Proceedings of the Standing Senate Committee on
National Finance
Issue 4 - Evidence
OTTAWA, Tuesday, March 23, 2004
The Standing Senate Committee on National Finance, to which was referred Bill C-18, respecting equalization and authorizing the Minister of Finance to make certain payments related to health, met this day at 9:30 a.m. to give consideration to the bill.
Senator Lowell Murray (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, there has been referred to us Bill C-18, respecting equalization and authorizing the Minister of Finance to make certain payments related to health. This bill was passed in the House of Commons on March 9 past and received second reading in the Senate last night.
We are happy to welcome to the committee Mr. John McKay, the parliamentary secretary to the Minister of Finance. Mr. McKay has been a Member of Parliament for Scarborough East since 1997. Welcome, Mr. McKay. This is, I believe, your first appearance in your official capacity before a Senate committee. I hope you will find it painless.
Since today is budget day, Mr. McKay will be leaving us in about 30 minutes; however, the officials who are here with him will be staying to help us in our consideration of this bill.
Please proceed.
Mr. John McKay, Parliamentary Secretary to the Minister of Finance: I appreciate your accommodation today. First, with me today, from the Department of Finance, are Krista Campbell, Clare Scullion and Natasha Rascanin.
I do not propose to use the remarks that have been given to me; rather, I shall table those remarks and talk about the essence of this bill. At its core, this bill is extremely simple. It has two components: The first is a $2-billion transfer to the provinces for health care that the previous Prime Minister had made conditional and this Prime Minister has firmed up by way of legislation. This $2-billion transfer will add to the $34.8 billion already committed in the September 2003 understanding between the provinces and the federal government.
The second part of the bill has to do with equalization. It is merely an extension of the equalization formula for one year. I read this committee's report last night — although I wondered at the time how much I was absorbing, it being 11:30. The report is one of the most thoughtful documents I have read on equalization; it was quite enlightening. I hope in the near future, post this budget, you will be able to have a further conversation about your report and the proposals of the government with respect to equalization. However, that is not the focus today. Today's topic is merely an extension of the equalization for one year so that the government has authority to write cheques and to keep the money flowing to the provinces.
That concludes my remarks. We have to do this by March 31 in order to have legislative authority, and hence there is a concern about the time. At this point, some of the provinces have actually booked the money; therefore, we need to have the legislative authority to literally write the cheques by March 31. Thank you for your time and indulgence.
The Chairman: Honourable senators, is it agreed that we will take the opening statement prepared for Mr. McKay and insert it in the record at this point because it does cover in more detail the provisions of this bill?
Hon. Senators: Agreed.
(For text of document, see Appendix)
Senator Comeau: My understanding, Mr. McKay, is that the new formula, when and if it does come into force down the road, will be retroactive. In other words, it could amend this current bill, Bill C-18. Would that not create the risk that some of this funding could be clawed back, given that it is retroactive?
Mr. McKay: The intention is to be retroactive.
The Chairman: To April 1, 2004.
Mr. McKay: That is right. So, it could not be retroactive to fiscal year 20003-04 but to 2004-05. Therefore, I am not sure I follow how a province would lose money.
Senator Comeau: The problem is that the provinces are budgeting at the present time for their upcoming year and they have no idea of what the equalization transfers will be in the coming year and years after. Hence, they have to guess at what kind of money will be coming in the future. Some of the smaller provinces are working on very tight estimates.
Am I right in saying that the upcoming payments will be based on what we are considering today, that is, Bill C-18?
Mr. McKay: Bill C-18 will enact protective legislation, so that if the new formula does not pass for some reason, say the government dissolves, the authority will still be there to write cheques based upon the formula currently in place. I appreciate that the provinces have difficulties estimating the amount of money to book, but I do not know that this proposed legislation would actually change that dilemma for them a great deal.
We will take the example of 2003-04. None of the economic prognosticators talked about a 20 per cent appreciation in the Canadian dollar, SARS or hydro blackouts. They did not talk about Ontario's tanked economy.
Senator Comeau: I understand that there is uncertainty out there. Atlantic Canada experienced storms that it had not foreseen; everyone agrees that there are uncertainties. This creates another uncertainty, on top of the ones already out there.
Mr. McKay: Does it not take one uncertainty away? In other words, would not a finance minister from a smaller province be booking his or her anticipated equalization based upon a known formula rather than an anticipated formula?
Senator Comeau: For the formula you know, yes. However, we are saying in the proposed legislation that if it does change all bets are off. In other words, if you are projecting the future based on the current formula, then that is all you have. We are saying, future transfers will be based on the old formula until we change it and then we will let you know what the transfers should have been and will either take back or give more depending on the new formula.
Mr. McKay: It is a risk, but it is a positive risk.
Senator Comeau: When governments prepare budgets, they are not one-year budgets but budgets for the future. I would imagine everyone is happy about the $2 billion. However, what I am suggesting is that, rather than a one-time $2 billion, would not it be preferable to have somewhat less but on a more permanent nature?
Mr. McKay: One could have talked about that a few months ago, whether the provinces would have preferred $2 billion spread over five years, which represents the 2003 accord. There were some conversations about that — ``We will take our $2 billion now; thank you, very much.'' In the longer term, however, we have to wrestle with the fact that the health money coming out of the federal government is not on a sustainable path. If you look at the charts, the $1.8 billion increase annually over the next five years — excluding the $2 billion — is quite a bit more rapid than the government's revenues or the growth of GDP.
Senator Comeau: You are opening an interesting line of questioning. My understanding is that the transfers to provinces have declined over the last 10 years. The federal government is now down to 16 per cent of what it was contributing to health care some 10 years ago, which was around 50 per cent. If you are saying that, that even reduced to 16 per cent the federal government must reduce even more in order to maintain the level of funding, then what I think you are suggesting is that the provinces can expect less on health care transfers, that the provinces may have to look at the whole question of health care and whether it can be sustainable based on provincial revenues, if federal transfers continue to decline.
Mr. McKay: With respect to 16 per cent versus 40 per cent and how you count money and transfers of tax points, you know the arguments well. The overall generic question though is whether this is a sustainable path, and all governments will have to wrestle with that.
In this particular bill, the $2 billion is a one-time contribution to the recognized needs of the provincial finance ministers.
Senator Ringuette: It is my understanding that with respect to the 2003 agreement regarding health care, the additional $34 billion, the provinces have not yet mustered up the plan within their provincial jurisdiction to use that money, and now we are giving them an additional unconditional $2 billion.
Will you be receiving a provincial plan for how the provinces intend to use and spend this money? We are talking about a lot of tax dollars for health. What kind of appreciation and planning do we see in regards to all these funds?
Mr. McKay: I do not anticipate any appreciation at all; a little thank you note.
The Chairman: There was a very wise politician who once said gratitude in politics is a lively anticipation of favours yet to come.
Mr. McKay: I was opening up an opportunity for the chair to refer to that quote.
The Minister of Health is probably the better person to answer that question. I know there has been a very lively debate as to whether the federal government should require of the provinces some level of accountability for how these moneys are spent, because it does seem to be an almost endless request for money. I also appreciate that the provinces are having a real struggle. It is a very difficult situation for them, one that is eating more and more of their budgets in absolute and percentage terms.
There have been efforts made to develop national standards, but there has been a huge resistance to developing national standards. I think the best answer is that this is a work in progress.
Senator Ringuette: You mentioned that this bill is an extension of the current agreement, to prevent any legislative shortcoming for the new agreement.
Can you talk to us about where the discussions are about a new agreement.
Mr. McKay: I know ongoing federal-provincial discussions have taken place over the past five years — 47 or 48 of them, in fact. I am somewhat constrained, however, about talking about the new formula until about four o'clock this afternoon.
Senator Ringuette: That is good news then.
Senator Finnerty: Can the provinces use the money someplace else, or is the money allocated specifically for health care?
Mr. McKay: My understanding is that this is a specific allocation for health care. The provinces cannot spend the money on other social issues.
Senator Finnerty: Will there be any accountability?
Mr. McKay: That question is similar to Senator Ringuette's question. I know there is a struggle to get accountability. How much real accountability we have for this money is a matter of rather vigorous debate.
Michael Decker, who chairs the Health Council of Canada, was setting up standards for the health council and trying to arrive at some form of consensus on measurements to measure waiting times. On our cross-country tour, waiting time was a big issue for people, in emergency, in heart, and in various other areas.
The Chairman: The health money is going to a series of trusts, is it not, so that it can be accessed by the provinces as and when they need it or see fit to access it?
Mr. McKay: Yes.
The Chairman: Mr. McKay, I presume what we will be hearing about this afternoon is the proposal that Mr. Goodale presented at the last federal-provincial finance ministers' conference. He is not presenting today a cut-and- dried final equalization formula for the future, is he?
Let me phrase the question a different way. Before we get another bill on equalization, I presume there will be further federal-provincial discussions. Am I right?
Mr. McKay: It is fair to assume that federal-provincial discussions are an ongoing dialogue.
The Chairman: On the new equalization — and I do not want to get into the details of it at all — a bill will come in at some point. Do you know what the timeline is? May we expect a bill in the fall perhaps?
Mr. McKay: I have not discussed that. On the record, I could not give you a timeline.
The Chairman: A new equalization bill has to come in before April 2005; correct?
Mr. McKay: Yes.
The Chairman: I know there have been ongoing discussions at the official level, over a considerable period of time, and there was at least one federal-provincial finance ministers' meeting that we know about a few weeks ago on this issue. At that point, Mr. Goodale made a proposal. The proposal is still officially confidential, but it was no sooner on the table than the provincial ministers were denouncing it, followed shortly by Mr. Goodale defending it. We still have not seen it.
If Mr. Goodale does not tell us this afternoon — we are going to need it to do our work here. I do not see any reason why he should not release it. To all intents and purposes, it is in the public domain now. Can you help us on that?
Mr. McKay: I cannot. That is not within my realm of prerogatives. The appropriate way to do it is in the overall budgetary context.
The Chairman: There is no point speculating; we will see what Mr. Goodale tells us in the budget. It may be sufficient to feed our process, which will take place after Easter.
The departmental officials may help you on this, if need be: The budget documents should contain a fiscal framework, should they not? There should be a global amount that the government will put into equalization over the next few years.
Mr. McKay: That is the normal way of doing it.
The Chairman: When the budget documents are tabled, we will see a notional amount for equalization in the years 2005, 2006 and so on, will we not? You are nodding affirmatively.
Ms. Natasha Rascanin, Senior Chief, Federal-Provincial Relations Division, Department of Finance: That is standard procedure.
The Chairman: After today's budget, anyone with a sharp pencil will be able to figure out the disposition of this money among the provinces. Is that not the case?
Ms. Rascanin: Yes.
Senator Comeau: May I have one last question on the matter that I raised initially? Might there be an impact on retroactivity? If changes are to be made, either up or down, the provinces would prefer that it be positive retroactive. However, if the change were negative in the equalization formula, could the provinces be assured that they would not have to give back the amounts that they would receive from April 1 until the new formula?
Mr. McKay: I do not think that we can say anything at this stage that would be of assistance and comfort to you on this matter. Your question is in the realm of the highly speculative, but it is still a good question.
The Chairman: We will now go to our witnesses, Ms. Natasha Rascanin, Ms. Krista Campbell and Ms. Clare Scullion.
I do not have the numbers in front of me, but the forecast for equalization payments in the Main Estimates 2004-05 are considerably lower than had been projected, although they are higher than they were last year. Could you give us a figure and explain why this is so? One hears various explanations, such as the census figures, and the lower-than- expected economic growth, notably in Ontario, as alluded to by the parliamentary secretary.
Would you put some numbers on that and explain why lower-than-projected equalization payments are in store for us in the fiscal year beginning April 1, 2004.
Ms. Rascanin: The official number estimated for equalization payments for 2004-05 is $9.5 billion. This is down from prior estimates exactly for the reasons that you —
The Chairman: What was the actual figure last year? It is $9.5 billion for 2004-05.
Ms. Rascanin: That is correct.
The Chairman: What was it for 2003-04?
Ms. Rascanin: I will look that up.
The Chairman: Are you giving us the estimate or the actual figure?
Ms. Rascanin: They are the official Estimates.
Mr. Chairman: Would that be the official Estimates as of this date but not as of March 2003?
Ms. Rascanin: The last set of official Estimates came out in February, using the most up-to-date information for the four open program years. As you know, the program has four open years.
I was uncertain about what you needed to know. I understand that you are seeking information about all the years as estimated in February or the prior estimate.
The Chairman: Let us just take what you think the total equalization payments were in the year that is now drawing to a close. You have just told me that it is $9.5 billion, for the year beginning April 1, 2004. What is it for the year ending in seven days' time?
Ms. Rascanin: For the fiscal year 2003-04, it is $10.1 billion.
The Chairman: It is an actual decrease. For next year, equalization payments will be down from $10.1 billion to $9.5 billion.
Ms. Rascanin: Yes.
The Chairman: For the record, why is that so?
Ms. Rascanin: It is for the reasons that you mentioned. The program is designed to capture economic information in Canada and to use the most up-to-date information to bring below-standard provinces up to that standard. In the last while, primarily the economic downturn in Ontario has brought the standard down. Therefore, the new Estimates going forward for 2004-05 reflect that decline.
The Chairman: Can you quantify how much of the reduction is because of the census, which shows the lower-than- projected population growth and the out-migration in some provinces? How much of it is for that reason and how much is because of the lower-than-expected revenues in the richer provinces?
Ms. Rascanin: I do not have that level of detail with us today, but we can obtain those figures for the committee and get back to you.
The Chairman: I should like to see that, for our future reference.
Ms. Rascanin: That would not be a problem.
The Chairman: You are attempting to recoup the money that has been overpaid to the provinces.
Ms. Rascanin: That is right.
Ms. Rascanin: That is how the program works. When economies are booming and there are disparities, the program will pay more. However, in this instance, the program will pay less. We pay the provinces based on first estimates and so on. As better estimates arrive for the open program years, if they are lower, that is considered an overpayment.
The Chairman: Those would be more accurate estimates, not necessarily better, in the view of the provinces.
Ms. Rascanin: There is recovery.
The Chairman: How much are you trying to get back, or do you know that?
Ms. Rascanin: The difference between the estimates is what would need to be recovered. There are provisions about maximum recovery limits in place, so that provinces would not be penalized beyond a certain amount. Certainly, provinces have been given the option of choosing a five-year deferral of the recovery of the amounts. That is available to all of them.
The Chairman: You said that the number for 2004-05 was $9.5 billion, and the number for the previous year, the year now ending, was $10.1 billion. The difference is $600 million.
Ms. Rascanin: That is not the amount that is recovered.
The Chairman: That is not the amount that you are trying to recoup. How much are you trying to recoup? That reduction is net of anything you claw back; is that right?
Ms. Rascanin: Yes, it is net of anything we claw back.
The Chairman: To put it more politely, that you recover; is that correct?
Ms. Rascanin: When we pay out in respect of an equalization year, we have already paid out amounts for 2003-04. The current estimate for 2003-04 is $10.1 billion. That, relative to the prior estimate for the same year, is the amount we would be recovering. In total, the amount is the difference between the October Estimates for the four open years and the February Estimates — and that figure is in the order of $2 billion. That is the amount in play in regard to the impacts of the census and the data changes due primarily to the decline in Ontario's economy.
The Chairman: For the four open years, ending with the year that ends at the end of this month, that is what we are talking about. We are talking about $2 billion, right?
Ms. Rascanin: That is right.
The Chairman: That is recoupable; that is what you are trying to recover.
Ms. Rascanin: That is right.
The Chairman: That is the same amount that, supposedly, the federal government is giving for health care.
Senator Ringuette: I do not think the formula is as simplistic as that. I have had a glance at the 33 items.
The Chairman: The formula is not, but the outcome is.
Senator Ringuette: My understanding is that there is a continuous dialogue with the provincial and federal officials in regard to ensuring that everyone is informed of the newest current data, so that they know the negative and the positive revisions that are occurring twice a year, officially.
Down the road, there is not a significant amount of surprise; it is just that the formula and the report of this committee on the issues certainly noted that the caprice of the formula.
Senator Doody: The unfortunate effect is that when the provinces are doing their budgets or their Estimates they must include the notional amount that they think they will receive. Then the battle starts, an ongoing discussion, where the federal government is saying, ``You owe us such and such,'' and the provinces say, ``We say we cannot pay you such and such; we do not have it.''
The Chairman: Senator Doody, the former finance minister in Newfoundland.
Senator Doody: I have the scar tissue to prove it.
Senator Comeau: I would not ask you to disrespect the confidential nature of the budget this afternoon; however, how do you go about budgeting, for example, the specifics of the equalization formula, which will eventually come through either this afternoon or in months to come? You still have the practical problem of having to prepare a budget for this afternoon and to plug in some figures.
I assume that two things could happen. First, there will either be a change in the formula that will be announced this afternoon, which could either increase or decrease the amounts of transfers that will be given to the provinces; or second, there will not be a change in the formula this afternoon, which would then not change the amounts that will be budgeted to be transferred to the provinces. Am I right so far?
Ms. Rascanin: Yes, you are.
Senator Comeau: If there are changes this afternoon, we would probably have a fairly good idea of the impact of the changes. The chairman mentioned that anybody with a sharp pencil could start doing additions and subtractions.
If there are no changes proposed this afternoon in the budget, those changes, for budget purposes, would have to come out of contingencies, would they not?
Ms. Rascanin: It would be best to wait until this afternoon.
Senator Comeau: The assumption would be done that that would have to be done probably this afternoon, if changes to the formula are contemplated, if it could not be done through Vote 5.
The Chairman: No, there are Supplementary Estimates. While any changes in the new formula will be retroactive to April 1, 2004, the money will presumably come out of future year, will it not?
Ms. Rascanin: There would have to be a parliamentary appropriation.
Senator Comeau: I was trying to get a handle on how they went about doing the budgeting.
The Chairman: Honourable senators, are you prepared at this stage to proceed to clause-by-clause consideration?
Hon. Senators: Agreed.
The Chairman: Shall the title stand?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 2 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 3 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 4 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 5 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 6 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 7 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 8 carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Is it agreed that Bill C-18 be adopted without amendment?
Hon. Senators: Agreed.
The Chairman: Is it agreed that I report Bill C-18 at the next sitting of the Senate?
Hon. Senators: Agreed.
The Chairman: Thank you, colleagues.
Thank you, officials. You are free to leave.
The committee continued in camera.