Past Session:

Proceedings of the Standing Senate Committee on
National Finance

Issue 27 - Evidence

OTTAWA, Tuesday, November 6, 2001

The Standing Senate Committee on National Finance met this day at 9:32 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: Senators, this is the committee's sixth public hearing on the subject of equalization. We have been mandated to examine and report on 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.

[Translation]

Mr. Neil LeBlanc, Minister of Finance of Nova Scotia: Thank you Mr. Chairman for the opportunity to come before you today to share Nova Scotia's concerns on what we consider to be a fundamental cornerstone of our federation. Pursuant to section 36(2) of the Constitution, Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

[English]

We must recognize that the constitutional commitment to equalization in section 36(1) of the Constitution Act is meant to complement another fundamental cornerstone to this federation. Section 36(1) of the Constitution commits the Government of Canada and the provincial governments to promoting equal opportunities for the well-being of Canadians and to furthering economic development to reduce disparity in opportunity.

Equalization on its own is self-perpetuating. The commitment of section 36(1) is to ensure that it does not happen. It makes a national commitment to build strong economies within the federation that will sustain the level and the quality of programs and services needed by all Canadians. Until that economic strength is achieved, however, and our provincial economies become self-sustainable, the important role that equalization assumes within our federation cannot be understated.

The equalization program has served us well over the past four decades. Since its introduction in 1957, it has channelled critical additional resources into Nova Scotia that have enabled us to provide a level of essential services that we would not have been able it afford otherwise. The inflow of those transfers to the province has provided us with the additional fiscal flexibility necessary to provide both comparable levels of basic services and simultaneously stimulate the growth of our economy through competitive tax policies.

As a result of such investment into our region, our overall provincial economy expanded and our per capita GDP and personal income levels per capita grew to represent 78.9 per cent and 87 per cent of the national average respectively by 1991.

Since the early 1990s, however, our progress in closing the gap with the rest of the country has stalled. Federal expenditures into the region have decreased and the limitations on the equalization program have reduced our overall fiscal capacity levels. Our fiscal capacity after equalization transfers is now only 96 per cent of the national average. This is in contrast to some of the more wealthy provinces whose fiscal capacity is well above the national average. For example, Ontario is at 105 per cent and Alberta is at 153 per cent.

Like most public programs, the equalization program has come under some criticism over the years. There are some who say that the program should be scrapped completely. They would argue that it is a welfare trap being paid for on the backs of the wealthier provinces. There are also those who say that it should be radically changed to address what are perceived as fundamental flaws in its design.

It should be clearly understood that equalization transfers are funded from taxes paid by all Canadians in all provinces. Nova Scotia's own taxpayers contribute as much in taxes to the federal treasury relative to the size of their economy as other Canadians, even those live in the more advantaged provinces.

It is from this national pool of resources that the federal government draws the revenues necessary to fulfil the constitutional commitment to provide equalization transfers to the less wealthy provinces. It must also be clearly understood that all provinces strive, first and foremost, to increase their own self-sufficiency and to build strong economies that will allow them to provide the high quality programs and services necessary to meet the needs of its citizens.

Unfortunately for many provinces within this federation, such opportunities have not been sufficient in the past. As the wealthier provinces within this nation grow and prosper, their ability to enhance the level and quality of their programs is similarly enhanced. This has posed a continual challenge to the less wealthy provinces to maintain comparable levels of services at comparable levels of taxation.

The current equalization formula for determining the levels of these transfers has come under criticism over the years for being far too complex and understood by only a few. Those critics would see the formula radically changed and replaced with an alternate, seemingly simpler measurement. Governments must respond to those arguments with caution.

The current equalization mechanism provides for a comprehensive accounting of the actual revenue-raising ability of provinces from the wide range of sources available. Governments must not rush to dismiss such progress in the face of misunderstanding and perceived complexity.

The real threat that has emerged within the system of equalization transfers today has come about because of cost-cutting measures taken by the federal government over the last two decades. Over the period 1983 to date, federal equalization transfers have declined significantly as a percent of national GDP and have accounted for a decreasing share of federal revenues. I do not intend to minimize the significance of federal dollars currently provided under this program. However, when compared to what funds are needed to do the job to fulfil the constitutional commitment, they are inadequate.

Our government struggles with the extremely difficult choices arising from the escalating cost pressures and increasing competitiveness from some of our sister provinces. Our ability to respond to those pressures in a fiscally responsible manner has been difficult. We are committed, however, to making the decisions necessary to live within our means.

Two years ago, when I assumed this post, the Province of Nova Scotia faced an annual deficit of approximately $500 million. Over the past two years, we have worked hard to turn the financial circumstances of the province around. Our deficit for last year was forecast at $199 million, and we are working toward reducing that even further in the current year, with a budget forecast deficit of $91 million. Our goal is to have a balanced budget by next year.

Our progress in reducing our deficit has come from making difficult choices and sacrifices. On a per capita basis inNova Scotia, program expenditures have been the second lowest in the country in each of the last three years. It is very clear that if we are to maintain our programs and services at comparable levels to other provinces we must have adequate federal support.

Nova Scotia depends upon equalization to help us deal with those challenges. Unfortunately, federal cost-cutting actions over the past several years have severely threatened our ability to effectively manage those challenges. To help you understand the impacts, honourable senators, I will give some examples.

Reduction in the core standard from a 10-province standard to one of five provinces in 1982-83 has cost Nova Scotians roughly $113 million annually, on average, or $2.3 billion in total since 1982. The introduction of a ceiling on the growth in annual entitlements under the formula has cost Nova Scotia over $250 million since the 1980s, with the continuing threat of further losses, most recently in respect of 2000-01. A five-year phase-in of technical improvements to the formula as identified pursuant to the 1999-2000 renewal process has cost Nova Scotia an estimated $100 million over the 1999-2000 to the 2003-04 period.

The arbitrary federal limitation and user-fee revenues included within the formula in the 1999-2000 renewal cost Nova Scotia $40 million. The further threat of full elimination of such revenues in the upcoming renewal poses an additional $40 million annual risk to the province.

In total, these federal restraint measures on the equalization program have cost Nova Scotia $2.6 billion in for-gone revenues over the past 20 years. The costs to all equalization-receiving provinces have exceeded $30 billion during this period.

We have struggled with the shrinking federal support in the face of increasing social program needs and costs. The equalization program does not look at the differences in spending needs and the capacity to meet those needs. For the less wealthy provinces in this country, both equalization and the Canada Health and Social Transfer, or CHST, are vital to the quality and level of health and social programming we are able to provide.

As part of the federal restraint measures of the 1990s, the overall level of support provided through the CHST was also dramatically reduced and the allocation among provinces altered. Reduction in federal CHST funding cost Nova Scotia over $640 million between 1996-97 and 1999-2000. It also made an erroneous assumption that underlying social program costs are equal per capita across the country.

We have real and threatening pressures as a result of higher-than-average incidence of illness, much of which is driven by challenging social circumstances faced by many residents of Nova Scotia. We have the second lowest rate of full-time employment in the country, average incomes that are 85 per cent of Canadian levels and the highest rate of child poverty in the country. In the face of these and other significant statistics, and the cost pressures that they invoke, the federal measures taken throughout the last decade are, indeed, worrisome.

Our challenges do not stop there. For Nova Scotia, tax reduction strategies introduced in the more wealthy provinces will seriously threaten the competitiveness of a small province such as Nova Scotia if they go unheeded. We need to remain competitive in order to attract and maintain investment levels within the province.

These challenges speak to the fiscal imbalances that exist in Canada today. Not only are there imbalances between and among provinces, often referred to as horizontal imbalances, but there is also a vertical imbalance that exists between the federal government and the provinces in terms of available revenues and expenditure responsibilities.

I would be remiss if I did not take the opportunity to comment on Nova Scotia's current effort to receive its rightful share of the revenues that will be generated through our offshore oil and natural gas developments. The campaigns of both Premier John Hamm of Nova Scotia and Premier Roger Grimes of Newfoundland and Labrador are not about equalization or proposing changes to the equalization program. Offshore fiscal fairness is focused solely on achieving one of the main objectives contained in our offshore accord:

... to recognize the right of Nova Scotia to be the principle beneficiary of the petroleum resources in the offshore area.

We are not the principal beneficiaries of our offshore revenues; the federal government is. If the current implementation of the accord is not corrected, the federal government will continue to receive the primary benefits until our non-renewable resources are completely depleted. It would be positive for the nation and all Canadian provinces and territories if Nova Scotia and our sister province Newfoundland and Labrador were able to utilize the proceeds from non-renewable resources to achieve a higher degree of self-reliance.

In closing, there is urgent need to have a strong and responsive equalization program that allows all provinces, not only the wealthiest, to respond effectively to meet the needs of their citizens. The Senate Finance Committee has a rare opportunity to make a difference. The 2004 renewal of the equalization program is an opportunity to lay the foundation for Canada and the21st century.

I urge members of the committee to recognize the importance of this commitment to the federation and to join all provinces in voicing their support for a stronger equalization program for the future. Equality is more than an ideal; we believe it is our right as Canadians.

With those few comments, Mr. Chairman, I am more than prepared to take any questions members of your committee may have.

The Chairman: Thank you, Mr. LeBlanc. We would also like to thank you and the Government of Nova Scotia for having left us this brief on the equalization program, and in both the official languages of this country. That is greatly appreciated.

[Translation]

I want to thank you for having made part of your presentation in French. We are pleased to hear the Minister from Nova Scotia speaking in French, his province being, after all, the birthplace of the Nouvelle-France in America. Don't you think so, senator Bolduc?

[English]

Senator Bolduc: That is true, let us be fair.

The Chairman: You come from a relatively junior place in that respect.

Senator Bolduc: My ancestors have been here since 1648. Let us go back.

[Translation]

The Chairman: They are about to celebrate a very important anniversary in Nova Scotia in 2004.

Senator Bolduc: Mr. LeBlanc, I have two questions for you.

[English]

Senator Bolduc: As a result of 1993 data, is it fair to say that the federal government does not put enough money into transfer payments when it has been proven that the financial requirements of the transfer were unsustainable in terms of the fair economic policy of the 1960s?

Mr. LeBlanc: That is a good question. As Minister of Finance, I have taken the time to state the fact that the federal government has a huge deficit problem. They dealt with it in three different areas. One way the federal government has dealt with the deficit is that they have worked on controlling their costs, which is admirable when you look at the deficit they had. They also reduced their CHST payments to the provinces, after setting many of the standards by which the services would be provided, especially in health care. They also established many different education and social programs that they would be sharing at 50 per cent. They limited their payments dramatically, especially in CHST, with no opportunity for growth for some considerable time.

They also looked at their equalization situation and limited their payments on that. The federal government limited its risk, in essence, in the areas that are of high expenditures: social services, health care, higher education et cetera. As revenues grew and recession occurred back in the early 1990s, the situation got much better for the federal government. I do not dispute that. Mr. Martin had a difficult task and I am pleased that the Government of Canada is now in a surplus position.

Many of the standards and many of the programs developed were done in conjunction with the federal government being a partner, and they have removed themselves from that process and left the provinces to deal with things on their own. We have many issues with regard to equalization that we are concerned about. The cap is one that we are concerned about because as we move forward that will have an impact on Nova Scotia. The fundamental aspect of the section 36(2) of our Constitution is we would be, as much as possible, equal participants within the Constitution. There is also section 36(1). I was trying to make the point that under section 36(1) we would help provinces grow. We have not done that. Our capacity has not grown since 1990. We have stayed where we are. The intent was for our economies to continue to grow whereby Nova Scotia, and the other seven receiving provinces, would be in a position where we could receive relatively similar services.

Nova Scotia will never be Alberta. We would like to be Alberta but we know we will never reach their level of wealth. ForNova Scotia there is a happy medium, however. We cannot have everything we want because we will ask forever, but I still think the federal government has a role to play.

Senator Bolduc: As we know, the per capita income in Alberta is much higher than it is in the rest of Canada. Most of the provinces are between $5,000 and $6,000 per capita income. That does not say that this is the average income of each individual, but those are the figures for statistical purposes. In comparison, the per capita income in Alberta is $9,000, about one-third higher than elsewhere. In a market economy, we would expect to have a migration from other provinces to Alberta, but apparently the people from Chester, Nova Scotia, prefer to stay where they are because they feel they have a better quality of life. Why should we ask the people of Alberta to pay for the rest of the other people?

Mr. LeBlanc: Just for Nova Scotia. Is this a trick question?

Senator Bolduc: This is a real question. We do not take that aspect into account. It is a social indicator that is very important. For example, I am seriously thinking of retiring.

Senator Cools: To Chester?

Senator Bolduc: No, but a place bit warmer, probably in B.C. somewhere, on the island maybe, or another island - south, I do not know. This is an important factor. We do not consider that at all. We always talk here in terms of cold statistics about the fact that you have lost $130 million since 1982. It seems to me it is tough to be objective about that.

Mr. LeBlanc: We in Nova Scotia are very proud of our heritage. Nova Scotians are passionate about living in their province. I am sure your chairman will be moving back before too long. We have a high level of academic achievement within our province yet many people have left to go to Alberta, Ontario and other provinces. Many of those people have returned to Nova Scotia. We have a high percentage of seniors within our province. They are a variable resource but they also present a challenge that we should try to deal with because, of course, the older you get the more you need to receive medical programs. We paved the way for some of those provinces by educating some of our best and they have imported them but they come back to Nova Scotia afterwards.

Beyond that, it comes down to what do we want as a country. What is the basis of Confederation? Is it that we should work together? From our perspective, we want to mention the Campaign for Fairness. We want to improve our economy whereby the statistics that I quoted in my presentation will not be the same going into the future. We are passionate about that. We think there is opportunity within Nova Scotia but it will take time for it to come into play.

Alberta did not become what it is overnight. It has taken Alberta 60 years to achieve its prominence. People seem to think it was like that right from the start and it was not. It all comes back to your vision of Canada, and our vision is that we are player, we are part of it, and we should work together to solve the problems.

Senator Bolduc: It has been proven that if you look at national economic statistics all over the world, Canada has a more equitable society than most. Perhaps a few are more equitable than us, for example Scandinavia, but we are among the most equitable. At the same time, we have a fairly high standard of living. If you put on too much taxation you will not get additional economic growth. That is the problem. In Canada, we are highly taxed, more highly taxed than the other OECD countries. More than that, it is not viable by comparison to the U.S. Our neighbour is important to us because we deal with them all of the time. We deal with Indonesia on a small scale, but Indonesia is not our main trading partner. The main problem for us is the fact that we are near the U.S. and because of that we have to be careful in terms of taxation.

For example, we permitted people to put their money into pension funds and went a bit fast in my opinion. I always thought that we should have done that in a more timely fashion. In the first year the Canadian dollar lost two cents. Then we added, and it lost again. It is a very sensitive matter.

I have always been troubled by that problem because a little more taxation in Canada, with at least part of the money coming from Alberta presumably, and Ontario and B.C., may mean that economic growth will be smaller.

If we look in terms of redistribution we have to understand that there is a limit to it. This is a delicate matter.

Even though I have been a critical of our Minister of Finance, I sometimes have some sympathy for the Minister of Finance when he looks at the whole situation. It is not easy. You are asking for a little more equity, but suppose that, for example, you say you are at 96 per cent. You gave that statistic in the beginning. When is it enough? Is it 97per cent or 98 per cent? What is your reaction to that?

Mr. LeBlanc: You have to use these statistics. You should also look at it as a comparison to the national average of GDP. In that regard, we are at about 75 per cent. There are different indicators. The indicator used for equalization shows that Nova Scotia is at 75 per cent with New Brunswick higher, and Prince Edward Island lower. Newfoundland is quite a bit lower. You have to look at what the Constitution says. Either you believe in the Constitution or you do not. The Constitution is very specific on this issue.

The Constitution says that as a Confederation we will provide comparable levels of services at comparable levels of taxation. Section 36(2) is very clear in that regard. You also talk about Alberta. We have done a lot of talking about Alberta and Ontario, and that is not fair. We have had huge changes in taxation policies in those provinces that have caused this country to experience some major problems. Competitiveness of the economies and where people work, are major issues. People now look more at what they earn than they ever did before. That is making competition a problem because we cannot compete with those provinces right now. There are very few provinces that can compete with Alberta and Ontario.

People also look at the services they receive from governments; that principle is fundamental within the Constitution. Equalization is based on whether we can afford it or not.

The points I have made about the role of the federal government and the standards that they have set show that they have set the table. They have also enshrined in the Constitution the principle of how this nation will function.

When you are contemplating changes to equalization be careful of what you put forward. We have discussed the complexities of equalization. Many people say it is too complex and we should make it simpler. It is complex because Nova Scotia different factored into the drafting of equalization standards over a long period of time. It is important we do not suddenly make wide sweeping changes that will change many of the factors that went into the initial drafting of the equalization standards.

I am urging you as members of the Senate committee to consider those aspects, if you are to put forward suggestions regarding equalization.

Senator Furey: Like the people of Nova Scotia we in Newfoundland and Labrador are not the principal beneficiaries of our offshore revenues either. You indicated that if the current implementation of the accord is not corrected the federal government will continue to receive primary benefits until the non-renewable resources are depleted. What recommendations would you make to correct the accord?

Mr. LeBlanc: The commitment in the accord is that the provinces are the primary beneficiaries and, as such, should be able to keep the royalties until they reached a level of fiscal capacity, which I believe is 110 per cent. That was the commitment made by Pierre Elliott Trudeau back in 1982. The accord was brought about in 1984. There were also comments made by the present Parliamentary Secretary to the Prime Minister to the effect that he believed in those same principles.

Over the years as we have looked at the modules regarding personal income tax, corporate income tax and royalties and we have seen that we are receiving about 19 cents on the dollar while the federal government is receiving the remaining 81 cents. That is not what was indicated that the provinces should receive from this arrangement. The reason we have been so passionate about it is because we realize that there are very few opportunities from natural resources from which we will be able to benefit. In a sense, this is our legacy to our children. We have been pushing and trying to make the case as much as possible that this is an opportunity for our province to get on its feet.

Senator Bolduc asked why we should give to the provinces and suggested that perhaps, equalization is the wrong way to go. Do we not want a country in which the provinces are relatively strong in their economies while at the same time being diverse? Nova Scotia is moving forward on that.

I have been in politics since 1984. I was absent for five years, which is a polite way of saying that I lost. When I returned to politics I observed that the people working in the offshore industry had brought about new entrepreneurship; new people had come in, which is good. There is new blood and new ideas. There is venture capital. That is what we want in our province. Nova Scotia will eventually get itself on its feet.

We look at the royalties being paid from these resources as a chance to put to become independent. I know my colleague from Newfoundland feels as passionately as I do about this. We have to make decisions today that we will be comfortable with in the future. The federal government made commitments in that regard, but it has not acted on them.

Senator Furey: I am wondering if you had some thoughts beyond changing the distribution aspect of the formula. Mr. Boessenkool from AIMS indicated that because your resources are non-renewable it is incorrectly thought of as income and should be treated as a capital asset. That is not tinkering with the formula. That is completely changing the whole concept and idea of what it is.

Mr. LeBlanc: I read his presentation. As Finance Minister I realize that we should have as many diverse ideas and as much debate on the issue as possible. I have concerns with the suggestions that are coming forward. There would be a great impact from carrying out that suggestion without having in place a number of safeguards to ensure that it would not have a negative impact at the start. To take one suggestion in isolation is good for debate, but I think people should understand the full package. There are implications that I do not think he addressed.

Nova Scotia's position is that we should be going with what we consider our so-called Campaign of Fairness that seeks to see the implementation of the accord. We realize we have a lot of work to do. Until now Mr. Martin has not been supportive of our efforts. That does not mean that we are will stand down from the task. We will push the issue as much as possible. We think it is the right thing to do. It was the commitment made to Nova Scotia, as well as to your province.

That is where we are going. We are waiting for Mr. Martin and the Prime Minister to respond.

Senator Furey: One of the criticisms Mr. Martin has levied at the package is that there are all sorts of ancillary benefits coming from offshore development, such as employment and revenues. He has therefore not so inclined to look at this as just being one big clawback for the federal government. Are the benefits that are derived from employment in the offshore huge in Nova Scotia?

Mr. LeBlanc: They are positive and considerable. However, they are not to the extent that people would tend to believe. They have helped our economy become more diverse, which is very positive. A considerable number people have been employed as a result. I commented earlier that Alberta has been in the oil game for about 60 years. Some people in Nova Scotia believed that within two or three years we would be the Alberta of the East.

A number of the jobs that have to do with the petrochemical industry, along with other manufacturing groups, for example, will take some time. It does not happen immediately. That is the long-term vision and it will only come about if we plan properly. First we have to develop an energy policy that is a long-term vision of where we should go.

The royalties on this project are considerable. In your province the royalties are even more considerable. They are, perhaps, twice of what they will be in Nova Scotia. This is an opportunity for us to receive what was promised to us in regard to the accord.

I can tell you what Prime Minister Trudeau said on this important aspect on July 16, 1980:

The commitment we have made regarding the off-shore is that until the provinces with the resources off their shores have reached the average income in Canada, we intend to see that they will get the overwhelming part of the resources from the offshore.

This illustrates the original intent of the Canadian government and that is the way that Nova Scotia wants to proceed. However, when we look at the modules today, that is not the case. The question is, do we re-examine that? I think the answer is "yes."

The Chairman: I take it that you do not want to scrap the present program and start with something new. You want changes. I have looked at the criticisms you have made and I am drawing inferences from those criticisms.

You state that going from a ten-province standard to a five-province standard has cost you $113 million annually, $2.3 billion in total, since 1982. I infer from that that you want to go back to the 10-province standard, do you?

Mr. LeBlanc: Yes. There are three components we have been asking for, one of which is the re-establishment of the ten-province standard. Another is the removal of the cap. We do not agree with the cap being on the program. If the program is supposed to work, how do you suddenly put a cap on it and say that if it reaches that, it no longer applies. The third component we are asking for is the comprehensive revenue coverage.

The Chairman: That is the user fees.

With regard to the cap, Mr. Martin pointed out when he brought in Bill C-18 that he was taking the cap off for a year. His point is that the cap moves. The purpose of the cap is to ensure that the growth in entitlements does not exceed the growth in the economy. That is his point. It is not a fixed cap; it moves with the economy.

Mr. LeBlanc: Mr. Martins' argument was that there should be a cap. He came to this conclusion from conversations that he had with the Auditor General who also had some concerns. Nova Scotia took a look at the situation two or three years ago when the renegotiation of the equalization came about. The federal government decided at that point that there should be a cap, or they wanted to establish one, but that we would never reach it so we need not worry. They set it arbitrarily lower. We disagreed at that time, and they told us not to worry about it. Here we are, a few years later, and we are hitting it and obviously we are worrying about it.

[Translation]

Senator Comeau: Minister LeBlanc is an old friend of mine and he comes from one of the most beautiful regions ofNova Scotia. Mr. Minister, I would like to welcome you here.

The Constitution is a very important document for our country. You just read Pierre Elliott Trudeau's comments, where he indicated that provinces should be at a comparable level all across Canada, in line with the Constitution's intent. We are talking about the transfer system of energy revenues, aren't we?

Mr. LeBlanc: Yes.

Senator Comeau: That has something to do with the Constitution, namely with sections 36(2) and 36(1). Did the federal authorities give you a definition of the terms "sufficient" and "reasonably" which are found in section 36(2)?

[English]

Mr. LeBlanc: The answer to that is "no." That brings up a lot of debate. Part of the problem with Nova Scotia nurses is that they see the kind of money that nurses make in Alberta and B.C. We had a contentious labour dispute with them recently during which time I spent a lot of time in the house, 24 hours a day for a few weeks trying to settle the nurses disputes. We are getting into competition. How do we compete? Those are the levels we talk about: Comparable levels of service, comparable levels of taxation, let alone the tax rates people pay in those provinces versus ours. These are all open to interpretation. We never expect to receive the same levels of support federally that would enable us to compete at that level, but obviously we have not come anywhere close to what was anticipated.

That is not so much because of 36(2), and we have concerns about levels of support, but 36(1). Our economies have not grown. If our economies had continued to grow, the demands we would have on the federal government would be lower.

Senator Comeau: I would like to touch on 36(1) and some comments made by Senator Bolduc regarding the town of Chester. Chester is an idyllic community in Nova Scotia. Rockcliffe is also a beautiful area of Ottawa but many citizens cannot afford to live there. It is the same situation with Chester. You would need to be Senator Bolduc to buy a property in Chester right now. I say that not as a joke but because there is a notion that all Nova Scotia natives live in such idyllic communities.

This may be anecdotal, but I seem to me that an increasing number of people return to Nova Scotia to retire, but our young people do not stay in Nova Scotia during their work years. Is that the trend?

Mr. LeBlanc: Actually, I am happy to report that there has been a change. We have done much better. The economy is doing well and attitudes have changed. Our economy has diversified and this change is bringing people into the province.

We have excellent universities in Nova Scotia, and we have students from as far away as Alberta. This has become a problem as we are penalized for our number of out-of-province students and pay a disproportionate fee because of them.

Many people do move back to Nova Scotia after spending their working years elsewhere. They move back to Nova Scotia and expect to receive services, which puts a strain on our resources.

I know that in other provinces in Atlantic Canada the situation is much the same. People have strong roots. It is the same in Prince Edward Island and New Brunswick. That is putting pressures on our social systems, and we have to deal with it.

I will take one second to mention an important event that will happen in 2004: The world Acadian congress. As Minister of Acadian Affairs, I should mention that.

We are very pleased that Nova Scotia was chosen to host the event. It will give Acadians an opportunity to show the world the uniqueness of our people and unified our culture is. Our religion has played a large part in our heritage and our language has maintained itself over many years of hardship. I invite honourable senators to take the time to read the material and come spend your money in our beautiful province. We need the tax revenues.

Senator Comeau: The current government hit its stride at an opportune time because the opposition in Ottawa did in fact push for the government to control its deficits, curb spending and so on. That has continued since 1993. Much of the power base in Ottawa is from Ontario, with most of the members of the governing party coming from that province. They have a negative perception of Atlantic Canadians.

How can you counter this negative perception, which might be a factor in how equalization programs are looked at? Obviously, if it is viewed as being a handout we will not be able to progress very far.

Mr. LeBlanc: There are seven provinces that receive equalization: Saskatchewan, Manitoba, Quebec and then, of course, the four Atlantic Provinces. When you talk about equalization, you get this perception that it is an Atlantic problem. However it is not; it is a national issue. It is one that comes down to whether you believe in Canada. If you do not believe in Canada then you do not believe in equalization. You cannot have it both ways. The Constitution is there. We want this Confederation to live and prosper. That means we must work together.

It is not just Alberta, B.C. or Ontario paying. Everyone pays and we pay Ottawa as well, so part of our taxes is paying for this.

I am not arguing they will pay more because they are contributing more, but the issue is that it is a national program that we do not want to find ourselves in a situation that we have such huge disparities in our nation that we would see ourselves as being second-class citizens. I do not think any member of this committee wants that and, as Minister of Finance and a representative of the Province of Nova Scotia, I do not want that either. We want to be a strong contributor. Through Campaign for Fairness we will be in a better position to offer more to Canada in the years to come.

Senator Banks: I am from Alberta. It is always a little embarrassing for me to talk about equalization. Oil was discovered in Alberta in 1914 in Turner Valley. The oil boom began in earnest with Leduc in 1948. Alberta was a recipient of equalization until 1961. That is a fact that, to its credit, the Government of Alberta continually reminds its citizens. It also reminds its citizens that if equalization payments happened to increase there would be no increase in the amount that Albertans pay. Equalization is a federal expense, period. All Canadians pay into the general federal fisc on approximately the same basis according to their capacity to do so.

I have two questions. First, the only place you can have exactly equal services for exactly equal taxes would be in a unitary state. Even then, it would presume that everybody lived in exactly the same density of population. It is impossible. The Constitution says "comparable," which does not mean "exact."

What is the measurement? At what point would it be okay for any province to say that the deal is off? The difference between the have provinces and the have-not provinces, as far as equalization is concerned, only consists in whether one receives it or not, not whether one pays it or not. What is the measurement?

You must have a number in mind as to the share of offshore revenues. Before the accords it was legal fact, whether it was right or wrong, that offshore revenues were the property of the Government of Canada. I believe that is correct. We must hope that there is a great deal down there in the provinces off whose shores those resources exist. If I am right, they now exist halfway to Scotland. What is the number? Is it 50-50? You must have thought about that number.

Mr. LeBlanc: Equalization works on fiscal capacity in proportion to the national average. There are seven receiving provinces. They are ranked in order. Saskatchewan is the highest: 98 per cent or 97 per cent, which is high. They are very close to not being able to receive equalization. Next are: Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland. Once you get to 100 per cent, you do not receive it any more.

To use an example, if Nova Scotia were to receive the royalties and so forth on the other side, our equalization payments overall, as calculated in a normal formula, would go down proportionately also. Once a province hits 100 per cent it does not receive equalization.

Senator Banks: Are you happy with the cut-off point that exists now? The best example right now is B.C., which at the moment is sort of hovering on the edge. Are you happy when you arrive at that point in the present formula?

Mr. LeBlanc: We are still far away. If I can get to that point, we will have a nice committee meeting here and I will probably take you all out to supper after and everyone will be happy.

Senator Banks: What is a fair split from the offshore?

Mr. LeBlanc: I will continue to refer to the accord, which said we would be able to keep those revenues until we hit 110 per cent. We are going back to what was indicated by the Prime Minister of the day back in 1982. Even the subsequent government always talked about the fact that we would be primary beneficiaries.

It is our intention to be able to keep all the revenues. This is not a negotiation of what is fair and what is not fair. We are going by what the accord says. To do anything other than that would not adhere to the principle or the intent of the accord.

That is as clear as I can be on that issue.

Senator Oliver: Section 36(1) says that the federal government and the provinces will work together to further economic development to reduce disparity of opportunity.

Senator Banks and Senator Bolduc asked you what test Nova Scotia uses to determine when it has reached the level at which it is equal and there is no more disparity between Nova Scotia and other provinces. How do you measure when the province is economically diversified and you are self-sustaining? What is the ultimate test?

Mr. LeBlanc: The best indicator is GDP per capita.

Senator Oliver: Mr. Minister, a number of people have said that perhaps if you did your finances differently you would not need so much from the federal government. As a result of September 11, the economy of the world has been badly shaken. One thing that has happened is that interest rates are way down. Perhaps you should consider restructuring a lot of your long-term debt to take advantage of these lower rates.

I noticed the following in yesterday's paper:

Notice of Redemption $150,000,000.00 Province Of Nova Scotia Series 8Q 12 5/8% Sinking Fund Debentures.

If you were to restructure and redeem your other long-term debentures and bonds, you could save tens of millions of dollars and your need for more equalization could be restructured.

Could you comment on taking advantage of debt restructuring with the low interest rates and the current environment?

Mr. LeBlanc: Oh, if we could.

Senator Oliver: But you are.

Mr. LeBlanc: I know. Some of our debentures have openings that give us the opportunity to recall them. This is one that we did, obviously at 12 5/8 per cent. It is obviously to our advantage to recall that.

People say that we can currently finance everything at 2.5 per cent or 3.5 per cent. Long-term 10-and 30-year rates have changed only marginally. People ask why that is. People do not want to invest at 2 per cent for 10 years right now because they are thinking that rates will go up. Therefore long-term investments are not made. However, most of our debts in Nova Scotia are long-term. Only 15per cent to 35 per cent of our debt is short-term.No province wants to have too much short-term debt because, if circumstances become difficult, you may find yourself in a cash crunch. We take advantage of every opportunity we have to renegotiate debt at a lower rate.

That is a good question and it shows that we are doing our job. The savings are not as large as people think they could be. In the short-term, our three-month notes are much cheaper. However, the rates on the long-term agreements into which we have entered must stay where they are.

[Translation]

Senator Ferretti Barth: You say it is urgent to reduce the high percentage of people who are sick and to eliminate child poverty in your province. Concerning your health system, you had to recruit nurses in other provinces. Do you need equalization payments to keep your health system working?

[English]

Mr. LeBlanc: For a province like Nova Scotia, equalization is a fundamental source of revenue to enable us to deliver those other programs. Although we have CHST, which is seen as a federal contribution to health care, higher education and social services, it is only part of our revenues. Many of the receiving provinces use equalization to deal with the shortfalls in CHST funding. Equalization is just as important as CHST.

There is a fundamental problem with the amount of money we get from Ottawa for health care. The federal government made changes and that is how they balanced their budget. They limited their exposure to the high-risk areas, the highest risk being health care. That is no surprise to committee members or to any provincial minister who holds the finance portfolio.

Health care is very complex. Technology, medicines and medical procedures have improved and people are living longer. Young children that would not have survived are now living and we are faced with the challenge of supporting and nurturing them through life. These are all serious challenges for provincial governments. Are of the programs that deal with those challenges are provincially funded programs. These are the challenges with which my colleagues and I across Canada are faced.

[Translation]

Senator Ferretti Barth: Has Nova Scotia a high percentage of old age people?

Many people choose to retire to Nova Scotia because of the fine quality of life that can be found there. Yet, that will add more seniors to those who are already living in your province. Since old age persons are considered more at risk of getting sick, could that trend not put more pressures on your health costs?

Are the equalization payments that you are receiving used largely for essential services such as health and education?

[English]

Mr. LeBlanc: Equalization does not take any of those factors into consideration. It is a revenue source for the province. CHST does not take into consideration the seriousness of illness or the age of the population. These factors have a direct bearing on the cost of delivery.

We are not looking to dedicate certain aspects of our revenues to certain programs. We are looking at achieving a level of service which is reasonable for our province and one by which we can live within our means.

We want to bring in a balanced budget. We are looking toward the long-term interest to live within our means. This will be an important achievement because we have seen what other provinces have done once they can manage on their own; they start to move ahead.

When I took this job two years ago, our province was facing a $500 million deficit. We now have it down to about $100 million. We have made some very difficult choices.

We understand that you have been looking at the issue of equalization. Part of the problem we see is how the federal government in looking at equalization. Are you looking at small changes or big changes? When you ask us what our concerns are, we are telling you about some of the failings of the system.

We have pointed out problems with the cap. We have pointed out problems with the fact that they changed the standard. We have pointed out problems with the comprehensive revenue coverage. We also see that it is being studied. That is a cause of concern because there are those who would say that it needs a major overhaul.

Many people who think equalization is too complex. Those complexities have been put there because of a lot of thought and experience.

I am looking to members of this committee to consider the impact of any changes to equalization before you make them. If there is anything I can impress on the committee members today, it is that comment.

Senator Cools: Coming back to your appeal to this committee to maintain the status quo, my first point is that I am a senator from Ontario. Liberal members from Ontario constitute the largest caucus in Parliament. However, as huge as that Ontario caucus is, it is also the weakest caucus in Parliament. There is no caucus that exerts less influence on public policy than the Ontario caucus. I just wanted to put that out here.

Senator Oliver: Nova Scotia must be number one, then.

Senator Cools: For years, the Nova Scotia caucus was number one in terms of influence.

In many ways, Ontario is under-represented in its needs.

I want to discuss the relationship between equalization payments and provincial sovereignty versus federal sovereignty. The notion of provincial sovereignty has been expanded and exaggerated to include all manner of items and agenda that were never anticipated under the heading "provincial sovereignty." I refer, for example, to Quebec and the promotion of separatism and independence. I am still trying to understand and comprehend how on earth sovereignty ever became the authority of a provincial assembly to authorize moneys for the promotion of independence and separation. We are told that it is legal. It is a vast issue.

How can you propose to us that the status quo remain? I understand why it is satisfactory to you, but we are living in an era where we see a minister questioning the constitutional right of the existence of the monarch, the Queen. We have seen another minister of the Crown questioning the ability or the right of the Senate to exist as an institution. We have had a constitutional destabilization, at least in the public mind.

If we are destabilizing, immobilizing and dismantling the blocks of the Constitution, how can we, with any amount of fairness, say that we should hold on to this element in the Constitution and preserve it unchanged? I am not saying I disagree with you. I could easily have been born and bred in Nova Scotia. I am a great believer in the concept of Her Majesty the Queen. I am a great believer in the concept of this upper chamber, the Senate. However, I find myself at greater odds within my own caucus. That is a fact.

In all the upheaval around the Constitution and the constant phenomena of changing it, why is it that item should remain untouched and unexamined?

Mr. LeBlanc: Mr. Chairman, I have changed my answer five times during the debate. First, we have not asked for the status quo to be maintained. We have asked for some changes to be made. We have also asked for the Senate to be very cautious in what it suggests in terms of changes to the CHST, especially regarding the macro versus the micro aspects of the complexities of the format.

Why we should respect this aspect of the Constitution versus the other one is a more complex issue. I respect the right of people to speak their mind, whether I agree with them or not. I am a federalist. I have no pretence to say otherwise.I recognize the right for people to have other opinions than my own. I believe in the Constitution. Many people from across this country outside Quebec have said that that this country is stronger as a whole than it is divided.

Once we start picking and choosing clauses of the Constitution that we want to support and other ones we do not, then we are living in a very difficult era. It is either all or non. My belief in Canada tells me that it has to be all.

Senator Cools: I admire the witness. Many of us understand that Confederation began with the East and grew to the West. Most of us here feel strongly about this unit we call Canada. We feel quite devoted to it. I am not without some understanding of everything that is going on around us.

The concept of equalization has a long history, and I say it is a very solid and firm history. I too am of the opinion that it should be maintained. However, when everything else is changing it becomes very difficult to defend that one item against all of the others that are in constant change.

The Chairman: I appreciate the point. However, the monarchy, for example, is entrenched to the maximum possible extent. Any change in the status of the monarchy, or for that matter of the Lieutenant Governor or the Governor General, would take the unanimous consent of Parliament and all 10 provinces, and the same applies to the abolition of the Senate. De facto, serious fundamental change in the Senate would take unanimous consent in a constitutional way. On the equalization formula, I do not know offhand what it would take to change that provision of the Constitution, but at the very least it would take Parliament plus seven provinces having more than 50 per cent of the population. Those provisions, in a constitutional sense, are fairly safe.

There was, in the BNA Act of 1867, a very primitive form of equalization, and it was sweetened after Nova Scotia threatened to leave the federation. They were the first separatists.

Senator Cools: We always hear that Nova Scotians were the first separatists. You would not know my background, minister, but I was born in the British Caribbean, and it has had long and historical ties, particularly with Nova Scotia. There is a lot of rum there, you see.

It is often said that Nova Scotia was the first province to raise secession. I read about this some years ago, and it is not so simple. In Nova Scotia, there was a lot of unhappiness about entry into Confederation, and they were asking to pull out of Confederation. It is very interesting that their request was not like the situation in Quebec. They always wanted to maintain allegiance to Her Majesty. That is very important. They were asking for a return to their previous state of allegiance to Her Majesty the Queen. If you were to read the resolutions around that area, you would see very clearly that they upheld the system in every other respect.

The Chairman: They were anti-federalists.

Senator Cools: Politically, they felt they had not been handled properly. That is a different situation than Quebec independence. I am not sure that it is helpful to compare the two, as many individuals do.

Senator Mahovlich: Premier Grimes presented us with his campaign, and he did not include Nova Scotia when he mentioned non-renewable resources. Here, you are also mentioning Newfoundland and Labrador. What about the other two provinces of New Brunswick and Prince Edward Island? Do their shores not touch the Atlantic?

Mr. LeBlanc: Yes, they do. The accord to which I refer was signed by the two provinces and not with New Brunswick and Prince Edward Island. It may be inappropriate for me to mention Newfoundland; however, I do know that we share many of the same concerns regarding the proper implementation of the accord. Both those accords were passed in our houses. It was an accord and a piece of legislation that was passed. That did not happen in the other two provinces.

Senator Furey: I am glad, minister, that you did mention Newfoundland and Labrador in the context you did. I want to go back to a point that Senator Comeau made regarding the CHST. Newfoundland, unfortunately, has a declining population and, and for reasons already mentioned has a greater strain on its ability to deliver health care, among other things. If we continue with aper capita distribution of CHST, are we not continuing to widen the gap between the provinces? Should the federal government not take into account some measure of need in that distribution?

Mr. LeBlanc: I can only speak for Nova Scotia, but I do think it applies to Newfoundland. Newfoundland is in a situation of declining population. It makes their pressures that much more difficult. When the CHST was changed a number of years ago, there was some factoring into its historical aspects and how it was funded. It was changed to a straight per capita. Because of the complexities of these agreements, we must remember the time and energy that went into the drafting of them. That is why I am saying to be careful before you make suggestions about going to a simpler formula. CHST used to have that type of built-in protection.

Many times Ottawa has said that we have agreed to change things, and we did not agree at all. It was more of a situation where if we did three changes we would agree. What happens is that one or two are taken, and the other one is kept off the table. That is exactly what happened in the changes to CHST.

Newfoundland has felt it probably more than any other province because their numbers are declining. That makes their situation that much more challenging. I can only empathize.

Senator Furey: Surely you agree that if we continue with a straight per capita distribution of those funds, that that gap will continue to widen?

Mr. LeBlanc: I agree. Our premier has made presentations with regard to the CHST at the First Ministers' meetings pointing out that there should be some factoring into it including severity of different indicators such as cancer. Nova Scotia has one of highest rates of cancer in per capita in Canada. We have many other factors that play into that. Those are issues that deserve a debate. It makes sense that when you give CHST money, these things should be factored into it.

Senator Finnerty: Has there been any study on why the cancer rate is so high? Is it contamination of the fish?

Mr. LeBlanc: That is a good question. There have been more studies than I can count. In Cape Breton there was a huge industrial base, and many people feel it may be attributed to that. I am not an expert and cannot speak about that. We are also downwind from many of the carbon-burning states that produce electricity. There are many different ideas concerning the cause of the cancer. I am not really competent to speak on what may be causing it. However, the facts speak for themselves. We have a very high incidence of cancer. It has taken a huge human toll on everyone, let alone on the system itself. It is a difficult aspect of Nova Scotia life.

We also have a high incidence of smoking, which is difficult to change. We raised the taxes again last week. I mentioned that at the First Ministers' meeting in Vancouver three or four weeks ago and was pleased to see six or seven of the provinces raise their taxation levels on tobacco. It is the most effective deterrent that we can utilize. My next-door neighbour who smokes was not very happy, but I think it was the right thing to do.

Senator Banks: We are talking about equalization but you have raised the question of transfer payments. Provinces seem to omit the fact that the directed, strings-attached transfer payments which used to be made at the request of the provinces were turned into more or less block grants, to which there are fewer strings attached, and tax room, commonly referred to as tax points.

There are people in the country who insist that when we are looking at questions about CHST, we must include in the calculation the tax room that was vacated by the Government of Canada. Those tax points were in effect transferred to the provinces.

The provinces seem to want to disregard that issue and discuss the CHST and how insufficient it is. I ask you to comment on that.

Mr. LeBlanc: This reminds us of the Second World War when we gave some tax room to the federal government for a little while and never got that back either.

The Chairman: You are not still complaining about that?

Senator Banks: I guess it is a question of where we draw the line.

Mr. LeBlanc: It is a two-edged sword. There were some tax points given up and I do not dispute that. The federal government often puts that point forward. You also bring up the point that there are some strings attached. Many provinces feel that the provinces are to put in place programs that are, in large part, designed by the federal government.

Look at the Canada Health Act. It dictates standards and how we are to do things but basically the provinces are responsible to do it. There are no more challenging programs to deliver than health programs, but there are others. I remember when the Solicitor General brought in the Young Offenders program. The federal government was in many new programs at 70 per cent or 50 per cent for the long haul, but they pulled out of many programs that are now 100 per cent provincial programs. Those are our challenges.

Paul Martin still has a difficult job. We realize that he has national security issues, defence issues and so on. In time, though, the problems must be addressed. The Romanow report will come out next year; the interim report is intended to arrive early in the year and the main report later on.

Senator Oliver: We will also have the Kirby report.

The Chairman: It will come down earlier.

Mr. LeBlanc: What is the role of the federal government? It is a national problem and in order to solve it, we need a national solution. Up to now, it has been the responsibility of the provinces to deliver these programs. I am not belittling the contributions that we receive, but our needs are growing much faster than the money that we are getting from Ottawa. We started off at 50-50; we are down to 12.5 per cent plus the tax points. The divergence is huge and that is where the risk factors are. That is why the provinces are facing huge problems.

The Chairman: Minister, as you can judge from the attendance and participation, this has been a very stimulating and interesting morning. Thank you for that.

The committee adjourned.

National Finance

Proceedings of the Standing Senate Committee on National Finance

Issue 27 - Evidence

Proceedings of the Standing Senate Committee on
National Finance