Proceedings of the Standing Senate Committee on
National Finance
Issue 15 - Evidence - Meeting of May 29, 2007
OTTAWA, Tuesday, May 29, 2007
The Standing Senate Committee on National Finance met this day at 9:34 a.m. to examine and report upon issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada.
Senator Nancy Ruth (Deputy Chairman) in the chair.
[English]
The Deputy Chairman: On December 12, 2006, the committee issued an interim report, The Horizontal Fiscal Balance: Towards a Principled Approach, as part of its ongoing study of Canada's fiscal arrangements for provinces and territories. Over the last month the committee has heard from a number of witnesses as part of our review of vertical fiscal balance, which is the division of fiscal resources and spending responsibilities between various orders of governments in Canada.
Joining us to start, by video conference from Toronto, is Douglas Reycraft, President of the Association of Municipalities of Ontario. Mr. Reycraft is accompanied by Brian Rosborough, Director of Policy.
Good morning and thank you for joining us, gentlemen. The committee has received your remarks and are prepared to follow along as you deliver your opening statement, after which we will move to the senators' questions and answers.
Doug Reycraft, President, Association of Municipalities of Ontario: Thank you. I am the mayor of the municipality of Southwest Middlesex, a small rural municipality of about 6,000 people near London, Ontario. I am also a counsellor with the County of Middlesex, which surrounds the city of London, to put things into geographic perspective. I am also the president of the Association of Municipalities of Ontario, AMO.
As you know, Canada has an international reputation for being one of the best countries of the world in which to live. In large part, this is due to the quality of life found in the cities and towns that make up Canada. In Ontario, that quality is threatened by diminishing municipal resources and a deteriorating infrastructure system.
At the heart of this lies a fundamentally flawed provincial-municipal fiscal relationship whereby 50 cents of every dollar paid in property taxes by Ontarians is siphoned into provincial programs, including education and social services. In Ontario, we collect about $18 billion in property taxes. About $6 billion a year of that is used for education and another $3 billion is lost through mandatory municipal cost sharing of health and social services programs such as benefits for disabled persons and long-term care for seniors.
No other province does this, and because of it, Ontario municipalities do not have access to sustainable revenue that matches their responsibilities. We see this in our streets, on our highways, in our transit systems and in our community centres. In most cases, the significant capital projects in our municipalities were undertaken in a previous decade, if not in a previous generation. It is not what one would expect of a province with the highest property taxes in the world.
Today, Ontarians pay $237 per person more in property taxes than other Canadians do, yet the provincial government spends $258 less than the rest of Canada on health and social programs and services. I suggest it is no coincidence that those two numbers are so similar.
We can do better and we owe it to our communities to make sure we do. Canada's citizens expect all orders of government to work together to build a strong and competitive nation, and that begins with vibrant and sustainable communities that meet the most immediate needs of their citizens.
I do believe in giving credit where credit is due, and also in holding governments accountable in their policy decisions. The federal government deserves credit for recognizing the overwhelming need for infrastructure investments in this province and providing a meaningful source of support in the form of the federal gas tax. This funding has proved to be of great benefit to municipalities and they have shown their gratitude by using it to serve their communities well. Importantly, this funding is entitlement-based rather than application-based, making it possible for all municipalities in the province to have access to this revenue and to plan ahead to make the most of this opportunity.
Ontario's municipalities were pleased and encouraged by the decision in this 2007 federal budget to extend this funding for a further four years. Ultimately, this funding must be made permanent to keep this country competitive in the face of a massive and growing infrastructure deficit.
Ontario municipalities, largely through AMO, are working with the province to review the fiscal structures that we share. Obviously, the province's fiscal relationship vis-à-vis the federal government has a profound impact on those structures.
Whether or not municipalities achieve their objectives with the joint provincial-municipal fiscal review, the fact remains that we have a decade-old infrastructure deficit that continues to grow by billions of dollars every year. It limits our ability to provide safe, clean water, to protect the environment, and to provide reliable transit and efficient transportation networks.
These kinds of limitations hurt more than the communities affected directly; they hurt the perception of quality of everyday life in this country. The only way to protect our hard-earned reputation of providing first-rate communities in which to live and to do business is to put municipalities back on a secure and sustainable fiscal footing.
Ultimately, what Ontario's municipalities need to thrive is a provincial-municipal relationship that works, not what the Ontario government has been offering us in its place — basically programs designed to prop up a system that does not work.
A better federal and provincial fiscal relationship is needed to lay the groundwork for a municipal fiscal relationship within Ontario that is sustainable, predictable, and accountable. The bottom line is that the vertical fiscal imbalance between Canada and Ontario has a direct impact on Ontario's municipal governments and by extension on the quality of municipal programs and services throughout the province.
Achieving a vertical balance with Canada will put the province in a better position to provide a fair deal to municipalities and end its reliance on municipal property taxes to fund provincial programs and services. That reliance costs Ontario's municipal property taxpayers more than $3 billion every year for income redistribution and health- related programs alone.
The province's reliance on municipal property tax revenue is detrimental to Ontario's future prosperity and the premier has admitted as much. The problem is that they have limited means to provide alternatives.
It is beyond due time that we achieve sound and sustainable fiscal policy for all orders of government. Ontario's municipalities are asking the federal government to take the first steps to achieve this.
Ontario municipalities would not make the request if we did not believe we had something to offer in return. In return for a sustainable source of revenue, we can offer financially sustainable communities, stable and affordable property tax rates, growth that is fully financed by development, safe and well-maintained communities, attractive streets, flourishing parks, access to recreation, and communities where families choose to live and work and where businesses choose to invest. In return for good public and fiscal policy, we offer competitive communities to support a competitive Canada, and that should be paramount on every government's list.
Another important way to support this shared goal is to ensure that federal funding actually makes its way to municipalities. AMO supports a flexible national framework that allows programs to be tailored to meet the needs of individual jurisdictions. Indeed, that is part of what makes the federal gas tax so successful. However, by combining funding for both provincial and municipal projects together under the Building Canada Fund in Budget 2007, the interests of Canada's municipalities may be overtaken by those of their provincial or territorial jurisdictions.
Only with sustainable, predictable, long-term and dedicated federal infrastructure funding can municipalities turn the page and move forward with progressive capital planning and construction activities.
AMO would be pleased to work with Infrastructure Canada in the development of the Building Canada Fund as a means of ensuring continued success of the national economy through investment in local infrastructure. We offered solid advice and recommendations during last fall's national consultations. We are looking forward to seeing that advice reflected in the rollout of the Building Canada Fund.
AMO believes that the fundamental goals of all orders of Canadian government are the same. We all want to be part of a competitive nation with thriving economies, first-rate infrastructure and healthy communities, and we all need sustainable sources of revenue to make that happen.
We are asking that the federal government take a hard and honest look at the role that municipal governments play in sustaining this vision and at the national consequences of siphoning property taxes away from the municipal treasury. It is time to put an end to an era of provincial downloading and deferred infrastructure investments that have occurred to the detriment of our communities, our province, and our country for far too long.
Senator Ringuette: This is a very good presentation. We have learned from other sources about the downloading that has happened in Ontario from the provincial government's responsibility to the municipalities.
You indicated on the first page of your presentation that you provide social services programs such as disability benefits and long-term care for seniors at the municipal level.
Mr. Reycraft: That is correct. Since the late 1990s or early in this decade, Ontario's 445 municipalities have had to pay for 20 per cent of the cost of services and benefits to disabled persons within the province and 50 per cent of the cost of administration of that program. The program is designed by the provincial government. It is administered by employees of the provincial government, and yet municipal property taxes are used to pay for a portion of that program. The only thing municipalities have to do with the Ontario Disability Support Program is write the cheque for part of the cost.
Senator Ringuette: What is the net percentage of property tax that the municipal governments receive after removing 20 per cent for the programs and 50 per cent for the administration of these programs? What is the net percentage that you keep on your property tax?
Mr. Reycraft: We keep 50 cents out of every property tax dollar that we collect to provide municipal services. The total value of property taxes collected by Ontario's 445 municipalities is roughly $18 billion per year. Of that $18 billion, $6 billion is sent to school boards to provide elementary and secondary education. That is topped up by a provincial contribution as well. About $3 billion of the $18 billion is used to pay for health and social services like support for disabled individuals, social housing, ambulance services and other programs that in other provinces are paid for through sales and income taxes.
Senator Ringuette: You keep 50 per cent of the property tax, which includes the education tax.
Mr. Reycraft: That is right.
Senator Ringuette: How does that compare to the other provinces in regard to the property tax that the municipalities can keep?
Mr. Reycraft: I am not sure if I have seen that number. I can respond to your question most effectively by referring to something I said in my comments. We know from studies that have been done by Professor Harry Kitchen of Trent University in Peterborough, Ontario, that Ontarians pay on average $237 per person more in taxes than the average across the country. If you take that $237 and multiply it by the population of the province, which is about 12 million people, it comes close to $3 billion.
Senator Ringuette: You have also indicated that you are negotiating with the provincial government on a new provincial and municipal fiscal framework. Does your negotiation include a per capita redistribution like the province of Ontario requested from the federal government?
Mr. Reycraft: Our negotiations have not advanced to that point yet. The premier announced the launch of the Provincial-Municipal Fiscal and Service Delivery Review last August during our annual general meeting in Ottawa. Negotiations through that review have been progressing, perhaps more slowly than we would like, but to this point the negotiations have tended to focus on the roles and responsibilities of the two orders of government rather than on the financial share, either on a per capita basis or any other basis. We have not really got down to the issue of discussing how the costs should be shared at this point.
Senator Ringuette: Have you looked at a per capita redistribution as a pre-emptive measure to suggest to the Province of Ontario? Have you studied that issue?
Brian Rosborough, Director of Policy, Association of Municipalities of Ontario: In terms of the provincial-municipal fiscal relationship in Ontario, there is no stable funding that the province provides to municipalities to assist with their responsibilities. Rather, we have a structural imbalance based on cost sharing for social programs, including welfare and disability benefits, whereby municipalities are providing a net subsidy to the province in terms of operating costs. Our discussions will focus on improving the structural fiscal relationship between the province and municipalities, and to the greatest extent possible, to relieve us of cost-sharing responsibilities for programs that in other provinces and territories are fully funded by the province instead of municipalities.
The province does have a funding program called the Ontario Municipal Partnership Fund, but it is designed largely as a mitigation tool to offset some of the problems associated with our structural cost-sharing arrangements.
Senator Ringuette: I understand. I do not want to take all the time. I am sure my colleagues have a few more questions. If time permits, I will come back.
Senator Eggleton: I would like to ask you about uploading. You have talked about downloading and the burden it placed on municipalities. Are you engaged in an effort for uploading? I did not see it mentioned in your brief.
Mr. Reycraft: That will be an important part of the outcome of our current fiscal review with the provincial government. Our focus is on the cost of services that are generally funded by the provincial and territorial governments in other parts of the country, not on the delivery of those services.
One positive outcome of the downloading that occurred in the late 1990s during the Harris government's time in power here in Ontario is that municipalities are now delivering services. For example, land ambulances used to be delivered by the province in most parts of Ontario prior to the downloading that occurred. Municipalities are able to deliver that service in a more effective and efficient manner than the provincial government simply because they know the demographic and geographic realities of their municipalities and can plan for the location of stations and the deployment of paramedics in a way that did not occur while the provincial government was delivering the service.
We are not opposed to municipalities delivering provincial services for the provincial government. It is paying for them that is our challenge.
Senator Eggleton: I understand that. You need the resources. There are at least a couple of models of how resources can be expanded by the federal government. The previous government had the New Deal for Cities. It was quite hands- on in terms of the provision of different infrastructure funds, tripartite agreements, et cetera.
There is also a body of thought in the current federal government that a greater emphasis should not be on the hands-on aspect of things. The arrangements should be less hands-on but involve more the provision of additional resources to the provinces as part of a vertical rebalancing. By doing that, then the provinces would have the responsibility. Both theories respect the constitutional arrangement, I might add.
Do you have any thoughts on the federal government becoming more or less involved in infrastructure and other municipal urban issues?
Mr. Reycraft: I will make a couple of points. First, municipalities are very appreciative of the full GST rebate implemented by the Martin government in Canada. That extra GST money is being used across the country to help deliver municipal services and to build and replace infrastructure. We also appreciate the federal gas tax rebate, which is still being ramped up to its 5 cents a litre level across the country. That reaches its maximum in 2009-10. We are pleased that the current government has extended that for an additional four years.
The federal gas tax model is one that could and should be emulated with other programs. It has a flexibility that makes it work well. For example, in Ontario, the gas tax money goes directly from the Government of Canada to our association and to the City of Toronto. We in turn, as an association, distribute it to the other 444 municipalities across the province. That works well. We have a direct line of communication with those municipalities. We work with them to ensure that they respect the principles of the program and the terms of the contract that we have entered into with the federal government and that the municipalities in turn have entered into with us. I believe there is a similar arrangement in British Columbia with their municipal association. On the other hand, the program has the flexibility to allow different arrangements in other provinces where the relationship between municipalities and the provincial government is different than in Ontario.
The direct, hands-on approach that has occurred here in Ontario with the federal government through the gas tax program is a good one and the federal government would be well-advised to instill the same flexibility in future funding programs so that they can deal with them appropriately in the 10 provinces and two territories.
Senator Eggleton: I can understand your inclination towards funding that is unconditional or has limited conditions, but there is the question of accountability when funding is being provided by the federal level of government.
I know Toronto is not currently a member of your association, but the Mayor of Toronto and the big city mayors have suggested 1 cent from the GST. It raises the question of accountability as well. Should that kind of a formula be pursued or should there be a formula that allows municipalities to take some tax room but make the decision themselves and take direct accountability for it? I am not sure how that would be administered amongst your 440 municipalities.
Mr. Reycraft: Accountability is achieved with the federal gas tax program through the contracts that AMO and the City of Toronto have entered into with the federal government. In our case, we have contracts with our 444 municipalities to which we direct the funding. They must provide us with audited statements showing how those gas tax funds were used so that we can ensure that they are used in a manner that reflects the principles of the program. There is full accountability there. The same kind of accountability could be achieved if the federal government were to agree to the request of the Mayor of Toronto and the Big City Mayors Caucus of the Federation of Canadian Municipalities to flow 1 cent of the GST to the municipalities. It is not necessary to create another structure in order to achieve accountability within such a program, and that would have to occur if municipalities were to use the tax rule that might be created to increase their resources. It would be better to use the existing structures so that we can use all of those dollars to provide services and to build infrastructure instead of using them to pay for administration.
Senator Ringuette: What is the formula for redistribution of the gas tax fund to your municipal membership?
Mr. Reycraft: It is distributed on a per capita basis based on information in the 2001 census from Statistics Canada. In that way, municipalities know today not only how much money they received in 2005 and 2006 and how much they will receive in 2007 but also how much they will receive right through to 2013 and 2014. That allows municipalities to plan ahead, and those that have urgent needs for new infrastructure can proceed with building that infrastructure, debt finance it and know that the revenue will be forthcoming to help them pay for the infrastructure development. In other municipalities where the needs are not so urgent, the money can go into a reserve fund for future infrastructure requirements.
Senator Murray: I was born in Nova Scotia and like many Nova Scotians, I went down the road to Ontario and was appointed to the Senate. Is this a great country or what?
We have had a fair discussion in recent meetings along the lines that Senator Eggleton raised on tax room or revenue sharing, or whatever it will be. My bias is in favour of as little conditionality as possible. However, I am coming around to the view expressed by some of our witnesses that the better way to proceed would be to provide tax room and have municipalities impose the tax and account for it. I would not worry too much about the objection that you raised, which is one of administration. We would have to do a deal with the provinces and I presume the collection arrangements would continue as they exist, but you would simply have to impose the tax.
My understanding of the way in which the gas tax transfer works is obviously incomplete. Mr. Reycraft, you said in your opening statement that it is entitlement-based rather than application-based and you talked about its flexibility. However, when representatives from the Federation of Canadian Municipalities were before the committee, they asked that it be made permanent with an escalator to protect its value over time, which is your position also, and that the federal government expand project eligibility criteria for the gas tax transfer. This would enable municipal governments to put their share of gas tax funds toward local priorities, such as transit systems or water systems, as currently allowed, or for newly eligible projects, such as sports facilities, libraries, parks or other social infrastructure. My impression from their brief is that they believe there is insufficient flexibility in the way this operates. Am I missing something?
Mr. Reycraft: No, I do not think you are missing anything. When I talked about flexibility, I was referring to flexibility on the part of the federal government to deal with the provinces and the territories. Currently, there is more flexibility in the gas tax program than there was when it was initially introduced. Initially, large municipalities in Ontario were not permitted to use that gas tax to fund roads and bridges. The current government has removed that restriction so that municipalities can use it for those purposes. The reality is that in Ontario's 445 municipalities there have been significant differences in priorities. Some municipalities have made water and waste water systems their top priority, so there is not a need for great investment in roads and bridges infrastructure.
Senator Murray: That reinforces my bias in favour of un-conditionality.
Mr. Reycraft: Yes, if it is unconditional, municipalities can invest it where they find their greatest need. It does not restrict municipalities that have made a particular area their top priority if that is the condition attached to it. I should also point out that with respect to municipal revenues, our big concern in Ontario is the fact that our property taxes are higher than those in the rest of the country. We are concerned about that for two reasons. First, it makes us uncompetitive vis-à-vis the other jurisdictions in terms of trying to attract new development to Ontario. Second, it is the wrong kind of tax to be the highest in the country. Property taxes are regressive in that they force low-income and middle-income Ontarians to pay a much higher percentage of their income in taxes than other Ontarians pay. A greater reliance on income tax revenues and sales tax revenues, which the other two orders of government have, is a much fairer way to provide financial resources to governments.
Senator Murray: What would the effect be on property taxes if some of your recommendations were implemented by the federal government?
Mr. Reycraft: We believe that ultimately they would result in a lowering of taxes. In Ontario, because municipalities have had to pay more than $3 billion per year for health and social services, social services have been unable to invest that amount of money in infrastructure. Some municipalities have done a better job than others in doing that. Municipalities whose infrastructure is in good shape would be able to use that additional revenue to lower their tax rates. Other municipalities that have pressing infrastructure needs would be able to use that money to meet those needs and, once that is done, they would be able to lower their taxation rates. Ultimately, we want to see property taxes in Ontario compare more closely to those in the rest of the country, which means that they have to be lowered in Ontario.
Senator Murray: Do you agree with the Federation of Canadian Municipalities that Canada's public transit systems need $20 billion in new capital investment by 2010 and that the federal government ought to develop a national transit strategy to meet those needs?
Mr. Reycraft: Our constituents are Ontario's municipalities. We have not taken a close look at the national situation but in Ontario there are pressing needs for infrastructure improvements, in particular in the Greater Toronto and Ottawa areas, where population density is the greatest. Anyone who drives in those area, in particular in the morning or late afternoon rush hours, sees the evidence of that in spades.
Senator Murray: I appreciate that; however, on page 4 of your presentation, you say that AMO supports a flexible national framework that allows programs to be tailored to meet the needs of individual jurisdictions. Indeed, that is part of what makes the federal gas tax so successful. When you talk about individual jurisdictions, I take it you are talking about the province and the municipalities.
I want to know whether you would support policies that are tailored and make a distinction between large agglomerations and smaller ones.
One of the problems that federal policy-makers have faced in developing policies to meet the urgent needs of some of the large metropolitan areas is that the minute you do that, there is a demand that those policies not be tailored to those areas but rather be designed in such a way that everyone can take advantage of them. The minute I bring up the problems of Toronto, my friend here from Edmundston, New Brunswick, says, ``What about us?'' Do you think you could keep your organization together and united if the federal government, or even provincial governments, made clear distinctions between the needs of municipalities of various sizes, to begin with, but also with different social and economic conditions?
Mr. Reycraft: The answer to your question of whether I think we can keep our 445 municipalities together is yes, I do. However, it is not a one-size-fits-all kind of situation. I believe the City of Toronto is using all of its gas tax revenue to fund transit programs. In small town and rural Ontario, though, our roads and bridges are our transit system and the gas tax program allows us to direct the new funds to assist with those programs. That kind of flexibility provides a system or a structure that works very well. I am not sure whether I have answered your question; if you want to take another shot at it, I will try again.
Senator Murray: The point I wanted to make is that fairness and equality of treatment do not necessarily mean identity of treatment. I think policies have to be tailored to take into account considerable differences between the needs and conditions of large agglomerations and smaller municipalities. As you know, most of our immigrants are going to several huge agglomerations and there are problems of a social and legal nature that vary greatly. I think that in trying to design some useful national policy we have to take account of that.
Mr. Reycraft: I think we agree on that point, Senator Murray.
The Deputy Chairman: You said that the Province of Ontario admitted that municipal property tax really was not the greatest thing for Ontario's future prosperity. Could you explain why they have limited means to provide alternatives and how you see that?
My second question picks up on Senator Murray's question about the national framework. In regard to the Building Canada Fund in the last budget, you said that the interest of Canada's municipalities may be overtaken by those of their provincial and territorial jurisdictions. Could you explain that?
Mr. Reycraft: With respect to your first question, I was referring to the fiscal imbalance that Premier McGuinty had referred to over the last couple of years. He was referring to the relationship between the provincial government here in Ontario and the Government of Canada. His argument was that Ontario was receiving less per capita for health and post-secondary education services than other provinces were. The federal government in the most recent budget has to some extent addressed that, and Premier McGuinty has acknowledged that as an important step forward, because it will provide the provincial government with additional federal revenues, which should improve their capacity to deal with the provincial-municipal fiscal imbalance in Ontario. Because Ontario will now, and in the next few years, get an increasing amount in federal transfers, their capacity to deal with our problem should be greater. That is what I was referring to when I talked about the limited ability of the provincial government to deal with the provincial-municipal fiscal imbalance.
Your second question dealt with the Building Canada Fund. Our concern is that, at this point, it is not clear how much of that money is to be used by the provincial government for infrastructure projects that it wants to proceed with and how much of it will actually be flowed to municipalities in the form of a municipal-rural infrastructure fund or other infrastructure funding. It is not clear to us how much of that money will actually end up going to municipalities and we are concerned about that.
Senator Mitchell: My questions relate to environmental issues, the emergence more and more of Kyoto and the issues that that raises for all levels of government.
Mr. Reycraft, could you comment on whether meeting Kyoto standards is becoming a policy consideration or has progressed even to policy initiatives in your organization amongst your municipalities? Second, if that is the case, are municipalities are seeing these initiatives as savings or as costs? Third, what involvement might the federal government take and under what kind of structure to facilitate initiatives in that area?
Mr. Reycraft: I think it is an understatement to say that governments of all orders all across this country have been demonstrating growing concern about environmental issues. We all subscribe to the principles behind the Kyoto agreement, and I think we all recognize the need for Canadians and for all governments in Canada to acknowledge the negative impact we have been having on our environment and change our ways to far better respect the environment. We are seeing municipalities right across the country make changes around waste disposal and energy sources and in other ways to change their habits and their methods. Hopefully we diminish the negative impact we are having on our environment and eventually slow down the rate of climate change that we are experiencing.
Senator Mitchell: I would emphasize that point. I was taken by the point that you made in your presentation that Canada has an international reputation for being one of the best countries of the world in which to live. You said that in large part, this is due to the quality of life found in the cities and towns that make up Canada. Internationally, environmental issues are becoming evermore prominent and our ability to respond effectively to those issues will contribute to or diminish our international reputation. Quality of life is a huge consideration with respect to municipal policy generally, but also with respect to the environment.
Senator Stratton: It is interesting that we are talking about Kyoto because it is a challenge, as you say, that we are all facing across the country and globally. It is also interesting to see what is happening at the municipal level. Generally speaking, that is where it starts, and then it grows to the province and to the federal government.
Our problem right now is that we are 32 per cent above the Kyoto requirements. In order to meet those requirements, we would need dramatic reductions. In terms of reductions, how long do you think it should take you, as a group of municipalities, to achieve what you think needs to be done?
If we try to achieve Kyoto in the near term, it would be economically disastrous for the country and for the municipalities and cities in which we live. In a realistic way, how can we achieve what needs to be done, in your view?
Mr. Rosborough: I do not claim to be an expert by any means and we have not done an assessment of what it would mean for Ontario's municipalities to comply with Kyoto provisions in the near term. A significant concern for Ontario's municipalities is the ability to adapt and change practices so that our communities can mitigate the impacts of climate change as well. That will have an impact on land use planning, on our ability and capacity to maintain dams and berms, and on our energy costs, so a considerable amount of analysis still needs to be done.
Municipalities are doing a number of things; and I concur with your assessment that a good deal of innovation occurs at the local level and goes upward. For example, we have been making sure that our members are aware that energy retrofits are an eligible category for federal gas tax funding under the category of energy. In Ontario, municipalities operate public housing and long-term care for seniors, so some municipalities are using their federal gas tax funds to undertake energy retrofits for municipal infrastructure, which leads directly to reduced energy costs and reduced greenhouse gases.
I think Ontario municipalities are using whatever tools are available to them. Some are leading the way in responding to the need for reduced greenhouse gases. Others are interested in finding out what senior levels of government have in mind in terms of opportunities to work with local communities.
Senator Stratton: This will not happen tomorrow. It will take a while to work through because it is a fairly significant problem. I am not trying to put words in your mouth, but I am trying to reach at least an understanding that yes, it is a large problem and yes, it must be addressed, but it will take time. Would you agree with that statement?
Mr. Reycraft: Absolutely.
The Deputy Chairman: I am afraid our time is up. Mr. Reycraft and Mr. Rosborough, thank you for your participation today. By the way, I have all kinds of roots in Middlesex, Woodstock and Arva, Ontario, so I was delighted to see you.
Honourable senators, it is my pleasure now to welcome Robert Gagné, Professor and Director of the Institute of Applied Economics at École des hautes études commerciales in Montreal.
Committee members will recall that in the fall of 2006, we heard representations from 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. As the former co-chair of the Council of the Federation Advisory Panel on Fiscal imbalance, Mr. Gagné is no stranger to our committee. In fact, he appeared before us on October 24, 2006, to speak about the advisory panel's report released in March of 2006, entitled Reconciling the Irreconcilable: Addressing Canada's Fiscal Imbalance.
Mr. Gagné, it is a pleasure to welcome you today and to thank you for coming to speak with us on the subject of vertical fiscal imbalance.
[Translation]
Mr. Robert Gagné, Professor and Director of the Institute of Applied Economics, École des hautes études commerciales as an individual: There are several issues that have to do with per capita transfers and the value of tax points. In order to speak to several of these issues, I have distributed some charts that come from annex 4 of the budget that was brought down last March.
I believe that charts 10 and 11 will answer several questions, particularly those that have to do with per capita funding of the Canada Social Transfer and the comparison with what was suggested in the report by the Council of the Federation; namely, whether this is a good way to use cash transfers.
Chart 10 shows the old system, as it existed before the last budget was brought down. Perhaps someone has already explained these things to you, but I think that it is important to return to them. Of course, it is somewhat technical, but everything is there, everything is hidden there.
Under the old system, the darker part of the bars at the bottom of the chart represents the value of tax points transferred in 1977, with the 2006-2007 per capita value for each province. You cannot see this because you do not have the original. Without the dollar amounts, one can see that with the exception of the territories (the Yukon, the Northwest Territories and Nunavut), the value of tax points on a per capita basis is the highest in Alberta, followed by Ontario.
The top part of the chart shows the satellite equalization system called ``associated equalization'' operated by the federal government which was intended to equalize the value of tax points according to the five-province standard. The bars at the top illustrate the cash transfers for social programs.
We can see that for most of the provinces, the transfer totalled $282 per capita. The figure is lower in Ontario and in Alberta, because the value of the tax points is higher. In Alberta, the total is $187 per capita, and in Ontario, $249 per capita.
The chart provides the rationale for Ontario's demands. When the Government of Ontario said that it did not want equalization outside the system, the explanation for its position can be found in this chart. Ontario was receiving $249 on a per capita basis, whereas the other provinces were receiving $282.
The response is to be found in chart 11 from the last budget, the chart on the right. The federal government yielded to Ontario's demands, and raised cash transfers to the same level on a per capita basis, namely $289, throughout the entire country. This figure was not pulled out of thin air.
You can see that before, everywhere in Canada, except in Alberta and Ontario, the transfer was $282. Basically, it increased by seven dollars. But in Ontario, it went up by $50, and in Alberta it went up by $102.
For Ontario, a per capita increase of $50 in transfers represents over $600 million in transfers allocated in the last budget. Funding was provided to three areas, namely post-secondary education, support for children, and social assistance.
What happened in the time between the two budgets? Associated equalization seems to have disappeared. In actual fact, it is no longer to be found, because associated equalization was transferred to the new equalization program. We did not come here today specifically to talk about the equalization program, but we have no choice but to discuss it.
Before, the federal government was operating on two levels when it said that it was transferring $500 on a per capita basis under social programs. In fact, that is not what it was doing. It was transferring $282 to some provinces, and $249 to Ontario. The tax points were in fact transferred 30 years ago. The government said that there was associated equalization, except that this was also reflected in its equalization program.
The money was spent in the equalization program, but the government made more or less two announcements. You could say that the funding was announced twice, but only one cheque was issued.
One good thing about the last budget, which was brought down on March 19, is that things are much clearer now. The government no longer claims that transfers total $500 per capita. They are doing what they say they are doing, they are allocating $289 per capita in transfers throughout the country. The association equalization program is where it should be, namely in the equalization program, but it continues to operate by equalizing the current value of tax points, which were transferred 30 years ago. The government is doing this following the ten-province standard, and this program operates independently with the equalization program.
I think I have answered several questions. What did the federal government do? It did three things. It equalized per capita transfers throughout the country. So now, the same amount is transferred to Alberta, to Ontario, and to the rest of Canada. Second, the government announced the associated equalization program just once, in its equalization program. Third, it increased per capita transfers by seven dollars. So, that is seven dollars multiplied by 32.5 million inhabitants. You can do the math. This is what has been done.
In addition to that, there is an escalator clause of 3 per cent per year. From now on, the $289 for the social transfer will be indexed at 3 per cent for the next five or seven years, just as that was done for the health transfer.
Fortunately for us, the situation is clearer now. However, there is another question that begs answering: Is $289, indexed at 3 per cent per year, an adequate amount? Unfortunately, I do not have the answer. We must not forget that $289 is now the starting point, and even if the escalator of 3 per cent were sufficient, if our starting point is off, then we are not resolving anything.
The report by the Council of the Federation recommended an escalator clause of 4.5 per cent. This percentage is based on simulations of cost increases, particularly in the field of education. Of course, if we compare the rate to what was suggested, the escalator is not enough. Nor is the starting point sufficient, in comparison with what was suggested.
It is important to realize that with the exception of Ontario and Alberta, seven dollars were added on a per capita basis for all of these programs. This is not nearly enough.
I think I have given you a good explanation of the proposed change, or at least the way I understand it. Is this the best way of transferring funds? Maybe not, but it is an improvement over what we had previously. The system is more transparent and clearer. There has been an improvement. Is a starting point of $289 adequate? No one knows. One has to make a value judgement. Is an escalator clause of 3 per cent enough? I do not believe so. I would be more comfortable with an escalator of 4.5 per cent. Under this system, will increases be limited? I do not believe so. We are already off to a slow start, and the escalator is too small. Clearly, we will not be able to bridge the gaps.
There is a whole series of issues that I am less comfortable with, including conditionality. Should the government set the same kind of conditions for social transfers as for health transfers? I do not know. This is not an economics issue, it is a political question. If I were a federal minister, I would want to set conditions, because I would have the unenviable task of imposing taxes, so I would want the money to go where I said it would go. I think that is legitimate. But we would not want to set too many conditions either, so as not to tie the provincial government's hands. With the conditions that one finds within large families, such as the ones we currently have for post-secondary education, no one will get all worked up as long as the funding is spent in this sector.
There also was a series of questions about transfers of tax points. Are transfers better or not? The 1977 transfers are there. We are currently trying to equalize them following the ten-province standard. Last year, they were not equalized according to the ten-province standard, but rather, to the top-province standard, in other words, according to the most prosperous province.
We do not see this in chart 10. If you look at that chart, the only way the federal government can claim to be transferring the same amount to everyone, is by playing with the cash transfers and the associated equalization program.
They used both tools, in combination, to obtain the nice rectangular box that you can see on the chart. On chart 10, the Equalization Program that is called associated equalization is not enough to equalize tax points everywhere in Canada and then to have the government claim to be giving equal cash transfers. The proof is that Ontario and Alberta received less than the other provinces. There is a line below $250. If you take this line and place it on top of Alberta's vertical bar on the chart, you have not changed anything. You still have a per capita transfer of $500 throughout the country. However, if you do this, you have just changed the associated equalization program considerably. You have gone from the five-province standard or the ten-province standard to the top-province standard. That has not cost the federal government an extra cent. You have not changed anything. All you have done is reduced cash transfers and increased the associated equalization program. However, nothing has really changed.
Let us call a spade a spade. What the program is currently doing is applying the top-province standard. It is clear from this chart. I have drawn my line on the chart, and I have not changed a single thing. I do not know whether Mr. McGuinty in Ontario is happy, but per capita transfers are now equal throughout the country. Afterwards, with these rectangles that are all the same for all the provinces, you can apply the escalator clause that you want. However, this is not what the government is currently doing.
By transferring the associated equalization program to where it should be in the Equalization Program but at the same time keeping the ten-province standard, the government has clearly increased the disparities within the country, because it has implicitly gone from the top-province standard to the ten-province standard. We can understand this. No matter where you live, it is not a question of a value judgment, it is a fact.
With the exception of the Equalization Program in and of itself, what the 2007-2008 budget did was transfer a great deal of money to Ontario and Alberta, two of the richest provinces in Canada. I agree with what they did, but when you transfer, on a proportional basis, more money to two provinces rather than to the others, you clearly increase the disparities. In other respects, you have an equalization program that reduces other disparities. The bottom line is that things are not so clear, but it is clear that with this system, the government has increased disparities. And if there were a trend over the longer term and there were pressure on the program, if the Equalization Program were attacked, or if you wanted to cut it back and all that, clearly, in this case the transfer method that has been changed would not solve the problem. On the contrary, it would make things worse, for the reasons that I just mentioned. The government has equalized transfers everywhere throughout the country, but especially in the two wealthiest provinces.
In our report, we suggested adopting the top-province standard, because first of all it was the ``cost-neutral one.'' Then, it allowed for a program of cash transfers that did not increase disparities, regardless of what might happen on the equalization side. We did not make any recommendations about transferring tax points in our report. We had a great deal of discussion on this matter. My position is that if we must transfer tax points, we must equalize them as was done in 1977, so that would mean using the top-province standard, but that would be awfully expensive. We did not prepare a simulation, but it is clear that each time you equalize using the top-province standard, it is very expensive. If you transfer tax points, but without equalizing them, you increase disparity within the country, disparity in terms of fiscal capacity. If you agree to transfer, equalized or not, it does not matter, if you transfer these tax points, obviously the whole issue of conditionality disappears. It will become politically difficult to impose conditions on the provinces for money that they will be collecting themselves. The provinces will not accept conditions, and I certainly understand them. That was for transfers of tax points, which are for personal and corporate income tax. GST is not included for the time being.
Obviously, if you were to opt for transferring GST points instead, it would be the same mechanism. It is just a different tax base. Since GST points do not have the same value throughout the country, if you transfer GST tax points, you increase disparities. That is why I have always found the recommendation from the Séguin commission rather odd. The Séguin commission in Quebec produced one of the first reports on the fiscal imbalance, and they suggested large transfers of GST points to the provinces. A province such as Quebec would have lost out, because GST points in Quebec are worth less than in Ontario or in Alberta.
I think I have covered all the questions that were asked of me. I can now answer your questions and try to provide some clarification. These are not such simple matters for someone who does not play with these concepts everyday, but they are not too complicated either, particularly when you have pretty charts.
[English]
Senator Eggleton: You and I have agreed with the bringing of Alberta and Ontario up to the same level as other parts of the country in terms of the per capita transfer for social purposes. Certainly, there is agreement by the Ontario premier in that regard and perhaps by the premier of Alberta as well. Of course, the optics of this additional money going to the two richest provinces in the country irks some people and others are saying that it places an unfair burden on the less populated regions of the country — rural areas and less-populated provinces — that have a particular struggle. Could you comment on that vis-à-vis this formula that the government has put in place?
[Translation]
Mr. Gagné: There are the remote rural communities, and there is social assistance. They are similar problems. I have not done any calculations recently, but I wonder if Alberta is not making a little bit of money with the transfers for social assistance. Since that funding is transferred on a per capita basis, it depends on the province's population and not on the number of actual welfare recipients. It may be a source of profits for Alberta, I do not know.
It certainly does pose a problem. It is the same thing for postsecondary education, since the number of students attending university is not the same everywhere. When we were preparing our report, we heard from people from Nova Scotia who told us that they had many students from across the country enrolled in the province and that they did not receive the federal subsidies for these students. The provinces receive subsidies according to the size of their population. A young person who temporarily moves from Ontario to study in Nova Scotia is counted as an Ontario resident. So the Ontario government receives the subsidy, not the Government of Nova Scotia.
Issues like this become incredibly complex and may even create, in my opinion, dangerous incentives. For example, with respect to social assistance, if transfers were made, not on a per capita basis, but on the basis of current requirements, provinces would not have much incentive to set policies conducive to limiting the number of those in need of social assistance.
The same goes for education. It is extremely difficult to calculate exactly how many students are enrolled in each province. Very quickly, we come around to situations like we have in Quebec, where tuition fees are very low. The assumption is that lower tuition fees increase university enrolment. Why then should the province receive more funding than others? All it needs to do is increase its tuition fees. We quickly fall into these types of circular discussions.
To my mind, calculating on a per capita basis can be problematic, both other methods pose even bigger problems. This method is fair and equitable and it does have its advantages. Some will claim that equalization no longer exists, but in actual fact, it takes on many forms. When Ontario, Quebec or Alberta receives the same per capita transfer, this is a form of equalization, because the transfer covers the cost of services which are not necessarily the same everywhere.
Per capita transfers present some interesting benefits. There are problems, but when weighing the alternatives, this is the best solution. Politically speaking, the per capita transfer is probably the most viable and marketable method.
Senator Murray: With respect to the 3 per cent CST escalator, I find your position tenuous in three respects. First, it does not allow for provinces to make up for ground lost since the 1995 budget. Second, it is based on the growth rates of provincial expenditures, particularly in the area of post-secondary education. As a university professor, I am sure you are aware of the problems. Third, it is tenuous given the elimination of associated equalization. In my opinion, we cannot say that the new equalization formula provides adequate compensation for the elimination of associated equalization. Am I mistaken?
Mr. Gagné: You are right. In fact, associated equalization remains intact. It has not been changed. We have placed it exclusively within the main equalization program, and it remains unchanged.
That is the first comment; there is nothing new here. It is simply a matter of monitoring the evolution of the value of tax points. Currently, the value of tax points is increasing significantly in Alberta. This has very little effect on the associated equalization program.
Second, it is obvious that current transfers cannot turn the clock back to 1995 levels. We did the math for the preceding year, which took us back to 1995 levels. The figures are significantly higher, so we are talking about an additional transfer of several billion dollars.
This is exactly what I was saying in my presentation earlier. The 3 per cent escalator clause is too low. A far more reasonable figure would be 4.5 per cent, given what we are observing in terms of cost increases. Our starting point, in terms of the escalator, is much too low. The rate of 3 per cent is too low. It is abundantly clear that costs are increasing and that transfers are also heading in this direction. The gap will continue to widen, unless provinces are able to contain cost increases.
Senator Murray: Let us talk about some of the expenditure forecasts made by the Council of the Federation.
Mr. Gagné: Expenditures for post-secondary education and social assistance?
Senator Murray: Yes.
Mr. Gagné: We considered reasonable scenarios, and not catastrophic ones that would ``inflate'' figures. According to the most conservative estimates, growth in expenditures should be approximately 4.5 per cent.
Senator Murray: And if expenditures have exceeded projections by only one percentage point?
Mr. Gagné: Let us set aside health care expenditures, which represent a whole other problem.
Senator Murray: One that apparently has been resolved. Correct?
Mr. Gagné: A rate of 4.5 per cent represents an average scenario, nothing out of the ordinary. Clearly, if this forecast does not materialize, and if expenditures increase at a rate of between 5 and 5.5 per cent, the provinces' projected deficit will be much higher than originally expected.
I wanted to say that if the provinces are able to limit the increase in post-secondary education costs to 3 per cent, I am not entirely sure if this would be good news for our country. I may even be in a conflict of interest position because of that comment. Resources for colleges and universities would be reduced and these institutions would be even more under-financed than they are currently.
Expenditure growth projections were independently calculated by the Conference Board, which laid out various scenarios. We sought out the most conservative, most stable scenario in order to establish a minimum level. The projected rate of growth cannot be less than 4.5 per cent. It can certainly be more, in which case the situation would be even more difficult. And we have not talked about health. We are talking about social transfers. As it stands, the most realistic health care projections have been surpassed, what with a provincial government tabling a budget with projected increases of 6, 7 or 8 per cent in health care spending. The projections have been exceeded.
I do not know if the budget is going to pass, but the Government of Quebec is trying to get its budget approved. It calls for a 6 per cent increase in health expenditures, and a 5 per cent increase in education spending. I do not believe that in these areas, Quebec should be treated as a distinct society. I think all provinces in the country are facing similar situations.
Even in terms of health care, the Government of Quebec is one of the few governments, if not the only government, that spends the least amount of money. It is controlling health care expenditures very carefully. Six per cent is probably one of the lowest expenditure growth rates in the country.
These scenarios are very optimistic. Clearly, what is being proposed in the federal budget is not realistic, in terms of projected growth rate of 3 per cent.
Senator Murray: I have a political question.
Mr. Gagné: Those are the best ones.
Senator Murray: Perhaps you may prefer not to answer it. You may have heard the testimony of representatives from Ontario municipalities. As a committee, we are studying problems experienced by municipalities. A particularly striking issue is Quebec's traditional concerns over preserving its constitutional prerogatives, including jurisdiction over municipalities.
Do you believe the federal government has the leeway to implement a federal policy on municipalities without declaring constitutional war with your province?
Mr. Gagné: I do not know, in fact. In fact, what I do know, and what I heard again this morning, is that the situation of municipalities varies greatly from one province to the next. Ontario's situation, for example, is very different from that of Quebec, and I received confirmation of this by listening to the presentation this morning. Municipalities in Quebec do not have the same responsibilities as Ontario municipalities. In Quebec, municipalities are responsible for drinking water, snow removal, upkeep of public lawns, soccer fields and ice rinks, but they do not intervene in social affairs, or seldom do. At least not to the same extent as Ontario municipalities.
Quebec municipalities are not subject to the same kind of pressure in terms of expenditures, the way Ontario municipalities are. The situation is similar to that of provincial governments who are under tremendous pressure at this time because of health care costs. Ontario municipalities seem to be under considerable pressure because of spending in social areas, which is not the case in Quebec.
To answer your question, I believe that yes, there would be a very strong reaction in Quebec, but the reason officially cited would be of interference. I believe that the Government of Quebec, along with most Quebecers, believe that municipalities are not short of cash. In fact, they spend too much on wages and salaries. Many studies show that the salaries of municipal employees in Quebec are 25 to 30 per cent higher than those of provincial public servants. Labour relations are therefore a serious problem, one that accounts for spending pressures.
So, I do not see the federal government bringing in a national program to resolve the types of problems that we are witnessing in Ontario, or implementing the same program that we have in Quebec. This would not work. The Government of Quebec would not want the federal government interfering in its affairs, because Quebec municipalities do not have the same types of problems.
From an economic standpoint, one must be careful to take into consideration the views of municipalities across the country. The previous witness said that in Ontario, homeowners pay on average $275 more in property taxes. Part of the reason for this is that property values are higher in Ontario than in New Brunswick. Since properties are worth more, it is only normal that taxes should higher as well.
Like Quebec, Ontario is home to some large cities, and it has been proven that large cities are not necessarily the most efficient.
Senator Eggleton: At least not in some areas.
Mr. Gagné: But I would be worried about a national program, or a standardized national policy, because provinces each have their own very different problems and systems. It would not work.
Senator Mitchell: Thank you for your presentation. I enjoyed it very much.
[English]
Professor Gagné, I would like to pursue a bit the question of post-secondary education. I may not have followed entirely the discussion here. Are you arguing that post-secondary education should be more directed so that we could have greater accountability, greater assurance that the money that is under the Canada Social Transfer for that is indeed actually going to it?
Could you comment also on the role of federal research and development funding through universities in that context? How should that be conducted? Should it be focused, or should it be more general and less conditional?
[Translation]
Mr. Gagné: When we visited the provinces last year, I believe that we heard the same message delivered in all provincial capitals. There is no question that programs such as the Canada Foundation for Innovation or the Canada Millennium Scholarships put considerable pressure on provincial budgets. The federal government is directly funding activities in universities by ignoring the provinces, which creates upward pressure on costs for the universities, and ultimately, for the provinces.
Certain conditions must be set, and they cannot be too strict. For example, provided the federal government receives assurances that the funding allocated for post-secondary education is indeed spent by the province in that area, that should be sufficient. To impose any further conditions on funding would mean that the federal government was attempting to step in and take over the administration of universities from the provinces.
We have noticed the same phenomenon throughout the country, and everybody agrees that the federal government is ignoring the provinces by sending cheques directly to universities, thereby creating problems. I set up a laboratory within my university through the Canada Foundation for Innovation; we received funding to build the laboratory, but we did not receive funding to ensure that the laboratory would remain up and running, that building costs, heating costs, et cetera. would be covered. The laboratory was established, nonetheless, and it is being managed by the university.
In a perfect world, the federal government should not have to intervene in such thorny areas as post-secondary education. It can support colleges and universities in their development, because this is important, but it must agree with the provinces on how to develop this area.
Ultimately, since the majority of funding comes from provincial governments, the provinces should be the ones to set priorities. In any case, I do not think the provinces are being irresponsible with respect to developing colleges and universities. They are trying to satisfy the most urgent needs. However, it is obvious that all of these specific programs put upward pressure on spending. My laboratory is just one example, and it is not going very well.
[English]
The Deputy Chairman: Thank you very much for coming back once again.
The committee adjourned.