Proceedings of the Standing Senate Committee on
National Finance

Issue 26 - Evidence

The Standing Senate Committee on National Finance met this day at 6:07 p.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: Honourable senators, we have a quorum. This is our fifth public meeting on equalization, the reference we have been given by the Senate to examine and report on the effectiveness of and possible improvements to the present equalization policy and ensuring the provincial governments have sufficient revenues to provide reasonably comparable levels of public service at reasonably comparable levels of taxation.

I remind honourable senators that the committee must report no later than December 21, 2001. We have already heard from several provinces and experts in the field. Next Tuesday morning, we will be hearing from the Minister of Finance of Nova Scotia, Neil LeBlanc.

Yesterday, we heard Professor Dan Usher, adjunct professor emeritus of economics at Queen's University, who has written extensively on this subject. Tonight we will learn, if we did not already know it, that Queen's is no intellectual monolith. We have an equally distinguished witness who, I suspect, is not here to agree with everything that Professor Usher had to say.

Professor Boadway has taught at Queen's University since 1973. He was head of the department of economics from 1981 to 1986, and is currently associate director of the John Deutsch Institute for the Study of Economic Policy. Professor Boadway has written extensively on issues relating to equalization because his research interests are in the area of public sector and welfare economics, with special emphasis on tax theory and policy, redistribution, fiscal federalism and cost-benefit analysis.

Professor Boadway's books include Public Sector Economics, Welfare Economics, Canadian Tax Policy, and Intergovernmental Fiscal Relations in Canada, and Economics and the Canadian Economy. In 1998, Professor Boadway edited a book entitled, Equalization: Its Contribution to Canada's Economic and Fiscal Progress.

We are delighted that Professor Boadway was able to be here. He is a very good witness. He has appeared before Senate committees before, most recently, in my memory, before the Standing Senate Committee on Social Affairs, Science and Technology. He has a brief opening statement to make, after which we will open the floor for questions and discussion.

Welcome, Professor Boadway, and thank you for coming.

Dr. Robin Boadway, Queen's University: Honourable senators, thank you for inviting me. I will put my cards on the table before I begin. I am a strong supporter of equalization and of the current approach to it.

I prepared a few notes that I gather have been circulated and translated. I will begin with the purpose of the program. The principles of equalization have been long accepted and satisfy well-conceived economic policy objectives. Section 36 of the Constitution Act captures the principle of equalization and the economic policy arguments behind it quite well, in my opinion.

The role of equalization is to correct for the fact that otherwise identical citizens living in different provinces would face widely differing tax burdens for comparable levels of public services. Economists use the term "net fiscal benefits" to refer to the relationship between the benefits received from public services and the tax burdens paid. Eliminating these differences in net fiscal benefits promotes an efficient allocation of resources across provinces and ensures the equitable treatment of all Canadians by the public sector.

The full elimination of these differentials for all citizens cannot realistically be achieved in a federation, only in a unitary state. That is due to the fact that different provincial jurisdictions will adopt different policies. Instead, as a compromise, the program provides the provinces with potential for providing comparable public services at comparable tax rates without obliging them to undertake exactly the same policies.

In your judgment of the equalization system, it is very important to be aware of what the program is not. It is not a program for redistributing from high- to low-income Canadians, contrary to the impression left by many people, and it should not be judged as such. That is the job of an interpersonal tax transfer system and social programs directed at individuals. Also, it is not a system of redistribution based on some abstract notion of equalizing provincial fiscal capacities or indices of well-being. Instead, its purpose is captured in the wording of section 36(2) of the Constitution Act, that is, to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

I will speak about some of the concerns with the existing system, some of which I think are real and some of which are not so real.

One of the reasons equalization is on the table now is because the ongoing decentralization of revenue-raising responsibilities to the provinces, which has been proceeding gradually since the Second World War, has made equalization both more pressing and more difficult. Cutbacks in the block grants - CHST and EPF - have removed an important equalizing component from fiscal arrangements and put a greater burden on the equalization system. As more revenue-raising authority has been devolved to the provinces, the extent of tax capacity differentials, and therefore equalization entitlements, are bound to rise. As a result of this decentralization, tax bases are becoming more hetero- geneous, making the definition of a standard base much more difficult.

There are some conceptual problems with some of the bases. I am taking for granted that you know how the representative tax system approach to equalization works, based on 33 different tax bases. There are conceptual problems with those bases that I do not want to spend much time on, but will answer questions on if you like, such as property tax, user fees, lotteries and so on.

There are some design problems that I think are becoming more pressing as time goes on. One of them is the ceiling that, in my view, violates the principle of equalization. Another is the use of the five-province standard that makes the treatment of resource revenues particularly anomalous. The third is the absence of any notion of needs as a component of the determination of equalization payments, which will become more pressing as populations age and different provinces develop very different demographic make-ups. Another one, which is somewhat more technical, is the fact that the equalization system is a gross rather than a net scheme, unlike the block grants.

There are some incentive problems associated with the equalization system arising mainly from the fact that the parameters of the program might be manipulated by individual provincial policies. In particular, there are two sorts of components of the formula that might be manipulated. One is the national average tax rate that might apply to a particular base, which gives rise to the so-called "rate tax-back problem." If one province is a substantial proportion of the base for one of the bases, it will have a large influence on the national average tax rate. This has been dealt with quite well in the existing system using what is referred to as the "generic solution."

The other problem is more serious, I think, and is called the "base tax-back problem." It arises because a province's entitlement to equalization depends upon the size of its tax base relative to some national standard. If the province can influence the size of its tax base, it will affect directly its equalization entitlement. This has been a perceived problem with respect to the development of natural resources, where provinces may have some influence on the rate at which those resources are developed. We will face a potential disincentive if increasing the rate of resource development causes them to lose some equalization entitlements.

With regard to imaginary problems, there is a view in the public that the equalization program fosters dependency and is like a provincial welfare program. I argue that equalization is not analogous to a welfare program, does not create dependency and does not create disincentives to work, invest, save and so on.

You may also have heard the argument that the system is complex. I argue that conceptually, the system is not complex at all. It is based on a very simple notion and the formula is very easy to understand. What complexity there is arises from the calculations that have to go into determining the components of it. One need not know how those things are calculated in order to understand how the program works. I take issue with the argument that the program is complex.

Part of the problem is that the public has not been particularly well informed, and one of the nice things about these hearings is they do provide an opportunity for some public debate on the issue. The public has not been well informed about the program because decisions with respect to it tend to be taken within government and often emerge as part of the budgetary process behind the veil of budget secrecy.

There have been some alternative approaches to reform and renewal, and you have probably been presented with them by previous witnesses. Some people have suggested moving away from the representative tax system approach to a simpler macro approach, where equalization would be based on a single aggregate indicator such as per capita provincial income. There are a number of drawbacks to that approach, and I am certainly not in favour of it. Macro measures are wrong in principle. They confuse the role of equalization with that of redistribution from high- to low-income persons or provinces.

Macro measures cannot capture the source of potential differences in net fiscal benefits, which rely partly on the fact that different sources of income or different types of transactions give rise to different tax capacities in practice. There is no unambiguous macro measure that could be adopted. It is not clear whether one should use provincial income, provincial output, personal income or consumption, et cetera. There are many different possible measures.

Macro measures do not avoid the incentive problems of the current system, especially the problem of base tax-back, and it would be difficult to provide special treatment of particular tax bases that are faced with that tax-back problem. I think also that the macro approach would probably open up the program to more federal discretion with respect to the equalization transfers on a year-to-year basis, rather than making it purely formula based.

My preferred alternative would be to retain the present system of equalization transfers, but consider amending it in some key ways. First, I would remove the ceiling, which I think is arbitrary and subverts the intention of the program. I would return from a 5-province standard to a 10-province standard. I would refinance the CHST program, because I view that as an important component of the equalization system, broadly defined. I would study simple ways of incorporating differences in needs arising from differences in demographic make-ups across provinces as a longer-term objective. Also, I would spend some time considering ways of getting around the incentive problems that arise with respect to major resource developments such as the Voisey's Bay project in Newfoundland. Finally, I would consider opening up the process and reforming the fiscal arrangements more generally. Other federations have had some success with arm's-length advisory bodies that look at the fiscal arrangements from a longer-term perspective, taking it out of the annual budgetary process, and offer advice based on broad consultation with all stakeholders, including the provinces. A good example of this is the Australian Commonwealth Grants Commission, although there are others in other federations.

Finally, I do not think equalization can be considered separately from other components of the fiscal arrangements because other components also contribute to equalization.

In particular, I would argue that more tax points should not be transferred to the provinces in lieu of grants, since this both removes the source of implicit net equalization and puts more pressure on the equalization system.

As well, it has other, long-term adverse implications for the federation in terms of fiscal harmonization and the ability of the federal government to foster national objectives.

Those are my opening comments.

The Chairman: Thank you, professor. That is an excellent, very succinct statement of your position.

Senator Bolduc: In your first three or four paragraphs, on the purpose of the program, you indicate:

The role of equalization is to correct for the fact that otherwise similar citizens living in different provinces would face widely differing tax burdens for comparable levels of public services...

In reality, they do.

Dr. Boadway: They would face much more dissimilar tax burdens for comparable levels of public services were it not for the equalization system. The equalization system enables all provinces to provide essential public services, such as health, education and welfare, to citizens at reasonably comparable tax rates.

Senator Bolduc: You indicate further on:

Full elimination of NFB differentials for all citizens cannot be achieved in a federation, only in a unitary state.

However, even there, the benefits are not similar. We cannot say that we have comparative public services in a province such as Quebec between, let us say, people in Gaspé and people in Montreal, or between people in Quebec City and people in Abitibi. There are huge differences.

Dr. Boadway: There are differences, but I think, by and large, everybody in Quebec, or in any other province, faces the same income tax system. A person at a given level of income pays the same tax, no matter where he or she lives in the province. The issue revolves around to what extent the levels of public services are comparable in different parts of the province.

I would argue that, although they are not identical, they are as close as one might expect, given the differences in cost associated with providing services in Abitibi as opposed to Montreal.

Senator Bolduc: Your basic theory is more equity in public benefits in Canada.

Dr. Boadway: No, I do not think it relies solely on more equity. There are two arguments. One is certainly equity, in the sense of comparable treatment of all citizens no matter where they reside, but consistent with differences in cost of providing public services. There are also efficiency arguments with respect to public services. If we did not provide basic levels of education to people living in rural areas, they might be tempted to move to Montreal or Quebec City or what have you.

The fact of the matter is that if you look within provinces, there is a lot of equalization. Basically, provincial governments are big equalization machines for the citizens within the province. The equalization program for the country as a whole essentially asks, should we do the same thing the provinces do within their jurisdictions for their residents for people who live in different provinces?

Senator Bolduc: I know the problem of five provincial standards instead of ten is embarrassing. Actually, we managed to get around the extremes. If you put Alberta within the system, with the personal income per capita that it has, it will pay like hell for the others. There is a limit, I think, to what we can ask from a province, particularly if we keep asking for 25 years. We saw that with the energy program. Those people were stripped of something like $58 billion in a 15-year period. It was a huge amount of money. You will put political stress on the system if you do that too often.

I have hesitations about using a 10-province standard. I think it would be a little unfair to the people of Alberta. After all, they are richer and they have the resources. If you want to live there, go there. In Canada, in principle, we have mobility. If people decide to stay in Prince Edward Island or in the Laurentides in Quebec, they have a reason for doing so. I would like to counter your argument, because you are an equalizer, no doubt.

Senator Banks: If you do not, I will.

Dr. Boadway: I am not sure if you are playing the devil's advocate or not. The problem with Alberta does not arise fundamentally from its difference in per capita income, but because of its resource revenues.

It is a difficult problem. We have a five-province standard because of resource revenues, rather than differences in per capita income. I appreciate it is difficult. I do not have responsibility for implementing the program. I come at this from an abstract economics point of view.

One of the features of the Canadian federation that differentiates it from many others around the world is precisely the fact that resource revenues accrue largely to the provinces rather than to the federal government. This is what gives rise to the distinction between Alberta and Prince Edward Island, or a province without natural resources.

My argument is that the Constitution and the principle of equalization suggest that we should equalize resource revenues accruing to Alberta. That does not mean taking money from Alberta and redistributing it. The problem that arises with implementing the 10-province standard is that the federal government is bearing the burden of financing an equalization system when it does not have direct access to the resource revenues in Alberta that are, in turn, giving rise to the problem.

I appreciate that it is a difficult issue, but adopting a five-province standard as a way of getting around the problems that arise because of resource revenues is, to some extent, dishonest. If it is a resource revenue problem, we should deal with it directly and say that we will only equalize 50 per cent of resource revenues, which is what we did prior to the five-province standard coming into effect.

I am not answering your question directly because it is a value judgment. Who do you allow to have the benefits of the resources?

Senator Bolduc: I have read your previous research on federalism. You have published one or two books on that subject, if I remember correctly. I read your books during the period of Meech and, after Meech failed, Charlottetown, from 1986 or 1987 to 1991 or 1992. I remember well your point of view on federalism.

In our Constitution, of course, most of the natural resources are under provincial jurisdiction. Probably it was related to property, which is a provincial matter in the Constitution. If you had to redraft the Constitution in terms of revenue, would you say that it should be that way, or should it be looked at from a continental or a Canadian perspective?

Dr. Boadway: First, I am not a lawyer. I know that most of you are.

Senator Bolduc: It goes beyond the law. There are reasons for the law being the way it is.

Dr. Boadway: I was going to say as an aside that, strictly speaking, the Constitution does not say that the provinces own the resources. The federal government can levy whatever taxes it wants. It could levy resource taxes if it wanted to.

Senator Bolduc: There are two basic principles in our Constitution. All the revenues are federal, except those that are provincial. All properties are provincial, except those that are federal.

Dr. Boadway: It is true that the federal government cannot tax the provinces, but the Constitution says the provinces have the right to raise revenues on non-renewable resources in any manner they wish. That does not rule out the federal government.

My answer to your hypothetical question would be yes. If I were designing the Constitution from scratch, I would not give resource revenues to the provinces. It seems to me this is a national bounty.

Senator Bolduc: So we would have a more centralized system.

Dr. Boadway: No, it is not a question of being more centralized. It is a question of a national bounty that is sort of arbitrarily distributed. Alberta was an equalization-receiving province when it joined Confederation. It just happened to find oil reserves after it joined. In fact, they did not even have ownership of natural resource revenues when they joined. There is nothing written in stone that provinces should be the owners of natural resource revenues.

Senator Bolduc: You understand that people like me, part of a big minority of 6 million, strive for more autonomy because we want to be in a majority situation when we decide on cultural and social matters. This is not about nationalism. It is reasonable to say that. If we do not want to hurt that basic principle and keep all the people in Canada together, one of the best ways to achieve some balance in what I call a kind of "market mechanism," which would cover the whole country in terms of economics, is to give some leeway to the inhabitants in various areas of Canada.

Dr. Boadway: I agree. I will not be dogmatic. My point is only that basically, none of the oil and gas revenues in Alberta are equalized, except that which ends up as individual incomes of people. None of the natural resource revenues that accrue to the Alberta government are equalized. It is a matter of judgment whether you think that is the right or the wrong thing to do. My position is that it contradicts section 36 of the Constitution, if nothing else.

The Chairman: How does it do that?

Dr. Boadway: It does not allow all provinces to provide reasonably comparable levels of public services at reasonably comparable tax rates. Alberta has lower tax rates. They are even talking about abolishing their income tax all together. The reason they can do that is because they receive all these resource revenues.

Senator Banks: I will content myself with observing that Alberta is a perfectly jolly contributor to the equalization program. It was in fact a recipient until 1961, not just when it came onboard.

You said that you think the ceiling violates the spirit, at least, if not the letter of equalization. I suppose it does because it is arbitrary, as you said. What about the floor?

Dr. Boadway: I would argue the same thing, sure.

Senator Banks: It ought to just float, then?

Dr. Boadway: Yes. The floor is a temporary thing. I should qualify what I am saying. In principle, the answer is yes. In some sense, you could say that the floor is a temporary thing, to prevent once-and-for-all reductions so that the provinces can adjust to reductions downward. The ceiling has the potential to become a permanent ceiling that will apply for a long time. In general, I agree with you.

Senator Banks: It ought to operate without constraint at either end of the spectrum in order to meet the stated intent of section 36; is that what you are saying?

Dr. Boadway: Yes.

Senator Banks: In the paragraph at the bottom of page 1 - and I am dense on these kinds of things so I am asking you to instruct me - you say that it is based on the actual fiscal policies chosen by provinces, and not some abstract notion of tax capacity. I did not and do not now understand why that is the case. I am seeking instruction. I thought that the list of 33 revenue sources were, in a sense, notional. That is to say, they were based on what a province could raise in a given area, whether or not it actually does so. Is that wrong?

Dr. Boadway: It is ambiguous. This is a paraphrase of some longer text, which causes the problem. Part of the argument of people who suggest using a macro formula is that one of the problems with the existing system is that the amount of equalization that is paid actually depends upon the actual tax policies chosen by the provinces themselves. For example, the amount of equalization that is paid on account of cigarette taxes depends upon the actual tax rates that provinces decide, on the average, to levy on cigarettes. The amount of equalization that is paid on behalf of corporate taxes, or on any of the tax sources, depends upon the actual tax policies that the provinces themselves choose.

Senator Banks: Is that so? I did not know that.

Dr. Boadway: If you are calculating equalization for something like cigarette taxes, then the amount of equalization paid depends both on the base of cigarette sales within each province, and the national average tax rate that provinces actually apply. Thus, the amount of equalization that gets paid on account of cigarette taxes is based on the actual tax rates that provinces, on average, choose to use.

Senator Banks: Is it literally an average figure that is used?

Dr. Boadway: Yes.

Senator Banks: I thought it was more notional than that. Would the national average of sales tax be applied to Alberta, including the fact it is zero there?

Dr. Boadway: Sales tax it is not a very easy case to use because provinces use very different sales tax systems, which is one of the problems in the system. The way the calculation works is that you take all 10 provinces, you find out the total tax revenue raised by general sales taxes, and then you divide that by the total amount of sales overall.

What you get, in the end, is a national average tax rate for provincial sales taxes. I am not sure what it is exactly. It might be 7 per cent or something like that. That is sort of an average of the zero per cent rate in Alberta and the 10 per cent rate in Prince Edward Island.

Senator Banks: Does the averaging of actual empirical numbers apply to each of those 33 descriptors?

Dr. Boadway: Property tax is a funny case because it is calculated in a bizarre way. That is precisely the way the representative tax system approach works.

Senator Banks: Thank you very much. I will close by saying that I agree with you that the present system is a great deal better at meeting the stated intent than the macro system would be. It strikes me that the macro system is an income distribution system.

Senator Furey: Thank you for coming. My first question concerns your statement about refinancing the CHST, which performs, as you say, an important net equalizing function. In that refinancing, are you also talking about the method of distributing the CHST and getting away from the per-capita distribution that came about in 1999? Is that part of what you mean by refinancing, or are you just talking about putting together a whole new financial package?

Dr. Boadway: I have no problem with per capita. My preference would be to disburse the funds in a way that is somehow related to demographic need. That is a useful way to go. Whichever way you do it, it is almost certain that CHST funds would not be dispersed according to where the revenues were raised. If the federal government were to disperse CHST based on where the general revenues were collected by provinces, we would have no equalization.

Senator Furey: Take a province like Newfoundland, which has a declining and increasingly aging population, so the strain on its health care system is increasing. The amount of money it receives, because of the decline in its population, decreases. The gap between the quality of the health care service delivered there and that in Ontario continues to widen.

Dr. Boadway: That is precisely what I mean by "needs." It is not so much the population per se - because the per-capita principle seems to be reasonable - it is the demographic make-up that is important, as you point out.

Demographic projections show that provinces like Newfoundland are going to have more rapidly aging populations than Western provinces, which receive many more immigrants. That has to be taken into account in the equalization system for precisely the reasons you mention. I do not have strong views about exactly what formula should be used to disperse block grants like CHST, but whatever it is, it will have an equalization component to it because it will be based on either per capita, need, or whatever it happens to be.

Senator Furey: Or a combination of per capita and need.

Dr. Boadway: Yes.

Senator Furey: When you spoke of alternative approaches, you indicated that you would consider formula-based rather than discretionary methods of dealing with the adverse incentive faced by have-not provinces with respect to major resource developments. Coming from Newfoundland, I have a certain bias, and I agree with what you are saying. How do you answer the Minister of Finance when he talks about that?

The Minister of Finance said that it is very important to understand that while there is an adjustment to the revenues received by the provinces, the people of Newfoundland and Nova Scotia benefit enormously from the jobs created by economic activity in the resource sector. There is not a one-for-one reduction, but there is a huge benefit.

How do you react to that? That is his answer to changing the formula for resource development.

Dr. Boadway: I am not sure that I understand his answer.

Senator Furey: He is saying that once you start your development, you get enormous benefits from it. You do not need to start fooling with the royalty regime.

Dr. Boadway: The problem with resources in Newfoundland is as much an incentive problem as anything else. Why develop a resource? You may well develop it just to get the jobs.

Senator Furey: It is short term, though.

Dr. Boadway: There is a disincentive to development if all the revenue will be equalized away. When I say that there should be some formula-based method, I have in mind something like what existed previously, when the 10-province standard was in place. Natural resources were only included up to 50 per cent. It was a formula-based approach that applied to all resources, not just big resource developments like Voisey's Bay, but also to any other non-renewable resources that had an equal impact on equalization-receiving provinces.

Senator Furey: Do you think that there should be some sort of claw-back holiday until provinces like Newfoundland get themselves into a better position to become contributors? The way it is now is a disincentive. You will never catch up. You will always be taking out. Development of Voisey Bay's is 20 cents on the dollar right now.

Dr. Boadway: I do not believe that you should think of equalization as a program meant to help regional development. To repeat my earlier comment, equalization is a program to allow provinces to provide comparable levels of public services. It should not be confused with a regional development program.

Senator Furey: I am not saying that it is a regional development program. I am saying that you will never have comparable levels of service if something is given with one hand and taken away with the other. There has to be some sort of holiday or readjustment to the scheme on off-shore oil, for instance. I think we get 30 cents on the dollar. In Voisey's Bay, we would be looking at 20 cents on the dollar.

For a province that is so far behind, some sort of adjustment has to be made. Even if you went to 50-50 or 60-40, some more realistic adjustment must be made, given the circumstances, if you are going to say that the objective is to have comparable levels of service in this lifetime.

Dr. Boadway: I hear you. On the other hand, I do not think you should burden the equalization program by trying to make it into something it is not. The equalization program is supposed to allow Newfoundland to provide comparable levels of health, education and welfare at comparable tax rates.

If the equalization program were working properly, it would do that. If you get more resource revenues, you do not need as much equalization to fulfil the purposes of the program.

You might have lower average incomes than Ontario and Alberta, but that is not the issue in equalization. The purpose is not to redress differences in average income or foster development of the Newfoundland economy. It is, purely and simply, to enable you to provide public services at reasonably comparable tax rates.

Senator Furey: Am I misreading here when you say as an alternative approach, you would consider a formula-based method of dealing with adverse incentives for have-not provinces?

Dr. Boadway: The point is that there are some adverse incentives in the program. There may be a disincentive for you to go ahead with resource projects because you are not getting as much return. Personally, I think that disincentive is overstated, but there are problems there. If the disincentive problems are such that you simply decide not to develop the resources, that is unreasonable.

If any disincentive problem exists in public policy, we need to come to a compromise or trade-off. We forgo a small part of the objective of the program to offset the disincentive. If this is a disincentive to undertaking resource development, then perhaps we should think about incorporating into the equalization program some provision that reduces the disincentive. Any resource development, no matter how big or small, would face the same tax-back problem.

Equalization is not a provision to help you develop the economy. It is there to take into consideration the fact that the program itself is a disincentive on provincial behaviour. I am not sure if I am making myself clear.

Senator Furey: I think I understand, thank you.

[Translation]

Senator Ferretti Barth: I had prepared some questions, but when I read your report, I saw that you have already answered them. Here you recommend six amendments.

I would like to ask you whether you think we should maintain the equalization formula that we currently have.

Do you truly believe that the formula we currently have ensures a certain equality amongst the provinces, bearing in mind the resources they have and the standards?

If for example, we look at the Province of Alberta, which has far more resources than the other provinces, and also bearing in mind that the government is always trying to save money, do you not think that the equalization amounts should be rather high so that the provinces can offer services comparable to those offered by Alberta? In addition, do you not think that the government is somewhat hesitant to increase equalization payments?

If we want to maintain the provinces and keep them happy, sooner or later equalization payments will have to be slightly higher, to allow the provinces with fewer opportunities to pay for these services, to provide comparable levels of public service, like the province of Alberta, for example?

[English]

Dr. Boadway: I hope that I understood your comments. I agree with most of what you said. I agree with the first opening discussion about differences in resources and the fact that the equalization system does not take that into account. In a sense, the proposal to return to a 10-province standard addresses that issue. We do not have a 10-province standard now, precisely because if we did, the full effect of Alberta's oil and gas, for example, would change the program quite a lot. It would cause the program to be more expensive for the federal government.

The big problem is that this would be costly for the federal government - for the Department of Finance. I am not responsible for balancing the federal government's budget, so I do not have to worry about what I say. However, as a matter of principle, when you decentralize revenue-raising responsibilities to the provinces the way we have over the last 30 years or so, the more demands will be put on the equalization system, because the more disparities will arise naturally from that decentralization. The program is bound to be more costly to the federal government as decentralization proceeds.

I am not sure that I can answer your question further, because in some sense, you implied the answer in the way you posed the question. I quite agree. If you want a system that satisfies the letter of section 36(2), which is a principle not a requirement, then it seems to me that at the least, you have to do the kinds of things that I am suggesting. That would be to move to a 10-province standard and put enough money into the program to satisfy the requirements of that section.

[Translation]

Senator Ferretti Barth: During your presentation you said that the current formula is very simple and easy to understand. Myself, I must acknowledge to you that I do not understand it. In my mind, two plus two equals four, and four minus one equals three. So I can see that there is a certain amount of mathematics involved in allocating equalization payments, and I find that to be somewhat redundant. In my opinion, it is normal for the provinces that have more natural resources - and consequently, more revenue, to take a higher percentage than the others, and to give that money back to the poorer provinces so as to reach a certain balance whereby that all the other provinces will have the same amount of money to pay for their public programs.

Senator Murray: You may recall, Senator, that when Paul Martin first became Minister of Finance in 1993, he admitted to us that there was only one person, one single official in the Finance department, who understood the equalization formula, and unfortunately, that person has retired since then.

Senator Ferretti Barth: So no one is left who understands any of this? It is unfortunate that that we cannot grasp the complexities of this formula.

Professor, you say that this is easy. Perhaps you could shed some light on the matter for me.

[English]

Dr. Boadway: Do you want me to explain the formula? I never understood the argument that the formula is complicated, because it is as simple as you could possibly imagine.

The Chairman: Explain it conceptually, then.

Dr. Boadway: Conceptually, I would explain it in the following way: Take the income tax. The provincial income tax base per capita is easy to calculate. Take all of the income in the province and divide it by the number of people. The result of that is the income tax per capita in that province. You compare that with the income tax per capita for the five provinces in the five-province standard. If I come from Prince Edward Island, and my per-capita income is less than the per-capita income in the five representative provinces, then I will have a deficiency in my income tax base and I will be owed some equalization. That amount will be based on the national average income tax rate.

On average, 20 per cent of income in Canada is taxed at the provincial level. Therefore, that is the national average tax rate that I will use for equalization. I will apply that 20 per cent to the difference between the per-capita base in Prince Edward Island and the per-capita base in the five-province standard. Immediately, I receive the amount of equalization per capita to which Prince Edward Island is entitled.

The idea is quite simple. It is to bring the revenue that Prince Edward Island raises from its tax base up to the level raised by the provinces in the five-province standard. That is a simple way of ensuring that they can raise the same amount of revenue per capita as the five provinces in the standard, and therefore, use that revenue to provide public services that have to be financed. That is the way it works.

It is not a difficult thing, but it is difficult to define the common base and calculate exactly what it is for each province. Conceptually, it is not a complicated formula. Anybody who knows how to multiply and divide can figure it out in 10 minutes.

[Translation]

Senator Ferretti Barth: Professor, why are many provinces quite unhappy with the equalization formula?

[English]

Dr. Boadway: You are talking about some of the recipient provinces. They are not happy with it is because of the arguments that I put down here. They would prefer to have a 10-province standard and no ceiling.

Those are the two arguments that are most often made.

Newfoundland and Nova Scotia are not happy with particular aspects because they feel that they are not getting as much revenue as they think they should from major resource developments. The equalization system is implicitly taking it all back.

[Translation]

Senator Ferretti Barth: Do you think that doing away with the ceiling will correct many problems?

[English]

Dr. Boadway: No, it would not correct anything. It would not correct the resources problem because it has nothing to do with the fact that the resources are not included in the formula. Removal of the ceiling alone would not do anything. The five-province standard is there to reduce the cost of the program to the federal government. That is the purpose the ceiling fulfils.

The Chairman: There is more to it than that, with respect. First, I was quite surprised by the testimony from someone the other day from either one of the provinces or perhaps the finance department. I was surprised by the volatility, by how the entitlements go up and down and up and down, almost from year to year. Perhaps the amounts do not sound like much in the overall budget of the federal government, but still, one has to be sympathetic to the need of the government's fiscal managers for some predictability in what they have to pay out. They are already sufficiently held hostage on some programs.

You speak here of the need for fiscal harmonization, but in terms of fiscal management, you cannot blame them for wanting some element of predictability.

Dr. Boadway: I understand that. I did not mention predictability or volatility at all in my talk. It is a potential concern that equalization can go up and down for a variety of reasons. It can go up and down because of the province's own base going up and down, or because Ontario's revenues go up and down. There are many different sources of volatility.

I understand the problem, but I am not sure how to get around it. I think that the only way to get around volatility at the provincial level is to have the federal government absorb the risk of unpredictability for the provinces. The question then becomes, who will bear the cost of that volatility? Is it the federal government or the provinces?

In some sense, that is why the floor is there, to avoid the worst part of unpredictability, which is the possibility of a significant downturn in the equalization payments. That problem will persist no matter what equalization formula you use, unless you have one like the CHST, which keeps to a fixed amount of money over a period of time. I think you are right that it is a problem.

The Chairman: Also, on the question of tax points and cash, I understand the argument that if there is no cash component, presumably the federal government has less ability to, as you say, foster national objectives.

Really, what is the difference between equalization and the CHST these days? Equalization is unconditional. Provinces can use it for whatever purposes they please. Except for the Canada Health Act, you know that provinces can use the money they get from the CHST for roads or anything else.

Dr. Boadway: That is true.

The Chairman: Your argument is based on the Canada Health Act, is it?

Dr. Boadway: There are also the mobility provisions to do with welfare, but I agree with you. Conditionality within the CHST is not currently very significant. It may change when the Romanow commission reports and other things happen.

The Chairman: What about the Social Union Framework Agreement? Is that even potentially an adequate substitute for the discipline of withholding cash? Have you looked at the Social Union Framework?

Dr. Boadway: I do not think it constrains the federal government. It does not prevent the federal government from using spending-power measures if it wants to.

The Chairman: I argued - I am in a minority, though - that the Social Union Framework Agreement actually strengthens the hand of the provinces in some important respects. Certainly on new programs or important changes to existing ones, there has to be agreement, first, among the majority of the provinces - six provinces at least - and then there are other provisions. I do not have the agreement in front of me, but there are these other provisions that will almost certainly require that there be some agreement about terms and conditions of a shared-cost program.

Dr. Boadway: I think it would be hard to argue with the Social Union Framework Agreement. I would not argue with it.

The Chairman: Only nine provinces are on board. That is a not inconsiderable fact.

Dr. Boadway: The Social Union Framework Agreement would only be effective if the federal government had some revenues it could use for implementing the agreed programs. I do not want to say that the only reason for preferring cash over tax transfers is that the federal government could not use the spending power. I think it has a few other important implications as well. For one thing, turning over tax points to the provinces rather than cash puts a lot of strain on the equalization system because these tax points are equalized, and it makes equalization more difficult and expensive.

Second, it also jeopardizes tax harmonization in Canada, in my opinion. One reason why our tax system is becoming more disharmonized is because we have turned over so many tax points over the years.

Turning over tax points rather than cash is an irreversible decision. Once you turn over tax points to the provinces, you rebalance the federation in a way that is very difficult to undo. If, 20 years down the road, you tried to come up with an agreement that entailed the federal government making some transfers to the provinces in support of whatever program it might be, pharmacare or something else, it would be too late. The provinces would already have the tax points. It is very difficult to undo that and transfer tax points back to the federal government.

As a matter of public policy, what is your opinion of the proposal for more equalization and fewer tied programs that we canvassed when the Premier of Newfoundland was here? You have answered the question to some extent, but the question did arise. He was demanding improvements in the equalization program, but he was also quite scathing about CHST.

He was Minister of Health when the deal for more money was cooked on the eve of the federal election. I said to him, "You took the money and ran. You should have stayed and held out for a better long-term deal." All the provinces are back demanding more money and screaming treachery over what they thought they heard the Prime Minister say about the ceiling on equalization not being honoured.

In the course of all this, Premier Grimes let it drop that they are on the verge of announcing a new federal-provincial program to rebuild roads. Roads are, I need not tell you, within provincial jurisdiction. I do not think anybody in Ottawa knows where roads would fit into the priorities or needs of Newfoundland compared with various other provincial responsibilities, but the temptation to spend 10-cent or 20-cent dollars on this roads program will be irresistible.

I am playing devil's advocate, but I am arguing that it would better to have a gigantic equalization program that would enable the provinces to discharge their responsibilities according to the priorities set by the elected governments of those provinces.

Dr. Boadway: I agree with you completely. I think that the bulk of transfers to the provinces should be unconditional, or at least, non-equalization grants should be block grants like the CHST. Personally, I am in favour of some form of federal conditions to represent national interests in health care and welfare programs.

The Chairman: Why could those not be negotiated between Ottawa and the provinces rather than imposed? It is still block funding, but the government decided that a notional amount would be designated for health care. The Canada Health Act could be enforced for that notional amount and penalties could be extracted from the provinces.

Dr. Boadway: I agree. In most cases, national standards could be decided on a joint basis or negotiated with the provinces. However, in the end, you have to consider a dispute-settlement mechanism. The federal government holds the purse strings.

On this point, we should think about one thing. The United States has no equalization program. Consequently, they pursue equalization and federal transfers in very interventionist ways. They pursue equalization through conditional grants. Most transfers to the states are conditional grants, apart from the welfare transfer that was recently put in place.

If you were to cut equalization transfers and block funding, then you would inevitably go down a road where the federal government would become more interventionist with highways, infrastructure programs and so forth. I agree with you that transfers to the provinces ought to be block transfers, aside from equalization.

There are some legitimate national objectives that are served by the major social policy programs that the provinces implement in health, education and welfare. There is a legitimate national interest in the way in which these programs are delivered. However, I see no reason why the provinces cannot participate in the formulation of national standards. This is getting somewhat far away from equalization.

The Chairman: It is related to the general question of public policy. We have equalization and CHST. Now we are getting into road rebuilding programs. That is tied money. You know what it does to the priorities of the government.

A witness here the other day from CUPE in Manitoba was lamenting the end of the old Canada Assistance Plan. Without going into it in great detail, provinces knew that the federal government would pick up half the bill.

I have been on both sides of the argument. I was in New Brunswick for some time as an adviser to the government. We would put into the Canada Assistance Plan anything that we had the slightest justification for doing so.

More serious was that the cabinet, when confronted with two new social programs, would always pick the one that would be most likely to get the 50-cent federal dollars, whether or not it was the better or the most needed one. I was on that side of the argument.

During the late 1980s and early 1990s, I was on the federal side. There was this phenomenon of provinces, and of Ontario, in particular, jacking up welfare payments and putting everything they could into CAP, to the point where we were provoked. It was not necessary. I was one of the prime movers in bringing in a cap on CAP, which in my opinion, and with 20-20 hindsight, was a mistake. The overall politics of it was a mistake. It threatened to sour people in Ontario and Alberta on equalization. It was not a good policy, but you can understand why we had to do it.

The CHST, which includes, notionally, social assistance, plus health and post-secondary education, strikes me as being fairer all round than the open-ended 50-cent dollars. When Mr. Pearson first brought in medicare, it was a 50-50 proposition.

That was to get the provinces into it. It is no longer 50-50, or anywhere near it.

Dr. Boadway: I agree. It is important to put CHST and equalization in the same "bundle" of policies and consider them together, just as it is important to consider sections 36(1) and 36(2) together, and not just focus on 36(2) when considering equalization, because in some sense, they address common issues.

Senator Bolduc: As Senator Furey said, the second option is a little less fair to some provinces than equalization. If you look at it in one way, provinces cry about equalization, et cetera, but over the last 20 years, it has risen from about $4 billion to about $11 billion. The rhythm of growth has been fairly steady. For example, in 1985, it was something like $5.5 billion. In 1988, it was about $8 billion. In 1995, it was less than $9 billion. Now it is around $11 billion. We can see there has been growth in the system.

I must admit that, even with the five-province standard, it is not completely unfair. If you look at the fiscal capacity per capita, it goes from $4,000 to about $6,500. It is something like 30 per cent, more or less, in the system, Prince Edward Island being at $4,000 and Ontario at $6,500. Quebec is $5,000 and Saskatchewan is $5,800. It is not perfect, but it is the reality of the fiscal capacity, except for Alberta, which I would call, statistically, a "cas aberrant." The rest are relatively comparable at about 25 per cent or 30 per cent, more or less.

It is the same thing under the election laws. Usually, ridings have about 75,000 voters, but some have more or less. In some provinces, perhaps Ontario, you have 150,000 or 125,000, and in smaller areas you have 45,000, but on the whole, it is about 75,000.

It is difficult to be entirely and completely equal. Even the services are not equal. Even within a province, they are not equal. We have a difficult situation. The federal government has cut, so the provinces have cut. Actually, the health services in big cities are worse than in medium-sized ones. The small cities of 50,000 have their hospitals and basic services. If you have some problem requiring neurosurgery, you have to go to Quebec City or Montreal. On the whole, people are happy. More than that, doctors, specialists, are leaving the big cities and the big hospitals to go to small hospitals about 50 miles away. They are happy. They go to those places and are treated like bishops. We have a kind of decentralization of specialized services in small and medium-sized cities.

The Chairman: There are winners and losers.

Senator Bolduc: The queues are longer in the big cities than they are in the medium-sized cities.

Dr. Boadway: I agree. You are saying the equalization program has been a resounding success. The fiscal capacities, apart from Alberta, have been equalized. My concern is not so much with perfecting the existing system as with preventing it from being eroded by people who argue it has more current problems.

Senator Bolduc: The problem is that it is 10 per cent of the federal budget. Compared to the GDP ratio, it is peanuts in the general outlook of the Canadian economy. We are generous and equitable, but it is 10 per cent of the budget. At the same time, the politics of public finance comes into play, and then you have definite, specific, conditional programs run by various ministries. We have additional conditional programs, and that is the third stage. You have equalization and CHST or the social union, and then you have the additional ones that the federal government decides alone, and the provinces scramble to get the pieces they can.

The Chairman: Payments to individuals.

Senator Bolduc: Yes. It is true also for the chairs of excellence and things like that. You know that. A good university like yours must have many of them.

The Chairman: Not enough.

Senator Bolduc: That is not a question, just an observation.

[Translation]

Senator Ferretti Barth: Professor, are the financial resources of a province that come from lotteries or gambling considered to be a province's natural resources? Are they included in the equalization formula?

[English]

Dr. Boadway: You are asking me if gambling is one of the bases. Gambling is equalized. It is a problematic area. It is unlike cigarette taxes or alcohol taxes or -

Senator Ferretti Barth: Casinos.

Dr. Boadway: The government regulates casino activity or gambling activity. A provincial government may decide not to allow gambling, or different provinces may allow different degrees of gambling. The size of the base is effectively determined by the legality of the activity itself. The treatment of gambling revenues under the equalization system is problematic, I would say, even though gambling, in other respects, is essentially like a tax. It is like a very regressive tax, given that the poor people are the ones who tend to gamble most.

Senator Mahovlich: Reflecting on equalization, it seems to me that there really is no answer, other than to try to improve it a little. I do not think we will solve the real problem of equalization because there is so much inequality from province to province. From year to year, things change. A certain province can have a big problem, and we will have to take a stand and try to help that province out in that particular year. Am I correct?

Dr. Boadway: Yes, I agree with what you are saying. In some sense, you are saying that provinces might have temporary problems, in which case the equalization system can act as a kind of insurance.

However, it may also be the case that the equalization system has a longer-run purpose. Some provinces are persistently less well-off than others and find it more difficult to provide basic public services. In my mind, the more important aspect of equalization is that longer-run role of ensuring that, no matter where Canadians live, they can be sure of receiving the most essential public services in the health, education and welfare fields at comparable tax rates.

Senator Tunney: I want to make a comment first. I think I am right in saying that less than 1 per cent of Canadians understand equalization. I had only a vague notion of it until we got into this study. It is fascinating.

Does CHST somehow frustrate or confound equalization?

Dr. Boadway: In my view, CHST complements equalization. It is part of equalization with a small "e." An equalization program consists of those two things together, and not just the capital "E" equalization scheme. The CHST is like the equalization scheme in that it is funded from general revenues of the federal government. Like the equalization scheme, it is dispersed to the provinces in accordance with criteria that, in some sense, reflect their need for expenditures. In the case of CHST, it is basically an equal per-capita transfer. You can say that provinces' required revenues for public services depend on the number of people they have. To my mind, equalization itself and CHST are both part of the equalization program. If the federal government did not make transfers under the CHST and the provinces had to raise the revenues that they otherwise would have obtained, it would impose a bigger burden on the program. Different provinces have different abilities to raise revenues to finance the kind of services that the CHST is meant to fund. The bigger the CHST program, the less pressure is on the equalization system.

Senator Tunney: That is good to hear. I had a clear notion that the CHST sort of worked against the principle of equalization, in that the bases for the programs are not the same. Are they?

Dr. Boadway: In some sense, I would interpret them as being the same. I go back to the comment that I slipped in about thinking of equalization in the context of both section 36(1) and section 36(2). The CHST program represents the federal government's contribution to the provision of health, post- secondary education and welfare. In some sense, it is meant to fund exactly the same kinds of programs. Those are the major programs, apart from secondary and primary education, that are offered by the provinces.

Senator Tunney: CHST does not work on any kind of formula, as equalization does, or am I wrong about that?

Dr. Boadway: No, CHST roughly disperses money on an equal per-capita basis, whereas equalization does not.

The Chairman: I was reminded to add a little something to what Senator Furey mentioned earlier. I note that you said, Dr. Boadway, that you recognize the special needs as a component of equalization for demographic reasons, for example, the aging of the population. There is another aspect to that brought home to us rather starkly by the Premier of Newfoundland when he was here. He said that the duty of looking after the health care of 600,000 people in Greater Winnipeg is one thing, but trying to provide health care or other services to 600,000 people spread out over a province as vast as Newfoundland is quite a different problem. Senator Moore, who is not here tonight, is also from Nova Scotia, and is constantly reminding us that a per-capita arrangement in respect of post-secondary education worked to the disadvantage of his province, and perhaps other provinces in the Atlantic region, where there are so many universities but a relatively small total population. I presume your thoughts about needs include factors such as those that I just mentioned.

Dr. Boadway: This is a difficult argument - whether equalization should compensate provinces that have higher costs in providing services. The term "needy" is used in the economic literature to reflect purely demographic differences. A province that has twice as many retired people as a proportion of its population than others will incur more medical expenses and will have to raise taxes to provide the services to those people.

Cost is a different element. Cost is one of the reasons you observe the big differences between urban and rural areas that Senator Bolduc mentioned earlier. The extent to which you want to equalize cost is not obvious. On the one hand, you would like to provide the same level of health services to people who live in the outback as you provide to people who live in Saint John's, for example.

The Chairman: You do not really do that.

Dr. Boadway: No. There is an efficiency cost associated with trying to compensate for differences in costs of providing services. It might be equitable to make the provision of services more equal between high-cost regions and low-cost regions - between Yellowknife and Winnipeg, for example. When I talk about needs as a component of equalization, I am not talking about the differences in the cost of providing services, but about needs arising from differences in demography.

The Chairman: It is fair enough to explain that to us, but I would like to think that you, and others concerned, would take this other aspect into consideration. Modesty prevents me from overstating the case of Nova Scotia, but the fact that they have many universities does make a positive contribution, some of us like to think, to the country as a whole. I am glad to hear you agree with that.

Senator Furey: You did say that one of the goals is to enable provinces to provide comparable services. I stated that if you were to maintain the distribution of CHST on a per-capita basis, not only would you not be attaining that goal, the margin would actually widen. At that time, did you not say that you would include a needs factor in a distribution of that particular program?

Dr. Boadway: Yes, I did.

Senator Furey: If you just do it baldly, on a per-capita basis, the margin becomes wider, for reasons we discussed earlier - declining population and increased burden on health care. The gap does not narrow or stay the same; it gets wider. Comparable services go out the window, and thus the goal of the program goes out the window.

Dr. Boadway: You have to be cautious when you try to equalize for costs, because then you are faced with the following situation: Because it is expensive to live in Vancouver, the British Columbia government has to pay doctors a great deal to live there. Thus we should be equalizing British Columbia for the fact that it is more costly to provide services in Vancouver.

You must be careful about going down that road.

The Chairman: You do not want to get into trouble with the economists' association. There are heresies, I suppose. Still, going too far down that road might be one of them.

Senator Banks: I will return to my earlier topic, because it was instructional. I thank you for removing the scales from my eyes.

I took some comfort, until we heard from you today, from the fact that the 33 sources of revenue were based on the capacity of the provinces to raise funds from each of those areas. I do not wish to ascribe Machiavellian or ulterior motives to any province, and I am not suggesting there would even be a good reason to do this, but having been in the grants business before, I know that sometimes you can manipulate a perfectly good and auditable statement to show a deficit and therefore be eligible for certain kinds of funding.

Since we are talking about empirical information in determining the averages of those revenues across the board, would it not be possible for a province to vacate room on its tax capacity, that is to say, lower provincial income taxes and sales tax, and have that room taken up by equalization payments?

At the moment, British Columbia is still a contributing province, but that is precarious. By squirreling nuts away in the right place, could that or any other province show a deficit situation that would allow the reduction of personal income taxes or the level of sales tax, et cetera, and have that difference made up through eligibility for equalization?

I am not suggesting that would be wise or prudent in terms of pride of place, but since we are dealing with real money raised, that would be at least theoretically possible.

Dr. Boadway: You are asking if is it possible for provinces to manipulate the amount of equalization they get by changing their own domestic policies. The answer is, in some cases it is, but not in the blatant way that you are suggesting. To take the British Columbia example, the tax rate that British Columbia imposes on the income of its residents does not have a direct bearing on the equalization entitlement that it receives, unless it changes the amount of income within the jurisdiction itself.

Senator Banks: That would have an effect if B.C. moved from being a have province to a have-not province, would it not?

Dr. Boadway: They cannot do that. Whether or not a province is a have or have-not province depends upon the level of income, the size of the tax base and the amount of income in the province. Unless a province can manipulate the tax system to change the size of residents' incomes, their equalization entitlement will not be affected, because that is based on the size of the province's base and the size of per-capita income, in terms of income tax, relative to the national average.

Senator Banks: As opposed to the actual income tax it charges.

Dr. Boadway: Exactly. It is not the amount of income tax it collects; it is the amount of income tax it would collect if it levied the same tax rate as the average of the others.

Senator Banks: You were about to explain that provinces could, in some less obvious or odious way, manipulate the system.

Dr. Boadway: The real problem that arises with the resources sector, for example in Labrador, is what is called the "base tax-back program." That is when the province can actually control or influence the size of a particular base. The amount of equalization that you get on account of resources depends upon the resources you extract from your jurisdiction. If you can directly control the rate of extraction of oil, gas, nickel, whatever it happens to be, from your jurisdiction, it will affect your equalization entitlement directly. That is where the real possibility for manipulation arises.

Senator Banks: Saskatchewan and Alberta both produce oil. If Alberta lowered its oil royalty rate, would the national average royalty rate be affected?

Dr. Boadway: Precisely. Saskatchewan is a good example, because there are some instances of equalization bases where almost all of the base is in one province. In that case, that province effectively controls the national average tax rate. Potash in Saskatchewan is an example. That is why there is a component of the equalization program that addresses that particular issue, although it is not a widespread problem.

The Chairman: Are tax points equalized?

Dr. Boadway: Any tax points turned over to the provinces are equalized.

The Chairman: How is that done?

Dr. Boadway: They enter into the equalization formula. It is exactly as if provinces increased their tax rates. Whenever the provinces raise more revenues, then equalization comes into play.

Senator Banks: The worst possible system, except for all the others.

The Chairman: I am not a Tory for nothing. I am leery about changes, unless I am very certain that they will work to the nation's advantage, especially to the long-term advantage of those on the receiving end. It is easy to become enthusiastic about a new formula, and you work it out and it looks like it will work to your advantage, but over time, it may not. It may have defects that we have no idea about now; whereas we know how this thing works, and we know that it can be improved, as has been suggested. That is one of the things we will want to look at. There will be people at this table who will want more drastic changes in the equalization program. We will have to have that out.

I hope you have enjoyed this seminar as much as we have, professor. It has been a very interesting evening. Not only have you identified some of the key issues in a very articulate fashion, but you have also left us with much food for thought and shown us the way for our deliberations. This is a very good document and your testimony has been very helpful to us. Thank you.

Honourable senators, Tuesday morning at 9:30, we will hear the Minister of Finance of Nova Scotia, the Honourable Neil LeBlanc.

Senator Tunney: Chair, I cannot be here on Monday or Tuesday. I will be out of the city or the province.

The Chairman: For you, we again have a Wednesday evening meeting. We will be hearing from the Minister of Finance of Manitoba and also Professor Boucher, from Quebec, and recommended to us by Senator Bolduc.

The committee adjourned.