Proceedings of the Standing Senate Committee on
National Finance
Issue 13 - Evidence - Meeting of May 1, 2007
OTTAWA, Tuesday, May 1, 2007
The Standing Senate Committee on National Finance is meeting today at 9:35 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.
[Translation]
The Chairman: The meeting will come to order. Welcome to the Senate Committee on National Finance. My name is Joseph Day and I am the committee chair. I am from New Brunswick.
[English]
In September 2007, 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 to the Senate not 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 marketing experts from across the country. The hearings took place over a six-week period.
On December 12 of last year, the committee issued an interim report entitled The Horizontal Fiscal Balance: Towards a Principled Approach as part of its ongoing studies of Canada's fiscal arrangements for provinces and territories.
In this next phase, the committee will commence its study by reviewing the division of fiscal resources and spending responsibilities between various orders of government in Canada.
[Translation]
I am pleased to welcome here today the Senior Vice-President and Chief Economist of the Conference Board of Canada. Joining him is economist Matthew Stewart.
[English]
Mr. Hodgson brings 25 years of experience and specialization in international economic and financial issues to the position of senior vice-president and chief economist of the Conference Board of Canada. Mr. Hodgson is the board's chief spokesperson on economic issues and has written extensively on economic and fiscal issues. He is the co-author of the recently published report entitled Mission Possible: Stellar Canadian Performance in the Global Economy. The report is one of three volumes forming the final report of the Canada Project, a three-year program of research and facilitated dialogue intended to improve Canada's standard of living and its place in North America and the world.
I believe you have introductory remarks, Mr. Hodgson. Please proceed.
Glen Hodgson, Senior Vice-President and Chief Economist, Conference Board of Canada: I would be happy to make just a few opening remarks, perhaps to set the context.
You have already mentioned, Mr. Chairman, the research we did. This is what volume one looks like, hard copy. I see many of you have a printed version in front of you. Three years of research went into it. Interestingly, it was funded almost entirely by the private sector. The purpose of the research was to try to answer the following question: How do we create sustainable prosperity for Canada? We have 76 recommendations, over three volumes; it is a huge read. If you have any insomnia, it might be one way to address it. More seriously, however, there is a lot there to speak to creating prosperity in Canada on a sustainable basis.
We have had a chance to brief deputy ministers, cabinets across the country, provincial and federal deputies, and many people are taking seriously the advice we have provided on this.
The issue of vertical fiscal imbalance is a sub-theme within the major work. You will find a two-page box on pages 62 and 63 of the report. We have added that because there is a theme that runs across all three volumes with respect to fiscal capacity of different levels of government to do to things we recommend.
We recognize that vertical fiscal imbalance is a structural issue. It is not solely about balances today. We know that, today, everyone is in surplus or in balance. Ontario just put out its budget for 2007-08, in which they have a very small deficit, of $400 million, but a contingency reserve bigger than that. In the event that they do not need the contingency reserve, Ontario will be in balance or in surplus. Newfoundland and Labrador are moving into balance and surplus.
On one level, in terms of current balances, we can declare victory: We can say that the problems have been solved, that the transfers of the last few years by the federal government to the provinces have addressed the problem. We think we need to go deeper than that. We see prospective imbalances on a structural basis going forward in two areas. First, looking at health costs as the key driver of provincial spending and the combination of aging population, slowing potential output in our economy over the next five, 10 and 15 years and the overall fiscal capacity of the provinces, we believe, will lead us back into a deficit for the provinces starting in about 2015. The specific year depends upon the assumptions you use on health costs as a driver — taking on board, for example, the recent added transfer of $39 billion over the next seven years from the federal government to the provinces. There will be influences there.
Our analysis, which was done for the Council of the Federation a few years ago, shows that with very conservative spending assumptions on health care, the provinces collectively would move back into a deficit position in 2013 or 2014. The hole will only get deeper as our population ages and as the potential growth rate for our economy slows over time.
There is a structural issue over the medium to long term. Now is a fabulous time to be talking about it. What better time to begin to address a serious structural problem than when you are in a surplus position. You have some fiscal capacity for addressing it.
Perhaps even more important is the structural imbalance faced by our cities today. I know this speaks to Senator Eggleton's heart because of the leadership he showed in the City of Toronto. Volume 3 of our Mission Possible study speaks to this in-depth. We look at the current capacities of the cities to pay for the services they are providing.
The various estimates that are out there for infrastructure deficits span from $50 billion to $120 billion, just on current needs, not even looking at expansion of systems going forward. Transfers to the cities from the provinces and the federal government have been declining as a share of city revenue over the last 15 or 20 years. If you put all that together, we think there is a serious structural issue facing Canadian cities.
We have a few preliminary thoughts as to how we can address this. As we look at governments across the country scrambling to meet the needs of our cities, various things are happening. The Province of Quebec has stepped up recently to provide a little bit of cover for the pension overhang liability the City of Montreal faces. However, that does not deal with the infrastructure issue. There has been a bit of adjustment recently on the Ontario budget as well.
If you put it all together, there is still a significant structural deficit facing our cities. That is probably the true fiscal imbalance going forward in the country. That is what is facing our cities, in addition to the demographic forces that will have an impact on provincial budgets going forward.
The analysis is there. As I said, if you are deeply interested in cities, Anne Golden should come back at a later date and talk about the research in volume 3 of our study. She was the captain of the chapter dealing in-depth with the future of Canadian cities.
The Chairman: Before we go to honourable senators with questions, you indicate that the City of Montreal carries a deficit. Could you clarify that?
Mr. Hodgson: It is not a deficit. They are facing a pension liability challenge. We noticed in their budget this spring that the Quebec government is providing additional resources to the City of Montreal to deal with that particular issue. That is just one of many issues facing cities.
You could probably examine city budget by city budget and see the same challenges with respect to meeting pension liabilities, with respect to current outlays and, more fundamentally, the structural issue around infrastructure. The fact that we have water mains breaking across every city in the country has to be addressed on a chronic basis now. It really is addressing the issue at two or three different levels.
The Chairman: That is the infrastructure deficit you were talking about in your report.
Mr. Hodgson: That is right.
The Chairman: Virtually all of the cities, being subject to provincial legislation in terms of the way they operate, are not entitled to have the deficit or to build up a debt, is that correct?
Mr. Hodgson: Cities are certainly the creature of the provinces, under our Constitution. Frankly, I am not an expert on city finance. You would have to examine the relationship province by province.
In general, cities have limitations in terms of the debt loads they can carry. One of the pieces of advice we give in volume 3 of our report is that cities should have a greater capacity to borrow. Of course, that is dangerous. If there is not the offsetting revenue stream to allow a city to service debt, a worse problem could be encountered, in terms of debt service down the road.
The more fundamental issue is giving cities access to growth taxes, taxes that grow over time with income. That means access to sales taxes or even to income taxes, as is done in other places around the world. Cities in the United States and in Europe have access to growth taxes in one form or another. That means they are less dependent upon transfers from more senior levels of government and more able to address their concerns directly.
The Chairman: Do we have any cities in Canada that have that capacity right now?
Mr. Hodgson: Not to my knowledge.
Senator Stratton: When you look elsewhere in the world at how other countries have solved their problems, do you have any examples of where there is success?
Mr. Hodgson: In volume 3, of which I was not the author, we provide a series of examples from the U.K. and from the United States, where cities are given some scope of access to growth taxes.
Senator Stratton: For example?
Mr. Hodgson: Right off the top of my head, I cannot give you one.
Senator Stratton: I do not need to know which cities, but where you say they have been given growth potentials, are you referring to sales taxes?
Mr. Hodgson: Yes, that would be one.
Senator Stratton: Is that the primary driver?
Mr. Hodgson: Certainly, in the United States, sales tax is the principal one. There are jurisdictions in Europe, for example, where cities have accessed income taxes. As income tax is apportioned out, cities get a percentage.
I personally would not want to do have a third level of detail in my tax return; an efficient way of administering that would have to be developed. However, access to income or sales taxes is the logical step you would take toward providing revenue for cities.
Senator Stratton: I read it, but I wanted it on the record.
The Chairman: Is the Conference Board report available on your website?
Mr. Hodgson: Yes, all three volumes are available there. Volume 1 deals with Canada's place in the global economy. Given my background in the federal government with the IMF and EDC, that was a natural for me to steer along. Volume 2 looks at the resource economy and how to get the balance right between prosperity and sustainability in oil and gas, agri-food, forests and mining. Volume 3 takes on the issue of Canadian cities. My president, Anne Golden, was the captain of that, given her obvious experience of leading task forces in Toronto.
The Chairman: Volume 4 is an executive summary, for those of us who want to synthesize it.
Senator Nancy Ruth: You say that pages 42 and 43 of your report states as follows: ``Canada's cities are relatively successful on measures of social sustainability such as the quality of life, the cost of living, housing, education and health care. But Canadian cities lag well behind international competitors on many measures of economic performance.''
The Canada Project seems to make some recommendations with respect to the workforce and social cohesion. My question is this: Is there some place in the report and in the underlying studies where you set out the measures of social sustainability for all groups, for the population of Canada? What is the baseline of this and what does ``relatively successful'' mean? Where does the report consider the distributional impact of its recommendations on the people who live here?
Mr. Hodgson: Thank you for a challenging series of questions. Your question is very timely because one of the next things we want to do at the Conference Board is build a series of benchmarks to allow comparisons among Canadian cities, including the social dimension. We are out there right now trying to raise funds to allow us to build a methodology to do exactly what you are looking for, to build measures of performance across six broad domains, and society would be one of those. We would look at things like income distribution and how successfully we live within our cities.
We do not have the metrics built right now, but we are out canvassing cities, provincial governments and others for funds at this very moment, so that we can build the methodology to do what you are asking about. We do not have the methodology built within our report; that would be the next step.
Senator Nancy Ruth: Can I assume the 45 participants were financial investors in the study?
Mr. Hodgson: Yes.
Senator Nancy Ruth: So NGOs were probably not there?
Mr. Hodgson: No.
Senator Nancy Ruth: Were there grassroots groups when you did your data collection? If so, how were these organizations involved?
Mr. Hodgson: I will back up and explain what the Conference Board is. We have been around for 55 years as a business organization, but we are taking on more and more a research capacity, to look at public policy issues. We do not have an endowment. We do not receive any money directly, so we have to go out and sell our services. The people with the money in our society tend to be the private sector. The report emerged from a conference we have with CEOs every year. There was a concern about national drift at that point amongst the CEO community and they turned to the Conference Board to act as a research organization to develop a view of where Canada was going and what we could do to develop our future. We involve NGOs in other research projects. We also reach out to labour on an ongoing basis. We have a variety of productions where we sit, business and labour together around the table, and talk about the future of industrial relations.
On this particular project, the funding was coming from the private sector, a little from the Ontario government and from a federal funding agency, but no funding support and engagement from NGOs.
Senator Nancy Ruth: If you are talking to deputy ministers about your research data and how productivity can be expanded in Canada, it is difficult for me to understand why you do not ask people involved in trying to change the system.
Mr. Hodgson: Our purpose is to do fundamental research. It is data-based research. We are not an organization that goes out and develops policy on a consultative basis; that is the role of governments, I would argue.
We are there effectively as a service provider, going into the numbers. That is the strength we have as economists, namely, to do the data analysis and try to determine the trends coming from that.
Senator Stratton: I need to go back to the question. In terms of Manitoba, my province, the City of Winnipeg is essentially 65 per cent of the population of the province, yet it receives substantially less than 65 per cent of the income of the province, when you look at all the income.
With that in mind, if you push for an equitable share for these larger cities, how far down the list do you go? Do you look only at the major cities? In Manitoba, you can go to Brandon, Portage la Prairie or Flin Flon. Where do you get the cut-off? Even a small town of 1,800 people has infrastructure problems. How do we deal with that? You cannot forget that there are substantial villages and towns that have similar problems on a much smaller scale than the larger ones. How do we deal with that issue? We may say, for example, one of the solutions is a share of the sales tax. How far do you take that down? Have you looked at that? That is a conundrum.
Mr. Hodgson: I am a Manitoban originally as well, so I know of what you speak.
We see the opposite problem right now. The approach particularly toward federal transfers to the cities has been what we call the peanut butter strategy, where you spread it smoothly across the land and do not recognize that the major cities have special problems.
The model you are describing is legitimate, because smaller centres will have problems around infrastructure as well. However, the challenge we see is that major cities have special problems. They have homelessness problems, a need for urban infrastructure, aging and decaying water systems — more acute problems.
We did a piece of research, which is reflected in volume 3, around the so-called hub cities. This has attracted a lot of attention. In Halifax, the Haligonians were thrilled to know that they are a hub city, and everyone else in Atlantic Canada was as mad as hell.
The Chairman: As long as you include Saint John.
Mr. Hodgson: We were trying to demonstrate that there is a locomotive effect. Let me point out a correlation: If you have 1 per cent more growth in the hub cities, you actually get faster growth in the countryside, in the smaller centres surrounding and the rural areas. That phenomenon is referred to as a convergence hypothesis. Over time, you get a convergence of levels of income and growth rates between rural areas and the major cities.
We did not do the analysis to say we should give 80 per cent of resources to the 10 biggest cities. You have a challenge drawing a cut-off point as well — with city 10 being Halifax and city 11 being Quebec City. They would ask the same questions about why they are being left out. The issue is more around trying to preserve the existing funding for all urban areas while doing something special for the major cities in view of the fact they have special needs.
I understand entirely your concern. We have been approached by various smaller centres and by rural associations to see whether we can do analysis around the special needs of smaller centres, because they have needs as well. It is the classic problem of government having finite resources and setting priorities. We thought we should put more priority on the needs of the big cities.
Senator Di Nino: I want to go back to the line of questioning that my colleague from Toronto, Senator Nancy Ruth, was looking at.
It is relatively simple to say, let us issue a cheque and solve the problem, if you had the money. As you said, the resources are finite, so you cannot do that.
In your examination and research, were you able to find opportunities for examinations or audit of the programs to see if they were effective, if they were still of value or if there were still an efficiency level? Were you able to do that?
Mr. Hodgson: The Conference Board has done that many times over the years when we have been contracted or engaged to do research or analysis on a particular program, but that was not part of the Canada Project research.
This was a top-down view of where Canada fits within the world and what we can do better to get balance prosperity and sustainability. No, we did not do a detailed analysis on specific programs in this research. We have done that in other areas repeatedly. One of the lines of business I oversee is a contract research business where we do analysis of policy proposals or current policy frameworks.
Senator Di Nino: In those cases, were you able to provide a level of comfort that the programs are servicing the right people and are being delivered in an efficient manner, from your recollection, or is that an unfair question?
Mr. Hodgson: I have not spent a lifetime at the board. I have been there only two and a half years.
I think the board's analysis is rock solid. I think our reputation is extremely good as an objective, independent analyst of policies and proposals.
I can provide a particular example where we have done work recently that I think has helped in changing government policy. I am referring to the tax treatment of the working poor. We were part of the so-called MISSWA municipal task force that was centred in Toronto looking at welfare recipients and the working poor and whether our tax system was unfairly penalizing them. We did some of the background work for them.
One of the recommendations that emerged from that was advice around a working income tax credit as a way to reduce the welfare wall; that is, effectively reduce the high and punitive rate of marginal taxation that the working poor face or people coming off of welfare and back into work face that discourages people from staying engaged in the workforce. We used our economist tool kit to analyze this, along with other organizations. I had a chance to provide advice to ministers of finance at various levels. We have now seen action at both the federal and provincial levels where governments are responding to that kind of research. That is a clear example of where the Conference Board can bring value by analyzing the current state of policy and suggesting changes to make it work better.
Senator Di Nino: I am not sure I got the answer to the question that I asked. My concern was that there is often the pressure to plug the hole somewhere because of not enough money to go around. I just wondered whether, when you were doing this, you were satisfied to some degree, or you looked at the need for a continuous and constant review of the value, validity and effectiveness of the program and whether the delivery of that program is in the right hands, place and level of government.
Mr. Hodgson: That thinking underpinned all of our work. That is why we have taken a strong position. Our analysis clearly shows that there is a vertical fiscal imbalance affecting cities today. Something structural should be done. Frankly, it will not be sufficient simply to see larger transfers from more senior levels of government to cities. We believe strongly, through our analysis, that they need to be given the tools directly. I hope that is a better answer to your question. That applied across the whole array of issues that we looked at in our research plan.
Senator Di Nino: The Federation of Canadian Municipalities and the Toronto-Dominion Bank both did extensive research and came out with staggering figures as to the number of dollars that municipalities, particularly, larger ones, will need in the next generation, 15 to 20 years. They both suggest $50 billion to $70 billion, and growing at a rapid rate. Is that something that you discovered as well? Is that something that you would be able to comment on?
Mr. Hodgson: We have done preliminary analysis in particular cities and extrapolated to the whole country. The range we mentioned in our paper is $55 billion to $120 billion, which is the estimate for the infrastructure gap that exists for cities right now. The numbers that the FCM and Toronto-Dominion Bank have put out fall well within that range. We have not done a serious inventory of all the infrastructure needs across the country. The figure of $120 billion seems like a big number. However, it might be an underestimation, when you add in maintenance costs and the fact that a city like Toronto is severely underserved vis-à-vis transportation infrastructure, compared to a city of a comparable size in Europe or the United States. It is probably three to five subway lines short. Therefore, those estimates are very credible.
Senator Di Nino: There are countries in Europe, Germany in particular, where they actually have city states or, in our case, cities with provincial designation. Did you look at that and do you have an opinion?
Mr. Hodgson: A study was done as part of volume 3 of our research of the U.K. Anne Golden visited city leaders in London and various British cities, which are going through an amazing transformation right now. A city like Manchester is having a rebirth. However, we did not extend that onto the continent in Europe.
The Chairman: Could you elaborate on the rebirth of Manchester and what is happening over there?
Mr. Hodgson: First, the British government has a plan. That is a useful starting point. In Britain, there is a clear understanding that London is special, a separate case, and so it has special regulatory and revenue powers that the other cities do not have. The fact that the central government in a unitary state has a plan for cities has been a major contributing force.
One of the key drivers in Britain is not just national government intervention or even public policy but rather local leadership. A lot of the turnaround in places like Manchester, Liverpool and Leeds is led from the local communities, elected officials, business leaders and civil society coming together and agreeing on a common strategy and plan. Easy to say and hard to do, but it is an interesting indication of the magic elixir to bring about change within a city. It is having alignment on the plan or strategy.
Senator Eggleton: Thank you for being here and for the Conference Board work on the Canada Project. I have gone through the summary report and read extensively the one involving Canadian cities. The Social Affairs Committee of the Senate that I chair has the topic of cities in front of it as a major study that will be done over the next three years, and it is well under way now. The input from this document will be valuable for us.
As the document points out, Canada has become one of the most urbanized countries in the world. The recent census indicated that more than 80 per cent of the population is in urban areas. In fact, the 10 largest urban areas of the country make up half the population and half the economy. Hence, it is not hard to understand comments made by the Conference Board and by other people who say that the prosperity of our country depends on what happens in our big cities. It is not a question of ``we,'' the federal government, helping out ``them,'' the cities. It is not a question of people who live in smaller or rural areas helping out people who live in cities. It is an ``us'' question, namely, how do we keep our economy prosperous? A key part of it is dealing with the challenges faced by our cities.
One example of the challenge is property taxes. In Canada, property taxes make up 53 per cent of the revenue of our urban areas. In the United States, property taxes account for 23 per cent. In the United States, there is a much greater access to what is called the ``growth taxes,'' things like sales tax or income taxes. It does not mean everyone goes around levying it or collecting it. We do have the Canada Revenue Agency, which collects for the provinces and the federal government. You can work out those systems. You do not even have to have municipalities levelling, but to get a greater share of revenue will involve either or both the federal and provincial governments helping to produce that.
The way we have helped municipalities of all sizes to this point in time is through the infrastructure program. Given what this document and others say about the $60-billion deficit in our infrastructure, we have still got a long way to go. The people involved in urban transit say there is another $20 billion over and above that just to get the infrastructure in the big cities into some kind of shape so they can be complementary to the need to move traffic as part of the economic development, et cetera. Moving people around is vitally important in places like my city, Toronto, and there is a big deficit in terms of that. We have not had much new infrastructure in that way for a long period of time.
You were asking, Mr. Chairman, about debt. Municipalities in Ontario, and I take it that it is the same in the rest of Canada, are not allowed to borrow for operating purposes. They cannot go into an operating deficit, but they can borrow for capital, and they do. They have large debt servicing. The City of Toronto debt servicing is way up the line in terms of the amount of taxpayers' money that goes into paying interest on the debt. That is all relevant to capital projects that are infrastructure related.
We have an extensive need. It is not ``we'' in the cities or ``we'' in the big cities; it is ``we'' the country, because it is all in our interests in terms of the economic drivers of this economy and our prosperity.
There are different ways of approaching this. We could go to square one and say let us revise the Constitution, which gets a lot of groans, to recognize that there are three orders of government. Back in 1867, when the Constitution was set, they did not see that. They saw provinces and a federal government, split it up between the two, and said that local government comes under the provinces. However, it does not face the reality. At that point in time, the numbers were vastly different from what they are today. It does not recognize the current reality.
On the other hand, talking about dealing with the Constitution does not warm anybody's heart. It is a long process. That may happen eventually. Meanwhile, we have to operate within the parameters of what we have today, which means we will have a lot more money from federal and provincial governments going to local government, either through infrastructure funds or give them a share of revenue, or gas tax. Gas tax was something the federal government has done and the provinces are doing in some cases.
Likely, that will be the root of this solution for some period of time. Having been a member of the government in the 1990s, at that point in time, in order to get the deficit under control, to eliminate it, there was a lot of downloading to the provinces. The provinces, in turn, download to the local government, and the local government has nowhere to go, other than the same poor taxpayer that pays at all three levels.
We need to do something about this. The municipalities are saying they need more in the way of infrastructure funds. They need things like a national urban transit fund. Apparently, we are the only G8 country in the world that does not have federal urban transit funding.
The municipalities say, ``You keep turning on the tap about infrastructure but you only give us two or three years of committed money. How do we make a plan with that?'' They want 20-year plans and say they need permanent gas tax access.
Could you respond to these particular requests from local government, how far you see that as going to help solve the imbalance problem and if you have any other ideas that might help to do that, short of getting into a major constitutional overhaul to recognize what should have been recognized a long time ago, and that is three orders of government.
Mr. Hodgson: It is fairly obvious that we agree with your comments. That is very much the position the board has taken over the last number of years on cities. I do not think we have a magic fix for this. In our report, we formally set out four options. You are right about the Constitution. I do not think there is much appetite in the nation, but perhaps you have a different view. Absent that, four options. Option one is to increase transfers, as you have already mentioned. There has been some early evidence of that. You can point to the last number of federal and provincial budgets where there has been recognition of the need to provide more to the cities.
You have volume 3 there in front of you. There is a table that I flipped through last night showing the share of transfers in total revenues for cities has actually fallen from 25 per cent to 15 per cent over the last 15 years. At a minimum, re-establishing the relationship 15 years ago would go a long way towards meeting the financial needs of cities. That is the first step.
Option one is to upload, to take responsibilities back. Senators have mentioned the downloading that happened. I was with the federal Department of Finance in the mid-1990s, and that was the price we had to pay as a country to fix the fiscal mess we had in 1994. We have now done that.
There is scope to reassume past responsibilities at the federal and provincial levels now because they are operating at balance or surplus, and that will be done on a jurisdiction-by-jurisdiction level. There is a hint of that in the Ontario budget, where there is recognition of a need for the province to reassume certain social responsibilities, such as social housing and other various things. It is still early days. There is still a lot further to go along that path to ease the burden on cities by more senior levels of government taking back responsibilities.
Option three is to create tax room, which is not a huge political winner. We have seen cuts in personal and corporate taxation over the last number of budgets, federally and provincially. With stage one of the GST cut in place and stage two coming, that might have created room for provinces to have an added 1 per cent, 1.5 per cent or 2 per cent and attribute that to cities as a transfer. That has not been taken up because it is never popular to raise taxes. That is part of why we are having an interesting debate around climate change and tradable permits versus carbon taxes. Economists would argue that carbon taxes are the right way to go, but elected officials generally do not want to touch it. That can be applied in an urban context as well.
Option four gives cities direct access to growth taxes. Notwithstanding the constitutional challenges, that is where I as an economist would put the weight. I was sympathetic to what Mayor David Miller was saying a month ago. He may not have gotten the mechanism absolutely right, but making the appeal directly for the need for the city of Toronto and other major cities to have direct access to some form of growth tax is the way to go. The administration is complex.
Currently, we do not have a well-integrated system of federal and provincial sales taxes. Atlantic Canada is clearly the leader there with the HST, taking a step forward and harmonizing into one system. It is almost like you need a big- bang solution if we are to talk about sales taxes as a growth tax for cities. That is where the greatest accountability would lie, where you have cities receiving revenues directly and being held accountable for how those are used rather than constantly relying upon senior levels to transfer but without being able to make a long-term commitment. It is hard to plan. Even a three-year commitment makes it hard to plan support for infrastructure going forward.
The Chairman: Regarding accountability, are they held accountable in ways other than standing for election periodically? If there is a transfer of a tax point from the province to the municipality, are you contemplating that there would be some restrictions and reporting to the provincial government on how the money is spent?
Mr. Hodgson: I was thinking of accountability really more in the court of public opinion. Certainly at election time, but many of us are watchers. We watch government behaviour and want to ensure value for money — more than strictly establishing a link to conditionality, which sounds more like a transfer of resources in a traditional way, where you establish conditions in exchange for providing funds. I think it would be more a matter of creating the capacity, clearly identifying the fact that cities would be receiving, say, 1 per cent of a provincial sales tax and having that set out in the budget and have a clear public debate about how well those funds are being used.
Senator Eggleton: I can tell you that people at local government are more scrutinized than any other level of government. They are right there on the street, in the neighbourhood. In terms of democracy, I think it is more in action at the local level than you will find anywhere else.
The Chairman: It is nice to have the experience of a former mayor of Toronto.
Senator Mitchell: Welcome. I am compelled by what Senator Eggleton is talking about. I do not know how many of us remember what we read at university. It has been almost 40 years, but I do remember reading Jane Jacobs, and I have never forgotten her conclusions, even back in those days, that the economy of a country was the economy of the cities. I am interested in this and compelled by the problem.
You mentioned David Miller's proposal, and I do not think he wants it to be seen as just his proposal. It is getting some cachet with mayors across the country. What did you mean when you said you are not sure he has got the formula or structure right?
Mr. Hodgson: It is the link back to accountability. If it is just a matter of the province adding on 1 per cent, do you have a clear linkage of how the city will use those funds and be held accountable for it? That is not a matter of provincial conditionality. If it is a provincial sales tax being levied, we clearly have to work on the mechanics around that. The core principle I believe is right. It would be hard to do in Alberta, of course, where there is no provincial sales tax.
Senator Mitchell: I am sensitive about that. If you take that argument to federal-provincial transfers, there would be many transfers. You would not do either because there is very little ``accountability'' in that regard.
One of the problems in the social transfers is that you cannot direct where they are going at all. You cannot rule out the 1 per cent solution, the Miller solution, on the basis of accountability because then you would have to rule out many transfers, billions of dollars of transfers.
Mr. Hodgson: You are exactly right. The first principle in tax policy is that those who spend the money should levy the taxes because then you have the linkage established. It has amazed me that federal governments transfer resources, try to impose conditionality, but ultimately cannot in an absolute way. Once you have transferred the money, it is gone. That is why we have the idea of creating tax room for various other levels of government on our list. In a perfect world, those that provide the service would generate the revenues themselves. I say that based upon my time at the IMF, which had hard conditionality when it transferred money to countries with serious debt problems.
Senator Mitchell: This is a follow-up to Senator Stratton's questions and your interesting analogy of spreading peanut butter. One of the issues that arises consistently where I am from, Edmonton, is the problem of sub-urban dwellers utilizing Edmonton services but not paying for them. Is there any way that can be addressed, or is it far too complicated?
Mr. Hodgson: A city like London, England, has tried to address that by having a road tax. People are paying up to £7 for the right to drive within inner city London. That was a huge political challenge, but Ken Livingston managed to put it in place and get re-elected.
It is a matter of how much creativity we have as public administrators. Are we prepared to do something as bold as that, which on the surface looks challenging? The technology exists today if the City of Edmonton wanted to capture some revenue from those living in Sherwood Park and St. Albert. You could simply read a licence plate and send someone a bill or have a transponder put in the car. The same exists on the 407 in Toronto. It is a question of political will, if you really wanted to find a way for the City of Edmonton to capture the revenues they require and do not have access to a property tax base.
Senator Mitchell: They do not have any constitutional power, but would that be within the powers that they actually have?
Mr. Hodgson: Personally, I do not see any limitation. I am not a constitutional lawyer, though.
Senator Mitchell: Your comments talk about the federal system as a whole, cities versus provinces versus the federal government. Are there provinces doing better at funding and supporting their cities than other provinces?
Mr. Hodgson: I would be reluctant to reach that judgment because I have not done the analysis myself in detail. When I visit Vancouver these days, I am impressed with how the three levels of government work together effectively on the Pacific Gateway. Much of this is driven by the Olympics, but things seem to be happening in the Lower Mainland in B.C. that I do not see happening necessarily in other jurisdictions. We have not, as an organization, done detailed analysis on a province-by-province basis.
The Chairman: One of the good examples you are holding out for us is the municipal co-operation in Vancouver and the B.C. Lower Mainland area. Is another example the Ontario legislation for the City of Toronto? Is that a good example to look at?
Mr. Hodgson: I think that would be another good example of a better practice, certainly moving in the right direction. The Greater Toronto Area has a special challenge because of the huge economic footprint that now runs effectively from Niagara Falls all the way to Cobourg. Coming up with a way to have multiple-tier governance is a big challenge. The City of Toronto Act is a step in the right direction, where you are starting to empower local officials to take decisions and be held accountable for those decisions.
Senator Ringuette: I find your study enlightening. On page 63 of your report, you indicate that provinces have downloaded responsibilities in transit, child care, education, social housing, selected airports and property tax assessment. The Ontario government has passed on responsibility for provincial highway maintenance.
I look at this list, and, being from New Brunswick, I cannot help but question when you say provinces. I think the Province of Ontario has downloaded responsibility. Therefore, I see a little irregularity.
When the Harris government downloaded all these responsibilities to the municipalities in the 1990s, is the transfer of dollars to these municipalities done on a per capita basis? How does Ontario transfer funds to its municipalities to take care of all these provincial responsibilities?
Matthew Stewart, Economist, Conference Board of Canada: Almost all the transfers are done on a per capita basis, with only a few exceptions, I think. Some of the transportation issues are not done on a per capita basis, but are negotiated directly with the cities.
Senator Ringuette: Could you provide this committee with more information in regard to how Ontario transfers and why it is not transferring to transport issues on a per capita basis. That seems, for Ontarians, a major issue in regard to infrastructure.
Mr. Stewart: Usually, the per capita basis is the start, and then they go to the cities and negotiate. I know the gas tax from Ontario is transferred on a per capita basis to all the cities.
Mr. Hodgson: It would be nice if we had simple, common principles in terms of how transfers operated, but unfortunately we do not. People start, as Mr. Stewart says, with per capita, but then we enter the world of realpolitik and politics takes over.
Senator Ringuette: It is not only politics. I find that a strict transfer, based on a per capita basis, distorts the needs level.
Mr. Hodgson: Both sides need to be evaluated — X amount of dollars per capita; as well as a needs evaluation. You are absolutely right.
The Chairman: Or a constant delivery of service.
Mr. Hodgson: That, too.
Senator Ringuette: Because of efficiencies, the service that you have to provide to a smaller population is a bigger cost per capita than with a bigger population. I see both economists are nodding their heads.
I am trying to relate all of this, that is, Ontario's downloading of provincial responsibilities to its municipalities and the fiscal vertical imbalance that everyone is talking about. I am from New Brunswick. I have a property here in Ottawa and a property in New Brunswick. My property taxes are at the same level in both provinces. The Province of New Brunswick retains its social responsibility — child care, education, housing, social assistance, et cetera; it has kept that. However, the Province of Ontario has not.
Maybe I am not explaining myself well. In terms of property tax, I pay the same. In terms of income tax, going to the province, I pay a lot more income tax as a New Brunswicker to the Province of New Brunswick than any Ontarian does to the Government of Ontario.
On one hand, you can say that your municipalities are suffering for money to do infrastructure, housing, transportation, et cetera. On the other hand, your population is paying a lot less income tax. There is a lot more to this issue than what has been downloaded to the municipalities in Ontario. As federal politicians, we have to look at the entire spectrum in the study.
Mr. Hodgson: I do not know what the business tax base would be in New Brunswick.
Senator Ringuette: It is also a lot more than in Ontario.
Mr. Hodgson: You can have a higher rate and a narrower base. In a city like Toronto, you have a huge business base upon which you can draw.
Senator Ringuette: Then you distort your arguments on a per capita —
Mr. Hodgson: On per capita transfers, yes. One thing we cannot measure — and we have not even done a serious estimation of it — is the gap that is growing. If you are not funding infrastructure properly over time, the problems remain invisible until, say, a water main breaks. It then requires three or more days to fix, resulting in an inconvenience for people. It is the invisible deficit that probably acts as a swing factor — something we cannot see but that needs to be addressed at some point.
Senator Ringuette: Yes, we need to look into building for the future. I also agree that the federal government has some responsibility, but I would like to see the provinces live up to their responsibility. It is one thing to talk negatively about the federal-provincial fiscal imbalance, but if you cannot put your own house into an adequate fiscal state, it becomes a question of politicians throwing the ball from one government to the other.
I appreciate the study you have completed; however, many of the premises are based on the Ontario situation, in my mind. Therefore, as an Atlantic Canadian, I have a harder time relating to all of this and to the four options to resolve this issue you are talking about.
Mr. Hodgson: That is not too surprising to me, given who we are as an organization and who engages us to do research. I would be only too happy to be engaged more often by provinces in Atlantic Canada to do policy analysis for them.
Senator Ringuette: We do not have the money.
Mr. Hodgson: The fact is, we are based in Ottawa, we have representation in Toronto and we do more work in central Canada than anywhere else in the country. However, we have a presence in Western Canada now; we have opened an office in Calgary. I seem to be on an airplane every third week, either to Calgary or Vancouver.
Senator Ringuette: I guess we agree that there are some biases in regard to the focus of this study. New Brunswick did not pay to put this together.
Mr. Hodgson: No, senator, but this is based purely on our knowledge base. I had a chance, as I mentioned earlier, to go to Halifax this spring and talk to 250 people about hub cities. I had a dialogue with Atlantic Canadians about the importance of investing in Halifax to create economic growth throughout the Atlantic provinces. Our analysis showed a clear linkage between success in Halifax and success in Saint John and Moncton, all the way up the Acadian coast in New Brunswick. That was a core message from our research; the health of our cities will drive the health of our entire national economy.
The Chairman: That is an interesting point about your research leaning toward the areas where the funding comes from. That is part of the problem with some of the smaller areas in trying to participate with the three levels of the government contributing one third each. Some of the rural areas and the smaller population urban areas do not have the one third to participate in the programs. They must obtain approval from the province in order to do so and the province does not give them approval.
This is an interesting dilemma we are skirting around here. We will think more about that later.
Senator Murray: I understand that the Cape Breton Regional Municipality, as it is now called, has taken the Province of Nova Scotia to court on the grounds that they are not getting a fair share of the equalization money that is provided by the Government of Canada to the Province of Nova Scotia. It will be interesting to see how that plays out.
In your opening remarks, you referred in passing to a slowing of our economic growth potential over the next five, 10 or 15 years. Why is that?
Mr. Hodgson: It is driven by demographics. Long-term economic growth in an economy is driven by three things. Growth in the labour force is one. As our population ages — the recent StatsCan census indicates that, by 2030, all the labour force growth will come from immigrants — there will be a real breaking effect on the growth potential of our economy.
We can offset that through capital investment or through rapid increases in productivity. That is why my volume focuses so much on a national productivity strategy as a way to offset the slowing population growth. We do a 20-year forecast at the Conference Board of our economy. It is guided by our ability to boost productivity, but really labour force.
The aging workforce will only start to be an important factor after 2010. I am sure the senator from Alberta is hearing about labour crunch problems there — but this is still early days; it is only going to get worse. Unfortunately, slow labour force growth translates into slower economic growth. Our forecast is that we will move from a 3 per cent growth world to 2 per cent to 2.5 per cent 2 over the next 20 years.
Senator Murray: In terms of potential?
Mr. Hodgson: Yes. Anything beyond that will start feeding inflation, and we may have upward pressure on interest rates.
Senator Murray: I just wanted to hear the answer to the question and have it on the record.
Mr. Stewart: As well, nominal growth feeds your ability to fund health care. From 2005 to 2009, nominal growth in the economy will be about 5.4 per cent — according to our latest research says. If you grow health care any faster than that, it is rising as a share of GDP. By 2015, it will slow down to just over 4 per cent because of the slowing growth in the labour force and the increasing per cent of the population over 65.
Senator Murray: Correct me if I am wrong, but certainly provincial expenditures on health care had been growing by over 6 per cent, had they not? Was it 7 per cent?
Mr. Hodgson: You have to go province by province, but you are absolutely right.
Senator Murray: I meant in general.
Mr. Hodgson: Part of the challenge we faced in doing the work for the Council of the Federation is we wanted to be conservative; we did not want to be alarmist. Therefore, we used a 20-year trend in terms of per capita spending on health care — and that was 5.7 per cent. When you put the aging factor in —
Senator Murray: However, 5.7 per cent is below what it has been; it has been over 7 per cent, has it not?
Mr. Hodgson: Notwithstanding various statements by provincial governments that they want to keep health care spending at 5 per cent, our analysis of the Ontario budget is that they will have spent almost 10 per cent more on health care in the fiscal year just ending.
Senator Murray: They are heading to a situation where 40 or 50 per cent of their budget would be spent on that.
Mr. Hodgson: For all provinces, by, say, 2020 to 2025, half of their spending will be on health care. That is why we point back to the long-term risk of a structural vertical fiscal imbalance debt problem because of the health cost drivers.
Senator Murray: Coming back to our municipalities, you have emphasized the need for our municipalities to have direct access to the taxes linked to economic growth incomes, sales taxes, and so on. Senator Eggleton properly makes the distinction between revenue sharing and direct imposition of the tax. The federal or provincial government might say, for example, ``We will remit 1 per cent of the income tax to municipalities.'' Are you taking a position one way or the other?
Mr. Hodgson: I think I can answer that in one word — no. We have not got into the mechanics.
Senator Murray: There are problems with anything, but surely you see the problem of allowing different municipalities to levy income and sales tax and all the rest of it.
Mr. Hodgson: Absolutely.
Senator Murray: We would be back into the tax jungle they used to talk about some years ago.
Mr. Hodgson: The whole spaghetti bowl of taxation. In my world, we have a simple tax system: We want one standard for each city in a given province. We already have provincial rates of income and sales taxation.
Senator Murray: No, but revenue sharing is what I am talking about. That seems to be both the simplest and the fairest way to proceed.
Mr. Hodgson: ``Fairest'' takes you back to the issue of per capita transfers as opposed to needs-based transfers. Fairness is in the eye of the beholder. If, as we make the case, big cities have a greater need, then equal sharing might not be the way to address that. We might need a ``surtransfer'' for larger centres.
Senator Murray: Let me go to one of your tables. This has been reprinted in some document here, but it is from your Mission Possible study.
Senator Ringuette, I suspect you are paying higher property taxes in Edmundston, New Brunswick, because of the increase in property values there and the fact that New Brunswick more aggressively ties its assessments to real market value than Ontario does.
Senator Ringuette: I am also paying more income tax.
Senator Murray: I know that. Correct me if I am wrong, but I think the assessments are centralized in Fredericton, are they not? You are not the first person I have heard complaining about property tax rates, but it may be attributable to the centralized assessments and the market value.
I have this table that shows 10 major cities. I am afraid New Brunswick just is not in there.
Senator Ringuette: That is okay. We did not provide funding to do the research.
Senator Murray: This is interesting in terms of the very point you made about downloading. Under ``expenditures'' — and these are per capita figures — if you look at an item like ``Social and Family Services,'' Toronto is spending $613 per capita. I do not know what year this is, Mr. Hodgson.
Mr. Hodgson: It is the Conference Board table, but I was not the author of the volume. I do not have the table in front of me.
Senator Murray: Let us say it is the most recent table. Toronto spends $613 per capita, on social and family services; $459 per capita, Ottawa, on social and family services; practically nothing in Vancouver; zero in Montreal, Winnipeg, Halifax and Regina; and relatively tiny amounts for the other cities.
For health, $125 per capita in Toronto; $118 in Ottawa and zero or comparatively tiny expenditures in those categories for the others. Let us look at social housing: Toronto, $291 per capita; Ottawa, $169 per capita. Again, two or three of the others are very small amounts, and most of them are at zero.
That speaks to the downloading in Ontario. I do not know what the Government of Ontario would say when confronted with this. When I go up to the revenue box, I see ``Transfers from other Governments, Provincial and Federal ``— and I assume most of that is or was provincial — Toronto $645; Ottawa $426. The average of the 10 cities is $302.
I do not know whether you can comment on that or have any explanation of it other than sheer downloading from the provincial government to those cities. Do you have the table in front of you?
Mr. Hodgson: We have the table now.
Senator Murray: Am I missing anything? I have eyeballed it and circled some of the numbers.
The Chairman: If you add up all the expenses, they certainly exceed the amount transferred by a significant amount of revenue that is transferred.
Mr. Hodgson: I think you have probably captured the so-called downloading effect from the Ontario government to cities in Ontario. There is one other variable we should be mindful of, namely, that half the immigrants of the country land in Toronto. There is an added bill for Toronto, Mississauga and the surrounding suburbs. Immigrant settlement is another key expense the cities have to bear.
Senator Murray: I am sure it is. The federal government recently concluded an agreement with the Province of Ontario on that. The fact is, most of the financial burden of that should be borne by the federal government. It is the federal government's policies that are doing this. I have heard this about teaching English as a second language in Vancouver, and probably in Toronto as well. I have heard it on other issues.
Some realignment of responsibilities in which provincial and federal governments accept some financial responsibility for the consequences of their own policies is obviously in order. I think that would still have to be combined with some kind of revenue sharing. How you make the distinction between the bigger cities and the smaller places except on a per capita basis, I do not know. Do you know?
Mr. Hodgson: No, I do not.
Senator Di Nino: Let me quickly follow up on my colleague Senator Murray's question. On the immigration issue, we need to look at the cost-benefit analysis. There is a huge benefit. You talked about the labour market previously and the economic spinoffs of that. We should not be looking at that solely as an expense or on the negative side of the income and expense statement. Can you make a quick comment on that?
Mr. Hodgson: You are absolutely right. Immigrants are the new source of dynamic energy within our economy. Clearly, Toronto benefits hugely from the number of people settling there.
Senator Di Nino: As does Vancouver.
Mr. Hodgson: Yes. There is a crying need now in cities like Calgary and Edmonton for more immigrants because their share historically has not been large. Alberta has a shortage of skilled workers right now. Immigrants are clearly part of the solution for them, if we can get the mixture right — that is, if we can get people learning the language of the workplace and adapting quickly into our culture.
Senator Di Nino: When we talk about these issues, we focus generally on the larger cities and the urban areas, but there are some different and special needs of rural communities.
We do not seem to discuss their issues at length. Sometimes they have to feel like second-class citizens. My concern is that unless we start addressing those issues as well, the pressure for rural residents to move to the cities where more services or better services are available, either real or perceived, will compound the problem.
Have you done any analysis of what can be done to assist the rural municipalities with their issues as well as the cities?
Mr. Hodgson: We have been approached recently by a few rural associations to do similar analysis on the link between growth in their centres in the rural areas and linking it back to the national economy. We are looking at doing more serious analysis of that right now.
Our focus over the last couple of years has been on the major cities, because that is where we saw the crying need, where there were inadequate fiscal resources and probably where inadequate political attention was paid. That is why we chose to focus our research there.
Senator Di Nino: I suggest the need is as great on the other side. We look forward to your next report.
Senator Eggleton: Let me focus for a moment on this per capita situation. There is a need in every part of the country, whether it is big, middle or small urban or rural, for infrastructure funding, and per capita has been the method, by and large, by which it has been transferred.
However, there are some big city needs that do not lend themselves to that kind of situation. I know in the case of Toronto, when they transferred money for public transit, they first looked at a per capita basis, but then they found that of all the transit systems in the Greater Toronto Area, 90 per cent of the ridership was on the Toronto Transit Commission system. It did not make sense to deal with that on a per capita basis.
Just picking up on Senator Ringuette's comment about some of the transit systems in larger cities where there are more economies of scale, maybe I am misinterpreting, but I got the impression that a bus in Toronto might be a more economic call than a bus in Fredericton simply because there is a bigger population and bigger economies of scale. All of that is true for the bus, except when you get into a bigger urban context like Toronto, buses are not enough. You have to go on expensive rail systems, underground systems and platforms that big cities require to move their people around that smaller places would not.
I think you are saying in your report that there is a need not only to recognize the general infrastructure deficit that exists in any size of municipality across the country but also the particular needs of the large areas that are unique and more complex. I mentioned urban transit in the big city context, but immigration has been mentioned. Three quarters of the immigration that comes into Canada comes into the three big cities — Toronto, Vancouver and Montreal. While it has proven to provide benefit, there is a settlement period and that is where the costs come in.
There is policing. The social structures in the big cities are far more complex. There are different levels of income and socio-economic backgrounds of people in neighbourhoods. Policing is more complex and more expensive.
I take it you are advocating that, while we should continue to serve all sizes of municipalities and infrastructure programs, the particular needs of the big cities that require special attention will not lend themselves on a per capita basis but will require more specific targeting programs to meet those challenges.
Mr. Hodgson: It would be either targeted programs or a targeted portion of overall transfers or revenues flowing to cities. That is exactly our point. We were not arguing going from an equal per capita solution to giving 80 per cent to the 10 biggest cities. We do say clearly that they should be getting something more than the others because their needs are special, whether it is policing, transit systems or infrastructure.
We did not come up with an algorithm to put numbers against that, but that is the right concept, where you have a base and then do something special for the 10 larger cities.
Senator Eggleton: With respect to the question of revenue sharing, the ideal situation is for each level of government to be able to levy the taxes it requires to do the work it is required to do. There is some issue that some of those things that have been downloaded, whether it is Ontario or whatever part of the country — it may be more severe in Ontario, but I think all parts of the country have experienced that — need to be uploaded, put back in the areas of responsibility where it was. The municipalities are saying, ``Either give us the tax money or take it back for housing, social services, immigration and so forth. That is fair, either way.''
The only problem of getting to the ideal situation, as I have said before, of each level raising the money it requires, is that it will require if not a constitutional amendment, certainly, a different arrangement of taxing responsibilities. It could be another equalization program. Certainly, senior levels of government would be loath to give up their taxing authorities.
That leads us to programs for which the senior levels of government would still have accountability requirements. The program that Mayor Miller along with a lot of other mayors is putting forward asks for one cent of the GST. Some people would say, yes, but if that is being raised by the federal government, the federal government has the accountability, so it cannot just say to the municipalities take it and do whatever you want with it. The federal government could say that it will give them the room for it, but the municipalities will have to take the responsibility for levying it. Of course, CRA will collect it, but that is a complex thing.
It would be far easier for the federal government to say that it will give the equivalent of that, namely, $5 billion a year, to the municipalities across the country, however it is divided, but it must go to infrastructure, similar to the other programs of infrastructure. That would get around the accountability problem.
However, I do not know if you have any further thoughts about how to deal with those types of issues.
Mr. Hodgson: We truly have not crossed the bridge in terms of limitation. We wanted to focus on the right first principles. From what I hear in your comments, I think we are in violent agreement on the right first principles, which is greater revenues flowing to cities, addressing their needs through access in some form to a growth tax. We did not get into the mechanics of whether it should a transfer with conditions or something to which they are directly held accountable.
The Chairman: Thank you. On behalf of the Senate of Canada and the Standing Senate Committee on National Finance, I wish to thank the Conference Board of Canada representatives, Mr. Glen Hodgson and Mr. Matthew Stewart, for being with us today.
You indicate you are developing fundamental research and you have shared many interesting points with us. We take the fundamental research and try to develop policy initiatives and recommendations for the government and move the file along in that regard. We thank you very much for being here.
The committee adjourned.