Proceedings of the Standing Senate Committee on
National Finance
Issue 16 - Evidence - Meeting of June 5, 2007
OTTAWA, Tuesday, June 5, 2007
The Standing Senate Committee on National Finances met this day at 9:32 a.m. for clause-by-clause study of Bill C- 294 and to examine and report upon 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.
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The Chairman: Welcome to the Standing Senate Committee on National Finances. I am Joseph Day, I represent the province of New Brunswick in the Senate and I am the Chairman of this committee.
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Today we resume our meeting to do clause-by-clause consideration of Bill C-294, to amend the Income Tax Act, sports and recreation programs. We have previously studied the content of this bill, which is a private member's bill sponsored by member of Parliament, Mr. Brian Fitzpatrick, who is the representative for the area of Prince Albert, Saskatchewan. We do not get that many private member's bills here and we congratulate you, Mr. Fitzpatrick, on your fundamental democracy in starting a private member's bill, which you have brought all the way through the House of Commons to appear before the Senate today.
As I have indicated, we have had an opportunity to study the bill with you previously. At this time, if honourable senators are prepared, we will go through clause-by-clause consideration of the bill.
Shall we proceed, honourable senators?
Hon. Senators: Agreed.
The Chairman: Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 2 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 3 carry?
Hon. Senators: Agreed.
The Chairman: Shall clause 4 carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Shall the bill carry in its entirety?
Hon. Senators: Agreed.
The Chairman: Shall I report the bill to the Senate with observations or without observations?
Senator Stratton: Without.
The Chairman: It is agreed that no observations are necessary. Honourable senators, that concludes this particular matter.
Mr. Fitzpatrick, congratulations to you. We will be reporting this back to the Senate, probably this afternoon. It would be my intention to report it back this afternoon, or tomorrow at the latest, depending on when we can get our paperwork ready. Then we will proceed in one day with third reading, which is our normal time frame. Following third reading, the bill will be then reported back to the House of Commons as having been accepted by the Senate without amendment.
Brian Fitzpatrick, Member of Parliament for Prince Albert: Thank you for all your help on this matter. It is much appreciated.
The Chairman: Thank you for being here and for your initiative.
Honourable senators, over the past six weeks the committee has heard from a number of witnesses as part of our review of the vertical fiscal balance, which is the division of fiscal resources and spending responsibilities between various orders of government in Canada.
Today, it is my pleasure to welcome Mayor John Morgan of the Cape Breton Regional Municipality. Mayor Morgan is accompanied by two of his officials, Mr. Jerry Ryan, Chief Administrative Officer, and Mr. John A. Whalley, Economic Development Manager.
On October 21, 2000, John Morgan was elected Mayor of the Cape Breton Regional Municipality for the term 2000 to 2004; he was re-elected in October 2004 for a further four-year term to end in 2008. He has served in various positions on the executive committee of the Union of Nova Scotia Municipalities, being elected in October 2003 as President for a one-year term. He subsequently served as Past President in 2004-05. He has also served on the board of directors of the Federation of Canadian Municipalities.
Mayor Morgan, I understand that you have some opening remarks. I can assure you that honourable senators have received your material, which will provide a very good background for us as we continue this study.
John W. Morgan, Mayor, Cape Breton Regional Municipality: Thank you, Mr. Chairman and committee members. As you indicated, we did provide a brief to the committee, so I will try to summarize it rather than read the entire document.
The underlying theme that you will see running throughout our brief is that we are urging the Senate, as it analyzes the issues before it, to consider not just the specific financial transfers but the underlying governance structures as well — in particular with respect to peripheral regions that are struggling, such as the Cape Breton region.
You will see in our paper that 25 per cent of our citizens live at income levels at or below the poverty level, and employment rates are dramatically lower than in other regions of Canada. To give you some background, I want to review the financial circumstances of the Cape Breton Regional Municipality.
In paragraph 22 of our submission you will see reference to the census data from 2006. In the last 10 years, the Cape Breton Regional Municipality has been losing population faster than anywhere else in the country. At the same time, that population loss has been aggravated by two factors related to government policy. The first is the equalization system that has been so much at issue at the federal level. Under section 36 of the Constitution, the federal government has an obligation to ensure that all areas of this country, all citizens, have comparable services at comparable tax rates, and there is an equalization system that causes funding to flow to provincial governments across this country. The challenge for the Cape Breton Regional Municipality is that provincial government policy causes our residents to have dramatically lower service levels while at the same time they have dramatically higher tax rates within the municipal jurisdiction.
Despite the commitment under section 36 to have comparable services at comparable tax rates, the reality in our region of Nova Scotia is that if you measure the actual services delivered, our citizens get dramatically lower service levels while at the same time our property tax rates are dramatically higher than other areas within our own province. That analysis would extend to other areas of the country. Our concern is that the commitments under section 36 of the Constitution are not being met, particularly in the field of municipal service delivery, which for the average citizens, is the level of government that has the most day-to-day impact on their lives.
At the same time that that is happening in our region, our provincial government is coming to the federal government and rightly and forcefully making the point that Nova Scotia cannot as a province be competitive or successful unless there is an effective equalization system in place that ensures that comparable services are available at comparable tax rates. The provincial level comes to Ottawa and argues properly that section 36 of the Constitution must be complied with.
I ask this committee to consider that once the equalization payments are made pursuant to that constitutional obligation, the money goes to provinces but those funds are not necessarily being used for the purpose for which they were sent. They were sent to reduce regional economic disparities. In fact, in Nova Scotia the funding is overwhelmingly being forwarded not to the poorest areas of the province but to the wealthiest. Economic disparities are not being reduced but are being aggravated in a sense.
In our paper, we refer to the need to address that issue. There must be some analysis of the transfer of funding and whether it is accomplishing its purposes. I know that the Senate has been interested in that subject in its previous hearings. I saw some of the previous presentations made before the Senate. Senators have asked representatives from the Department of Finance what type of tracking occurs once funding is provided to provincial governments and to various departments. Once these payments are made, what analysis is done to ensure that the intended purpose is being accomplished? It is fair to say that there has been little or no response from finance officials to the question of whether they are in fact dealing with these disparities in an effective way.
Notwithstanding all of the other issues you are confronting with respect to the vertical and horizontal fiscal imbalances, we urge you to analyze whether you are in fact getting objective feedback as to whether section 36 of the Constitution is being complied with. I would suggest that it is not sufficient just to send a cheque to provincial governments. It is not sufficient because you do not know at the federal level whether you have complied with those obligations unless you analyze the results of the funding being forwarded.
I have commented about the transfers at the provincial level. It is important to keep in mind that at the federal level of transfers a number of programs have been established for the purpose of direct financing from the federal government to comparatively poor areas of the country. Atlantic Canada is often referenced in that vein. The funding is provided by the federal government to agencies such as the Atlantic Canada Opportunities Agency. A number of agencies are referenced in the paper. In the context of Nova Scotia in particular, and I suspect it is not necessarily an isolated example, the disproportionate share of that funding is going not to poor areas of the province but to the very richest areas. For example, Nova Scotia's principal economic development instrument is Nova Scotia Business Incorporated, an organization that funds various businesses within our province. Eighty per cent of that organization's expenditures are made in the richest area of Nova Scotia, an area with an unemployment rate of 4.9 per cent, which is lower than the unemployment rates of Toronto, London and many Ontario cities. That is our concern.
Many of these funding programs are funded from the income tax system, so in effect funding is coming from relatively poorer areas of wealthy provinces and, as long as it is not tracked, going to rich areas of poor provinces. I would suggest that that is not consistent with the intention of section 36 the Constitution. The intention of section 36 was to ensure that these regional economic disparities were reduced, certainly not exasperated. It was to ensure that comparable services at comparable tax rates were available everywhere in the province. That obligation is not being met under the current scenario.
There are a number of other comments made in the paper but I do not want to go through the entire paper with you. Mr. Whalley, Mr. Ryan and I are available for any questions.
The Chairman: Thank you very much. I am sure that interesting questions will arise from the material you have presented.
From time to time we have provincial representatives before us and they make the point forcefully that the federal government should not interfere with or delve into subsections of any province. You are proposing that the federal government has not only the authority but also the responsibility, under section 36 of our national Constitution, to look into a subset of a province.
Mr. Morgan: Absolutely. I understand the desire to respect provincial jurisdiction and I know that sometimes it is a challenge for the federal government in dealing with programming, but there are certainly conditions attached to much smaller funding payments for a number of comparatively minor expenditures at a much lower level than the federal equalization program, which sends about $1.4 billion to our province each year. In contrast, there are no strings attached to that massive equalization payment, a payment that has enormous consequences for the citizens of the province and that literally could mean the difference between prosperity and ongoing decline for our region in particular.
It must have been very frustrating for this committee to try to get details from the federal Department of Finance officials as to those expenditures; I was frustrated just reading the transcript of the senators trying to get information. However, we hired experts and have done that analysis ourselves, and some of those materials are referenced in our paper.
It is abundantly clear that the money is not going for the purpose for which it is being sent; it is not going to the poor areas, certainly not in our province. The distribution of the money follows a theory that government money and resources ought to be sent to very wealthy areas, to what some economists argue are winning regions.
Now, whatever the economic merits are of putting all government resources into winning regions or winning communities, it is my submission that that is certainly not consistent with the Constitution. If government or economists have decided on a new theory that it is best to put all your money into wealthy areas, I suggest they ought to amend the Constitution rather than carry on with what is happening now.
Nova Scotia is pursuing this strategy now of going with its winning region. However, if you were to suggest that all of the Government of Canada's resources ought to be put into Ontario or Alberta or British Columbia because those regions are already prospering, I suggest there would be a lot of objection from Nova Scotia in particular but also from many provincial units because that is not consistent with the Constitution.
The Chairman: Just for the record, could you clarify, is the Cape Breton Regional Municipality the entire island of Cape Breton?
Mr. Morgan: No, we are what was formerly known as the county of Cape Breton. There are eight former municipal units making just over 100,000 in population in the southeastern portion of Cape Breton Island. We have the majority of the people, but not the majority of the land area.
The Chairman: What are the major cities?
Mr. Morgan: The former city of Sydney, the former town of Glace Bay, New Waterford, North Sydney, Sydney Mines, Louisburg.
The Chairman: That sort of geographically places it for us.
Senator Murray: You know this, of course, but I want to point out that there are two parts to section 36 of the 1982 Constitution. One is on regional disparities, the other on equalization. The first part is a commitment of both orders of government, federal and provincial, to promote equal opportunities for the well-being of Canadians, to further economic development, to reduce disparity and to provide essential public services of reasonable quality to all Canadians. That is a commitment by both orders of government. The second part of section 36 is a commitment by Parliament and the Government of Canada to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.
Perhaps the easy way to do this is to take the second part first. We are dealing with a cross-Canada comparison. Are you suggesting that the provincial government in Nova Scotia is not providing reasonably comparable levels of public service in Cape Breton? Are you saying that your hospitals or your schools are inferior?
Mr. Morgan: I would not say that about hospitals, necessarily, but I think the schools are a good example. Let us compare our region versus some other areas of our province. The richer areas that have much higher levels of revenue are able to provide supplementary funding through the municipal government structures, because the municipal governments are much wealthier than our own. They provide supplemental funding to their school boards, and as a result there is programming available in the Halifax Regional Municipality, for example, that is not available in our own regional municipality.
If you move outside the field of health care in particular, the analysis rapidly breaks down. In the field of economic development, for example —
Senator Murray: I will come to that.
Mr. Morgan: In virtually in every area of government expenditure outside health care — and there is an important distinction with health care because of the aging population in the community — you see dramatic differences in the service levels. In road maintenance, waste water management and across a variety of services, the expenditures are dramatically less in our region. This is true not only for municipal services but for provincial government-delivered services as well.
Senator Murray: Do you pay part of the cost of education in Cape Breton?
Mr. Morgan: Yes, we do.
Senator Murray: What portion do you pay?
Mr. Morgan: It is based on our assessment; roughly 10 per cent.
Senator Murray: What does that represent in terms of your total expenditures?
John A. Whalley, Economic Development Manager, Cape Breton Regional Municipality: It is about 10 per cent of total expenditures; it is approximately $11 million annually out of an operating budget of $112 million.
Senator Murray: What does it go to?
Mr. Whalley: It goes into the general pool for the school board.
Senator Murray: It is a grant from the municipality to the school board.
Mr. Whalley: The province considers that money as the provincial component of property taxes. They do not view it as municipal money; they view it as provincial money and they use the municipality as a clearing house.
Senator Murray: You have said that the property tax burden is heavier on your people in the Cape Breton Regional Municipality. I think you said the rates are higher. Are they higher than the Nova Scotia average?
Mr. Morgan: Absolutely, yes.
Senator Murray: How much higher?
Mr. Whalley: We have the highest urban residential and commercial tax rates by 10 per cent to 15 per cent and we have the highest rural tax rates by about the same amount.
Senator Murray: Is the assessment centralized in Nova Scotia as it is in New Brunswick, or do you do your own?
Mr. Morgan: It is a centralized assessment service. Not only are those tax rates among the highest, but our expenditure rates for operating expenditures, for example, are about 66 per cent of what the average would be in our province as well, so there are dramatically lower expenditures on municipal government services. Policing, fire and the range of municipal government services are dramatically lower, but we have the highest property tax rates.
Senator Murray: I presume the property tax is by far your major source of revenue.
Mr. Whalley: It represents two thirds of our total revenue.
Senator Murray: Where does the other third come from?
Mr. Whalley: The equalization program, a variety of smaller grants and some user fees.
Senator Murray: Are property assessments based on market value?
Mr. Whalley: Until recently, assessments have been based on market value, and this is an important point. The province imposed a cap on assessment. This year I believe it will be set to the change in the consumer price index. Essentially, it is another form of holding the municipality's ability to raise revenue. It will transfer the burden from wealthier households to poorer households over time.
Senator Murray: Is the cap on the assessment or on the rate?
Mr. Whalley: It is on the assessment.
Senator Murray: I will move on to the question of economic development. In your statement, you made quite a comparison between two islands, Cape Breton Island and the province of Prince Edward Island. You talked about total federal development assistance in P.E.I. in 2006-07 of $42 million as compared to total assistance of approximately $19 million in Cape Breton. I do not know what you include in development assistance but it strikes me that two large federal installations are located in Prince Edward Island. One is Veterans Affairs Canada in Charlottetown, which was decentralized in the 1970s, I believe; and the other is a GST centre in Summerside which we transferred to compensate for the closing of the Canadian Forces base in the early 1990s. Those offices are employment and revenue generators for the economy of P.E.I.
In terms of economic development, there is Nova Scotia Business Incorporated as well as the federal Atlantic Canada Opportunities Agency. Cape Breton is almost unique in this country in that it has its own federal Crown corporation called Enterprise Cape Breton Corporation, whose vocation is to help grow the economy of the area. What is the problem in that region? It has existed for a long time.
Mr. Morgan: From my perspective, the key is not these development functions. Enterprise Cape Breton Corporation delivers services on behalf of a variety of federal agencies referenced in the paper to the extent that they are delivered in Nova Scotia. They have their own budget as well for their programs.
Coming back to a central point made earlier, the totality of the government assistance has to be analyzed as opposed to cataloguing whether there is an agency with "Cape Breton'' in the name. The issue is whether the totality of the assistance being provided indicates that federal development assistance is going principally toward Cape Breton or whether it is simply a name. I would not describe it as a shell, because that is too strong, but in the end it comes back to tracking where federal economic development dollars are going.
Senator Murray: Break down the $42 million and the $19 million figures that were mentioned earlier.
Mr. Whalley: In looking at federal development assistance, the brief compares the Atlantic Canada Opportunities Agency's spending in Prince Edward Island to that agency's spending in Cape Breton combined with Enterprise Cape Breton Corporation. Last fiscal year, the federal economic development assistance in Prince Edward Island was more than twice the total combined federal economic development assistance of all agencies in Cape Breton.
Senator Murray: Do you have any idea why that is? To be provocative, are more and better ideas coming from entrepreneurs in Prince Edward Island than are coming from Cape Breton? Are many applications from businesses, local governments or non-governmental organizations in Cape Breton coming forward and being turned down by Enterprise Cape Breton Corporation?
Mr. Whalley: We do not know the administrative reasons for that. Federal development assistance has over the years been on a roller coaster in Cape Breton. The figure might be $20 million this year, $50 million next year and back to $15 million in the subsequent year. There is no consistency. We are saying that the provincial development organization, Nova Scotia Business Incorporated, is disproportionately engaged in investing in a low unemployment area and is ignoring high unemployment areas. Similarly, federal agencies in recent years have effectively moved their assistance into wealthier areas. Cape Breton would have to create about a 30 per cent increase in total employment to reach P.E.I.'s current employment rate. The federal government, counter to its obligation and commitment under section 36, and the province, counter to its commitment under section 36, are not moving to reduce regional disparities, for whatever reason.
Senator Murray: We are talking about section 36(1). I will leave it at that for now.
Senator Nancy Ruth: I will not ask about your law case but my run-up to it is that we have heard testimony from others wanting conditionality on federal monies. We heard from Armine Yalnizyan, Director of Research, Community Social Planning Council of Toronto; and from Nancy Peckford, Program Director, Canadian Feminist Alliance for International Action, in Ottawa. The people we hear this from are the poor. That is the commonality between all your groups, and they all want conditionality on these monies. In your legal case, have you prompted interveners in your province to give you a hand? If you take it to the Supreme Court of Canada, will you engage other groups such as these?
Mr. Morgan: In terms of the legal action, our municipality is unique in the sense that we are very poor, from a national perspective, but relatively large in terms of poor municipal units. We have over 100,000 people there. We have had the ability to engage lawyers to advise us, and I think we have some of the best lawyers in the country dealing with this issue.
We have been able to undertake the issue as a municipal government. The issues are unique in that much of the focus is on municipal funding arrangements and the economic disparities of a particular region. However, the issues at stake for our municipal government are likely similar to those of other areas within Canada that are seeing the same kind of dynamics. You made the point about poor groups that are primarily asking for conditions or analysis and yet it is obvious that many people are being left behind in our nation. From our perspective, we are seeing not only a demographic group but also a geographic region being left behind. They are being cut loose and left to die slowly by our own provincial government. In terms of the expenditures at the federal level, the same thing is happening federally. Some of the academics in Nova Scotia, such as the president of the University of Dalhousie, have articulated the point that government does not articulate the process of allowing these peripheral regions to die. It is suggested that they allow them to die by starving them slowly of funding and the ability to deliver services to their citizens at comparable tax rates, causing citizens invariably to flow to the rich areas of our province. I suspect that it is happening across the entire country.
The irony is that within our own province, we watch our premier and our finance minister come before committees of this Senate and committees of Parliament and argue how essential it is to the survival of our province, and all the provinces, that section 36 of the Constitution be complied with. Without compliance, it will be economically disastrous for the individual province; yet back in our own province, they do not abide by the same set of principles. They allow major areas of our own province — we are the second largest urban area of Nova Scotia — to try to survive or else die by depriving it of the very funding that they argue is essential when they come to Ottawa.
Senator Nancy Ruth: Good luck to hold their feet to the fire.
Senator Mitchell: I have a series of questions I would like to pursue with you. What is the current unemployment rate in Cape Breton?
Mr. Whalley: It is approximately 17 per cent.
Senator Mitchell: Do you have a significant native population?
Mr. Whalley: We do; in our municipality, it is probably 4 per cent to 5 per cent.
Senator Mitchell: Would the Kelowna accord have been of assistance to that portion of your population? Would you have followed that and its implications?
Mr. Whalley: Yes, presumably.
Mr. Morgan: It would have had some impact. In terms of our municipal governments, whenever you have native communities within your borders there are internal issues regarding funding and services. We have had one community that has been particularly successful. Membertou is known across the country for its commercial successes, but it is relatively small compared to the entire population.
Senator Mitchell: Have you noticed any change? Has the problem of getting your share of funding been exacerbated by the federal government's decision to renege on the accord? Has that changed the province's predisposition to funding?
Mr. Morgan: I do not think we could tie the two together. Are you speaking of the offshore gas accord?
Senator Mitchell: Yes.
Mr. Morgan: Both before and after the decision on that accord we have seen a consistent unwillingness to provide a fully funded equalization system or anything close to that in our own province, even as our province ran budgetary surpluses. Although there is obviously a complaint about some of the budget decisions from the provincial government, certainly there had not been a complaint that you did not have a fully funded equalization system at the federal-provincial level at the end of either of the two scenarios that the province was given an option to select. You had a fully funded province in both scenarios — arguably, in one scenario, more than a fully funded province. However, no matter what the scenario was, they were intent on not fully funding municipal services in Cape Breton.
Mr. Whalley: The province is arguing nationally that there should be no cap. The provinces of Nova Scotia and Newfoundland and Labrador are arguing that their fiscal capacity in certain years should be allowed to be above the national standard. That is not our argument.
Within Nova Scotia, we just want to get to the standard. We are at 65 per cent of the standard. We have been capped in 11 of 13 years. This is the hypocrisy of the provincial government's argument in Nova Scotia. The other part of the hypocrisy is that they are arguing the offshore accord on the basis of economic development. The reality of the offshore oil and gas projects in Nova Scotia is that there is no benefit associated with those projects for us. The benefits have disproportionately gone to two regions in the province. There is no natural gas in the vast majority of the province. There are no pipelines. This gas is being exported and there is no economic development plan associated with either the Sable project or the Panuke project that has any effect whatsoever on our region.
Senator Mitchell: You talked about education, health and infrastructure in answer to Senator Murray. If you had to prioritize assistance, what would your priorities be — economic development assistance in the sense of subsidies, or access to financing for businesses and entrepreneurs? Would it be infrastructure development? Where do you see the biggest problems?
Mr. Morgan: It is fascinating. It is important to come back to the point that was made earlier by this very committee that there is a need for objective analysis of expenditures no matter what option is selected. It is difficult to pick just one, but infrastructure is key — even tax incentive systems. There are a variety of potential solutions. They all begin with the acceptance that there is a funding problem and that there is an obligation, pursuant to the Constitution, not to abandon struggling regions. All the solutions start with that.
There are a variety of solutions, and you have suggested a number of them. I would say that as efforts are made to comply with those constitutional obligations, there is uncertainty as to what will work and what the formula is. That makes it critical that there be objective feedback of the results and that standards be set. The people who are paying into equalization have a right to know that it is being used effectively for the purpose for which the funds are being dispersed. That is not happening today.
I know you are from Alberta and funds are coming from Alberta. Some communities in Alberta have unemployment rates higher than those in Halifax, yet we are taking funding from some areas that have higher unemployment rates and giving it to an area that has a much lower unemployment rate does most of the country. It is simply not consistent with the intent of the Constitution.
Mr. Whalley: The point we are trying to make in the paper is that it is not a series of ad hoc decisions that is required. The federal government transferred local airports and local ports, but the ones that they transferred were seen to be liabilities. They were the small money losers, so they shuffled those off to local authorities.
They are important for our local region, but the analysis that has to be made — and I guess some people are laughing at the document, suggesting that we are separatists — is that there is an evolution of government, and the governance in Canada is behind the economic and technological realities. You have to see these regions as being competitors. We cannot have our decisions being made for us in Halifax and other regions. That has not worked and it will not work; we have had 45 years of decline to understand this. We do not need subventions. We need the tools to allow decisions to be made in our region about our future.
Senator Mitchell: Mayor Morgan, it seems to me that the thrust of your suggestion to have more directed funding is this analysis process. If we analyzed the situation, we would show that the funding was not working the way it was supposed to work and that would enhance accountability and get the federal government's attention.
Would you take it further and say that is there another structure where you would have three-way agreements with the feds and the provincial authorities, where you would say, "This is what we need; let us have an agreement to ensure that the funding gets here''? Would you get that specific?
Mr. Morgan: You have had arrangements in that structure in the past with the Canada-Nova Scotia infrastructure programs. They were in fact tripartite agreements and you had input. I do not know that you necessarily have to go to that level of detail. It is a matter of going back to the basic constitutional principles and the federal government having an awareness of the constitutional purposes of the funding.
Getting the information in an effective way from the bureaucracy is a huge challenge, as evidenced from what this committee has gone through in the past. The Department of Finance has an obligation. When you asked the department where this money going or how much is going into a particular province or particular region, I sensed that they felt no obligation to respond. My view is that when this committee asks those questions of the department, you are asking not just individual senators but on behalf of all the citizens of this country. The officials ought to respond and they ought to give wholesome answers. I suggest you did not get that. It is essential to know whether that part of the Constitution is being complied with. We have tried with great frustration to assemble that information. We have got it for our province and it was a painstaking effort with much resistance from our provincial bureaucracy. I can only imagine how much that would be amplified when you are dealing with the federal level.
Senator Stratton: It is an interesting discussion. The big concern is how far the federal government can reach down in governance in areas and regions of the country. That becomes a big issue with the provinces.
You mentioned the Membertou band and how successful it seems to be. Can you attribute its success to specific reasons?
Mr. Morgan: There is probably some controversy. A significant source of revenue for the reserve is gaming activities within an urban centre. It is very difficult for me to analyze that. You have to go to the members of the band itself to answer that.
Senator Stratton: The Standing Senate Committee on Agriculture and Forestry is now looking at rural poverty. I am sure they will be visiting your area as they are visiting most areas of the country. When looking at rural poverty, they are looking also at the successful areas. Some parts of rural Canada are highly successful.
Studies have been, at least in my recollection in my province, Manitoba, and it comes down to individuals. It always comes down to individuals and small groups, where they are civic minded. They get involved and they drive something and are highly successful. The village or town seven miles or 10 miles down the road does not do that and is declining. I am not suggesting that for your region but it is always a fascinating issue that despite the fact that you have large pockets of poverty you see beacons shining.
Mr. Morgan: That has also been the case in our own municipality. There have been success stories. Membertou is a good example. When you are dealing with regional economies, there always will be significant success stories and we have them. We must celebrate them. Ultimately, though, you also have very difficult stories of people moving away. The question is the totality of the events.
You mentioned rural areas and areas that have struggled such as Charlottetown, Summerside, Moncton, and to some extent Sudbury in Ontario. Government has been able to intervene in some of these peripheral regions. They have done it effectively on a number of occasions. You will see some consistent themes in the strategies. Invariably they have decentralized some of the federal government offices into those communities that are struggling. We have not seen that to any significant extent in our own community because there has largely been a lack of acceptance that there was a problem at the federal level. There has been decentralization, if you look at Moncton, Summerside, Sudbury and a number of other communities. There has often been an effort to build effective infrastructure in the communities as well. In New Brunswick, the highway system was twinned to join all the major communities. We have seen communications infrastructure and tax incentive systems put in place, particularly in Prince Edward Island. Government has followed consistent strategies and done it effectively in a number of regions throughout the country.
In our region, the strategy from both levels of government has been to claim success by referencing some individual success story. The Enterprise Cape Breton Corporation is one. It is suggested that that reflects the entire region without an objective analysis of whether they are being successful or not. If you have objective feedback mechanisms and you see that you continue to lose population and the employment rate remains low, you will adopt some other strategies and invariably you will look to the strategies that worked elsewhere such as the massive decentralization that occurred to stabilize Moncton and the twinning of the highway systems. These are things that worked in other regions. They are not taking place in our region but they could take place in many peripheral regions across the entire country.
First and foremost, you need the government to do that objective analysis and be very truthful rather than providing a rosy, unrealistic and untruthful picture of local economies for fear of offending people. Tell the truth about what is happening in those local peripheral economies and then take actions employed successfully elsewhere to stabilize those regions and you will have a more balanced country.
Senator Stratton: I appreciate your comments on that. I have found that in my province and particularly across southern regions, which are affluent in the sense of good agriculture, as opposed to northern regions with the Canadian Shield, which is quite a different story.
However, some southern towns did not rely on government at all and are highly successful. I would like to look at those success stories as well. It is not enough to say that government should do everything. You have to look at ways to encourage entrepreneurship, which drives most things. Has the provincial government looked at ways of encouraging entrepreneurship?
Mr. Morgan: I think they have. It would be difficult to fault government on trying to follow that mechanism. Their principal focus has been on individuals.
The challenge we find in our region as well is that only a very small commercial base remains; only a small number of businesses, relative to the size of our region, still survive. Often the remaining private sector activities are looking to government as well as to the funding programs. In effect, you have a cocktail party type of economic development strategy where the business people try to make friends with the right people at the funding agencies so that they will get their pet projects funded.
Some private sector initiatives and some of those government-funded private sector initiatives will be successful, but the issue is whether the totality will be sufficient in a region such as our own. Ours is a very large region suffering from an enormous amount of poverty, so the private sector that might be still present in many towns has been harmed greatly over the last four decades and it is very difficult to imagine that that sector alone would be sufficient to rebuild a community of our size.
Mr. Whalley: There is also a practical example in the paper with respect to the tourism industry — the comparison between Cape Breton Island and Prince Edward Island. During a three-year period, the federal government's transfers to the tourism industry association in P.E.I. were in excess of $20 million. That is just the federal government alone. P.E.I. also has its own tourism department. At the same time, the federal transfers to Cape Breton's industry association were zero, nothing. The industry association in Cape Breton cannot compete given that differential.
There is not a level playing field. The private industries alone are not being allowed to compete. Even the Conference Board of Canada is making the argument that large urban centres should receive the vast majority of federal and provincial infrastructure investment. Well, if you do a comparison between Halifax and our region, the population differential is three and a half times. The capital budget differential is seven and a half times. Why would the federal and provincial governments provide a greater gap? This is not about individual effort. This is about a system of policies and structures that has tilted the whole field.
Mr. Morgan: You may even argue that if you not going to send government assistance to the poor areas, at least you should not send it to their competitors. Really, that is what is going on. The assistance is actually aggravating the situation in Cape Breton, and in many poor areas that are not within large urban centres, I am sure, by encouraging their citizens to go to other communities.
I also want to make a point about the depopulation of our own community. We see depopulation happening across much of rural Canada right now, and we know that the population is generally following services. Generally speaking, people want to be in communities that have modern amenities. Therefore, the issue of whether or not comparable services are available is not an academic one; it is a real issue for dealing with rural population decline, at least in peripheral urban areas, because certainly the peripheral urban areas have a chance at survival, notwithstanding that wave of loss from rural Canada. There is a core infrastructure there that could be maintained and developed effectively.
The converse of that is true as well. If you allow the urban infrastructure of the peripheral regions to decline, people will be leaving by the busload. Unfortunately we have seen that in our own region.
Senator Stratton: What you are speaking of is typical for regions right across the country. Yours is an example. The decline of the population of rural Canada and the attraction of the cities has been happening for well over 100 years. All governments have tried to solve that problem in many ways, but you have to ask whether it is a solvable problem or whether you just delay the inevitable decline. I believe that you do all you can to support a region that is suffering because of declining population and attraction to other areas, but you have to ask what you can realistically do, and I stress "realistically'' because we have put so many bad dollars after good dollars into regions where the money has just been wasted.
Mr. Morgan: It is a challenge. I agree that there has been terrible wastage in the past, but it has always occurred without accountability, without feedback, without analysis of whether measures are effective. The fact that there have been failures does not mean that there is not a path to success. Unfortunately, in many instances special interests have taken over and ensured that funding is repeatedly paid, regardless of whether success was being achieved. Our point is that the Constitution builds in an obligation not to abandon regions, but it also builds in an obligation to analyze whether the interventions are being effective. The federal government is not even abiding by its own constitutional obligations if it is not analyzing whether regional economic disparities are, in fact, being reduced. You have to set standards, you have to set objective criteria and you have to change course if your approach is not working.
With regard to migration to large cities, I know we are not talking about environment so much here, but I am struck by comments about the challenges of dealing with greenhouse gas emissions. Principal among those challenges is the necessity for people to commute long distances in large urban centres, and the point is repeatedly being made that we cannot continue to have urban sprawl growing at the current rates. At the same time, people do not want to live in more densely packed cities in Canada.
I would argue that one principal alternative is to stabilize some of these peripheral communities and give people another place to live that does not involve commuting 30 minutes or 45 minutes or an hour to work every day. Ultimately, the question is whether the model of the mega city is sustainable in an age of concerns about greenhouse gas emissions. I would suggest to you that perhaps the more sustainable model is the small or moderate-size community. At least in the longer term, I think that may moderate the drive toward the city.
Senator Stratton: Saskatchewan is doing that right now. They are advertising and because of it people are moving back to Saskatchewan. There are examples of that. Maybe this is a suggestion for your problem.
The Chairman: Thank you for your answers Mr. Morgan. You are making interesting points.
One point of clarification, Mr. Whalley. In a question from Senator Stratton, you talked about a population differential between Halifax and Cape Breton of three to one. Are you talking about the entire Cape Breton Island or the rural municipality?
Mr. Whalley: The two largest municipalities in Nova Scotia: the Halifax Regional Municipality and the Cape Breton Regional Municipality.
The Chairman: Then you talked about a revenue differentiation.
Mr. Whalley: The annual capital budget of the two regions.
The Chairman: You were just talking about their capital budgets and not about federal transfers in this instance.
Mr. Whalley: Yes. Halifax Regional Municipality's capital budget is approximately seven and a half times that of the Cape Breton Regional Municipality.
Mr. Morgan: You see a similar issue with respect to operational expenditures as well. There is an enormous disparity because it relates, in part, to the federal element. For example, we have a very low-functioning transit system, because operationally we cannot afford to maintain a transit system. The majority of the federal government commitment to the transit system in Nova Scotia went to the Halifax Regional Municipality, while a few hundred thousand dollars went to Cape Breton Regional Municipality. Mr. Whalley might have the figures for that distribution. In some respects, the federal government is contributing to the issue by providing funding to comparatively wealthy areas and very little funding to poor areas. The consequence is that people tend to leave communities that have poor public transit systems.
The Chairman: For the record, is the Cape Breton Regional Municipality a member of the Federation of Canadian Municipalities?
Mr. Morgan: Yes, it is a member of both the Union of Nova Scotia Municipalities and the Federation of Canadian Municipalities.
The Chairman: Representatives from FCM appeared before the committee to testify. Have you had an opportunity to review their comments?
Mr. Morgan: Mr. Whalley has reviewed them.
The Chairman: Do you take issue with the points they made during that appearance?
Mr. Whalley: Their discussion is very modest relative to what we believe is required. Some share of GST funding is extremely modest, relative to our needs. Our issues are fundamental and comprehensive. This is not a case of individual initiative being able to overcome some modest lack of entrepreneurial spirit in the region. This is why we give Prince Edward Island as an example to show that two regions in the same geographic position function at very different levels. The question is what role public policy and public structure play in that. We believe that their fundamental role completely undermines the objectives of section 36.
We have a letter from the former Deputy Prime Minister and Minister of Finance, John Manley, saying that from the federal government's perspective, once the funding has been transferred, that signals the end of the government's involvement. The provincial government argues strongly that equalization is needed but when they come back to Nova Scotia, essentially they build a region-state. Of the 18 counties in Nova Scotia, 14 are in decline. The majority of the province is going down. Their argument is that Halifax, at some time, will be able to support the entire province. Fundamentally, that is the argument that people have to understand. We cannot benefit from that because we do not have the transit systems and we are not close enough to Halifax. If you are not interested in our region, that is fine, but we need to take back our responsibilities. We need to start making our own decisions. If you are keeping all of those tools and pouring the greater share of federal dollars into the Halifax region, then we have no chance whatsoever. That is true in transportation, in natural resources and across the board, as Mayor Morgan understands.
Mr. Morgan: With respect to the FCM proposals, obviously we do not disagree with the requests for funding for infrastructure. However, I am concerned that FCM is increasingly an organization of large city mayors and representatives. I do not know that it necessarily speaks to our issues because, as Mr. Whalley has pointed out, our issues go much further and deeper than that. In a sense, those large cities are our competitors in a peripheral region. They are being funded disproportionately, in our view. However, do not take our word for that. We urge you to do the analysis in the context of the constitutional obligation.
Certainly, we do not disagree with the request for transfer of funding nor with the fact that it is essential. I do question whether it will address the concerns of peripheral regions if you comply with what they are seeking. It might aggravate the loss and the decline that has already been experienced.
Senator Murray: I keep thinking about this comparison between Cape Breton and Prince Edward Island and what you have said about the latter. I cannot help but observe that there was an election in Prince Edward Island a few days ago. The government was turned out and one of the reasons was an election issue whereby a considerable sub-region of Prince Edward Island felt it was not being fairly treated by the centre. These phenomena exist everywhere.
That being said, the comparison you make is extremely interesting and deserves much greater analysis than we have been able to give it. I do not think you are suggesting that the main reason for the difference is that Prince Edward Island is a province and Cape Breton is not a province. Otherwise, you would be proposing that Cape Breton become a province. I trust you realize that if many people in Ottawa, who are in much more powerful positions than we are around this table, had their way, there would be only one province east of Quebec.
Mr. Morgan: We are not suggesting that that is necessary in order to solve the problem. It would be accurate to say that we believe the status quo is a recipe for disaster and, over the long term, death in some ways as an urban centre for our region. The status quo is certainly not acceptable, but our point is that the Constitution, if implemented, provides an opportunity for all regions of our own province, and indeed all regions of the country, to survive, but it must be implemented. You have to give the regions the tools that they need, including the fiscal ones, to survive.
Senator Murray: Well, yes. I hope you agree that the discussion here has given you an opportunity to bring out all of those points, which you have done very well; and I congratulate you on that. As far as section 36(2) is concerned, the principle of equalization payments from Ottawa to the provinces, Mr. Manley was right. Once the cheque is sent to the provincial capital, the federal government does not look behind it. I do not think you would ever find any federal government that would take such a look. I do not think you would find a federal government that would say to Quebec, "We are sending a cheque for equalization and you are not playing fair with West Quebec,'' or would tell the Nova Scotia government that it is not sending a fair share to Cape Breton or the South Shore. I do not think that would ever happen, certainly not in that way under section 36(2).
It is a political issue that can be fought politically at both the federal and the provincial level. However, a political issue that one can get one's teeth into is section 36(1) and the commitment of both orders of government to work on regional disparities and equal opportunities.
Mr. Morgan: At the federal level, we would make the point that its programs are similar.
Senator Murray: Yes, that, and whether it is justiciable will have to be argued by the legal scholars. You will go to court and you will settle that issue.
You put your finger on it when you spoke about the relatively small commercial sector in Cape Breton. It would be interesting to look at a comparison between Cape Breton and Prince Edward Island in that respect. I have not looked recently, but perhaps you have looked at the proportion of what the economists call "earned income'' in Cape Breton and income from transfers such as pensions, employment insurance, welfare, and so on. I do not know what the figures are but if you have them, it would be interesting to know. They would indicate the general level of economic activity in the region.
The federal government had a Cape Breton investment tax credit in the 1980s. It was the richest tax credit in the country at the time. I do not know how many indigenous Cape Breton organizations took advantage of it, but it attracted a number of businesses to Cape Breton. Some of them stayed and some left, so the best that can be said about the Cape Breton investment tax credit is that it had mixed results. However, I would not say it was a failure.
Where do we go from here? I would like to see more analysis of the comparison between Prince Edward Island and Cape Breton. I do think that in terms of economic development, someone has to look at more closely at the operation of Enterprise Cape Breton Corporation. I would imagine that when a proposition comes from Cape Breton, there is probably a reflex reaction at Nova Scotia Business Incorporated that surely the federal government will look after them; they have their very own Crown corporation.
Mr. Morgan: That is definitely some of it.
Senator Murray: Whether the problem is one of inadequate funding or imagination on the part of the federal government or not enough of a commercial sector in Cape Breton to take advantage of the Crown corporation, I do not know, but we should find out. You have a university there.
Mr. Morgan: I think you are right. Much of both federal and provincial development programming is geared toward the private sector which is relatively small now in Cape Breton. If that is the case — and certainly it appears to be — there ought to be other options explored. It should not be the case that one model is presented. As I say, there are success stories among individuals, but, in total, where is the funding going? Under the current circumstances, it is not going to our region. Even if you look at Atlantic Canada Opportunities Agency programming, although funding is going there, federal government programming is not going to Cape Breton in any disproportionate amount. It is disproportionately going to other, wealthier areas of our region.
Mr. Whalley: The scale of all this is important as well. We talk about the municipal equalization system in our brief. The system currently is being funded only on the basis of approximately 34 per cent of municipal expenditures. Our annual entitlement currently exceeds $25 million; our actual entitlement on a fully funded system would be $75 million, on a $112 million operating budget. That gap, just at the municipal level, exceeds by several times the total federal economic development assistance.
Even if it were the most efficiently run organization in the world, Enterprise Cape Breton Corporation, ECBC, cannot compensate for the weakness in the municipal equalization system, let alone compensate for the deficiencies that exist in other federal programs or the deficiencies that exist in the other provincial programs in our province. This is why there is a comprehensive need for an evaluation. You cannot look just at one entity, one agency and say that if we change a few things here and there, ECBC will make a difference. ECBC cannot make a difference; it is being overwhelmed by deficiencies in other areas. This is really the point, that it cannot change what has happened here.
Senator Murray: Who has an economic development strategy for Cape Breton? Is there one?
Mr. Whalley: There is no strategy for Cape Breton, obviously. There are five different municipal units. Our approach has been to try to resolve the municipal equalization issue. As others have argued before this committee, there are two foundation pieces: there is the equalization program, which is essentially to lift and hold regions to stabilize them; and then there is economic development. We have neither, so we are trying to put in place the stabilization and then we will have economic development.
Mr. Morgan: In effect, Enterprise Cape Breton Corporation acts as a photo op resource for many politicians. I must say I have been at some those photo ops myself.
Senator Murray: I think you missed some, as well.
Mr. Morgan: You are quite correct about that. However, the fact is that it is photo opportunities without substantive analysis of whether the totality of the economy is recovering or whether the demographic situation is stabilizing. That is the problem.
You can make tremendous photographic opportunities, publicity opportunities with relatively small amounts of money while there are literally tens of millions of dollars — and we would argue collectively hundreds of millions of dollars — being siphoned from the region through the ineffective distribution of equalization funding.
We are being overwhelmed by the equalization issues and inadequate funding of services in the region. At the same time, the photographic opportunities are suggesting to at least some in the population that there is success — and perhaps suggesting to some at senior levels of government that success is happening. Meanwhile, the population is voting with its feet; they are moving to Alberta, to Fort McMurray and other areas for opportunities.
Senator Murray: The fact that 14 out of 18 counties are declining in population in Nova Scotia certainly grabs one's attention. It should be a matter of concern to the provincial government, and to the federal government too.
Mr. Whalley: That is our point. Yet, this year, the two economic development priorities for the government of Nova Scotia have been the Halifax gateway strategy and the Halifax Commonwealth Games bid, in a period when 14 of their 18 regions are declining.
Senator Murray: Is the Donkin coal mine about to reopen? I should ask that on behalf of former Senator Buchanan.
Mr. Morgan: There is certainly no official announcement. They are doing the analysis now. They are pumping out the mine. I think they are optimistic that in the next few years that may develop.
The challenge is the nature of mining today. The operations are much smaller in terms of manpower than in days gone by. A modern mine might employ several hundred people, but not 1,500 or 2,000 people, as they might have in the past. However, it is a bright spot we are looking forward to, although from a municipal perspective, we do not think we would see a significant increase in revenue from that mine source. Much of the operations are underground, so for the most part it is not part of our assessment base.
Senator Murray: No.
Mr. Morgan: However, it would be very beneficial because of additional jobs and secondary employment in the region.
Senator Murray: What about all the money that has gone there for the tar ponds? That is an industry by itself, is it not?
Mr. Morgan: It has been, and there is some additional optimism that the cleanup will soon be under way, with significant economic consequences to the cleanup itself. However, as you are well aware, we have been waiting for many decades, so I do not think anyone is gambling on when precisely it will be in.
The Chairman: Mr. Whalley, in an earlier answer you talked about the municipal equalization program within the province of Nova Scotia. Some of our viewers might have confused the term "equalization program'' with the one we have studied, which is the federal program that transfers the money to the various provinces. That is just point for clarification.
We have had many comments from municipalities indicating the importance of predictability and permanence of these various programs, and I am sure you agree with that. Does the gas tax transfer, along with the programs that fit within it, affect you directly?
Mr. Morgan: It certainly would, and we agree with the Federation of Canadian Municipalities and our own provincial organization on that point — the need to have stable, predictable funding, and the pursuit of additional sources of funding as well.
The Chairman: A number of witnesses have brought to our attention the announcement in the current government's last budget that the Canada Social Transfer and Canada Health Transfer both over time, one more quickly than the other, will go to a 3 per cent fixed escalator. Does that affect you directly?
Mr. Morgan: It would not affect us in any specific way. There is concern, obviously, with some of the changes to the federal equalization system as it moves to per capita funding. That would not affect us distinctly in the short term at least, particularly given how the province is dealing with our region. However, I am tremendously concerned when I see the commentaries before this committee on moving to per capita funding. It would not be consistent with the principles of the constitutional requirements. I respect the comments of the other witnesses before this committee from the Department of Finance, but it is difficult to see a per capita funding of any of these programs, unless there are simultaneous adjustments to the equalization system in other regards. You may see one of the provincial governments pursuing the same type of legal arguments in the courts that we are today if that system materializes over time.
Senator Murray: I would not want you to understate the escalator in the Canada Health Transfer. It is not 3 per cent. It is increasing by 6 per cent per year to 2013-14. It would be churlish of us not to recognize one of the accomplishments of Mr. Martin's government. The 3 per cent increase starts in 2009 with the Canada Social Transfer. It is inadequate in terms of post-secondary education.
The big issue is the decision to go to equal per capita funding for health and social transfers because it eliminates the equalization that used to be associated with the transfer of tax points going back to 1977. It is not sustainable. They will have to revisit it. It will not work the way it is now designed, in my humble opinion, and it is onerous for provinces other than Ontario and Alberta.
Mr. Morgan: It is unsustainable in the long term. It is more a federal and provincial issue than an issue at our level at this stage.
Senator Murray: It will be an issue quickly in terms of your hospitals, your university, and the social assistance programs in Nova Scotia.
Mr. Morgan: There is tremendous concern, and as the programs kick in, you will see progressively more complaints from provincial governments as there is a realization of what is in store with those changes.
The Chairman: Thank you for that clarification.
Mr. Morgan, Mr. Ryan and Mr. Whalley, we very much appreciate your having come from Cape Breton to talk to us. You have made some excellent points and your brief will be very helpful to us in our deliberations.
The committee adjourned.