Proceedings of the Standing Senate Committee on
National Finance
Issue 5 - Evidence - Meeting of November 7, 2006
OTTAWA, Tuesday, November 7, 2006
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to examine and report on issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada.
Senator Joseph A. Day (Chairman) in the chair.
[English]
The Chairman: Honourable senators, the Standing Senate Committee on National Finance is meeting today to continue its work on the vertical and horizontal fiscal balances among the various orders of government in Canada. It is a timely study of an issue that is attracting a lot of national attention.
This issue is of direct and immediate relevance to the governments of the provinces and territories, so we have extended invitations to all of the provinces and territories to provide input, either in writing or through an appearance.
Today, we are very pleased to welcome representatives of the Province of Nova Scotia. The Honourable Michael Baker, M.L.A, is Minister of Finance, and he is accompanied by Vicki Harnish, deputy minister, and Elizabeth A. Cody, assistant deputy minister.
Hon. Michael Baker, M.L.A., Minister of Finance, Province of Nova Scotia: Let me begin by thanking you and the members of your committee for your work on this important issue on behalf of Canadians. While it may not be top of mind for most Canadians, how the federal government addresses the fiscal imbalances that exist within our country will either positively or negatively, directly or indirectly affect practically every Canadian family.
As you can appreciate, I will focus my remarks on the issues of most concern to Nova Scotia.
At the top of our list is the need to address the fiscal inequities that exist between and among the provinces and territories. If these inequities are left unchecked, they have the potential to spin out of control and fundamentally alter the nature of our federation and, in the process, put our nation's future prosperity at risk.
If that sounds like a dire warning, it was meant to be.
If equalization is not adequately funded or, worse still, watered down, regional disparities will simply widen. If Canada is to be a true country, Canadians must receive a relatively equal level of services no matter where they live. That is the minimum all Canadians have a right to expect.
Let me briefly outline the actions Nova Scotia believes would be in keeping with the principles of equalization and the objectives of the Constitution.
Equalization needs to be strengthened to ensure adequacy of transfers. We believe the 10-province standard should be restored. The decision to move to a five-province standard was arbitrary and extremely costly to Nova Scotia, and, we believe, contrary to the principles of the Constitution. Since it was adopted in the early 1980s, Nova Scotia has suffered the loss of over $3.3 billion in foregone federal revenues.
We also believe the representative tax system should be maintained, as it is the truest reflection of a province's capacity to raise revenue. While agreeing that predictability and smoothing volatility by using rolling averages are desirable, annual payments must reflect current conditions. Therefore, we suggest using three-year averages, beginning with the current year.
We do not support the imposition of artificial ceilings that restrict the extent to which the federal government is prepared to meet its constitutional commitment to Canadians. We do support the comprehensive inclusion of resource revenues, including 100 per cent of user fees and natural resource revenues.
With respect to natural resource revenues, excluding them from the equalization formula would unfairly favour resource-rich provinces that also receive equalization transfers. Those provinces would get to keep the full benefit of their resource revenues as well as reap the full benefits equalization. At the same time, however, the exclusion of resource revenues would lower the average fiscal capacity to which provinces are equalized and thereby negatively impact less-advantaged provinces by forcing them to reduce services below the national norm or to increase taxes above that norm.
I will return to this subject a little later, particularly as it relates to Nova Scotia's offshore revenues and how, contrary to popular belief, they support the interests of equalization-receiving provinces.
While these improvements I just outlined support the principles and objectives of equalization as referenced in the Canadian Constitution, Nova Scotia recognizes that for equalization to work effectively for all Canadians and to be acceptable to all Canadians, everyone may need to compromise. We in Nova Scotia are ready to engage in discussions on this issue.
I should like now to take a few moments to address some of the myths or misunderstandings surrounding equalization that continue to be circulated by some who have come before this committee, as well as others, specifically, the notion that equalization rewards wasteful, free-spending provinces, or that Nova Scotia's offshore accord undermines the principles of equalization. With all due respect, those who argue the former demonstrate a fundamental lack of understanding of the nature and makeup of our country.
Canada is not, as they seem to suggest, made up of 10 provinces and three territories, all with the same economic opportunities, the same wealth-generating capacity, the same economies of scale or the same burden of costs.
Populations differ widely. The mix, amount and value of natural resources differ widely. Income levels differ widely. Debt levels differ widely. These are more than a state of mind; they are real and they are structural. All of these factors, and more, result in different fiscal capabilities and different expenditure needs between and across the provinces and territories.
For example, the majority of Nova Scotia tax filers do not have nearly the same income levels as those that exist elsewhere in the country. Roughly 66 per cent of our tax filers earn less than $30,000 per year, while only 9 per cent of our population bears 49 per cent of our personal income tax burden. In wealthier provinces, higher-income earners comprise a significantly greater portion of their personal income tax base.
Here are a few more statistics worth noting: In 2004, Nova Scotia had the third highest personal income tax rate for the middle- and high-income brackets and the second highest corporate income tax rate. In other words, Nova Scotia is at the limit of its ability to raise revenue through taxation. On the one hand, we have less capacity to raise revenues through taxes than other provinces. On the other hand, we have higher per capita costs for providing health and other vital services.
For example, Nova Scotia has the second oldest population in the country, the country's highest rate of disability and is among the country's highest chronic disease rates. In 2005-06, health spending alone accounted for almost 48 per cent of total program spending. With one of the oldest and sickest populations in the country, these health care pressures will only get worse as our population continues to age and as more young and healthy income earners are lured west by salaries we cannot compete with. Over time, that will place even greater pressure on Nova Scotia's ability to address its other expenditure needs, namely, the need to invest in education, research and technology, safe highways and safe communities, all of the things that will help Nova Scotia's economy grow to the national norm and help our country prosper.
Mr. Chairman, as an equalization-receiving province, we are not, as some would suggest, wasting our equalization dollars. We are using them to provide Nova Scotians, to the greatest degree possible, with a standard of service to which the Constitution states all Canadians are entitled. Broad sweeping assumptions that focus on spending and not overall fiscal capacity do little to help advance what is already a very complex and difficult issue to resolve.
Again, for the record, I would point out that Nova Scotia has posted five consecutive balanced budgets. We have improved our credit ratings and we have made significant down payments on our debt, including every penny of the $830 million we received through our offshore accord. Also, we are relying more and more on our own successes and our own source revenues.
In 1996-97, provincial revenues accounted for 61.3 per cent of our total revenues. In 2006-07, they now account for 64.2 per cent. These are accomplishments that did not come easy in light of the rising cost of health care and other public services. They required some tough choices, and it does not look like our choices will get any easier any time soon.
We have a huge infrastructure deficit — over $3 billion for roads and highways alone. There is pent-up demand for improved services in a host of other areas and, as I noted a moment ago, our higher tax rate puts us at a competitive disadvantage not only in attracting people and businesses to locate in our province but also in retaining the skilled people we already have. That is why we still rely on equalization, which represents approximately 22 per cent of our total revenues.
I will sum up this part of my presentation with this: Those who philosophically oppose equalization oppose, by extension, the notion that Canadians, no matter where they live, should receive relatively equitable levels of service at relatively equitable levels of taxation. With all due respect to the authors of the Constitution, they got it right and the others are wrong. Equalization was enshrined in the Constitution to help — if not to level the playing field, it was intended to at least make it more even. It was put in the Constitution as a tangible way for the Parliament of Canada to connect Canadians with one another. It is as much about our values as Canadians as it is about dollars and cents.
I should now like to address the suggestion that Nova Scotia's offshore accord undermines the principles of equalization such that it amounts to equalization outside of equalization. This suggestion may be the result of a lack of understanding around the constitutional and historic background of the accord and the legal and policy objective it fulfils.
The Nova Scotia offshore accord is a bilateral agreement that resolved a long-standing jurisdictional dispute between Nova Scotia and Canada dating back to the early 1980s. In 1982, Nova Scotia agreed to set aside its claim to jurisdiction in consideration of a joint-management regime and a sharing of offshore revenues. Canada's agreement, particularly with respect to the sharing of offshore revenues, was rooted in its constitutional obligations under section 36.1 to further economic development in all regions. By setting aside this legal dispute, offshore development was expected to proceed.
The 1982 agreement, and its successor, the 1986 accord, provided that Nova Scotia would be the principal beneficiary of its offshore revenues until Nova Scotia achieved agreed-upon per-capita fiscal capacity — a capacity the authors noted should be well above the national average. In fact, they identified a fiscal capacity of 140 per cent. The authors of the accord did this, recognizing that equalization could and likely would threaten to undermine the intent of the accord. That is why they knowingly included equalization offset payments to protect the offshore revenues from being clawed back.
The Nova Scotia accord is a bilateral agreement, and bilateral agreements are essential if the Parliament of Canada is to help provinces achieve their economic potential. It does not follow that, because such agreements may, directly or indirectly, improve the present or future fiscal capacity of a province, they undermine the equalization program. Otherwise, the economic development principle and other legitimate areas of bilateral agreement between Canada and the provinces would be impeded and that would not be in the best interests of any area of our country.
The only substantive difference between Nova Scotia's bilateral agreement with Ottawa to support the development of our offshore and Ottawa's support of Quebec's aerospace industry or Ontario's automotive industry, for example, is that we had to give something up to support our economic development objectives; they, arguably, did not.
Regardless, in all cases the Government of Canada was fulfilling its constitutional right under section 36.1 to support the prosperity of every province of our country for the benefit of every citizen of our country — one of the most important constitutional objectives of the Parliament of Canada.
For the record, I will reiterate a point I made earlier: Nova Scotia's offshore revenues are fully accounted for in the equalization formula. They increase the benefits available to equalization-receiving provinces. Their exclusion, like the exclusion of natural resource revenues in any other province, would seriously undermine the spirit and intent of what equalization is intended to achieve, by significantly underestimating their contribution to fiscal capacity.
Mr. Chairman, I spent the better part of my time here today speaking to the fiscal imbalances that exist between and across provinces. I hope the reason I am spending more time on the horizontal imbalance than the vertical imbalance is clear. Simply put, I believe it is the fiscal inequities between provinces that pose the greatest threat to our nation's prosperity and unity. Furthermore, I believe the issue of vertical imbalance is well understood.
Most observers, including the current federal government, have accepted the fact that cutbacks in federal transfers to the provinces for health and social programs are a large part of the reason Ottawa has consistently posted huge federal surpluses while most provinces have consistently struggled to maintain quality public services and to stay within budget — federal surpluses, I might add, that make strengthening equalization more affordable.
In support of this, and in the interests of time, I would refer you to the testimony of my colleague from Prince Edward Island, Minister Murphy, who clearly laid out that the cost of equalization as a percentage of federal GDP has dropped in recent years, from 1.3 per cent of GDP, or 8 per cent of federal revenues in 1982, to 0.8 per cent of GDP, or 5.1 per cent of federal revenues today.
I would also reiterate Minister Murphy's concerns regarding the transfer of tax points as a means of closing the vertical gap. Tax point transfers would benefit larger, wealthier provinces to a far greater extent than they would smaller, less wealthy provinces where the value of tax points is much smaller. In other words, tax point transfers would widen the horizontal gaps that currently exist between provinces.
Let me also raise another concern, one that I am sure most of my colleagues would agree with — that is, that any increase in equalization must not be financed from federal savings as a result of withdrawing from existing cost-shared programs. To do so would be to negate, or perhaps erode, a province's ability, particularly the ability of a smaller, less wealthy province, to maintain, let alone improve, the level of public services they provide their citizens.
There are currently 22 federal-provincial cost-sharing agreements in Nova Scotia set to expire in this year, 2006-07, at a value of $31.8 million. It would be disingenuous for the federal government to claim it has addressed the fiscal imbalance on one hand while at the same time backing out of cost-shared arrangements they have historically funded. At best, it would amount to a zero sum gain for Canada and do nothing to address the horizontal and vertical imbalances that currently exist.
Likewise, any cap on equalization must not claw back the hard-fought gains Nova Scotia and Newfoundland and Labrador stand to gain through our offshore accords.
As I stated earlier, Nova Scotia has set aside its legal claim over the offshore with the signing of a legally binding bilateral agreement with Ottawa, an agreement designed to help Nova Scotia's economy grow and our country to prosper. If the Parliament of Canada took any action to breach the equalization offset provisions of the accord, it would place Canada in the untenable position of undermining or neutralizing the revenue-sharing agreement set out in the 2005 accord. Such an act would call into question the bone fides, indeed the honour, of the federal Crown.
I hope the committee now has a better understanding of Nova Scotia's position with respect to both the horizontal and the vertical fiscal imbalances we are confronting, and I hope I have cleared up a few of the myths and misunderstanding.
Thank you for your time and interest in hearing Nova Scotia's position. I would be glad to answer any questions.
The Chairman: Thank you very much, Minister Baker. We appreciate your comments and that overview. It will be interesting to discuss your points of view with respect to the offshore accord and its impact.
Thank you for mentioning vertical balance. However, we have decided that at the beginning of this study we will deal with horizontal balance, or equalization. Later, we will probably get into the issue of vertical balance between the federal government and the provinces, perhaps down to the level of municipalities. At that time, we will be interested in hearing a bit about your unique situation vis-à-vis the Cape Breton regional development lawsuit. However, we will not get into that today.
Senator Eggleton: Will we be having the minister back for a discussion on vertical balance? Otherwise, I will ask him questions on vertical balance.
The Chairman: Please keep questions on vertical balance to a minimum. We have another witness to hear from today and some other business to deal with. I know that is a matter of preoccupation with you, and we will be getting to that in due course.
I will call on Senator Baker from Newfoundland, who should perhaps declare any conflict by virtue of having the same last name as the minister.
Senator Baker: In case the viewing audience does not understand the discussion of horizontal and vertical, the subject is fiscal imbalance between provinces.
When the witness was appointed Minister of Finance for the Province of Nova Scotia, it took one or two months for Standard & Poor's to upgrade the province's credit rating to an A-plus. All three credit rating agencies have now given the Province of Nova Scotia an A-plus rating. Standard & Poor's did make specific reference to the minister's position on various issues, especially deficits.
Twenty-five years ago, the witness was a litigator in the province of Nova Scotia. I would like his exact position relating to the special deal on offshore benefits that Nova Scotia has with the federal government and its treatment by certain other provinces and specifically by the expert panel.
Are you saying that the deal made with the federal government concerning offshore revenues should not in any way be associated with the equalization formula? You made reference to other deals made by other provinces and other areas of Canada that should be used as illustrations of the offshore deal with Nova Scotia. Are you saying that the equalization formula and the discussions surrounding it should not involve the deal you have made? Will you be specific? Please give one example of what other provinces have received similar to what your province has received, demonstrating that that is how the discussion should take place.
Mr. Baker: My years as a lawyer have taught me to recognize a leading question when I hear one.
The position of Nova Scotia is that, beginning with the first accord in 1982 and moving forward, Nova Scotia settled its long-standing dispute over offshore ownership with the Government of Canada. As part of that settlement, Nova Scotia would be the principal beneficiary of its offshore resources.
On the current accord, it was clearly the position of Nova Scotia and the Government of Canada that this was a bilateral agreement. It was not part of equalization. It was not designed to alter equalization. In fact, other equalization-receiving provinces would and have received more money as a result of the accord. It was never meant to give Nova Scotia a bigger share of the equalization pot. In fact, from Nova Scotia's point of view, the equalization pot technically shrunk as a result of the accord. It simply gets a separate bilateral transfer back.
As an example, the government is talking about the road around Montreal. I have no problem with that, because that would be a bilateral agreement between the Government of Canada and the Government of the Quebec on an issue of interest to the Province of Quebec. It is hard to understand why, simply because Nova Scotia is receiving the benefit of the offshore accord — that is, getting paid in one way or another — some people believe that this is fundamentally opposed to the principles of equalization. I do not believe it is. In fact, the principles of equalization have been respected such that perhaps the expert panel would have liked to move this bilateral agreement into the equalization formula.
Senator Baker: In the alternative, you are saying that all natural resource revenues of every province should be included in calculating what they receive through equalization.
Mr. Baker: Yes.
Senator Baker: However, you are saying that monies given, for example, as subsidies for grain in Western Canada should not be included.
Mr. Baker: That is right.
Senator Baker: That is an interesting way of putting it.
Mr. Baker: Our country is very diverse. Every Canadian province, no matter what its fiscal capacity, has different challenges. As a government and a country, we need to find ways to address those. We believe that to the extent that natural resource revenues, particularly Nova Scotia's, affect a province's fiscal capacity, they must be considered in the formula. However, we have no problem with bilateral agreements that may provide a benefit to any Canadian provinces.
You referred, senator, to western grain. It matters not whether it is western grain or the Pacific Gateway, which is of very great interest in the province of British Columbia in particular. Those are methods by which provinces and the Government of Canada reach agreement on bilateral issues that fundamentally involve the transfer of money. It is ultimately about the transfer of money. It is certainly about principle, and it is also about the transfer of money. To the extent that natural resource revenues affect the capacity of a province, they need to fit into the equalization formula. Having said that, I have no problem with bilateral agreements that may involve transfers of money to a province.
Senator Baker: Minister, you said that I used the example of western Canadian grain; no. I was using your exact words that you used in a previous address, and you were the one who suggested it. I agree with you.
The position of the Province of Nova Scotia is that all revenues from natural resources should be included in computing the equalization formula but that special subsidies for grain, any other product revenue or deals for the automobile industry in Ontario or the aerospace industry in the province of Quebec should not be included.
Mr. Baker: Right. Those bilateral agreements are outside of the equalization stream.
Senator Baker: You express no opinion on the 10-province standard. Why is that?
Mr. Baker: I mention that the 10-province standard is essential.
Senator Baker: You do?
Mr. Baker: Yes.
Senator Baker: The expert panel recommends a cap. Of course, as a Newfoundlander, I would see red, because is it not true that Newfoundland would lose?
Mr. Baker: I have heard that.
Senator Baker: Newfoundland and Labrador would lose immediately. Nova Scotia would not lose immediately; is that correct?
Mr. Baker: Not immediately, no.
Senator Baker: What do you mean by that?
Mr. Baker: We hope at some time in the future to be at a much higher fiscal capacity than today. Some people have the idea that equalization is wrong because it raises the fiscal capability of a province. That is exactly the purpose of equalization — that is, to make a situation where Nova Scotia is, with all due respect, not an equalization-receiving province. The fondest desire of the Government of Nova Scotia is to get to the point where Nova Scotia, as a result of a true, fair and equitable formula, does not receive equalization. At that point in time, Nova Scotia will be a have province.
Senator Baker: I was very impressed that two thirds of the taxpayers of the province of Nova Scotia earn less than $30,000 a year, 8 per cent of the people pay 50 per cent of your revenues in taxation, and 40 per cent of your total expenditures are just for health care.
Mr. Baker: Yes.
Senator Baker: Finally, your observation that equalization payments are guaranteed under the Constitution of this country.
Mr. Baker: Absolutely.
Senator Eggleton: Good morning, minister. The Ontario government says that there is enough money in the equalization formula now and there is no case to be made to go beyond where it is. However, if we look at the different recommendations, the government and maybe the people of Ontario would find more comfort in the expert panel report than in the advisory panel report, simply because there is a cap recommended.
Without that cap, we could have a situation where your province, amongst others, could have a greater fiscal capacity than Ontario. Is that really what you see equalization as being about?
Mr. Baker: I would like to see the day — this is no disrespect to the Province of Ontario — when Nova Scotia's capacity as a province was greater than any other province in the country, because that is obviously the interest that I represent. However, the idea of a cap, to the extent that it uses the offshore accord, is where we differ, certainly with the Province of Ontario. We have a website that outlines our differences with the Government of Ontario.
The accord with Nova Scotia and the accord with Newfoundland and Labrador are bilateral agreements and, in our view, should be kept outside the principle of equalization. Where we differ is really around the inclusion of the accord money as part of the equalization formula.
Senator Eggleton: I do have an interest in the local level of government as well, being a former mayor of Toronto. Vertical capacity is an issue that we will primarily deal with after we get through the horizontal aspect.
The Union of Nova Scotia Municipalities has had a lot to say about the subject and put out a report on it. There is a lawsuit from the Cape Breton Regional Municipality. What about the issue of dealing with your municipalities? They are providing valuable services to the people, services that are a day-to-day requirement; police, fire, et cetera.
How will you rectify that?
Mr. Baker: I will not comment on the lawsuit itself. The phrase is oft repeated, but it truly is before the courts.
Certainly municipalities provide valuable services to Canadians in this country and are organized very differently in individual provinces. I know that the range of services provided by municipalities in some parts of this country is very different than those services provided by others. As an example, in Nova Scotia, we have among the highest, if not the highest, level of provincial maintenance of roads and road infrastructure. There are other provinces, Ontario, for example, that have a much higher level of road maintenance done by municipalities.
There is a wide range of services. That is one of the difficulties that are fundamentally lost — in other words, that different provinces organize their municipal governments differently and are responsible for different kinds of services.
Certainly municipalities need to be treated fairly. In Nova Scotia, we believe they are being treated fairly. Clearly, there are issues around individual municipalities occasionally feeling they are not receiving their fair share of resources. That happens with other municipalities other than the Cape Breton Regional Municipality. Ultimately, the political system and discourse within the province is the proper way, not the courts, to resolve that.
Senator Mercer: As someone who lives in rural Nova Scotia, I can attest to the $3-billion road infrastructure deficit. I am tempted to lobby you for work on the roads, but I will not do that; we could talk later.
As one of the first people to raise concerns about Minister Flaherty's musings on the accord after he became Minister of Finance, I, as well as Senator Baker, have some great concerns about that. I am concerned that these musings may become more than musings. Have you had discussions with the federal minister about this? People say that some people have been talking about this, but these are not just ``some people.'' This is the Minister of Finance of the country.
Mr. Baker: I have discussed with Minister Flaherty the position of the Government of Nova Scotia. As I indicated earlier, obviously the minister has every right to receive this information, but he has not made tremendous comment on it other than he has received the information.
Certainly, our position is that it is quite clear how the offshore accord should be treated. The present Government of Canada has been a supporter of the offshore accord and has indicated its support for the accord. I will take people at their word that they will continue that support for the offshore accord.
Senator Mercer: If that were to change sometime, I would assume, then, that you would be one of the first to take them to task on it.
Mr. Baker: I can tell you that the position of the Government of Nova Scotia is unequivocally that the offshore accord cannot be changed without the consent of the Province of Nova Scotia and that to do so would be wrong. Obviously, I see no reason at the present time why the Government of Nova Scotia would agree to any change in the offshore accord.
Senator Mercer: Having been there for the ceremony in Halifax when it was signed, I know how important it is to all of Nova Scotia.
Mr. Baker: It is important to all of us in Nova Scotia.
Senator Mercer: I want to change subjects slightly. In your presentation, you said that there are presently 22 federal- provincial cost-sharing agreements in Nova Scotia set to expire in 2006-07, at a value of $31.8 million. What is the state of negotiations? I understand there is more than one agreement, but where are we in negotiations between the province and the federal government on these issues?
Mr. Baker: I understand that only approximately half of those are under active negotiation. That is why I wanted to signal our concern that some of these agreements may be allowed to expire. Quite frankly, many of these agreements are in areas where the Government of Nova Scotia would either have to dramatically reduce services or, alternatively, have to take over that area of responsibility and backfill the money. That would simply be another strain on our situation.
Senator Mercer: Do we have a list of those agreements? It concerns me.
Mr. Baker: We can provide the committee with a list.
Senator Mercer: That would be helpful. Some of us can ask questions about it on a regular basis. I would not want the people of Nova Scotia to miss out because this government is not negotiating on half of these agreements.
Senator Mitchell: How does your royalty regime compare to Alberta's royalty regime? Do you know, offhand?
Mr. Baker: I do not think I can answer that question, other than to say that, quite honestly, our royalty regime is lower in some ways because we have always had a higher risk kind of offshore.
Senator Mitchell: As I read between the lines, I think you may be referring to the think-tank in your province called AIMS.
Mr. Baker: Yes, I think that would be fair to say.
Senator Mitchell: You were interested in their argument but not compelled by it.
Senator Stratton: I was.
Senator Mitchell: You are probably not even right-wing enough for them to vote for you.
I was very interested to note that you said all of the revenues you get from the accord will pay debt. Could you tell me what your debt is and how much you are paying off?
Mr. Baker: Our debt is $12.2 billion. That is the provincial debt. That is actually down as a result of the money we received under the accord agreements, which was simply used to pay off that debt. Notionally, on our books, we therefore take the amount of revenue every year that is foregone from equalization as a result of that and show that on an annualized basis so it figures into our current accounts.
Senator Mitchell: What would be the total amount you are actually paying on debt, on principle payments?
Vicki Harnish, Deputy Minister, Nova Scotia Finance, Government of Nova Scotia: It is $830 million. However, because there is a difference between cash receipt and the accrual basis of accounting that we use, we recognize and flow to surplus each year the portion of the $830 million that we are deemed to earn that year. The $12.2 billion is the accounting value of the net direct debt, and it will be reduced by the full value of the $830 million over the eight-year period that we recognize that money on an accrual basis.
Senator Mitchell: That is proof positive that AIMS's conclusion, that equalization incurs debt, is wrong.
Mr. Baker: Absolutely. Our premier at the time made a commitment, because our debt had grown over time because of our lack of capacity to fund programs. This was a tangible effort by the government. Obviously, you see a lot of money there, and it is tempting to spend it, but we figured that, in the long-term interests of Nova Scotians, the debt should be paid down, and it is legislated by Nova Scotia.
Senator Mitchell: Finally, I am interested in the area of post-secondary education and the role of the federal government in creating national standards, or at least stimulating post-secondary education across the country. What is your feeling on how that should be funded or what role the federal government should have in that? It is critical to our country's productivity, among many other things, but we do have a productivity issue, and investment in education is a critical feature of that.
Mr. Baker: The federal government does have a role to play in post-secondary education. I have spoken with the federal minister about this, and certainly we believe that there is a role. In Nova Scotia, and this is not a secret to anyone, we have the highest tuition fees, or among the highest tuition fees, in the country as a result of a funding formula issue. We are fortunate in receiving students from many other Canadian provinces and beyond, but many other Canadian provinces. We are funded based upon our per capita, meaning the number of people that Nova Scotia has in the country as a whole as opposed to the number of students, and that creates a funding issue relative to university education. Obviously, we believe that that is something that should be at least considered in the university funding issue. Whether it is R & D or any other type of funding for universities, capital infrastructure is a huge problem in our universities. Having a lot of universities in Nova Scotia, 11 universities in a province of approximately 950,000 people, you can imagine what the infrastructure pressures are.
Senator Di Nino: Welcome, minister. Let me go back to this issue of trying to arrive at a fair distribution of the wealth of the country — the transfer of money, as I think you used the term. You said that bilateral agreements should be excluded from the consideration of equalization. In effect, then, and please help me understand it, if there were a relationship between a region or a province and the federal government, the federal government could, by bilateral agreements, transfer a lot more money to that region, to that province, which would upset that balance or fairness that we are talking about.
Mr. Baker: I believe that some issues are protected in the Constitution, and I believe equalization is one of them. Other issues are protected by another process called politics. I am traditionalist enough to believe in parliamentary institutions and the political process as the true, best protection for many of Canadians' rights. I would suggest that if a particular region of the country were to receive a disproportionate benefit relative to other regions of the country, then there is a mechanism, and that is the political method, to redress that.
While I am suggesting obviously that some determined attempt by any government to benefit one part of the country disproportionately and without any principles is wrong, there are ways of doing that. I do not believe, however, that treating everyone the same is treating everyone fairly, and that is where fundamentally I would differ from some. Some people believe that the only way you can treat anyone fairly is to treat them exactly the same. I am a parent. I long ago learned that treating my children fairly does not necessarily mean treating them the same. I have a 15 year old and a 12 year old. I am sure the 12 year old might be happy with that, but the 15 year old might resent it.
Senator Di Nino: You obviously are on the side of those who suggested that 100 per cent of natural resource revenues should be included, and there is a strong lobby on the other side saying it should be only 50 per cent. The panels differ on that as well.
Would that not be in a similar vein? Is it not the same type of argument, namely, that if you include all revenues there should be no exceptions, including bilateral agreements? That is not necessarily our position, but I would like the benefit of your wisdom.
Mr. Baker: Again, my argument is quite simply that the equalization process, which is set out in the Constitution, is different from the bilateral agreement process. They are two different processes with two different outcomes, and, overall, they make the Canadian federation as vibrant as it is. To use an example, if you were going to subsidize fish, fishery subsidies would not be much use to Saskatchewan. However, wheat subsidies would not be much use to Nova Scotia as a total of our economy. We have a different country with different kinds of concerns, even different environmental ones, across this country, depending on the region. Nothing is wrong with suggesting that those concerns are different, but the way Nova Scotians view their environment, as an example, is different from the way Ontarians and Albertans view theirs.
Senator Di Nino: Minister, I guess it is fair to say that all democratic countries distribute wealth in one form or another, and there will always be these differences between regions as to who should get what, how much and whether they are being treated fairly.
One of the witnesses made a comment that I thought was quite telling. To paraphrase, he said that equalization should not be blamed for the problems of regions or problems of areas. That is often used as a political tool, if you wish, particularly during elections. I wonder if you could make a comment on that.
Mr. Baker: As I said earlier, Nova Scotia has different challenges than do some of the other provinces and regions in the country. We have some great advantages. We are talking about the situation where, for example, our tax system or our ability to provide public services is roughly the same. We realize we have to compete in a competitive world, both in Canada and beyond, and in Nova Scotia we are not using that as an excuse for our challenges. We are meeting them head on. I indicated earlier, for example, how our own source revenues have grown and a number of other kinds of things are being done.
We need a situation where the hill is not so steep that we cannot try to become a have province. We believe that a situation where a tax system, for example, discourages our young people from staying in Nova Scotia because their standard of living would be significantly reduced is unfair. It is hard to attract an immigrant to this country if in one part of the country there is a significantly different level of health care than in another part of the country. Canadians have a right to demand and expect a relatively equal level of health care whether they live in Nova Scotia or Newfoundland, at one end of the country, or B.C. at the other end of the country.
Senator Stratton: It is interesting when you say that each province and region are different and that those differences need to be addressed. I am of the mind that equalization should be the equal treatment of each province and region, and that the problems and concerns of each province or region can be addressed outside that box, with specific items that Nova Scotia, Manitoba or P.E.I. may have, and you deal with them on that basis.
We have to go back to the fundamental principle. When we say ``equalization,'' we mean ``equalization.'' All provinces should be treated the same within that box.
That is why I liked the presentation of the AIMS group, because they were thinking outside the box. This committee needed to hear ideas from outside that box, even though, as Senator Mitchell says, it was way too far right for him. That is okay. We need to hear that kind of thing, whether we accept it or not.
What is your reaction to the statement that, if all provinces are treated the same within equalization, we can deal in another way with the specific issues and concerns of each province?
Mr. Baker: I am failing to understand the question, I believe. Certainly, I can agree with the premise that equalization should treat every province fairly. In fact, that is what we are here discussing at some level. For example, does a five-province standard or a 10-province standard treat every province fairly? I believe that a 10-province standard treats all provinces fairly because it compares everyone to each other and not to some artificial standard that is less than that.
I agree that equalization is about treating people fairly and equally, and then looking outside of that for bilateral or multilateral agreements, for example.
Senator Stratton: We are essentially agreeing on the principle that that is how equalization should be approached.
Mr. Baker: Yes, we are.
Senator Stratton: If we can agree on that, then you can move forward fairly well. Whether it is a five-province standard or 10-province standard becomes a debate depending on where you come from.
Mr. Baker: It is more than that. It gets to what application of principles most clearly provides that ability to compare and determine what is equalization. For example, we talked about equalization. We believe user-fees should be included in equalization because we believe it is all of the revenues that a government has available, not just the revenues that you call taxes. In point of fact, for legal reasons, we vote most of the fees in the same way that you would vote a tax in Nova Scotia. To call something a ``fee'' on the one hand and a ``tax'' on the other is an artificial distinction. There are ways of financing the government. It is the same thing I pointed out earlier with respect to the municipal government. It depends on how you organize yourself. It is a tax burden. If you are a taxpayer, you look at your tax burden. If you are making a decision to come to Nova Scotia or to bring a business to Nova Scotia, you look at your total tax burden — municipal taxes, workers' compensation rates, corporate income tax levels — and then make a decision about the best place to put a business. For example, should the business be put in Halifax, Winnipeg, Toronto or St. John's, Newfoundland?
Senator Stratton: With respect to equalization, one of the presentations showed a disturbing statistic, namely, that Manitoba has more bureaucrats per population than any other population in the country. Manitoba receives equalization payments, and you say that something is wrong here. I would like to explore that a little further.
If you receive equalization payments, are the strings attached defined sufficiently? If you receive dollars from the federal government, you should justify how those dollars are spent to the people of the province and to the federal government. That is because when you read a statistic like Manitoba having more bureaucrats it is kind of disturbing. Is that a responsible way of taking equalization payments and spending the money?
Mr. Baker: I will not comment on Manitoba.
Senator Stratton: I appreciate that. That is my example.
Mr. Baker: However, I will comment on Nova Scotia's. I believe there are some statistics that are misleading, and I will give you an example. In health care, Nova Scotia has the Queen Elizabeth II Health Sciences Centre, a health facility that also provides care for provinces beyond Nova Scotia. Other provinces send in patients to that centre. You could look at our statistics, for example, and say that we might have a higher level of certain kinds of health care professionals per capita than an adjoining province. The reality is that you must cluster those health professionals in one spot for the benefit of everyone in that region.
We must be careful about looking at economies of scale. With a sicker population, we have a Department of Health Promotion and Protection, which we created for a very specific reason. Hopefully, we do have a lot of health professionals working on health promotion and protection. It would be misleading to say, therefore, Nova Scotia has a sicker and older population than most of the country and, therefore, somehow we are wasting our money by providing this service.
It is important that, in comparing statistics like the statistics you indicated for Manitoba, there is some analysis done of those statistics to determine whether there is waste, which is really what everyone is trying to avoid, or whether what we are really getting at is the fact that there are different needs in Manitoba. I will not speculate on what those different needs in Manitoba are, but I can certainly tell you there are different needs in Nova Scotia, particularly in the health area, than there would be in other parts of the country.
Senator Stratton: I am not disagreeing with that. I am just simply saying that there should be a justification back to the people and to the federal government that gives those equalization payments. It should not just be a one-way street. That is a view I think the public would like to see happen, if it is indeed not happening already.
Senator Murray: I agree with you that these things should be sorted out in the political process.
When it comes to equalization, the first thing is that it is supposed to be based on relative fiscal capacity of the provinces, that is, how much the province can raise by itself. To measure relative fiscal capacity, it is obvious to me, and I think to most people, that you need 10 provinces to measure so that you have a true measure. To measure relative fiscal capacity, it seems obvious to me you should have 100 per cent of the revenue sources measured.
The expert panel agrees with all that, up to the point where you get to natural resource revenues. At that point, they say, ``No, no, only 50 per cent of natural resource revenues in order to measure entitlements.'' Mr. Al O'Brien, who is chairman of that panel and is an extraordinarily able and experienced man, as we all know, was here, and we also heard from Mr. Lacroix a bit later, who was a member of the panel, and Paul Boothe, who has had all kinds of experience in these matters. None of them really tried to present this 50 per cent formula as being in any way principled. They all came pretty close to blurting out the truth. The 50 per cent formula was intended to address the issue of affordability, and it is an issue for any federal Minister of Finance. One understands that.
The advisory panel that I took part in said 100 per cent of all revenues to measure the entitlements and then, if you have a problem of affordability, scale back proportionately where everyone can see it and you have to defend it and debate it with the provinces and in Parliament and elsewhere. For years and years, successive federal government have addressed the affordability issue by fiddling the formula, manipulating it in various ways so that at the end the overall amount comes out where they want it. That does not seem to me to be very effective and certainly not a very principled way to go at it.
I want to thank you for putting the offshore agreements in their historical context and for doing that so clearly. You have said, among other things: ``The 1982 agreement, and its successor, the 1986 accord, provided that Nova Scotia will be the principal beneficiary of offshore revenues until Nova Scotia achieved an agreed-upon per capita fiscal capacity. A capacity the authors noted should be well above the national average. In fact, they identified a fiscal capacity of 140 per cent.''
I do not know whether that was in 1982 or in 1986.
Mr. Baker: It was in 1982.
Senator Murray: In any case, you are telling us that the offshore agreements that the Martin government concluded with your province, and with Newfoundland and Labrador, are completely consistent with 1982 and 1986; they do not depart in any sense from the principle and from the objective of those agreements. Is that true?
Mr. Baker: I am sorry, could you repeat that?
Senator Murray: Are the agreements that you as well as Newfoundland and Labrador negotiated with Prime Minister Martin totally consistent with the objectives and the principles of the 1982 and 1986 agreements?
Mr. Baker: Absolutely.
Senator Murray: Is it true that one of the problems that arose over the period 1982 to the present is that the pace of development of those resources, perhaps off your shores and also off the shores of Newfoundland and Labrador, was not as much as had been foreseen in the early first accords?
Mr. Baker: There was, as everyone would know, and there has been in Nova Scotia, some cyclical development issues that have been troubling. Having lived in Nova Scotia all my life, I can remember periods when there was a greet deal of economic activity as a result of exploration and development in the offshore and then other periods when there was not. Therefore, we have not had the consistent — if that is the right way to put it — kind of revenues that were anticipated at some point.
Senator Murray: I am intrigued by this mention of a hypothetical future fiscal capacity of 140 per cent in your case and in that of Newfoundland and Labrador. You are nowhere near that now. Where are you?
Mr. Baker: I am not sure, but I can tell you we are not at 140 per cent. We are at 76 per cent.
Senator Murray: Is that after equalization?
Mr. Baker: Before equalization.
Senator Murray: After equalization, how close are you to 100 per cent?
Elizabeth A. Cody, Assistant Deputy Minister, Nova Scotia Finance, Government of Nova Scotia: It depends on the standard. On the five-province standard, we would be at 96 per cent.
Mr. Baker: We are certainly under 100 per cent.
Senator Murray: The advisory committee said 100 per cent of natural resources for entitlements. Of course, the question of a cap does not arise in that case. Do you happen to know where Newfoundland and Labrador is even after equalization in terms of fiscal capacity?
Senator Baker: We are way up there.
Mr. Baker: I can tell you what Newfoundland and Labrador's fiscal capacity is from loan source revenues, if that helps. Our statistics indicate that Nova Scotia is at 76.18 per cent and 77.78 per cent from their own source revenues.
Senator Murray: The argument is that with the 100 per cent inclusion of natural resource revenues Newfoundland and Labrador would be over 100 per cent. How close would they be to 140 per cent?
Senator Baker, do you know that?
Mr. Baker: I do not think they are very close.
Senator Baker: No, I do not know that.
Senator Murray: I have a couple of items in terms of inclusion of revenues. I rather like what the expert panel suggested on property taxes. The advisory group appointed by the Council of the Federation did not get into it in much detail. They are suggesting a stratified system that makes sense to me.
Something else that makes sense to me is what they said about collapsing the 33 tax bases into five. I believe that would simplify the operation. I would like to hear your comment on that also.
Finally, I cannot make up my mind about user fees. Our panel certainly did not exclude them as the expert panel did. The expert panel wants to exclude user fees. I find their argument somewhat appealing, in that it is so difficult to judge what is a simple fee recovering the actual cost of the service. They have asked whether tuition fees should be included. I do not know the answer to that question.
You say that your user fees are mostly voted by the legislature. I am not sure that is the case everywhere. I do not know of any finance minister, except for perhaps you, who has admitted at budget time that the user fees imposed by the government are really a tax.
Mr. Baker: User fees are a source of revenue. The reason for choosing user fees as opposed to other taxes is because you wish, as a question of policy, to shift the burden for receiving certain services onto a certain group of people. For example, we have legislation in Nova Scotia that guarantees that the net revenue from operating our registry of motor vehicles goes to our highways. Therefore, when you buy your vehicle driver's licence in Nova Scotia you are contributing to highways.
Arguably, we could put a tax on gasoline and recover that amount of revenue or drop the tax on gasoline and raise costs. However, from the point of view of drivers in Nova Scotia, those taxes will ultimately be a burden to them.
I do not have a position on whether university tuitions should be in or out. I do not see logic to that. Most provinces in this country have driver's licence fees and I do not think it is inappropriate to include that as part of capacity.
As to the five simplified principles, transparency is good. From talking with my colleagues in the legislative assembly, I know that discussions about the calculation of equalization cause people's eyes to glaze over. A system that would allow more Canadians to understand how it is calculated would not be a bad thing. The general idea of having a transparent formula is good.
I do understand the philosophical argument on having 100 per cent of natural resources in or out. However, I cannot figure out the logic of 50 per cent. It is half principled at best. We believe that it is best to include all natural resource revenues. However, I do understand some of the logic that is being put forward by others.
As I said earlier, we believe that compromise is necessary. As you said in your remarks, senator, there may be affordability issues that the Government of Canada must deal with. I understand affordability issues. Obviously, the level of equalization will affect affordability of certain other programs. However, affordability is a different discussion than the principles of equalization.
Senator Murray: What about the property taxes?
Mr. Baker: We are open on property tax revenues. It has not been a huge issue for Nova Scotia and we are prepared to look at that.
Senator Baker: We are fortunate on this committee to have the expertise of Senator Murray. We will benefit from that in making our recommendations.
When asked about the continuity of offshore resources, the witness noted that this has been going on for a long time. It was a new area into which the Nova Scotia government was venturing. It came to my mind that the first act that was proclaimed in the legislature was to seize control over all resources off the coast of Nova Scotia to the extent of exploitability. The experts predicted that that would extend to the coast of Africa, because it would be exploitable right across the Atlantic. I notice they have not as yet changed that on their books.
In defending your position against the position of other provinces, there are two simple arguments that could be used. First, Alberta was given a seven- or eight-year break from all revenues from their oil resources as it relates to an equalization formula. Second, when people attack you regarding the idea of putting money into poor areas, the argument can be made that figures from the Export Development Corporation show that the poorer areas in Canada contribute the most, on many occasions, to the economy of the country in exports per capita. The poorest areas of the country contribute the most to keep us with carpet on the floors in Ottawa and to keep our cities vibrant with their exports to foreign nations, without which you could not print money.
When these attacks are made against your logic, why do you not become very specific about what Alberta received in the beginning, that being total exclusion of revenues, or state that the figures show that the Province of Nova Scotia contributes more per capita to this country than various large cities? Why do you not become that combative in your arguments?
Mr. Baker: Perhaps Nova Scotians have a reputation of being somewhat subdued in their arguments. However, that should not be confused with lack of compassion for our arguments. I believe that Nova Scotia's offshore accord is no different from other decisions that have been historically made by the Government of Canada and the Parliament of Canada. For example, the boundaries of the provinces of Quebec and Ontario at the time of Confederation have been appropriately expanded, which gives them a huge natural resource base in their northern areas. That was done at the appropriate time.
It is no less appropriate that Nova Scotia receive the full benefit of its offshore resources. That is our hinterland, in the same way that Northern Ontario and Northern Quebec were their hinterlands. Our offshore resources should be used no less for the benefit of the people of Nova Scotia. If those resources, when fully exploited, provide us with a greater level than another part of the country, the equalization formula of the day should then come into force to provide the level of taxation and services to the other provinces that Nova Scotia would have at that time.
Senator Baker: I want to congratulate the witness on behalf of all senators, I am sure, for the excellent presentation he has given on behalf of the Province of Nova Scotia.
Mr. Baker: Mr. Chairman, I wish to table an appendix to my submission. The appendix outlines in greater detail some of the positions I expressed.
The Chairman: That would be very helpful. We hope to issue an interim report in two or three weeks on this area of discussion. We may well be in touch with you again to discuss the vertical issues. Senator Eggleton has some questions on that with which you may be able to help us.
Thank you for being here, Minister Baker, Ms. Harnish and Ms. Cody. You have presented the position of Nova Scotia very well and that will be very helpful to us.
The committee continued in camera.