Proceedings of the Standing Senate Committee on
National Finance
Issue 12 - Evidence - Meeting of April 17, 2007
OTTAWA, Tuesday, April 17, 2007
The Standing Senate Committee on National Finance met this day at 9:33 a.m. to study and report on issues related to the vertical and horizontal fiscal balances among the various orders of government in Canada.
Senator Joseph A. Day (Chairman) in the chair.
[Translation]
The Chairman: Welcome every one. I call this meeting of the Senate Standing Committee on National Finance to order.
My name is Joseph Day, senator for New Brunswick and chairman of this committee.
[English]
On September 27th, 2006, the Standing Senate Committee on National Finance was authorized by the Senate to examine and report on issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada and to report back no later than June 30, 2007. In the fall of 2006, committee members heard presentations by key officials from various provincial and territorial government departments, academics, and policy and market experts from across the country. The hearings took place over a six-week period.
On December 12, 2006, the committee issued an interim report, entitled The Horizontal Fiscal Balance: Towards A Principled Approach, as a part of its ongoing study of Canada's fiscal arrangements with provinces, territories and municipalities.
The committee, at that time, did not have an opportunity to hear from representatives from the Province of Saskatchewan, so we are very pleased to welcome the Honourable Harry Van Mulligen, Minister of Government Relations for the Province of Saskatchewan. Mr. Van Mulligen was first elected in 1986, re-elected in 1991, 1995, 1999, 2003 — I will stop and congratulate you on all of those victories — and then in 2006 he was appointed Minister of Government Relations for the Province of Saskatchewan. He previously served as Minister of Finance, Minister Responsible for SaskEnergy, Government House Leader, Minister of Social Services, Minister Responsible for Disability Issues and Minister Responsible for Seniors. He has also served the legislature as chair of the Public Accounts Committee and as chair of the Crown Corporations Committee.
Joining the minister today from the Government of Saskatchewan are Mr. Jones, Assistant Deputy Minister, Department of Government Relations, and Ms. Brady, Analyst, Department of Finance.
We understand you have another engagement at 10:30.
Prior to commencing, the Senate committee would like to express to the people of Saskatchewan our sincere condolences on the death of Senator Jack Wiebe. Senator Wiebe served on this committee, as well as on a number of other Senate committees. He has served the province of Saskatchewan very well. All senators join with me in expressing our condolences.
Please proceed, Mr. Minister.
Hon. Harry Van Mulligen, M.L.A., Minister of Government Relations, Province of Saskatchewan: Thank you for those kind words. For those of us who knew Jack, and many of us around this table, in my view, he was always a prince of a guy. He was extremely well regarded in Saskatchewan by people of all political stripes because he was the type of person able to work with all kinds of interests and reach out to many people. He was great as our lieutenant governor because he was seen as a unifying force by all of us. He will be missed, so thank you for those kind words.
Thank you, too, for this opportunity to appear before you and to assist you in your deliberations as you continue to struggle with what is surely one of the more vexing questions to face our federation: How should fiscal resources be distributed and dealt with in our country, both from the viewpoint of the capacities of the federal government and the provinces and territories? How should we distribute fiscal resources among the provinces and territories? I want to commend you for taking on what must seem to be a task without end. We do appreciate the Senate's work in this regard, and we commend you on that.
In today's presentation, I want to deal with three issues primarily. One is the question of equalization. In our view, there is still a fairness issue that is unresolved. The second is the issue of per capita transfers and a change in position by the federal government with respect to per capita transfers. Third is the question of the unilateral federal process. I shall address each of these in turn, if I may.
First is the question of equalization, and this is the promise that the federal government made to ensure that non- renewable natural resource revenues are removed from the equalization formula to encourage economic growth. I might say, too, that that was a promise made without qualification, in the case of Saskatchewan, and I assume to the rest of the country. There was no mention of a cap or any other qualifications that might cause people to think that it was anything but a clear commitment.
The promise to us recognized that the equalization program essentially resulted in provinces selling assets to fund core programs, and that has not changed, and that equalization clawbacks are also a disincentive to economic development, and that has not changed for Saskatchewan.
First, I want to deal with the question of the cap. The bottom line of the federal proposal is that the option to exclude resource revenues is essentially offset by the introduction of a cap where 100 per cent of resource revenues are included. For 2007-08, the cap still leaves Saskatchewan with some benefits, but in later years we will be left only with the cost of resource extraction and no equalization entitlements.
On the left side in this bar graph, we have full exclusion — what was promised. On the right side, we have the reality — what we got. It is very frustrating for Saskatchewan to keep hearing the promise was kept, when it was clear in reality it was not. The left column in our view represents a fair, principle-based approach. The right represents another arbitrary ad hoc measure.
This slide illustrates how the cap claws back our resource revenues. If resource revenues increase by $100 per capita, as shown in the column on the right, there is an equal decline in our equalization entitlements. There is no net benefit to Saskatchewan from the increase in resource revenues. The problems behind the promise are not resolved. We are forced to use one-time asset sale revenues to fund ongoing programs.
This, in our view, denies us the benefit of section 36(2) of the 1982 Constitution Act and its commitment to reasonably comparable services at reasonable levels of taxation. This commitment should not require us to sell our one-time assets to fund programs.
The new equalization formula will further entrench the current unfairness, where some provinces have full access to their energy revenues without clawbacks but Saskatchewan does not. We do not believe that equalization reforms should be implemented without resolving the fairness issue. A Saskatchewan energy accord is one option that could potentially bring fairness to equalization.
I should like to talk about the distribution of the Canada Social Transfer. The traditional allocation of the CST was based on an equal per capita tax, plus cash, transfer that took into account the tax points transferred to provinces in 1977. The decision to distribute the CST on an equal per capita cash allocation without counting the value of tax points will penalize provinces like Saskatchewan with lower fiscal capacity. The new CST allocation will shift $800 million a year from less wealthy provinces to Ontario and Alberta. The new CST allocation will heighten, in our view, our competitive disadvantage at the same time as equalization reform denies us the benefits of our resource development.
This slide illustrates the impact of changes to the CST. Saskatchewan CST allocation, the red line, will basically not grow until 2011-12. By then, Ontario's allocation, the green line, will have grown by 42 per cent, and Alberta's allocation, the blue line, will have grown 90 per cent, compared to 2006-07 levels.
I wish to say a few words about per capita funding outside of the Canada Social Transfer. The federal government has decided to use equal per capita allocations in areas like climate change and the national highway system. This does not make sense to us because population is not the core cost driver in these programs.
For example, Saskatchewan produces 9 per cent of the country's greenhouse gas emissions but is home to 3 per cent of the population. In other words, we receive 3 per cent of the funding while we have 9 per cent of the problem. Saskatchewan has 9 per cent of the core national highway system but receives 3 per cent of the funding to maintain the national highway system. The result is that Saskatchewan will have to shoulder a heavier burden than other provinces to reduce greenhouse gas emissions and to maintain the national highway system.
In closing, I wish to make a few observations about process. The intergovernmental process in Canada is broken. Open federalism has turned out to be a one-way street. There has been no significant multilateral engagement by the federal government in the last year over equalization, CST reform or important issues such as climate change. As there are no multilateral engagements, governments are forced to negotiate in public or through ad campaigns in websites. This is not helpful and does not serve the interests of the citizens of Canada.
The broken intergovernmental process has produced an approach to fiscal balance that will not serve Canadians well, because equalization reform does not address the unfairness in the treatment of non-renewable resource revenues. Federal funding is allocated per capita when population is not the core cost driver. Federal transfers are now dramatically aggravating existing economic development challenges for less wealthy provinces.
There is a better way to serve Canada. Governments need to work together on a multilateral basis to tackle national challenges such as climate change, and we are ready to do so.
I would be pleased to deal with any questions that you may have.
The Chairman: Thank you for that overview. We appreciate you touching on the equalization side as well as the social transfer side. There may be some questions with respect to the educational transfer side.
Senator Ringuette: Thank you again for appearing before our committee; your arguments are laudable.
I have heard that Saskatchewan is a producer of electricity to a certain extent. Has your department looked into the impact of the revenue generation of electricity? If it were included in the formula, how would it impact your equalization payments?
Mr. Van Mulligen: I am not entirely clear on the answer to that question, that being to what extent revenues from SaskPower, our electrical utility, might be impacted under the equalization program. That is a good question. I can say that SaskPower's relative position, to Manitoba, for example, with Manitoba Hydro's extensive revenues from export of electricity, do not begin to compare to their capacity. We do some export of electricity but are not constructed to be a net exporter. There are conditions under which we export electricity because we have a surplus at points in time where other jurisdictions have a need, but we are not set up to see SaskPower at this point as a net generator of revenues. Neither do we have a low-cost service, such as might be provided for the citizens of Manitoba and Quebec, because of their hydroelectric potential.
Senator Ringuette: Do you feel that the revenue from electricity should be included in the equalization formula? We are looking at the announcements just made in regard to equalization. I feel it has not contributed to rebalancing the fiscal imbalance because there are provinces, and let us admit it, such as Quebec, that have a high amount of their income from electricity. It is not taken into consideration when balancing the redistribution. That was the purpose of my question.
The other issue of major concern that we should look into is this distribution per capita for health, education and, as you have indicated to us now, for a national highway system and greenhouse gas emissions. I look at that and say, well, when there is funding to help public transit, it is not a per capita system for certain provinces. I guess there is a lot of gerrymandering from the current federal government in regard to how they distribute money to help the provinces. The bottom line is that the less populated provinces are the persona non grata of the current way of helping the provinces and the population of these provinces. Perhaps you could add to this.
Mr. Van Mulligen: The public who may be watching this program may well have questions about what is wrong with having equal transfers under the Canada Social Transfer to the provinces and, at some future time, extending that to health transfers. At some point, the federal government said that, as opposed to giving you cash, we are going to transfer tax points to you. That will reduce our taxes and you can increase your taxes; therefore, everything is the same.
However, it does not quite work that way, as we know. For the federal government to say we will reduce our taxes by two points and you can increase yours by two points and you get the same revenue — wrong. Ontario and some provinces may well receive the same benefit because of the wealth they have within their provinces, but other provinces that have less capacity will have to increase their taxes by many more points to receive the same revenue.
The federal government is saying never mind that, we just want to give out equal transfers. In our view, this begins to transfer more wealth to the provinces that have the wealth to begin with. This creates additional strains, perhaps not as much now under the Canada Social Transfer, but I think significantly more when we start to also extend this — I understand in about seven years' time — to the health transfers. This will be a huge challenge for Canadians.
For us, it exacerbates the difference in fiscal capacity between us and our neighbour to the west, Alberta. Alberta has a fiscal capacity unlike that of any other jurisdiction in Canada. It puts great pressure on us to compete, to stimulate and to strengthen our economy so that we provide more opportunities for our young people at home. This is a huge challenge for us.
Then to change this transfer system puts greater stress on our ability to compete effectively with them. The question of per capita transfers is more readily understood by Canadians because they will know that there are many more miles of highways in Saskatchewan than in many other jurisdictions but we do not necessarily have the population to support that.
Senator Murray: Believe it or not, I was present at the first ministers' meeting in 1977 as an adviser to the New Brunswick government, when Mr. Trudeau brought in the block funding proposal complete with the transfer of tax points to the provinces — I think it was 13.5 points of the personal income tax and one point of corporate. The provinces bought it because Mr. Trudeau made a very persuasive argument about how the provinces would have more flexibility to follow their own priorities.
Of course, Ontario, Alberta and the richer provinces wanted it, but other provinces, who saw that the value of a tax point varied greatly from one province to another, demanded successfully that those tax points be equalized. The Trudeau government agreed to that, so we had the established programs financing, EPF, as it was called, that essentially continued until the mid-1990s.
Some of us said — and some provinces said — that the transfer of the tax points and the narrative that the federal government employed over the years tended to confuse the discussion about how much the federal government was contributing to health, social assistance and post-secondary education. Every time the federal government claimed a dollar figure, they included the value of those tax points that had been transferred 20 or 30 years before and were now being imposed by the provinces.
In that sense, I am glad to see the end of the consideration of tax points. Your problem, of course, is with the associated equalization that went with the tax points to your province and other equalization-recipient provinces. The associated equalization grew over the years.
I will come to the Canada Social Transfer in a moment. I have been trying to get to the bottom of this for some weeks but I have not quite got there. The Martin government came to an agreement with the provinces about the Canada Health Transfer. I believe it is a 6 per cent per year increase out to 2013-14 over a base amount. What became of the associated equalization in that agreement? Can you or your officials tell me that?
Erin Brady, Analyst, Department of Finance, Government of Saskatchewan: Those tax points will continue to be equalized until the CHT is renewed in 2014-15. The feds have said that their intention then is to move to equal per capita there as well.
Senator Murray: That was announced in the present budget. The associated equalization is still there.
Ms. Brady: Right.
Senator Murray: However, when the federal government talks about the amount of money in the Canada Health Transfer, they no longer refer to the value of the tax points, do they?
Ms. Brady: It is still measured, but we more commonly refer to the cash.
Senator Murray: We are talking cash now.
Ms. Brady: Right.
Senator Murray: To come to the Canada Social Transfer, I have been talking to some of your colleagues in other provinces and I still do not have a clear understanding.
The federal government seems to recognize that there is a problem here. They say they are going to increase their cash payments under the Canada Social Transfer by 3 per cent per year. I happen to think that that is inadequate in terms of post-secondary education, but that is another argument.
Then they say there is a $300-million increase already provided for in existing legislation this year in the base amount for the CST. I am quoting now from one of the budget documents, entitled ``Restoring Fiscal Balance for a Stronger Federation'':
To bring Ontario, Alberta and the Northwest Territories to the same per capita cash support as that of the other provinces and territories, while ensuring that no province or territory is unduly affected by this change, total CST cash levels will be increased by $687 million in 2007-08.
You have the $300 million that was already legislated and another $687 million which is supposed to keep you whole, if I read this correctly, in terms of the associated equalization, so that is almost $1 billion extra.
Then, in 2009-2010, they will begin to escalate by 3 per cent. What is your problem with that?
Ms. Brady: Our problem is with the growth of the transfers.
Senator Murray: Is that the base amount?
Ms. Brady: The problem is not with the base amount. Rather, Saskatchewan will be restricted to the floor amount. Other provinces will see growth in their transfers but Saskatchewan is limited to the $335 million in the CST. The move to per capita transfers is costing us so much that the federal government has advised Saskatchewan to ensure that it does not fall lower than this year's amount. The reality is that we will not see the growth so it puts the province in the difficult position of competing with provinces like Alberta, which will see 90 per cent increases over that time while Saskatchewan will see almost no increases in its CST until beyond that time.
Senator Murray: Is the best comparison with a neighbouring province or with what you would have received had we continued associated equalization? I understand your point that the transfers kept you whole for one year but there is no provision for the province going forward. I would assume that is the case with all recipient provinces.
Mr. Van Mulligen: We are highly sensitive to any further changes or distortions in fiscal capacity between Alberta and Saskatchewan. This is a huge issue for the province.
Senator Murray: May I ask a question about equalization, or would you rather proceed?
The Chairman: I should like you to ask that question, but I wish to ask a point of clarification first.
With respect to the point you have just discussed on the social transfer, it was my understanding that it is 3 per cent per year through to 2014-2015 beginning in 2009 but that Saskatchewan's base has been increased in this fiscal year to keep you whole. The 3 per cent is not 3 per cent of your base but rather 3 per cent of the overall envelope, and that is the problem. Is my understanding correct?
Ms. Brady: That is true. The national base will grow by 3 per cent but Saskatchewan's share will not grow because it is limited.
The Chairman: I had thought that each province would be increased by 3 per cent.
Ms. Brady: Unfortunately, that is not the case.
Senator Stratton: Everyone will be curious as to why Saskatchewan is not growing when they look at those curves. Is the lack of growth related to the population? Why is the province not growing?
Ms. Brady: The move to per capita transfers cost the province about $50 million per year so the federal government said that it would protect that amount for the province going forward. However, each year, the value of that protection begins to shrink. Saskatchewan still does not see growth past its $335 million.
Senator Stratton: The question becomes difficult in respect of the comparison of population growth in Alberta and Ontario with that of Saskatchewan. Is that not the core issue?
Ms. Brady: No, the federal government has not made a commitment to us on a per capita floor. My understanding is that the floor is Saskatchewan's total transfers.
Senator Stratton: I do not understand why Ontario and Alberta are experiencing growth where Saskatchewan does not have a similar growth. The only thing that I can suggest is population growth, particularly in Alberta. I do not understand why you would stay flat while those two provinces grow if it is not because of the growth in population.
Dylan Jones, Assistant Deputy Minister, Department of Government Relations, Government of Saskatchewan: The essential thing is the switch to a formula that no longer takes into consideration the lower value of our corporate and personal income tax. Thus, a certain gap that was being compensated is no longer being compensated, and we are moving to a full population-based model. That means that Saskatchewan's entitlement drops dramatically. You could draw a line on this chart to show the amount of the loss because of the difference in the calculation. An essential is the decision to no longer look at the difference in Saskatchewan's capacity to fund those programs.
Senator Stratton: That is because of the lower tax base. You also mentioned the transfer to a per capita base.
Mr. Jones: That is right.
Senator Stratton: It is affected by the growth in the populations of the other two provinces.
Mr. Jones: That is not the main driver.
Senator Stratton: I understand, but it is one part of the argument.
Mr. Van Mulligen: We all understand ``per capita,'' which is not an issue for us. Rather, the issue is the value of the taxes and a clear recognition that many more head offices of corporate and industrial enterprises are located in Ontario and Alberta, therefore creating a percentage of tax that will generate far more per capita or otherwise in those jurisdictions than in Saskatchewan.
The Chairman: We have been discussing initiatives announced in Budget 2007 that we have not seen in the form of proposed legislation. Parliament has not pronounced on the initiatives yet, but the committee will revisit this issue undoubtedly as bills come forward. This committee will examine proposed budget implementation legislation in due course, I would expect, and might call on you again to explain the impact of these various new initiatives.
Mr. Van Mulligen: Certainly, this committee will want to keep an eye on this issue, which is clearly about winners and losers in our federation and the questions of regional tensions and what appears to us to be a further shift in resources to fairly well-to-do regions within the country at the expense of other regions. It is not a discussion that we would be having if, in 1977, there had been straight cash transfers as opposed to tax points. This issue bears watching.
Senator Murray: On equalization, the issue is how to treat natural resource revenues. During the 2004 election, I believe, Mr. Harper made a commitment in Saskatchewan of zero inclusion of natural resource revenues for purposes of the equalization formula. Parenthetically, I should say that he was joined by Mr. Layton of the NDP, who was not going to stand by and allow Mr. Harper to be more friendly to an NDP government in Saskatchewan.
The idea of zero inclusion has respectable academic provenance. We heard from Professor Ken Boessenkool on the first occasion this committee studied equalization in 2001-02. In that examination, we crunched the numbers, albeit retrospectively, and found that while it would create quite a bonus for Saskatchewan, British Columbia and, to some extent, Newfoundland and Labrador, just about every other recipient province would take a big hit. As a matter of fact, compared to various other inclusion rates, the 0 per cent inclusion rate results in a smaller pool of equalization funds.
The committee looked at it a second time in 2006 and came to much the same conclusion. As you know, the provincial-territorial panel that I was a member of also looked at it and found that it could not identify any true principle for zero inclusion. Rather, the panel drew the conclusion that the better principle was 100 per cent inclusion. That would create a win-win situation for just about everyone, although it would be quite an expensive proposition for the federal government. The panel concluded that, if it were too expensive, then it would be a case of adhering to the principle while cutting back proportionately among the provinces without a cap. When the panel examined it further, it found that the 0 per cent inclusion, when compared to the five-province standard with 100 per cent inclusion, would put Saskatchewan $1.1 billion ahead — Newfoundland the same amount as well — and would put British Columbia $2 billion ahead.
All the others took a big hit. Prince Edward Island was down by $18 million, Nova Scotia by $97 million, New Brunswick by $51 million, Quebec by $244 million and Manitoba by $34 million.
The O'Brien panel recommended 50 per cent inclusion, and the government has accepted that recommendation but with the cap. I just want to ask you, for the record, what your entitlement would be going forward this year on the basis of 50 per cent without the cap. Am I right in saying that it would be in excess of $600 million?
Mr. Van Mulligen: I think somewhere in there.
Senator Murray: The number I have here is $640 million.
Mr. Van Mulligen: Yes.
Senator Murray: While I appreciate your insistence that the government maintain its commitment on the zero inclusion, what is really cutting or hitting you hardest is not the 50 per cent inclusion so much as it is the cap, right?
Mr. Van Mulligen: It is the cap.
Senator Murray: There was an undertaking explicitly that there would be no cap. I do not know whether that was said in Saskatchewan, but it was certainly said in the Atlantic provinces.
Mr. Van Mulligen: That is the issue. There was no qualification when it came to the promise by the then Leader of the Opposition, now Prime Minister, with respect to the equalization. I know this has been a contentious issue for your committee, too, over the years to know how to land on this. However, I know, too, that in your report when you talk about the territories clearly then you understand the principle of allowing jurisdictions to retain their resource revenues as a way for them to invest in their economies, to broaden and strengthen their economies, and we take the point of view that it is not much different for Saskatchewan. We have the same challenges.
Senator Murray: The issue for us was what is so different? The argument that is made by Professor Boessenkool and others is that revenues from non-renewable resources are in the nature of the sale of a capital asset; they do not recur. However, that could probably be said about other revenues also. In any case, they come into the Consolidated Revenue Fund, they are part of a province's fiscal capacity and provinces use them for provincial priorities. That is the other argument. That is the argument we accepted.
Mr. Van Mulligen: Again, I know this has been a contentious issue for you. We will continue to take the position that there is a real difference between royalties and tax income and revenues that reflect an economy.
I might say that in this particular case we have a bit of what you might call double counting, where industries that are involved in resource extraction in Saskatchewan — whether it is oil companies or potash companies, uranium companies — do pay corporate taxes and the people who are employed by them also pay income taxes, and then this is measured to reflect our fiscal capacity. In addition to that, you also want to count royalties, which is again taking an asset that we have in the ground into what might be termed a liquid asset, to say that that also needs to be taken into account. We think it has gone too far.
Again, to our frustration, there is recognition of that principle. There is recognition of that principle certainly by the Senate committee when it comes to the territories. There is recognition of that principle historically when, in the early stages of equalization, Alberta continued to receive equalization, even while benefiting from, at that point, a relatively healthy flow of resource revenue. There was recognition of that principle, too, I think with respect to the two Atlantic provinces and the Atlantic Accord.
Hence, when we see that recognition but now are confronted by rules and principles that do not treat us well in terms of caps and the like, we chafe at that.
Senator Murray: Saskatchewan was taking quite a beating a few years ago on equalization for various reasons, one of which was that you were —
Mr. Van Mulligen: That was a representative tax system issue.
Senator Murray: To some extent, it was resolved by Mr. Goodale in his budget. When he abandoned the formula- based equalization and went to the so-called new framework, including for the previous year, 2004-05, lo and behold, you went from zero entitlement to $652 million. That was a soft answer that turneth away Mr. Calvert's wrath. You remember Mr. Martin made a commitment to him and they met.
Mr. Van Mulligen: All provinces were receiving what might be termed one-time payments from Ottawa under the program. We certainly appreciated the one-time payment from Ottawa. That was also meant to extinguish Saskatchewan's claims to any further redress we were seeking with respect to the excessive clawbacks.
Senator Murray: Tom Courchesne.
Mr. Van Mulligen: Where for every dollar we generated in oil revenues our equalization payments would be reduced by something more than a dollar, and even the federal government said it was unfair.
Senator Murray: We had a discussion about it in the Senate, and we questioned Mr. Goodale about it at the committee.
I have one small question.
The Chairman: We are late on time.
Senator Stratton: Please, Chair, how long do we have the minister for?
The Chairman: We have the minister until 10:30.
Senator Murray: My question can wait.
The Chairman: Sorry to cut you off.
Senator Mitchell: Minister, I shall make mine quite specific. There was an ad run by the federal Conservative government on television in Saskatchewan arguing they somehow had delivered $878 million in new funding for Saskatchewan and that somehow you had received a per capita increase. I do not believe it. I should like to see you dispel that if you could, please.
Mr. Van Mulligen: If you looked at what the federal government transfers would be to Saskatchewan over a period of two years, not just this current fiscal year but also the next fiscal year, then a completely different picture emerges. Then you would see that Saskatchewan would be receiving the least or maybe second least in terms of per capita transfers from the federal government. Their calculation is based on, again, a one-time payment of $200 some million under equalization, which next year will be zero. Their calculation also includes an assumption on their part of a specific development that may or may not occur in Saskatchewan, and it also includes Saskatchewan's share of transfers that are received by all Canadians, but this is not a calculation that is, I might say, well received by Saskatchewan people.
Senator Mitchell: Is there a net reduction then in the second year overpayments that you received this year in the first year and will there — there is an absolute net reduction —
Mr. Van Mulligen: They calculate the payments somewhat in excess of $800 million. That figure would reduce to $400 million, roughly speaking.
Senator Mitchell: So the year after this year, Saskatchewan will take a hit to its revenues of $400 million just arbitrarily implemented by this budget?
Mr. Van Mulligen: Not to our budget as such. Again, these are not funds necessarily going to Saskatchewan. These also include a potential investment by Ottawa in an ethanol plant in Saskatchewan which they then count as transfers to the province.
Senator Mitchell: They are counting as transfers to Saskatchewan investments that are not going through your government? They are mixing apples and oranges here, to try to make their case look stronger; is that correct?
Mr. Van Mulligen: You could say that. I could not possibly comment.
Senator Mitchell: Unbelievable. Thank you.
The Chairman: Thank you for bringing that out, Senator Mitchell.
Senator Nancy Ruth: Minister, thank you for being here. Senator Murray has referred to Harper's comments in 2004 about the inclusion of resources, but I am also interested that Dion has said in the weeks and months leading up to the budget that all resource revenues should be included. You have mentioned in various articles a dream of a Saskatchewan accord. If there are two national leaders saying ``no way,'' what do you hope to obtain and how will this change your picture?
Mr. Van Mulligen: I am here today to do what I have been doing for some time, and that is to ensure that Canadians understand there are principles involved here, principles that even the Senate committee has argued and debated over time. It is the question of the inclusion of resource revenues and how they should be factored into the equalization program.
The committee has the point of view that maybe they should all be included but that when it comes to the territories they should be excluded. The territories have a need for development that we all recognize, and I would say the same holds true for Saskatchewan. That is one of my reasons for being present.
I also want to point out that it is fine to have principles, but then to find reason to have something other than those principles being observed inside deals such as the Atlantic accords or to have them not being observed initially when the program was constructed — we need an equalization program and we should be measuring fiscal capacity. However, that fiscal capacity should certainly not be measuring royalties the provinces are receiving from their resources. That is another reason I am here.
I am not clear on how this will be received by this federal government or that party; that is not something I can control. All I can do is continue to put our case before Canadians. I am appealing to a fundamental Canadian value of fairness.
Senator Stratton: Minister, you have made an excellent case on behalf of your province. Perhaps you should move to Manitoba and help us out there as well.
Mr. Van Mulligen: I moved from Manitoba to Saskatchewan. I still have family in Manitoba, so it is hard for me to be strictly regional when I have families in five or six different Canadian provinces.
Senator Stratton: You look at Alberta as we look at Alberta from Manitoba. We also look to you in Saskatchewan as being fairly well off as compared to Manitoba with your oil, potash and uranium, particularly today. We are rather green with envy regarding that.
My concern is the fact that, when you try to arrive at a formula that seems to work, the fundamental principle adopted by most studies on this issue is that no one should have a greater fiscal capacity than Ontario, using that as a base.
When you measure fiscal capacity, you are talking about non-renewable resources. We can appreciate that comment, although in order to have capability, the reason for the cap is quite apparent to everyone.
When you measure fiscal capacity and the federal government looks at fiscal capacity, Saskatchewan rightfully argues that it has more miles per capita of highway than any other province. Having spent a great deal of my youth working in Saskatchewan, I fully understand that. I hitchhiked half of Saskatchewan when I was working as a kid.
Having said that, there are also benefits that one receives in agriculture, for example. There are subsidies going towards agriculture that are fairly substantial. Does Saskatchewan not benefit from that to a large degree? Does Saskatchewan not benefit from other plans that surely must be a part of this balancing, which is always tricky? I should like to hear your explanation regarding that.
Mr. Van Mulligen: We only have until 10:30.
Senator Stratton: I realize that, but I should like to hear your comments on the agricultural issue alone.
Mr. Van Mulligen: I will go through the points, because you raise many.
First, with respect to agricultural subsidies, they are to recognize the fact that there is an international trade war occurring that sees extensive subsidies by the U.S. and European governments to support their agriculture producers. The federal government realizes it needs to do something in Canada, but that something is tempered by an expectation that provinces will come up with 40 per cent of the cost. I am not quite sure how it is that something that reflects national policies should require that degree of provincial participation.
Yes, moneys do come to our province, but 40 per cent of those payments are generated from our revenues. This is a huge issue for us, one that we continue to put forward at agriculture ministers' conferences.
Yes, we have resource revenues, but we also have expenses that are not dealt with. We have huge expenses in terms of extracting those resource revenues. The mines in the north have expenses involved in building roads to them. About half or more of our oil in Saskatchewan is heavy oil, which is not something you take out of the ground with a pump jack and which goes immediately into a pipeline. The heavy oil must be transported by trucks to regional treatment centres, thereby creating a tremendous amount of strain on roads in Saskatchewan. However, there is no recognition in these programs.
There are times when we are expected to simply live off our resource revenues, and there is no recognition of our expense for that. Then we look at our neighbour, Manitoba, which receives equalization and wonder how we can be further ahead. I am unsure what there is to envy.
I also believe there should be more equitable treatment in terms of renewable resource revenue, that is, hydro resource revenue and non-renewable resource revenue. With respect to non-renewable resource revenue, we want to have a representative tax system — that is, we want to estimate what your revenues should be, as in some provinces in the past, as Professor Courchene has pointed out. Vis-à-vis hydro, we want to take the actual amount. If you want to lowball your estimates from that and if you want to provide your citizens and your industries with very cheap electricity and use that as a competitive edge, we will not take that into account. We will only take your actual revenues into account.
This also provides some challenge for us, to see industries looking at Manitoba because of very cheap electricity and have that recognized in the equalization program. Therefore, this is a huge issue for us as well.
I might point out that in Saskatchewan we at all times look to guarantee to our people that they will have the lowest bundle of utility costs — telephone, hydro, natural gas and automobile insurance — and then see this very low electrical rate in Manitoba effectively subsidized by Canada's equalization program.
Senator Stratton: I happen to be on your side with that. They may string me up there, but the point is that we pay far too low a rate in Manitoba for hydro electricity. To me, that is our oil, and we should be measuring and selling it at a rate well above where we are now.
I still make the argument that, despite your costs, you are sitting on uranium, which is exponentially high compared to where it was a few years ago. The same holds true for oil and fertilizer, potash particularly.
Part of your problem is also that the wealth of the province from these resources has increased dramatically over the last three to five years, and that is hurting you.
I guess the fundamental question must be: Do you not believe we should have a basis or principle that no province should be able to have greater resources than money flowing into Ontario? I think that fundamental principle has been adopted universally by everyone. There can be side deals struck, as there was with Newfoundland and Labrador and Nova Scotia.
Would that be your fundamental argument in order to make your particular case, that you should argue for a side deal similar to that of Newfoundland and Labrador and Nova Scotia?
Mr. Van Mulligen: That is exactly the approach we are taking at this point. On the question of a cap, I do not know if that is a question of principle or whether that is a question of real politic. It is something, but it certainly affects Saskatchewan in a major way.
The Chairman: This brings us to the end of this part of our meeting. I wish to thank our witnesses sincerely — Minister Van Mulligen, Ms. Brady and Mr. Jones — for being here and for raising a number of interesting points. Your presentation and the material that we have to take along with us will be very helpful in our deliberations.
Mr. Van Mulligen: Thank you very much, senator. I very much appreciate this opportunity to put our case before you and to assist you in your deliberations.
The Chairman: For those watching on television, the interim report on equalization or horizontal fiscal balance can be found on the National Finance Committee website under the heading of ``reports,'' and we hope to generate another report with respect to the ongoing work in transfers generally as we proceed.
The committee continued in camera.