces wanting to have it all ways, and I am also critical of the federal government abandoning the leadership role that built this country, as we know it.

The Chairman: Thank you. We greatly appreciate your efforts.

The committee adjourned.