Proceedings of the Standing Senate Committee on
National Finance
Issue 4 - Evidence - Meeting of October 18, 2006
OTTAWA, Wednesday, October 18, 2006
The Standing Senate Committee on National Finance met this day at 6:22 p.m. to examine and report on issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada.
Senator Nancy Ruth (Deputy Chairman) in the chair.
[English]
The Deputy Chairman: Honourable senators, I call the meeting to order. The Standing Senate Committee on National Finance is meeting today to continue its study into the vertical and horizontal fiscal balances among the various orders of government in Canada. This is a timely study of an issue that is attracting more attention. We will be building on our previous work and on the equalization formula, but we will also move beyond that to consider the issue more broadly.
Today, I am pleased to welcome representatives from the Atlantic Institute for Market Studies, AIMS, a Halifax-based economic and social policy think tank. We are joined by Charles Cirtwill, vice-president of AIMS, and Bobby O'Keefe, a policy analyst.
Charles Cirtwill, Vice-President, Atlantic Institute for Market Studies: Thank you for the invitation to attend tonight to chat with the committee about the fiscal imbalance.
Before I start with the prepared comments, I want to take a few moments to talk briefly about our institute and to give you a little background. We are a Halifax-based think thank. We call ourselves the eastern Canadian voice for regional, national and international public policy debate. We cover all gamets of the public policy spectrum — health, education, public policy, finance and municipal affairs. We cover a broad range of subjects.
In our 12-year history, AIMS has become one of the most decorated think tanks in the world. We have won four Sir Anthony Fisher Inernational Memorial Awards. Only two other institutes in the world have won that award that many times, both considerably larger than us. We are extremely pleased about that.
In our anniversary year two years ago, we won a fifth international award, the Templeton Freedom Award for Institute Excellence. That gives you a sense of the quality of our work, the breadth that we cover and the fact that, in the think-tank community, we have done very well amongst our peers.
We try to keep our message simple. As outlined in our opening statement, AIMS has published a series of commentaries on the issues of equalization and the subject of fiscal imbalance. This is our second set of commentaries on the subject.
Drawing from that material, from our previous research and from an ongoing project, we make the following observations. First, if there is a vertical fiscal imbalance, it is in favour of the equalization-receiving provinces, ERPs. Second, if there is a horizontal imbalance, it is in favour of the equalization-receiving provinces. Third, the equalization program perpetuates that dependence of equalization-receiving provinces. It should instead be used as an incentive for sound fiscal management. Two opportunities for that exercise relate to the treatment of non-renewable resource revenues and the handling of debt.
I will start with why there is no vertical fiscal imbalance. As everybody knows, beginning in 1993, the federal government aggressively pursued a balanced budget agenda in an effort to reduce the level of national debt as a per centage of GDP. The provinces followed suit with all provinces improving their operating balances, primarily during the period between 1992 and 1999. By 2005-06, only two provinces — Prince Edward Island and Ontario — projected budget deficits.
The key to realize is that the means by which these balanced budgets have been achieved are very different. Between 1992 and 1999, Ontario and Alberta — both non-equalization-receiving provinces — achieved budget balances by keeping program spending in check while their own source revenues increased.
Extending this analysis to 2004-05, while relying increasingly on growth in transfers, Ontario and Alberta remained ahead of the national average in balancing transfers, again with own source revenue growth to reduce operating deficits.
During the same period, one of the equalization-receiving provinces followed a similar trend. Saskatchewan's own initiatives in improving its operating balance rivalled that of Alberta. Quebec also performed respectably in this regard with its own initiatives basically at the national average.
On the flip side, three of the four Atlantic provinces and Manitoba relied on significant increases in federal cash transfers to improve their operating balances. Only Nova Scotia had increases in own source revenues greater than increases in program spending. Four of those provinces had their federal transfers increase at a rate greater than the national average.
Also interesting to note is the fact that only two provinces, Saskatchewan and Newfoundland, saw their federal transfers decrease during this period. All other provinces, both equalization-receiving provinces and equalization- paying provinces, saw their federal transfers increase.
The conclusion from the spending trends of the last 15 years is clear. Federal transfers have allowed almost all of the provinces to maintain spending levels beyond the reach of their own source revenues. Equalization-receiving provinces in particular have especially benefited from this federal largesse.
This does not address the question, moral and political, of whether the federal largesse has been sufficient to meet the broader goals of the Canadian federation, or the equally more political question of whether the existence of the largesse at all has created more harm than good. The numbers conclusively demonstrate who the winners are under the current system.
Having addressed vertical imbalance, let us talk about horizontal imbalance. The question of winners and losers is also tied directly to this question of horizontal fiscal imbalance and the idea that not every province has enough revenue to provide the same level of services that are provided in other provinces.
This imbalance has most often been portrayed as the poorer provinces, such as those in Atlantic Canada, not having the money to provide the same services as the richer provinces like Alberta and Ontario. The problem with this assertion is that many of the equalization recipients spend more per capita on government services than do the richer provinces.
If we look at total government spending per capita by the provinces, of the five provinces with spending greater than the national average, four are equalization recipients.
Spending alone does not tell the whole story because comparative purchasing power must also be considered to determine if variable spending levels enable the provincial governments to purchase what they are supposed to be purchasing, which are relatively comparable levels of services.
The federal government's expert panel appeared to address the issue by simply saying it was too difficult to determine what cost side factors were at play. They argued that the expense of determining cost variables accurately would probably not be worth it in the end. In essence, the panel accepted the conventional wisdom of zero capitalization of costs.
That means that they agreed with the prevailing assumption that regardless of the provincial economy, the cost of public services in each province is the same. If Ontario suddenly finds itself with $1 extra to buy public services and Nova Scotia finds itself with $1 extra to buy public services, then the amount of public services that both those provinces could purchase is the same. That is the assumption. In fact, that has been the assumption since the beginning of the equalization program in Canada.
Let us just explore that assumption for a minute. In the United States, they do not equalize the fiscal capacity of states because they assume the differences are fully capitalized in the variable wage, rent and price structures present in each state.
In Australia, on the other hand, they take the opposite view. They do attempt to allow for the variation of the market cost for public services. Therefore, it is not necessarily the case in the Australian view that, if you have an extra dollar in Auckland, you can buy the same dollar in Wellington.
Queen's University Professor Tom Courchene has completed some work in this area using average provincial wage rates to demonstrate that, here in Canada, the local economy does have a measurable impact on what he terms `effective fiscal capacity.' We at AIMS have expanded on this work.
Where Dr. Courchene used wages to try and correct for this effect, our work looked at the broader costs that a business would face in different provinces, making note of where differences between a private business and a provincial or local government would arise.
We did not look at differences in tax burden. Our findings mirrored those of the professor. We found that a purchasing parity gap does exist, but we also discovered that, in 2004-05 for example, once equalization is taken into account, seven provinces had effectively more revenue than Ontario once cost considerations were taken into account.
Yes, Alberta was one of the seven, but the others were the four Atlantic provinces, Manitoba and Saskatchewan. Equalization gives ERPs the ability to purchase more public services than Ontario. The proposed Ontario cap put forward by the expert panel only mitigates that effect, it does not eliminate it.
Consider next what the equalization-receiving provinces are spending their equalization money on. One of our commentaries provided to the committee is titled "The Flypaper Effect. " We explored the phenomenon where governments receiving subsidies choose to spend excess amounts on public service. A recent report from Australia argued that money thrown at a state government tends to stick even though the welfare of the households would be better served if the money was passed on through lower taxes.
This analysis applies equally to Canada. Equalization-receiving provinces tend to have larger numbers of public service employees on a per-capita basis and pay public servants a greater wage premium, compared to the average industrial wage in each province, than the national average of those measures. On top of this, the equalization receivers have higher-than-average debt levels.
To reiterate, ERPs, equalization-receiving provinces, have more buying power and use it to hire more public servants and pay them a higher premium than is generally found in the rest of the Canada. This sounds like a horizontal imbalance, but not the one that has garnered so much attention during the debate to date.
Switching from the question of vertical and horizontal imbalance, let us talk now about why equalization-receiving provinces do not have to be so. To this point, we said that equalization represents a boon to the ERPs, giving them the ability to purchase services beyond those available using their own source revenues and, in most cases, giving them the ability to spend more on public servants or public services than the EPPs, the equalization-paying provinces.
Despite these apparent benefits, equalization remains a long-term threat to the economic health of ERPs because, as it is structured now, there is no incentive to cease being an ERP. In fact, there are powerful disincentives.
Consider first, the question of non-renewable natural resource revenues. These are not like income or sales taxes. Such taxes and most other revenues are renewable because they flow from the endlessly renewed efforts and activities of people. The same is true of revenues from renewable natural resources such as forest products or hydroelectric power. Provided that these are husbanded properly, they can provide a reasonably sustainable long-term flow of income.
But non-renewable natural resource revenues come from the sale of finite resources. When the oil and gas, or copper or coal or nickel are gone, they are gone. So when we sell these resources, it is a one-time deal. God will not put new minerals under the ground when we deplete the current ones. We are the stewards of those resources and must manage them in the interests of all present and future citizens. We therefore have both a financial responsibility and a moral obligation not to treat this money like a lottery windfall, or to sell the house to splurge on fancy cars or new clothes, or to have the revenues viewed as regular revenues to be included in the equalization formula to the detriment of those provinces that own them.
If it is correct that non-renewable natural resource revenues must be treated as capital, it follows that they should be reinvested so as to confer benefits on each province's citizens. The ultimate owners of the resource are those provinces' citizens. Over a long period of time, you want those benefits to continue to accrue. That does not happen currently.
That means such revenues should be used exclusively for two things. One of them is debt reduction. When you are heavily indebted, it makes sense to sell assets to relieve the pressure of interest payments and free income for more productive purposes. The other thing that can be done is to create a heritage or trust fund where a province invests the capital and spends only the income it generates. That would smooth out the huge fluctuations in natural resource revenues that occur, while creating an asset that could be invested in things that confer long-term benefits like infrastructure, medical research and top-flight facilities for schools, colleges and universities.
Of course, the challenge for equalization is that many provinces do not act responsibly and instead spend these revenues as if they were ordinary provincial income. While the revenues last, they effectively boost the province's spending capacity, but at the cost of creating an inequity where some provinces can afford to offer richer services than others simply by running down their capital assets to finance current consumption.
Such abuse, however, is no reason for the equalization program effectively to force all recipient provinces to act in this way.
The solution to this problem appears relatively straightforward. In calculating both the 10-province standard up to which equalization-receiving provinces are to be brought and their equalization entitlements, Ottawa should look at what the provinces actually do with their non-renewable natural resource money. If, like Alberta, a province is a net contributor to equalization and spends it on ordinary spending, that money should count towards its fiscal capacity and should feed through to the calculation of the 10-province standard.
Correspondingly, if an equalization-receiving province spends its revenues as ordinary program spending, that money should be counted in that province's fiscal capacity and deducted from its equalization entitlement.
If, on the other hand, a province acts responsibly and treats its non-renewable resource revenues as the asset they are, this should be reflected in the way those revenues are treated under equalization. For example if the money goes to reduce provincial debt, it should not be counted in the province's fiscal capacity. If it goes into a heritage-type fund, only the revenues generated by the fund, not the capital endowment of the fund itself, should be counted in the province's fiscal capacity.
Interestingly, such an approach would also help resolve a horizontal inequity in the way equalization is financed. Including non-renewable natural resource revenues in the fiscal capacity used to calculate the 10-province standard increases the entitlements of the equalization-receiving provinces. But the extra costs of such payments are financed principally out of federal taxes, not out of a tax levied, for example, on Alberta's oil industry. There is no such tax. As a result, the burden of these expanded entitlements falls chiefly on federal taxpayers resident in Ontario, a province that does not benefit from higher oil and gas prices.
Our approach to non-renewable natural resource revenues would also allow the federal government to honour its promise not to count such revenues in calculating provinces' equalization entitlements — subject only to the condition that these revenues be treated as capital, not income — while improving incentives for those revenues to be handled correctly.
This is in marked contrast to the expert panel's recommendation that actual resource revenues should be used as the measure of fiscal capacity in the equalization formula. That continues the bad old practice of treating non-renewable resource revenues in recipient provinces as if they were ordinary revenues.
The idea that equalization be used as incentive applies not only to non-renewable natural resource revenues, but also to provincial debt. Just as the current system encourages the abuse of non-renewable resource revenues, it also encourages provinces to carry more debt. Dealing with debt alone would have a substantial impact on the ERPs' ability to provide comparable public services primarily because high debt levels result in high debt service costs.
Rather than providing the equalization-receiving provinces with additional money to provide public services, the majority of equalization dollars go to pay interest on the debts of the recipient provinces. In fact, between 2000 and 2005, 92.1 per cent of equalization payments went to pay the provinces' debt service costs.
Consider for a moment what would happen to the provinces' ability to provide services if they were free of debt and its associated debt servicing costs. At present, all provinces' program spending could be fully covered by provincial revenues. That also includes federal transfers other than equalization at their current levels. Only one province, British Columbia, has program expenditures that exceed 95 per cent of its revenues. This means that, if the provinces had no debt, they would have sufficient revenue to cover their program expenditures with a per centage left over for tax reduction or other investment.
In effect, the provinces do not need additional equalization cash from the federal government for program spending. They need assistance with managing their debts, or, at the very least, they need incentives to deal with those debts, rather than a handout to allow them to service their debts without having to raise the money themselves. Remember, debt is simply deferred taxation, and by encouraging higher-than-average debt loads, equalization is actually encouraging a perpetual variation in tax levels across the country.
Earlier, we dealt with one option for rewarding appropriate debt management when discussing non-renewable natural resource revenues. Another option might be using some per centage of the equalization fund to finance a direct debt swap between the federal and provincial governments. Of course, any swap would have to be tied to certain performance parameters on the provincial side. Balanced budgets and matching provincial debt repayment dollars are two such options that should be considered. These conditions would be crucial in avoiding the moral hazard of seeing provinces simply rack up more debt once the federal government has paid down the existing provincial debt.
In conclusion, if all the provinces were able to reach national average levels of public service employees, wage premiums and debt, and if the savings achieved were passed on directly to the equalization program, Saskatchewan, Manitoba and Quebec would effectively have their need for equalization wiped out, with savings totalling more than 100 per cent of their average equalization benefit. The Atlantic provinces would yield lower savings, ranging from about 19.8 per cent of the province's equalization entitlement in New Brunswick to 47.5 per cent in Newfoundland.
While not eliminating the need for equalization, this analysis provides further support to the argument that the current system over-equalizes, with the result that the extra cash is captured by well-organized public servants — who turn the extra money into either substantially higher wage premiums, extra public employees or both — or it allows politicians to shift taxation into the future by using equalization to finance high levels of public debt. None of these outcomes was intended by the equalization program, nor are they how the program is justified to those who pay higher taxes to finance the transfer.
In the words of the `father of equalization' James Buchanan, "You have politicians in these provinces who are recipient provinces of these grants who are able to spend money without being responsible to taxpayers. So you have no cost side. There is a benefit side, but not a cost side. If you have a situation of benefits not offsetting costs, then you're likely to get irresponsible behaviour."
Remember now, that comes from a Nobel Prize-winning economist, and a fellow who in the 1950s published his doctoral thesis which essentially laid the groundwork for equalization across the globe. On the topic of James Buchanan, the `father of equalization,' we would end by pointing out that his vision for the equalization program was never one of cash transfers between a federation and its state or provincial governments. Rather, Buchanan's ideas of equalization centred around transfers to individuals in the poorer regions. Given the difficulties faced in reaching the consensus of the provincial premiers, returning to the original equalization ideal of transfers directly to individuals certainly has its attractions.
Senator Fox: This is the first time I have heard this approach to equalization. It seems to be a principle to which we are committed to a great extent in this country, going so far as putting it into the Canadian Constitution. I suppose one of the reasons people subscribed to it around the table in the 1980s is the fact that equalization was in there.
When I listened to your exposé, I got the impression that we should help the provinces out by killing the equalization program completely. Basically, we are driving them into debt, we are forcing them to pay public servants higher and we are ruining their collective agreement approach with their unions. Why do we not do away with it and put them out of their misery? It seems to me from your point of view that that would be helpful.
Second, when you say that 92 per cent of these payments go to pay debt, I think we should help them again and eliminate the payments next year and let them find some other way of paying that 92 per cent. I am sure that would do a lot for social services in the provinces.
Third, what is your point of view on other transfer programs, for example, the health transfer programs and others? How would you deal with that? Certainly, that is a way of driving up social services costs in the provinces and surely we should do away with that, too.
Fourth, some provinces cannot even afford to pay for a catastrophic drug plan and, obviously, from what you told us, the federal government ought not to help them put it into place because that will bring along further increases and people will not benefit from it even if they get the catastrophic drug costs at no cost at all. They will not realize they are being badly served by the fact that there is a program to that effect.
I put those four questions to you and, unfortunately, I will not be here for the full answer as I have to leave.
Mr. Cirtwill: I got the first three questions. What is the fourth one?
Senator Fox: It concerns the catastrophic drug plan. I would assume you would be against a province using equalization payments to set that up because, obviously, that would increase their debt down the road, although it might help some people not to have to mortgage their homes or move out of the Atlantic provinces, where they do not have that program, into some jurisdiction such as Quebec or Ontario.
Mr. Cirtwill: If we had set up the equalization program properly when it was put in place, every province without a catastrophic drug program now would have money from their own revenues to fund such a program, and they would not need your help.
Senator Fox: That is a bit difficult to understand.
Mr. Cirtwill: The data is in the document we put forward to you. It shows the level of debt currently held by provinces that are receiving equalization — well above the national average. You have the work of Thomas Courchene with the exact same numbers in it discussing the spending trends and habits and the exercise in expanding their debt when, in fact, they should not have been in the position to spend the debt.
Let us think back to the early 1990s. Which provinces did not cut program spending? They were the ones you fellows were backing up, coming with the chequebook, and they knew you were coming. To answer the question, you did not force them to do anything. You would not create a misery. This is a natural incentive, and they responded naturally. If someone is there with a chequebook to support you and back you up if you get into trouble, then you will be more likely to get into trouble.
Senator Fox: Does your analysis apply to other transfer payments? I assume it would not apply to, for instance, employment insurance because that is a direct transfer to individuals.
Mr. Cirtwill: Regionally adjusted employment insurance creates the same kind of disincentives. If you look at the level of unemployment in our region, it is well beyond what it should be. That has a direct connection to regionally adjusted unemployment rates. If you look at the changes we made in 1997, our employment levels went up, our income levels went up and our GDPs went up. When we had the election in 2000 where those changes were taken back, everything reversed itself. It is a clear causal connection.
Senator Fox: I am nodding to what you are saying but not in agreement.
Bobby O'Keefe, Policy Analyst, Atlantic Institute for Market Studies: If I could respond to the first question, we are not saying that the equalization program should be completely eliminated. We are saying that, as it stands now, the incentives that the equalization program presents encourage bad behaviour. We would prefer to see an equalization program that encourages and helps the provinces to get out of debt, which is one of the biggest issues.
Senator Murray: The federal government is a paragon of fiscal responsibility — is that it? Do you think they have lessons to teach to provinces about how to manage their finances? I do not.
Mr. Cirtwill: We cannot perpetuate a system that encourages governments of any stripe to misbehave. Frankly, we have not had good fiscal management at any level in this country in a long time.
Senator Mitchell: We just balanced the budget federally. Do not go there.
The Deputy Chairman: Hold on, senators. Calm it down; the hockey rink is closed. Alberta, be quiet. Please go on, gentlemen.
Mr. Cirtwill: The point that Mr. O'Keefe was making is a key one. We are not suggesting that the equalization program go away. We are saying we have this constitutional guarantee, whatever the wording is of the constitutional guarantee, but it is there. The people believe in it. Politicians believe in it. All we are saying is, if we are going to keep this program, let us look at the unintended effects it is having and find a way to fix them.
Senator Stratton: This is fascinating. Here I am a resident of Manitoba, and you look at these charts and we are one of the worst sinners, if not the worst sinner, when it comes to exactly what you are talking about. I am interested in accountability because that seems to be the word around this place lately.
How would you propose making provinces accountable in their spending if they are to receive equalization payments? There have to be measurable things that you can go to them and say, "okay, if we give you this money, how do we know that you are spending it wisely? We need some feedback here. How will you do that? "
Mr. Cirtwill: The ideal way to make provinces accountable for spending is the way James Buchanan originally envisioned it, which is that federal transfers under equalization are transferred to the individuals in the region and the provinces justify to those individuals how much of that they then take. You get direct taxation, direct program delivery and direct accountability at the ballot box. That is the best structure.
The next best is not to talk about targets, goals or objectives, but to look at the equalization program and to do things like target a portion of it to debt reduction, or work with the provinces to come up with a deal that is going to see debt reduction done on a bipartisan basis. If there are matching funds from the provincial debt, then the federal equalization money will follow. There are those kinds of performance targets.
The other exercise is to get at the question of the treatment of some of the resources underneath. When you talk about non-renewable natural resource revenues, which has been a subject of some debate, the more those resources can be left purely in the hands of the provinces so that the expenditures and the use of those resources are appropriately judged in their hands, then the provinces are not in the position to say the feds did not give us enough equalization money this year or the feds took away our oil and gas revenues on the East Coast. However, it applies to both sides because the federal government routinely says that is provincial jurisdiction and they should be spending it. By having an equalization system that allows the money to come from one level of government and the spending to be done by another, you create a situation where neither is accountable for what is done with the money.
Senator Stratton: As far as accountability is concerned, Manitoba has a lot of fresh water and hydro that it exports. We pay the lowest rates in North America as a province. My argument has always been that that should not happen — we should be paying average rates and building a contingency fund as Alberta has done because that is our oil.
I still argue that — I think it should be done. Manitoba taxpayers will likely want to kill me but really that is the province's future. With respect to equalization, would you recommend actually saying to Manitoba, "Look, your rates are far too low. You should be paying the average because that is a renewable resource. " It has a dramatic effect on the income of the province.
Mr. Cirtwill: That gets back to the equalization formula itself.
Mr. O'Keefe: On that same point, going back to the equalization formula, if you include all resource revenues in the formula, you end up creating another disincentive to producing or developing those resources. In the case of renewable resources, you can renew them; yes, they are a genuine source of revenue for the provinces. But if every dollar raised in resource revenue is taken away from an equalization payment, you are instantly creating that disincentive to develop those resources.
Senator Stratton: I will get shot tomorrow.
Senator Mitchell: I would like to say to both of you that this is very stimulating and you have provoked some outcry here, which I think is a good thing.
On the one hand, I say I find it very stimulating. On the other hand, I have this funny feeling that there is something missing here and it may be captured. I will challenge you with that because if you actually were right, it would be quite intriguing to me.
At a general level, I have this funny feeling that you may demonstrate correlation but I am not sure you demonstrate causal relation. You do say that certain things seem to happen under certain circumstances, but it does not necessarily mean that one leads to the other.
Second, I would like to challenge you to say that there are some logical problems with what you are arguing. I need to do more analysis of this but maybe you can help me. You talk about zero capitalization and you infer, I think, or you try to conclude that really you can buy the same amount with the marginal dollar in a non-equalized province that you can in an equalized province.
Mr. Cirtwill: Cannot.
Senator Mitchell: You said that in the margin you can buy the same amount.
Mr. O'Keefe: That is not the conclusion we are drawing. That is the assumption that the current equalization formula makes.
Senator Mitchell: My conclusion would not be that you necessarily therefore need less equalization. I think you could equally draw the conclusion that you actually need more equalization in these provinces.
It seems to me the only statistic you give to demonstrate this is just to say that equalized provinces spend more per capita on public services than non-equalized ones. You do not give an actual statistic that would demonstrate this idea of zero capitalization.
I would argue that it may be that it is more than a coincidence that all of those provinces that spend the highest per- capita amount on public services are also the smallest provinces in the country. Therefore, you have not really addressed the issue of the cost differentiation — that, yes, they may need more equalization because, in fact, their costs are higher. If they are smaller, they have fewer economies of scale. They may be more rural. It may be much more difficult to deliver health care, for example, or education. Perhaps you have thought of those things, but that seems to me to be a very critical variable.
Another logical problem is that I could take this to mean that, if an ERP took all of its money and put it into debt reduction, now it would get more equalization. How would you manage to make a province pay off debt if it would be encouraged to do that and therefore get more equalization? The moment it pays off debt, it does not have enough money to cover these costs that you say it needs to cover. I think that is where you are going with this. It seems to be the logical conclusion.
Mr. O'Keefe: I will address your question on purchasing power. In one of the background documents supplied, we did address that by looking at the cost factors, as Mr. Cirtwill described. We used that factor to compare the effective revenues, which is the phrase Professor Tom Courchene adopted.
In terms of business expenses, we looked at KPMG's cost competitiveness data and factored in that there are costs to government that are not the same as they are to business, taxes, for example.
We looked at how much a dollar in Ontario buys in Nova Scotia. Looking at those cost comparisons, that is how we came up with the effective revenues of many of the equalization-receiving provinces being greater than that of Ontario, which is supposed to be one of our richer provinces.
Senator Mitchell: Does that mean one can buy things at less of an expense in Nova Scotia than in Ontario?
Mr. O'Keefe: Yes.
Mr. Cirtwill: You can hire staff, you can pay gas, you can get a taxi, you can buy meals — all of those services are cheaper there.
Senator Mitchell: Did you factor in the status, extent and condition of the infrastructure? Let us say that an underfunded or poorer province simply does not have the infrastructure that Alberta does. When that province hires a new person it is cheaper, but when it builds a hospital like the four Alberta has built and Nova Scotia needs that hospital, Alberta does not need to build it but Nova Scotia does. Maybe the average school is far older and it needs to spend more money.
If your zero capitalization idea addresses purchasing power as you say it does, that is one thing. It does not necessarily address differential infrastructure or the issue that the ERP province has not been receiving as much money for as long and, therefore, has not accumulated as much.
Mr. O'Keefe: You are getting at the second part of the equation, which is the demand side. For example, in the eastern provinces where the average age of the population is increasing, health care costs increase as that happens. Both things need to be considered in the equation.
On the demand side, there is not a lot of data out there, and we have not explicitly looked at it in this situation.
Senator Mitchell: That is a significant barrier.
Mr. O'Keefe: Yes. A recent study looked at the demographic factors and issues of the provinces and health care was a big part of that. Education is an area where spending will be declining in the next few years in terms of a demand for education services as the population ages.
There are other issues to look at as well. For example, transportation was not included as a demographic issue of the provinces. A province like Ontario will have larger transportation issues than a province as small as Prince Edward Island.
Senator Mitchell: There are huge intricate variables in the cost of delivering services.
Mr. O'Keefe: Yes. Those intricate variables have not been considered at all.
Senator Mitchell: I agree. I do not see how you reached the conclusion you did unless you considered those things, at least in part.
Mr. Cirtwill: One of our proposals talks about the importance of behaving in a manner that provides a revenue fund set aside to address these infrastructure problems so the historical decline can start to be addressed.
I do not necessarily buy into the argument that infrastructure in Atlantic Canada is any more deteriorated than the infrastructure in Ontario or rural Manitoba or rural Alberta for that matter. I have been in schools across this country, and I can tell you there are just as many poor falling-down schools in downtown Edmonton as in Halifax.
Senator Mitchell: That is anecdotal. You would not make a public policy decision of this magnitude based on that.
Mr. Cirtwill: You guys do that every day.
Senator Mitchell: You mistook me for a Conservative. It is the Conservatives who do that every day.
This is a huge decision. I am impressed by your analysis and am not being critical. I am just trying to push it. I do not think you can draw that level of conclusion about a massive public policy decision based on the fact that you saw some schools in downtown Edmonton and downtown Halifax.
Mr. Cirtwill: Remember that the expert panel on equalization told you to ignore those factors, the way you have ignored them for the last 50 years. That is equally wrong; in fact, it is even worse. This is the kind of discussion that must happen before you reform equalization and simply continue the mistakes of the past.
Senator Murray: I am pleased you accepted the invitation to be here. I am glad you appeared early in the deliberations.
There are other critics of equalization and of federal-provincial fiscal relations. When we did a study of equalization a couple of years ago, people such as Ken Boessenkool, whom you know, made the case against the inclusion of natural resource revenues. Other scholars talked to us about recommending a macro formula of some kind for determining equalization and so forth. We have heard a lot of ideas.
I was expecting from you a root-and-branch denunciation of a half century of governance in this country and a denunciation of fiscal federalism for the past 50 years, perhaps even of social policy. You have not disappointed me at all. It is all there.
I think it is important that not just equalization-recipient provinces come here and answer this case but also the federal government. Whatever its stripe, federal governments have maintained a certain system going back to the mid- 1950s.
In the mid-1950s, the St. Laurent government brought in a hospital insurance program. Mr. Diefenbaker changed it a bit and before too long all the provinces were on board. Then, in the 1960s, the Canada Assistance Plan was brought in to assist provinces with what we would call social welfare; then medicare was brought in by Ottawa, and you are familiar with the fiscal arrangements that attended all of these programs.
You start with the vertical fiscal imbalance to say there is none. When we talk about the vertical fiscal imbalance, we are talking mostly about the adequacy or otherwise of those social transfers from the federal government. There is now the Canada Health Transfer, the CHT, and the Canada Social Transfer, the CST, covering post-secondary education and social assistance. Those are the two main ones.
You say that federal transfers have allowed almost all of the provinces to maintain spending levels beyond the reach of their own source revenues, and that equalization-recipient provinces especially have benefited from the federal largesse. Do I understand you correctly that Ottawa could cease making social transfers, and that the provinces could afford to carry those programs by themselves?
Mr. Cirtwill: Absolutely not. We are not proposing that Ottawa stop the existing transfers other than equalization, nor are we suggesting that equalization itself should go away. Are federal taxes too high? Yes, absolutely. There is evidence to that effect. Are there better ways to conduct our transfers? Yes.
It comes back to the question of accountability. Should the funds go directly to the students taking advantage of the education grants or to the patients taking advantage of the health transfer? By directly passing the money to individuals, the federal government empowers them to hold providers accountable in a way that does not happen now.
Senator Murray: I am familiar with that argument and it is a valid point of view. I want to be clear that that is what you are suggesting as an alternative — direct payments to Canadians rather than through the provincial treasuries.
Mr. Cirtwill: There is no question that transfers between levels of governments create opportunities for mismanagement that would not necessarily be there if the transfers went directly to individuals.
Senator Murray: We are getting some important views on the record here. You say that the federal government should not stop spending in fields such as health, post-secondary education and social assistance; rather, the spending should be direct to individuals and to universities also? Or to other institutions?
Mr. Cirtwill: These programs have been in existence for so long that there is an expectation they will be met; they cannot disappear tomorrow.
Senator Murray: I understand that but I am asking for your prescription.
Mr. Cirtwill: Transferring directly to individuals, yes, but not to institutions. Transfers to institutions get you into the same trouble.
Senator Murray: No middle person?
Mr. Cirtwill: No middle person.
Senator Murray: That would involve the exercise of the federal spending power in areas of provincial jurisdiction and, in some cases, exclusive provincial jurisdiction. Perhaps you do not want to go there.
Mr. Cirtwill: Federal spending powers are being exercised in areas of provincial jurisdiction every day. It is a concern but we have to remember this is a federation — the Constitution was structured in a particular way. A lot of authority and power is given to the central government to take on responsibility, and it has a moral obligation to stay in the game and do it appropriately. There are all kinds of compromises that various people could come up with.
Senator Murray: You obviously find a very great deal of fault with the federal transfers to provincial governments or, indeed, to other institutions, including universities?
Mr. Cirtwill: I think they create an opportunity for mistakes or errors that would not happen otherwise.
Mr. O'Keefe: I might qualify that, but we are talking, as far as the equalization payments go...
Senator Murray: No, no, Mr. O'Keefe. I started with the social transfers — the Canada Social Transfer, the Canada Health Transfer — and whether that is the best way to do business in this federation for hospitals and health care and so forth. The federal government transfers money and tax points. What about that?
Mr. Cirtwill: Let me respond directly to the transfer of tax points. When that comes up, we start pointing at the 1977 exchange and the fact that the federal government counts that transfer as a portion of the grant.
I would go back to the person who had the first principled thoughts about transfers in a federation and that is James Buchanan. The theory he was working on was the question of differentiated federal taxation in the various regions. His thesis was, rather than exchange tax points in any formal exercise, that the federal government would simply adjust its tax level to the economic performance of the regions. That was the direction his thinking was going on this idea.
Senator Murray: What would you think if the federal government were to call in the provincial premiers and say, "We will pay off all your debts as of October 18. However, federal-provincial fiscal relations will never be the same. Once these debts are paid, if it can be done, here is what you can expect of us and what we can expect of you. "
Fill in the latter part of my statement: "Now that we, Ottawa, have paid your debts, here is what you can expect of us. " What would that be?
Mr. O'Keefe: I do not think we are suggesting on an instantaneous basis that the federal government would pay off the debts of provinces. We are suggesting that equalization could be used to assist the provinces in getting out of debt, of paying their debt service costs and allowing them to spend the revenues they have on their program spending.
Senator Murray: Are you helping them with their debt or their debt service costs?
Mr. O'Keefe: Helping them manage their debt by paying a portion of their debt service costs in exchange for lower equalization payments.
Senator Murray: Not going forward, though, on the basis of further debt? There would be a cut-off date?
Mr. Cirtwill: That was a failure in our presentation to specify when we used the term "debt swap. " We are not talking about a literal debt swap. We are talking about swapping the servicing costs of the debts so that the interest and principal payments would be swapped. That would give an incentive to the provinces to undertake debt reduction on their own, which then would see them build up, on a long-term basis, their own source revenue ability to pay.
The second part of your question gets back to my earlier point about certain limitations such as, you will not turn around and borrow the $50 billion that we pay off today, tomorrow. Another limitation would be to talk about a commitment on the provincial part to maintain balanced budgets.
Most have done this. They have legislation in place that says they have to have balanced budget within a set period. We are not talking about a huge amount of pain to the provinces, but again, if you wanted to move forward, it would have to be worked out.
Senator Murray: Do you agree it would represent a radical change in the federal system?
Mr. Cirtwill: The entire basis of our presentation is that equalization, as it currently exists, does not require tweaking; it requires a fundamental readjustment along the lines we have been discussing.
Senator Murray: Would you say the purpose of this would be to provide incentives for and impose upon the provinces, certain fiscal policies that are — that you or we in the federal Parliament or government might find — more congenial?
Mr. Cirtwill: The federal government would have a hard time imposing anything on the provincial governments.
Senator Murray: Robert Bourassa used to talk about "fédéralisme dominateur. " This is it with a vengeance.
Earlier, you compared public service wages with other wages in the province.
I worked in New Brunswick for a while a long time ago, and the competition in terms of developing a public service and attracting and keeping public servants was not with K.C. Irving or McCain's. The competition was with other governments and the federal government and places like that. In order to build up and maintain a competent public service, which I think they have in New Brunswick and Nova Scotia, the standard is not what some private sector employer may be paying down the street. Could I have your comments on that?
You mentioned the part of the recommendation regarding resource revenues — that there should be a way to exclude resource revenues that go into a heritage fund or are used to pay down the debt. If you have done some work on that, I would be interested in it. On the Council of the Federation panel, we really tried, and every formula we came up with had consequences that we did not want to pursue for various reasons. It was very difficult to make it work.
Mr. O'Keefe: On the natural resources issue, I agree it would be difficult to come up with a system where you are tracking exactly what natural resource revenues or royalties are going towards debt or going toward an investment fund.
Senator Murray: There is quite a possibility that a given province could manipulate things to the disadvantage not just of the recipient provinces but also, perhaps, of one or two in particular, if the resource-rich province were mischievous.
Mr. Cirtwill: It is fairly easy to track whether debt is going up or down. It is easy to recognize what the current balance in your provincial heritage fund is. You can use those as two baseline measures to start the conversation. I do not necessarily buy into the argument, which I have heard time and again in this equalization debate, that if things are difficult, we should not do them. The effort that you expended on the panel trying to find a way was effort well spent. Those kinds of conversations and efforts need to be carried on. As I indicated, there are basic measures from which you can start that conversation that are easy to track and simple to follow.
I have to emphasize the phraseology here. We are not talking about natural resource revenues. We are talking about non-renewable natural resources revenues.
Another possible exercise that would be relatively straightforward is to look at the 33 tax bases that go into equalization — look at the 14 that are targeted around natural resources, identify the ones that are explicitly associated with non-renewable natural resources, and pull those out.
Senator Murray: That has been done.
Mr. Cirtwill: There are several exercises before that conversation can happen.
Senator Murray: What do you think of the O'Brien panel's recommendation to reduce the number of tax sources to five?
Mr. Cirtwill: The simpler you can make this system, the better off everyone will be. I enthusiastically endorse some of the panel's recommendations around identifying measures of fiscal capacity and tracking them and reporting them publicly. I enthusiastically endorse the idea of talking about it on a regular basis and having an annual public exercise so that people understand exactly what this system is.
Regarding the marketplace for public servants issue, it is important to recognize that, when we looked at the differential for public servants, we recognized that the market for public service is a national one. We used the benchmark of what is the premium used in other provinces to attract public servants. We found that the national premium on the local pay rate was around 20 per cent, whereas in Prince Edward Island, the public service premium was 31 per cent. The premium in New Brunswick was around the national average or higher. The key thing is, we did recognize the marketplace for the public servants is probably different than for pipefitters, steamfitters and painters.
However, the simple fact is that that observation is changing. In fact, I have done three media interviews in the last four days talking about the fact that we literally are now in a national global marketplace for all industrial workers. It is not just lawyers, accountants and engineers who can go anywhere and do their jobs. It is also painters, pipefitters, steelworkers and so forth. The fact that there is a marked premium for public servants is indicating a variation from the national marketplace that is justifiable for concern and some discussion.
Senator Day: I am sorry for arriving late this evening and, as a result, will ask you to go back to basics.
I think of fiscal balance as vertical or horizontal, as capacity to generate. When you say there is no vertical fiscal imbalance, are you saying that there is no difference in capacity between the federal government and the lower levels of government?
Mr. Cirtwill: Yes, I would argue that if you look at the fiscal performance — the fiscal capacity and the tax bases available to the both levels of government — there is no inherent fiscal vertical imbalance. In fact, the numbers I heard the other day were that the federal government collects roughly $210 billion in taxes, and the provincial governments collect roughly $200 billion in taxes. That is much the same dollar figure and, of the $210 billion collected by the federal government, much of that immediately gets passed over to the provincial governments.
When you look at the tax bases, they are shared. In fact, the bias is again toward the provinces. The federal government cannot, for example, tax directly natural resource revenues nor can it take advantage of lottery or gaming revenues, both of which are tax bases available to the provinces that are not available to the federal government. Therefore, when you talk about a vertical imbalance, you have to recognize that there are many advantages here, but they are mostly to the provinces, not the federal government.
Senator Day: Your next heading is why there is no horizontal fiscal imbalance. Again, we are talking about capacity and it is between the same levels of government, all of the various provinces. We have to analyze that on a per-capita basis to be able to look at it meaningfully. Does Prince Edward Island have the same capacity to generate revenue per capita as Ontario?
Mr. O'Keefe: We are saying they may not have the same capacity but, when you factor in the cost side of the equations and the services they have to provide, how much it costs, they have the ability to pay for the services they need to provide.
Senator Day: Are you factoring in cost of delivery?
Mr. O'Keefe: Yes.
Senator Day: You are factoring in all of that in terms of costs.
Mr. O'Keefe: We are factoring in a relative measure of the cost of delivery. We did not look specifically at the demand side of the equation, for example, in the eastern provinces with aging populations and health care costs escalating. We have not explicitly looked at that, but on the cost side of the equation, we have looked at a relative cost factor, and it shows that the provinces should have enough to pay for what services they need to provide.
Senator Day: Thank you for that. You will have a supplementary in due course asking to explain that but it will not be from me; it will be from my colleague, Senator Murray.
This is anecdotal so I just want you to react to it. We seem to get into trouble when we start talking about —
Senator Mitchell: You are drawing conclusions.
Senator Day: I am just asking questions. I would like you to tell me if you have analyzed the European Community, in particular the success of Ireland. It has been written in several articles that part of the success has been due to the transfer of funds to Ireland from the community and its ability, therefore, to keep taxes down, which has generated a wonderful economic success story. Have you had a chance to analyze any of that?
Mr. O'Keefe: I am not familiar with that.
Mr. Cirtwill: We have two books, one called Road to Growth and one called Retreat from Growth that deal in-depth with the Ireland experience, the experience of Georgia in the southern U.S. and a couple of other international examples exactly along that line. They talk about what those lessons say for Atlantic Canada, again talking about the opportunity that federal transfers or support — or the fact that we have a large country there to help us — gives us, and the fact that we are failing to take advantage of it in a sensible way, the way Ireland did.
Of course, Ireland also reduced taxes, invested in infrastructure and focused on education. They did quite a lot. Basically, it was — getting back to the phrase we were using earlier — a fundamental change in the way things had been done before.
Senator Day: Which they were able to do with the transfer.
Mr. Cirtwill: It was not just the transfer. With the reduction in taxes, they saw economic growth accelerate; they say that by reducing their tax levels, they were able to increase their revenue stream. It was more along the lines of the Alberta and Ontario experience of the last five years, where they used both transfers and increases in own source revenues to piggyback on each other and make the trickle-down effects that much larger.
Senator Day: They managed the transfer very nicely.
Mr. Cirtwill: Yes, they did the appropriate things with the money when they had it.
Senator Murray: And they had favourable demographics, according to The Economist magazine recently.
Senator Day: They are bringing people back from everywhere.
Senator Murray: At a time when a smaller group of producing people were supporting huge numbers of youngsters and oldsters —
Mr. Cirtwill: I have not seen the article, but are you saying the favourable demographics were at the beginning of the trend?
Senator Murray: No, over the Celtic miracle, part of the success has been due, according to this article, to the fact that there are more now producing in the middle —
Mr. Cirtwill: Burgeoning economies draw young professionals and families.
Senator Murray: No, fewer kids and fewer oldsters.
Senator Day: Obviously, there always are other factors but, clearly, they have managed the transfer of funds from the rest of the community to them in a way that the Maritimes have not managed their funds.
Mr. Cirtwill: I would not necessarily point just at the Maritimes. There is lots of blame to go around.
Senator Day: You are most familiar with that.
Mr. Cirtwill: Yes, I am most familiar with the Atlantic Canadian case. I would say all four Atlantic provinces could improve how they used their fiscal transfers. We have suggested some things we think make sense in terms of readjusting the focus of equalization.
Remember, maybe this is a point that needs to be made; there have been several jokes about people from New Brunswick and Nova Scotia. I am a Nova Scotian, born and bred, proud. The reasoning behind this thinking is, I want my province to be the best it possibly can be and, under the current fiscal arrangements, we are not getting there.
I think it is totally appropriate for us to look for help, and that help does not have to come in the form of a blank cheque. It can come in the form of structures and systems that encourage us all to do the best we can with the resources we have available. I do not like tin cups.
Senator Day: Do the structures and systems include infrastructure?
Mr. Cirtwill: Absolutely, they include infrastructure, investment, post-secondary education, health care, the social transfers we are talking about. There are always going to be challenges and industries under threat — people who, for one reason or another, are not able to take an effective role in the economy.
Some of those folks will only be needing help for a short period of time; some of them will require assistance for the rest of their days. My argument is that we have made a covenant with these people that we will deliver these services, and right now we are putting them at risk by the way we are managing our funds.
Senator Day: In equalization, the funds are coming from the federal government.
Mr. Cirtwill: They are coming from the Canadian taxpayer. It is coming out of my wallet.
Senator Day: Through the federal government.
Mr. Cirtwill: Yes, there is always a middleman.
Senator Day: That is the point I want to get to. Are you applying your non-middleman trickle down? Are you saying the federal government should be investing directly in infrastructure and education because, when they transfer to the provinces, all they do is increase the debt or are inclined to increase the debt?
Mr. Cirtwill: Some provinces actually use the transfers to support infrastructure investment and that kind of thing. We are suggesting that you should look at restructuring the equalization program to encourage more provinces to do that kind of exercise.
In fact, the federal government does invest in infrastructure. Our argument is, if they are going to invest, if they are going to interfere in provincial jurisdictions, if they are going to invest in cities, they should do it in areas where it is most appropriate and which will deliver the longest term benefit. That would be infrastructure.
Senator Day: Would your preference be a direct investment by the federal government as opposed to giving it to the provinces?
Mr. Cirtwill: My preference would be for the money to be in the hands of individuals — that whatever money the various levels of government feel they have to have in order to do things, they take it directly and spend it directly so that they are accountable directly.
Senator Day: I think you are answering my question.
Mr. Cirtwill: I hope so.
The Deputy Chairman: Senator Mitchell, are you ready for your second round?
Senator Mitchell: Let us say that today all the debt was paid off and the provinces used their own revenues to pay for services. Are you arguing that, as of today, there would be equality of services across this country in some kind of national standard? Or would you accept the general premise that probably in New Brunswick, as an example, the overall level of health care service and education is not as high as it is, say, in my province of Alberta? Are you arguing everybody is equal? You cannot be arguing that.
Mr. O'Keefe: I am going to clear up a point that relates to what Senator Day's question was about as far as capacity of the provinces. In terms of both the advisory panel and the expert panel, their recommendations have gone along with what the majority of the premiers want, which would be increased equalization payments. When we are talking about the capacity of the provinces, we are talking about the capacity including current equalization levels. When we say on an adjusted basis that several of the equalization-receiving provinces are better off than Ontario, we are including the current level of equalization provinces.
Senator Mitchell: I know you are but that is not my question. My question is, if there were no debt and no equalization payments, would we then have equal standards of service delivery in critical areas, which I think are essential so that we can call ourselves a country?
Mr. O'Keefe: In terms of the comparable services side of the equation, we are saying we do not know what that comparable service is.
Senator Mitchell: We know that probably health care services are not as high in Manitoba as in Alberta. We know that. Your argument then is, if we just paid off all the debt — it is very appealing, there is no doubt. Alberta and Canada have paid down debt and it has probably made a huge difference. Your solution might end up with provinces having no debt, but it still does not address the issue of having some sort of equal level of standards so the Canadian in Nova Scotia and New Brunswick has some semblance of equivalent health care delivery or education delivery as a Canadian living in Alberta. If that is the case — and all you can tell me right now is that you do not know, although I do know that it is not the case — then you would need equalization to make that work, or you would need somehow to have their own revenues increase.
Mr. Cirtwill: Let us remember that equalization as it exists — and as we are theoretically talking about — is not about raising everyone to Alberta's standards. It is about delivering the national average standard everywhere. Our argument is quite simply that, if the debt disappeared today, if everyone's debt magically went away, all of the provinces would be able to deliver the core, critical, committed public services at an appropriate national average level with their own source revenue.
Senator Mitchell: The only way that can logically be true is if all of their equalization payments now are strictly going to pay off debt and interest charges. Otherwise, it cannot be true except for some kind of driven efficiencies.
Mr. Cirtwill: That was exactly the point we made. The dollar figure of the provincial payments on their debts equals 92 per cent of what they get from equalization.
Senator Mitchell: The 8 per cent plus the equalization is going strictly to debt repayment and carrying charges in every case — is that what you are saying? You have to be saying that.
Mr. Cirtwill: The 92 per cent is going. The 8 per cent is left over for program enhancements.
Senator Mitchell: Are you saying the equalization payments are strictly going to pay debt carrying charges and nothing else?
Mr. Cirtwill: Exactly.
Senator Mitchell: Is that on average?
Mr. Cirtwill: That is a total, a five-year average over 2000 to 2005 — 92 per cent of equalization dollars.
Senator Mitchell: We will have to look at that in a specific way. That is an interesting argument.
With regard to the idea of getting funds to individuals, I expect there probably is not a party far enough on the right wing for you to feel comfortable voting for it, but that is okay. I think there is not — not even this one. How would you get this money to individuals? One of the ways in education would be to have coupons — or what is it called?
Mr. Cirtwill: Vouchers.
Senator Mitchell: You would have vouchers where people would go and it would be all market-based.
Mr. Cirtwill: Absolutely.
Senator Mitchell: You would need to build new infrastructure or roads — if federal money or transfers go to an individual. Are all roads toll roads?
Mr. Cirtwill: I did not advocate that. I said an appropriate direct investment by the federal government would be in infrastructure. It would be hospitals, schools, roads, ports and airports.
Senator Mitchell: Would you not have vouchers?
Mr. Cirtwill: You would not for that kind of infrastructure.
Senator Mitchell: For program spending on education, would you have vouchers?
Mr. Cirtwill: Yes, we would have vouchers if we are talking about the ideal mechanism for the federal government to transfer funds in post-secondary education or even secondary education — and, God forbid, do not ever get the federal government involved in Kindergarten-to-Grade-12 education, please. The most appropriate mechanism for post- secondary funding by the federal government would be funds to students whether in a voucher exercise or a grant to Canadian students pursuing post-secondary studies.
Senator Mitchell: It absolutely kills poor kids.
Mr. Cirtwill: You are from Alberta, correct?
Senator Mitchell: Yes.
Mr. Cirtwill: Edmonton public schools have a total choice system where literally every child is a voucher student.
Senator Mitchell: No, not at all. You do not understand the system. Students can go to another school if that school has an available position, but they do not take their money and go there, essentially. They are within the public system and the system has a certain amount of money, but it is not as if the parent gets the money and it goes to Lethbridge.
Mr. Cirtwill: I have spent the last year and a half travelling around with the head of the Edmonton public school board and his characterization is exactly the way I have described it — that they literally can take that voucher and go to whatever school they like.
Senator Mitchell: I disagree with him and I disagree with you.
Mr. Cirtwill: The money goes with them.
Senator Mitchell: It is much less market-oriented and driven than what you would suggest.
Mr. Cirtwill: Fifty-four per cent of students in Edmonton go to schools outside their neighbourhood school.
Senator Mitchell: Yes, they go six blocks, three blocks or four blocks. Do you know that?
Mr. Cirtwill: That is a fact, 54 per cent of students.
The Deputy Chairman: We are talking about economics, senator.
Senator Mitchell: What services would you transfer directly to people? Are you saying transfer to people services such as health care?
Mr. Cirtwill: I refer to health care, education, any services that people have to purchase or secure.
Senator Mitchell: How would that work?
Mr. Cirtwill: Health care could work in any number of mechanisms. One could use a voucher exercise, a tax differential, or encourage people to use medical savings accounts and then do a top-up with federal transfers the way we do with registered education savings plans, RESPs. There are many mechanisms that one could use.
Senator Mitchell: How do you make that work equally if someone is really sick and someone else is not? That is another issue, but you may answer the question.
Mr. Cirtwill: Each one of these systems would have some sort of adjustment for people who are particularly bad off. We do that routinely.
Senator Mitchell: That is the system we have, is it not?
Mr. Cirtwill: If that is the slippery slope that led you down to this exercise, maybe we need to stop the slippery slope. I would argue that you can find a balance between the worst-case scenarios, the horror arguments that we always use to justify what we are doing, and actually finding a way that works better.
Senator Mitchell: You have said explicitly that much of what you say involves the idea that lower taxes mean greater productivity but, in fact, among the most productive countries in the world are Sweden and Finland. I am not for more taxes but the fact is that some of those states have very high productivity, and we have a productivity problem in Canada that will not necessarily be cured by taxes. In fact, one can make strong arguments that after-tax expendable income for Canadians — you will not accept this — is actually higher for the average Canadian than for the average American, because they have to pay for their health care out of after-tax dollars.
You have some interesting and provocative ideas but, ultimately, it is not as if the system was created by stupid people and it is not as if the system did not address the kinds of issues you are trying to address. This system did it in a very detailed and comprehensive way. You are making some sweeping generalizations which, to give your argument credibility, must be worked through. I do not accept that levels of service are the same if you cut everything out, which raises the question: What role does the federal government play in establishing and ensuring that national standards are met? Is there any role?
Mr. Cirtwill: You are still talking about the same exercise. When we talk about the ability to pay for the national average of services, we are using the benchmark that is used today in equalization. It is not as if we are talking about rocket science or reinventing the wheel or coming in behind all these smart people and changing the way they were established. We are using the measure they created for the national average. "Can you or can you not pay for it? " is the question we have asked, and the one we have answered.
Senator Mitchell: Every one of them can?
Mr. Cirtwill: Yes, every one of them can. Sorry, I forgot the second point you raised.
Senator Mitchell: So have I. What would you say about issues such as agricultural subsidies? If the U.S. subsidizes wheat at $1.40 a bushel, Europe at $1.70 and we are 25 cents, there is a Conservative on this committee who says the problem is that we do not subsidize enough.
Senator Stratton: You are putting words in my mouth.
Senator Mitchell: It is not you.
Would you argue the New Zealand case, which I think is in some disrepute?
Mr. Cirtwill: New Zealand is a good example to follow. Several other countries have found a balanced way that mixes both subsidies and other incentives and exercises and eliminates them. There is a good and active public debate on the question of whether subsidies are appropriate at all and at what level they should be used. For the most part, the practical situation for you around this table and those around the House of Commons committee table will be the political factors. From a political perspective, there is the argument that if Sweden or the U.S. are offering subsidies, we have to. That is a powerful argument that you have to consider. Whether it is the most appropriate economic policy, I think that is an entirely different debate.
Senator Mitchell: How do we get to your model from here? I think Senator Murray asked this but I am not sure the answer he got would do it for me. Is it some sort of stage process? It would not be enough just for the feds to pay it all off — that does not work. But how do you get there from here anyway?
Mr. O'Keefe: To a certain extent, we are not fully there yet. Our equalization theory is a work-in-progress so we have not completely got to the exact ways of how it would work. There would definitely need to be a transition period of some kind. You cannot turn off the taps immediately and have the provinces able to pay a national average level or a reasonably comparable level, however the standard is determined.
Senator Mitchell: Would you pay more equalization so they can start to pay off more debt? Would you require them to raise taxes so they start to pay off more debt? How would you do it?
Mr. Cirtwill: I am not prepared to eliminate any of those options. What we are saying is, if you want to reform equalization to the point where it is a permanent program encouraging provinces to increase their fiscal capacities so that they no longer receive equalization, these are the kind of ideas you have to consider.
We are not saying this is the recipe for a solution; this is how a debt-swap program would work. We are saying this is the kind of discussion you have to have and these are the kinds of questions — the ones you are asking — that have to be asked and discussed. The difficulty is you have two national panels — one from the premiers and one from the federal government — basically saying you should not be having this conversation and that the equalization system is just fine with a few tweaks and a few extra dollars. Our response is that is rather short-sighted and does not take into account the proven demonstrated negative — unintended — consequences of the program as it exists.
Senator Murray: I think what you are suggesting, and I have alluded to this before, is that the equalization program be so designed to be a vehicle for — I will not say imposing — creating a certain fiscal discipline on the part of the provinces, that they would bring in fiscal policies that you and others would find congenial.
In practice, I think that would imply a level of "dirigiste " policy on the part of the federal government that, if government were to apply it to the private sector, AIMS would be rushing the barricades tomorrow. You would be indignant and rightly so.
I am going a bit broadly now. One of the problems facing the Atlantic provinces, as you know and have probably written about — and forgive me if I have not taken note of your studies on this question — is that the demographics of out-migration are terrible.
I would like to hear you say something about out-migration. I do not think you can blame government policies for encouraging out-migration. Some of their policies, like regionally tailored unemployment insurance programs, have been known to create little spikes in population in provinces that I was familiar with at different times in the past. I think you know that.
On the question of redistribution in general, I do not want to accuse you of being against it in principle. However, a Liberal said something to me today, and I believe him. He was talking about the leadership campaign in his own party and the dearth of ideas that he would regard as properly Liberal. He said that the real incomes of what he called the working poor in this country — and he meant household income of about $40,000, of which 40 per cent is perhaps going to shelter — have not moved in 20 years. I do not know whether that is an exaggeration or the literal truth, but I think it is clear that globalization, technology and free trade and all these things have generated enormous amounts of wealth. We will face a serious social — not to say political in the broadest sense — problem if there are large sectors of society who feel they are not participating in that.
That is not what you came here to discuss, but I am morally certain you have opinions on it that, if pressed, you would share with us in the few minutes remaining.
Mr. Cirtwill: Let us deal first with the redistribution question. We are not in principle opposed to redistribution at all. In fact, the arguments we have put forward here are that we recognize the federal government is going to undertake redistribution. All we are suggesting is that we do it in such a way that it helps everyone, or helps the maximum number of people as opposed to the way we are doing it now which, based on the numbers we have collected, would seem to indicate it is hurting a lot of people.
That leads me to your second point, which gets back to the out-migration question. I think you said that I could not point at government policies as a cause of out-migration. I would disagree with that. There are all kinds of government policies that lead to out-migration. For example, the fact that Atlantic Canadian provinces have some of the highest marginal tax rates in the country encourages people to out-migrate or not to migrate at all. The fact that we have a province like Alberta or one like Ontario. Or we have the North American Free Trade Agreement, which has created a global marketplace where now a welder does not only have to consider the quality of life in Clare or Cheticamp, he also can reasonably consider his ability to actually create a standard of living where he can enjoy that quality of life.
I listened to a regional CBC piece on out-migration and the way in which one of these workers now living in "Fort McMoney, " Alberta characterized it was quite poignant. They said that they were surviving in Clare, but they were living in Fort McMurray. We need to recognize that this is the challenge we are facing now. We cannot simply argue that quality of life is enough to justify staying in some of these communities, and we have to look at policies, opportunities and options for both government and the private sector that would make it not only desirable to stay in these communities but possible to stay in these communities.
Senator Murray: That is a somewhat different critique of equalization than is taken, I will not say by AIMS necessarily, although I have seen it in some of your stuff, but certainly by other critics on what I might loosely call the "right. " I have heard it said that one of the disadvantages of equalization is that it is keeping Maritimers or Quebecers or whomever down on the farm, as it were, when they should be moving, that it is an impediment to labour mobility. I keep asking myself how many Cape Bretoners and Newfoundlanders are needed in Fort McMurray or do we want to send there.
Mr. Cirtwill: Apparently quite a number.
Senator Murray: This was not your argument. Your argument is that a better equalization program, better tax programs and market-oriented economic policies will create the kind of opportunities that will keep people in Clare or Cheticamp or wherever. What do you say to the argument that government policies are impeding labour mobility, that is the transfer of more people from wherever, Newfoundland, Cape Breton, to other locations?
Mr. Cirtwill: I think part of the reason you have been seeing levels of out-migration in the last few years not necessarily seen before — although there was considerable out-migration over the last 15, 20 and 25 years — is the fact that the government incentives to stay are now being outweighed by the opportunities being created by the free market in places like Saudi Arabia, Singapore and Fort McMurray.
Senator Murray: The latest population figures indicated an overall decline in population in some of those provinces. In Newfoundland, the number of deaths was greater than the number of births.
Mr. Cirtwill: Yes, and that is the case in just about every Atlantic Canadian province.
Senator Murray: Yes, and not that much in-migration. Do you have an idea of what would be a minimum below which a province like one of the Maritime or Atlantic provinces really could not be viable in any real sense and would simply become a basket case?
Mr. Cirtwill: I do not pretend to be a demographer so I cannot tell you what that magic figure is.
Senator Murray: I am talking about the economics of it.
Mr. Cirtwill: The way I would respond is that AIMS has been — and by AIMS I mean AIMS authors, the institute itself does not take a position but the authors of the various materials take positions — arguing for many years that the principal concern for Atlantic Canada in particular and Canada in general was not unemployment, which quite honestly is what most of our provincial and federal systems and structures are designed to address, but in fact our challenge is quite a significant labour shortage. We have been talking about that now for probably eight years and the principal arguments we have had against things like EI or the equalization program or social welfare benefits is that they are not structured to facilitate the move from welfare to work or to facilitate the natural creation of economic opportunities. For example, one of the things we have consistently said is it is a shame, and something that we should all be embarrassed about, that the people who pay the highest marginal taxes in this country are the people trying to transition from welfare to work. In many cases, those dollar figures they earn in that period of transition are taxed back more often than not at 90 per cent or sometimes at 100 per cent. Those are the kind of structural disincentives we have been talking about for a long time that have to be eliminated. We think if you address those structural disincentives, that will help you to respond to the demographic trends where people are leaving because there are no opportunities; you have a lower birth rate because quite honestly it is expensive to have a family. I have four children and it is very expensive to maintain that.
Senator Murray: Just wait. The worst is yet to come.
Mr. Cirtwill: If people do not have the opportunity to earn the income to support those families, they will just not have those families. Those are the challenges we face.
Senator Ringuette: I have been listening carefully to the exchange, to the dialogue going on here, and I agree that government policy has an influence on where people locate. Coming from New Brunswick, I have a hard time accepting that we will have a government policy, i.e. extreme tax incentives to exploit the oil sands of Alberta and yet we will have Maritimers criticize the fact that we have a very, very small economic incentive program called ACOA. They are still government policies. When we talk about government policy, whether it is institution, program delivery, equalization, et cetera, everything has to be on the table. When one criticizes a certain government policy, one has also to look at all related government policy in the same sector.
This is more of a comment than a question but, yes, government policy does have an influence on the economy and social growth and economic growth. Therefore, I hope we will see more government policy helping Atlantic Canada so that we, too, can have the incentives that other regions have received.
Senator Murray: Do you have any good news to give us?
Mr. Cirtwill: The private sector in Atlantic Canada has gotten the message. They are creating opportunities like they have not done in some time.
The Deputy Chairman: Thank you very much for coming, Mr. Cirtwill and Mr. O'Keefe.
The committee adjourned.