Proceedings of the Standing Senate Committee on
National Finance
Issue 18 - Evidence - Morning meeting of June 19, 2007
OTTAWA, Tuesday, June 19, 2007
The Standing Senate Committee on National Finance met this day at 9:09 a.m. to examine Bill C-52, an Act to implement certain provisions of the budget tabled in Parliament on March 19, 2007.
Senator Joseph A. Day (Chairman) in the chair.
[Translation]
The Chairman: Welcome to the Standing Senate Committee on National Finance. My name is Joseph Day, I represent the Province of New Brunswick in the Senate and I am the Chairman of this committee.
[English]
This committee's field of interest is government spending. Either directly through the estimates or indirectly through bills that provide borrowing authority or bear upon the spending proposals identified in the estimates. Today, we begin our consideration of Bill C-52, to implement certain provisions of the budget tabled in Parliament on March 19, 2007, which received second reading and was referred to this committee by the chamber of the Senate last evening.
Appearing before our committee this morning is the Minister of Finance, the Honourable James Flaherty. Mr. Flaherty is a first-time member of Parliament and was elected to the House of Commons in 2006. He served as a member of the Ontario provincial legislature from 1995 to 2005. Under Premier Harris, he served as deputy premier and Minister of Finance as well as a number of other portfolios. Mr. Flaherty graduated from Princeton University and has a law degree from Osgoode Hall Law School. He was called to the bar in 1975 and practised law for more than 20 years before entering politics.
Accompanying Mr. Flaherty are officials from the Department of Finance, Tax Policy Branch. To save time Mr. Flaherty, I will introduce your colleagues: Mr. Paul Rochon, Acting Assistant Deputy Minister, Economic and Fiscal Policy Branch; Ms. Barbara Anderson, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch; Mr. Frank Vermaeten, General Director, Federal-Provincial Relations and Social Policy Branch; Mr. Brian Ernewein, General Director, Tax Policy Branch; and Mr. Alfred LeBlanc, Director, Federal-Provincial Relations and Social Policy Branch.
Minister Flaherty, we understand that you are able to be with us for one hour, but the officials can stay after that if there are other questions. You are a very popular man in town. We have a full contingent of senators here today. I understand you may have some introductory remarks and then we will we proceed. I have quite a list of senators who are anxious to have a discussion with you.
The Hon. James Michael Flaherty, P.C., M.P., Minister of Finance: Thank you. I want to cover some of the fundamentals in Bill C-52. I will stay as long as I can. I have my colleagues from the provinces and territories meeting today at Meech Lake on the subject of securities regulation in Canada, so I will move to a different subject later this morning and this afternoon at Meech Lake.
[Translation]
I am pleased to appear before your committee today to discuss Bill C-52.
[English]
As honourable senators know, this is the first budget implementation bill for Budget 2007. Both budget implementation bills, as usual a spring bill and a fall bill, for Budget 2006 were passed by the House and the Senate and have received Royal Assent. We move to the second budget of our government, Budget 2007. As I say, this is the first budget implementation bill, the spring bill, that has passed through the House and is now here before you.
There are a number of important aspects to the bill. I will get to the equalization issue in a moment. It is a great deal of money, if you are concerned about spending; it is about $39 billion over the next seven years on equalization, a massive transfer to the provinces and territories in Canada.
On the corporate side, this bill deals with income trust, that is, it levels the playing field for tax purposes between different forms of corporate entities in Canada, so that if one chooses one form of corporate entity, there is no advantage over another form in this country.
That distortion, that synthetic high yield that that income trust represents will be gone. We are reducing the general corporate income rate again by one half of a percentage point to 18.5 per cent by January 1, 2011. This is, again, the general policy to reduce taxes overall as we go forward.
For seniors, there is a $1,000 increase in the age amount from $4066 to $5066 to benefit seniors effective January 1, 2006. There is a very important tax change for seniors and pensioners in Canada and that is income splitting. For the first time, we will have that arrive in our tax system in Canada, that is, the ability of seniors and pensioner to split income in their pensions.
Also for seniors, there is an increase in the age limit for maturing RRSP plans and deferred profit sharing plans from age 69 to age 71 effective 2007. A change, I can tell you, senators, that is most welcome by seniors in Canada, as I am sure you hear also from people you represent here.
For seniors also, we are expanding the types of investments eligible for RSP and other deferred income plans, effective budget day, March 19, 2007.
There is a major tax change for families. We are introducing a new child tax credit of $2,000 per child multiplied by the appropriate percentage for a tax year, again effective 2007.
We are increasing the contribution limits for RESPs. This is very important for young families in Canada who want to save for the education of their children. We are amending the Canada Education Savings Act to increase the maximum annual grant on contributions made to a registered education savings plan after 2006.
We are also getting rid of the spousal penalty in the tax law of Canada which is, in my view, long overdue.
We are legislating the tax-back guarantee. We have reduced public debt at a record level, more than $22 billion in the course of the first 16 months of this government. Our tax-back guarantee, which is in Bill C-52, provides that the savings we make in interest every time we reduce the public debt in Canada will be passed on to Canadian consumers by personal income tax reductions.
The bill also has very important environmental provisions. The Canada ecoTrust for Clean Air and Climate Change provides more than $1.5 billion for a trust established to provide the provinces and territories with funding to support green projects.
There is a large amount of funding for post-secondary education and training, particularly $574 million to Ontario for post-secondary education and training in respect of the Canada-Ontario Agreement. There is $21.7 million for Manitoba and $18.4 million for Saskatchewan, both with respect to training.
The bill also contains a major initiative by the Government of Canada in the health area with respect to the health of girls and women in Canada: $300 million for the funding of the HPV immunization program, which will save lives of girls and women in this country.
In regard to patient wait times guarantee, there is $612 million to support the provinces and territories.
There are other payments also to the territories with respect to the territorial agreements.
That is the bigger picture, and then there is the equalization issue, which has had some prominence in the budget. This is not a surprise.
In Budget 2006, we said that we would address the issue of fiscal imbalance between the governments in Canada. We said we would consult, and we did. We said we would listen to the provinces and territories and meet with them, and we did. The premiers and leaders of the provinces and territories met also in the Council of the Federation and other places. As you know, they were unable to agree among themselves. Therefore, it is left to the national government, our government in Canada, to act on this important issue for the good of our country overall.
All provinces made it clear to the Expert Panel on Equalization and Territorial Formula Financing — as you know that was headed by Mr. O'Brien, the former deputy treasurer of Alberta — that they wanted a return to a formula- based equalization program. That is the first step.
We did that. Indeed, equalization-receiving provinces have been calling for a 10-province standard since 1982. A 10 province-standard is the second point.
Our government took action in this budget putting equalization on a principle-based footing by adopting the O'Brien recommendations with one major exception. Mr. O'Brien's panel recommended that there be a cap on the Atlantic accord. We rejected that recommendation and the Atlantic accord remains uncapped.
We did go ahead with the 10-province standard as the provinces asked. The formula also imposes a cap to ensure that the fiscal capacity of a province that receives equalization payments does not exceed that of a province that does not receive those payments. Again, that is a fundamental point in terms of fairness within our Canadian federation.
Provinces will receive the greater of the equalization entitlements under the formula based on a 50 per cent exclusion rate or the amounts they would have received under the same formula based on full exclusion of all natural resource revenues. There will be more stable and predictable payments and a more transparent and simplified program. By adopting this new formula, we will be providing the provinces and territories, as I said, with an additional $39 billion over the course of the next seven years.
There are unique situations, as you know, senators, in Nova Scotia and Newfoundland and Labrador. That is because each of those provinces had accord agreements with the Government of Canada. As a result, they are the only provinces in Canada that have been afforded a choice in the new plan. They can choose to continue with the accord agreements they have with the Government of Canada as if the budget never happened, as if Bill C-52 never happened. That is continuous as long as they are entitled to equalization through the balance of the accords for the full terms of those accords. There is no cap on the accords, despite the fact that Mr. O'Brien's panel recommended a cap. The governments of Nova Scotia and Newfoundland and Labrador asked that the accords remain the same and not be capped.
Nova Scotia and Newfoundland and Labrador may also choose a new, principled equalization system based on the recommendations of the O'Brien panel established by the previous Liberal government in Ottawa. The accord provinces have the option of permanently entering the new system with the other provinces if and when financial benefits outweigh those of the accords and the previous equalization system.
Let me be clear: Every province will be better off as a result of our fiscal balance package. Nova Scotia has already realized an additional $95 million in benefits over the accords by opting to the new system for this fiscal year alone. Transfers to Nova Scotia include nearly $1.5 billion under the new equalization system, $68 million in offshore accord offsets, Canada Health Transfer and other benefits.
Restoring fiscal balance brings federal support to Newfoundland and Labrador totalling more than $1.5 billion in 2007-08. Under the fiscal balance package, Newfoundland and Labrador will receive $54 million more in 2007-08 than it received in 2005-06. These include additional transfers of $477 million in equalization, $494 million in offshore accord offsets, $34 million under the Canada Health Transfer, more money under the Canada Social Transfer and $52 million for infrastructure. This is all for Newfoundland and Labrador.
To ease the transition to the new system with respect to the accord provinces, we have offered some implementation measures because each is in the unique position of having accord agreements with the Government of Canada: The flexibility to reverse their decision on a one-time basis if economic developments make the old equalization system and accords more beneficial than the new system. This is particularly true for Nova Scotia. Before the March 19 budget and afterward, I had discussions with the Minister of Finance in Nova Scotia about their concerns that their accord entitlement will likely run out to 2019, or so — although it is quite a challenge for anyone to estimate future oil and gas prices, from now until 2019.
The concern expressed by the Government of Nova Scotia for several months has been electing to opt in to the O'Brien formula, which they have done for this year, and then realising later that they would be better off under the accord formula. We have said that we are prepared to work on implementation so that we could keep the firm commitment that all provinces would be better off under the new system. Those discussions with Nova Scotia are continuing.
I want to say a few words about the cap, because it is fundamental to an informed discussion of this issue. In a federation such as Canada, fiscal arrangements are for more than a line item transfer in a federal budget. In many ways, they are the political expression of how our country governs itself. They are underpinned by the values of Canadians of not only sharing but also fairness and reasonableness. This is at the core of our new fiscal balance package. O'Brien applies a cap to ensure that the fiscal capacity of a province that receives equalization payments does not exceed that of a province that does not receive equalization payments. That is a cap. There is no cap on the accords, but there is a cap on the new O'Brien equalization formula. In our view, this approach is fair. As senators know, section 36(2) of the Constitution Act, 1982 articulates clearly the purpose of the equalization program, and I quote:
Parliament and the government of Canada are committed 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.
That is our goal and that is why we have a cap on the O'Brien formula as recommended by Mr. O'Brien and his panel of experts. Equalization is not about lifting the fiscal capacity of a receiving province above that of a non- receiving province. The new-found prosperity of the accord provinces is something to be celebrated. Striving to become a have province is a good thing in Canada. Ongoing emerging trends, such as rising commodity prices and a rising Canadian dollar, have changed the dynamic across Canada. Resource-rich provinces, such as Alberta, Saskatchewan and the accord provinces, are well positioned to take advantage of these trends; while traditional manufacturing economies, such as Ontario and Quebec, are feeling tremendous pressure.
As the Minister of Finance for all Canadians, I have to remain sensitive to these trends and ensure that transfers are fair to all provinces, whether they receive equalization or whether, such as Ontario or Alberta, their citizens are net financial contributors to our federation through their federal taxes. Canadians cannot and should not be expected to support an unfair equalization system that transfers funds from less wealthy provinces to the wealthier provinces. This budget's new equalization formula ensures that the transfers are capped when they bring the fiscal capacity of an equalization-receiving province up to the level of a non-receiving province with the lowest fiscal capacity, which is currently the province of Ontario. This approach is responsible and fair. With respect to the issue of exclusion of resource revenues from equalization calculations, the need to preserve fairness in the equalization system also underpins this budget's approach to the treatment of non-renewable resource revenues as they apply to the calculations used to compare interprovincial wealth for the purposes of determining equalization payments.
As senators know, we said we would exclude non-renewable natural resource revenues without adversely affecting provinces by the changes to the equalization formula. Budget 2007 delivers on this commitment. The new equalization program will give provinces the higher of the payments calculated under 50 per cent natural resource exclusion or full exclusion. We would expect the exclusion of 50 per cent of natural resource revenues to provide higher payments in most cases because it increases the equalization standard. However, this depends on resource production levels and natural resource prices going forward. If these prices decline significantly, full exclusion could provide a higher payment. Giving provinces the benefit of full exclusion or 50 per cent exclusion fulfills the government's commitment to fully exclude non-renewable natural resource revenues from equalization without lowering payments to any province.
Finally, it is important to bear in mind, I say respectfully honourable senators, that whether we are talking about the cap or the resource inclusion rate, we are dealing with questions on which the provinces are fundamentally and deeply divided. The provinces and territories tried to reach consensus on questions of fiscal balance through the Council of the Federation but were conspicuously unable to do so and ended up issuing separate news releases highlighting their points of disagreement. This should come as no surprise because all premiers and their finance ministers have an obligation, as part of their job, to try to ensure that their respective constituents receive the biggest possible piece of the pie. I respect their efforts in that regard. Believe me, they are all doing a good job of making their cases but, as Minister of Finance for all Canadians, I must ensure that the pie is distributed fairly and in a way that is of maximum long-term benefit to all Canadians.
Fortunately, our government had the guidance of the independent O'Brien expert panel appointed by the previous government and of the many engaged Canadians who took the time and effort to participate in our fiscal balance consultations. I am proud of Budget 2007 and our fiscal balance package. This is a turning point in our history. Canada's new government not only acknowledged the difficult issue of fiscal imbalance, which some deny, but also faced it head on and provided a fair and reasonable solution that is principle-based, predictable and able to withstand the test of time, which the provinces and territories have requested for decades.
[Translation]
I will now be happy to answer your questions on the budget implementation bill. Department of Finance officials are also present here today. They will provide you with any information that you may require.
[English]
The Chairman: Thank you, Minister Flaherty. I remind honourable senators that the minister is before the committee for only one hour, so we have 45 minutes remaining for questions.
Keep your questions short, and hopefully the answer will be equally succinct. I will start with the critic for Bill C-52 in the Senate, Senator Rompkey from Newfoundland and Labrador.
Senator Rompkey: It will be no surprise to you that I will start my questioning on the accords. I will refer you to a column that was in The Globe and Mail this morning by John Crosbie and Roland Martin. They have also written to the Prime Minister saying that, in their opinion, the budget does, in fact, gut the Atlantic accord and makes a substantial change to it. That means we will have less money as a result of the budget and, in fact, breaks a promise that was made.
I listened carefully to your testimony, and I wanted to put this in front of you, because we now have two finance ministers who will be in front of us; yourself and a former finance minister, who was there when the accords were signed and has kept a very close eye on what has happened since.
The first point I want to raise with you is the nature of the accords, the reason for the accords and what the accords are meant to accomplish. They say in their column in The Globe and Mail this morning:
That is because these two bilateral agreements are economic development arrangements, no different in principle than Ontario's various federal-provincial auto-pact programs, Ottawa's recent multi-hundred-million-dollar funding of Quebec's aerospace industry or B.C.'s "Pacific Gateway'' economic opportunity, all of which contribute to building a stronger and more prosperous Canada.
Don't forget that in the 1950s and 1960s, Alberta received both equalization and its oil and gas revenues until its economy had sufficiently developed.
I wanted to ask the minister, because this is fundamental. Equalization does not talk about debt, infrastructure or education; those are things we need to solve. We have the highest per capita debt in the country. If we do not pay that down, there is no way we can change our lifestyle, there is no way we can be a contributor to Canada. This is fundamental because this has been cast as an equalization issue, as a transfer, a money problem between provinces and the federal government. This is an economic development issue.
I want to quote Senator Murray, who knows this as well as any of us, who said in the Senate with respect to Newfoundland and Labrador and Nova Scotia:
I would say that those provinces and the federal government have always considered those offshore accords not a part of equalization, not a part of section 36(2) of the Constitution Act, 1982, but, rather, of section 36(1) of the Constitution Act, 1982, which imposes upon all of us federal and provincial obligations for regional economic development.
This is fundamental. Does the minister accept that the Atlantic accord is under 36(1) of the Constitution Act, 1982 and has really nothing to do with equalization? Equalization impacts them obviously because it is there, it is a program; they cannot avoid it. That is why the off sets were paid; to deal with the clawback. If you make a buck on resource revenue and the federal government claws back a buck on equalization, you are treading water, you are on a treadmill. You do not get anywhere.
The equalization problem obviously has an impact, but these are economic development agreements. Does the minister fundamentally agree that these are economic development agreements with the provinces? By the way, the first cheque that went to Nova Scotia went to pay down the debt. This is essentially a debt reduction and infrastructure improvement policy, program, effort. Does the minister agree with that?
Mr. Flaherty: No.
Senator Rompkey: Then it is clear that we have really not much to discuss.
Mr. Flaherty: Senator, you asked me a question, and rather than beat around the bush I gave you an answer.
Let me explain. The calculations in the accord, as I am sure you know, are based on equalization. To say the accords are simply some sort of economic development agreement unrelated to equalization in Canada is "disingenious'' at best.
Senator Rompkey: You mean disingenuous, not "disingenious.''
Mr. Flaherty: All right, senator. Thank you.
Senator Rompkey: You do not attempt to comment on my intellect, but rather on the nature of the program. It is a matter of semantics, that is all.
The Chairman: Order. Mr. Minister, you have the floor.
Mr. Flaherty: The dispute then arises with Newfoundland and Labrador and Nova Scotia because of their view that the O'Brien formula should be uncapped. Quite frankly, that is not a view that is accepted by the majority of provinces in Canada, nor is it accepted now because Government of Canada has adopted the O'Brien recommendations.
It would take us back to a situation in which there is no organized, principle-based equalization formula in Canada. That is why we have moved forward, in what is a difficult subject, by taking the best advice available in Canada and respecting the accord.
If Newfoundland and Labrador want to stay with the accord they can do that as long as they are entitled to equalization, which will only be another two years or so.
Senator Rompkey: In your opinion it does not matter that Newfoundland continues to have the highest debt in Canada, that Nova Scotia continues to have a high debt for years, and could never become a contributing province in Canada?
The fiscal comparison to Ontario interests me. I want to quote what Prime Minister Harper said before he became Prime Minister about making the Ontario comparison, because that seems to me to be a prime topic for you, minister. We can never, ever exceed the fiscal capacity of Ontario.
The Prime Minister, before he became Prime Minister, said, quoting from a Liberal finance minister's remarks:
. . . for an eight-year period covering 2004-05 through 2011-12, subject to the provision that no such additional payments result in the fiscal capacity of the province exceeding that of the province of Ontario in any given year.
That was a recommendation coming forward to Mr. Martin that he did not accept. At that time Mr. Harper said the following:
The eight year time limit and the Ontario clause effectively gutted the commitment made to the people of Newfoundland and Labrador during the election campaign.
Why should Newfoundland's possibility of achieving levels of prosperity comparable to the rest of Canada be limited to an artificial eight year period? Remember . . . that these are . . . non-renewable resources that will run out.
This is a window of opportunity for us, minister. If you know our history at all, that is a life preserver for us. We either grab that or we are stuck where we are forever. It is the same for Nova Scotia as well. That life preserver is there, and if we do not grab that now, the non-renewable resources, as Mr. Harper said, will run out. Referring to the Liberal government, he goes on to say:
Why is the government so eager to ensure that Newfoundland and Labrador will always remain below the economic level of Ontario?
Mr. Harper was right then. Yet he says:
The Ontario clause is unfair and insulting to the people of Newfoundland and Labrador, and its message to that province, to Nova Scotia and to all of Atlantic Canada is absolutely clear. They can only get what they were promised if they agree to remain have not provinces forever. That is absolutely unacceptable.
That is Mr. Harper, and he was right.
The Chairman: Do you have a question, Senator Rompkey?
Senator Rompkey: That is my question.
Mr. Flaherty: It is a good thing that we have substantial economic growth in the country. In fact, we have the second-longest period of economic growth since the period immediately after the Second World War. That includes Newfoundland and Labrador, which should have the second strongest economic growth in this country.
It is a wonderful thing, senator, that two years from now Newfoundland and Labrador will not qualify for equalization payments in this country. We should rejoice when we see economic growth in all regions of the country.
The only other point I wanted to make was about the cap. That is not a question of any province being better off than another. The point is this: A province that is a non-recipient of equalization should not have a fiscal capacity that is lower than a province that is a recipient of equalization.
Surely the senator agrees with that basic principle?
Senator Rompkey: No, Mr. Minister, I do not, because it is a very narrow view. It is fiscal, it is an adding-up-the- numbers view. It is a clear, cold calculation of finance.
The Chairman: I am sorry, the time has run out. I am not setting a fixed time, but I am afraid we will have to move on. I will put you on the list for a second round if that is possible. We will be having a debate on these issues for the next couple of weeks, so it may be that we will have the minister back another time if we cannot ask all our questions.
Senator Murray: I know other honourable senators want to ask questions, so I will be brief. We will hear from the Premier of Nova Scotia today; the Premier of Saskatchewan; Mr. Crosbie and Mr. Martin. As you know, they will have a different perspective than the one you have presented to us.
I am looking for information. Would you elaborate or clarify the announcement that you made recently about an insurance policy for the effected provinces in Atlantic Canada.
I heard what you said this morning, that the province would have an opportunity to reverse their decision on a one- time basis, and then you went on to say that the insurance policy would ensure that they would be better off.
I understood from your announcement that if Nova Scotia, for example, chose the 2007 formula and it turned out that they would have been better off under the previous one, that you would top them up. You would make up the difference. You would cut a cheque to make up the difference.
Is my understanding correct on that? Is the status quo, as we speak, what was in the budget plus what you have announced today?
Mr. Flaherty: The status quo substantively is what is in the budget, what we have announced; that is, that there are two choices. Choice "A'' for Nova Scotia is the Atlantic accord with all the benefits and rights that go with the Atlantic accord. Choice "B'' is the modified O'Brien formula.
Senator Murray: What is the insurance policy?
Mr. Flaherty: You raise a very good point. We have worked very hard at this since before and after March 19, not only with the Minister of Finance but also the Acting Minister of Finance in Nova Scotia, their officials and Premier MacDonald himself.
This is about implementation. It is a point that applies primarily to Nova Scotia because of the likelihood that that province is looking at a time frame running out to 2019, during which time their entitlement to equalization will remain; unlike Newfoundland and Labrador and Saskatchewan, in all likelihood.
Legitimately, the province raises the issue of whether they would be better off making choice "A'' rather than choice "B'' at any given point in time. We have solved the problem for this year because clearly the province is $95 million to the good by choosing the new formula. We agreed with Nova Scotia that for budget purposes they could think about it for the year and have the benefit of the new money and the new formula for this year.
Now we have been talking at length about implementation going forward and trying to devise a way in which we can assure the province that they will be better off over the course of the period running out to 2019. No one has crystal clear crystal balls about prices and so on going forward, so we have been trying to work out a way in which that assurance can be provided to the province of Nova Scotia, and we are still working on that.
Senator Murray: The term "better off'' is capable of all kinds of interpretations. The question is whether they will be able, if not better off, to move from one option to the other. The question is whether you are will cut them a cheque to make up the difference if it turns out going forward that in a given year they have made the wrong choice financially.
Mr. Flaherty: I believe we are saying the same thing.
Senator Murray: Are we?
Mr. Flaherty: I believe we are. There is no substantive change in the budget provisions, in the equalization provisions. There will be no special side deals with any province or territory in Canada. We can, on the implementation side, facilitate implementation particularly given the choices that Nova Scotia faces and make sure that no province will be worse off; all provinces will be better off.
Senator Murray: Will this take legislation?
Mr. Flaherty: Depending on how we conclude those discussions. It might be necessary to have an amendment and, if so, we would propose to put it in the fall budget bill.
Senator Murray: Therefore, it is a decision that has been made. They can take that to the bank now.
Mr. Flaherty: No decision has been made. We have been talking about it, and we have not arrived at an arrangement. A decision was made a long time ago that no province would be worse off and that all provinces would be better off. It is expensive to do this; it is $39 billion over seven years.
Senator Murray: The insurance policy is not a fait accompli as we speak.
Mr. Flaherty: I want to be frank with you, senator. We are having this discussion and there are different ways of doing it, and we have not agreed yet.
[Translation]
Senator Fox: Mr. Chairman, since we have very little time with the minister this morning, and because it is important for my colleagues from the Atlantic provinces to be able to ask their questions, I would like to defer my time to Senator Baker.
[English]
I would simply like to defer my time to Senator Baker.
Senator Baker: My first question is about the cap that you refer to, which is the all-important matter as far as the amount of money is concerned under this bill that alters the amount. It says in the bill, the result that a province having, in that fiscal year, a total per capita fiscal capacity that is greater than the per capita fiscal capacity of any province that would not receive a fiscal equalization payment for that year; as you pointed out a few moments ago.
Three days ago, the Premier of Newfoundland and Labrador wrote to the Prime Minister and asked him for clarification on this very point, because you wrote to the Premier of Newfoundland and Labrador almost three months after the budget came down, during all of these negotiations that you are presently conducting behind the scenes, and you described it in your letter as ". . . a fiscal capacity cap which sets a ceiling on equalization payments based on the fiscal capacity of the highest non-receiving province.''
That would change the entire scene and give Newfoundland an additional $11 billion. Perhaps that is where your negotiations are. Is that it? That would raise the level to the fiscal capacity of Alberta, and I am sure that the provinces would look at that as a solution to the entire problem.
Mr. Flaherty: Nice try, senator. It is a good try. I wrote to the provincial Minister of Finance and confirmed to him that there is an error in the letter; where it said "highest,'' it should have said "lowest.''
Senator Baker: Was it an $11 billion typo then?
Mr. Flaherty: It was an error in the letter, and I clarified it.
Senator Baker: The words "instead of any province'' would be changed to "highest non-receiving province''; that is quite a typo.
You sent the letter; you signed it without reading the letter, is that what you are saying?
Mr. Flaherty: I read the letter, it had an error in it and I signed it. I clarified it immediately as soon as we realized the error had been made. You can beat it to death if you want; go ahead.
Senator Baker: The premier wants clarification from the Prime Minister. Now we have clarification: In fact, you are not going there at all. It is there as it remains under the bill.
Does this bill amend the Atlantic accord?
Mr. Flaherty: I know what you are getting at, the provisions in the bill that creates the options to move from one system to the other.
Senator Baker: No. I am just asking you a simple question.
Mr. Flaherty: That is what is in the bill, senator. If you want to ask me what is in the bill, the provisions in the bill are the ones that provide optionality.
Senator Baker: Starting with clause 78 of this bill, there are about four pages of consequential amendments to the Canada-Newfoundland Atlantic Accord Implementation Act. Then there are amendments to the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act, which go back to the Atlantic accord and the Nova Scotia accord. There are amendments in this bill to the Canada-Newfoundland Atlantic accord. There are amendments there. Yes or no?
Mr. Flaherty: Yes, there are amendments to provide optionality. Otherwise, the provinces would not be able to move from the accord to the new formula. Do you not think we should make the legislation say what we intend?
Senator Baker: You intend the amendments and you have made them. Let me go back for a second to the Atlantic accord signed by Brian Mulroney, John Crosbie, a Conservative government in Newfoundland; clause 60 states:
Except by mutual consent, neither government will introduce amendments to the legislation or regulations implementing the Accord.
In the preamble of the Canada-Newfoundland Atlantic Accord Implementation Act, it says:
. . . and have agreed that neither Government will introduce amendments to this Act or any regulation made thereunder without the consent of both Governments . . .
Further in that implementation act, which you are now amending, there is a provision, section 4, which says:
In case of any inconsistency or conflict between
(a) this Act or any regulations made thereunder, and
(b) any other Act of Parliament that applies to the offshore area or any regulations made under that Act . . . this Act and the regulations made thereunder take precedence.
Obviously, there is a conflict in this particular case because you did not get the approval of the provinces.
You have admitted these are amendments. In the laws that you are amending, acts of Parliament, it says that you cannot make amendments without the approval of the provincial governments. Could you explain that to us?
Mr. Flaherty: Absolutely. Would you like me to?
Senator Baker: Yes.
Mr. Flaherty: I am happy to do so. There was never any agreement by the federal government that equalization formulas were written in stone in this country, period.
Now, the provisions to which you refer in Bill C-52 are the optionality provisions. By that I mean there must be a mechanism in place for the benefit of the accord provinces — Nova Scotia, for example, this year, $935 million to the better — to give that province the opportunity to elect into the new formula. Those provisions to which you make reference only come into force, as you will see from reading the entire bill, once the province elects, in writing, to opt into the new formula.
Senator Baker: I understand that, but you are making amendments to three pieces of legislation in which it says that no amendments shall be made without the approval of both governments.
Mr. Flaherty: That does not apply to equalization.
Senator Baker: No, but you are amending the acts in the original act that was then passed in the provincial legislatures as well — federal-provincial agreements and then the acts came in. I remember voting on it. John Crosbie, who was one of the signatories, said, "This cannot be changed.'' Yet, there it is in black and white; I have just read it to you. You are amending those acts, and you say that it is because of an equalization formula. You are either amending it or not. You are saying you amending it, but it does not apply to the Atlantic accord. Would you mind if we then removed those amendments to the Atlantic accord and strike them in an amendment?
Mr. Flaherty: The first objection you will get will be from the people of Nova Scotia, because it will cost them $95 million this year. It will also cost the people in Newfoundland and Labrador money. This is not money for some balance-sheet federalism. This is money transfers for health care and for post-secondary education in the provinces. This is money that matters very much to the daily lives of all of us who live in Canada, including all the people in Nova Scotia and Newfoundland and Labrador. The accords are fully in tact.
Senator Baker: However, you are amending it now.
Mr. Flaherty: If your province wishes to continue with the Atlantic accord, just as it was on March 18 this year, the day before the budget, they may.
Senator Baker: Yes, but the Atlantic accord is amended by this bill.
Mr. Flaherty: Yes, and the amendment is that if your province chooses to elect —
Senator Baker: You cannot do that.
Mr. Flaherty: May I finish, senator?
Senator Baker: Yes; sure.
The Chairman: Order, please. Senator Baker, you have made your point. I believe that issue is clear.
Senator Baker: I believe I have an answer, as well.
The Chairman: I believe so, too. The next senator on the list is a senator from Montreal, Senator Angus. He is also the sponsor for this bill in the Senate.
Senator Angus: Thank you, chairman. I cannot help noting that this committee is a little more lively than the Standing Senate Committee on Banking, Trade and Commerce where I usually hang out. I am enjoying it. These counsels are very good.
Mr. Flaherty, welcome, and to your officials. You mentioned that you were very proud of this budget, and I commend you for it. Given the shortness of time, I would like to cut to the chase.
It has been stated that if this budget were not passed by June 30, or by some date this summer, a number of significant benefits provided for in the budget would not take effect, in particular for the tax year that has already passed. Is that correct? Could you outline some of those?
Mr. Flaherty: Yes. There are very substantial payments to the provinces and territories, for example, $1.5 billion to support provincial and territorial efforts to reduce greenhouse gas emissions and air pollutants. The issue of environmental protection and enhancement is a major issue across Canada. This is a large transfer to the provinces and territories. As I mentioned earlier, the health patient wait times guarantee is important to health care for Canadians in their daily lives. There is $612 million here; $570 million for post-secondary education and training in Ontario; $54 million for the Northwest Territories to cover payments related to the earlier arrangements, which is very important to that territory; $30 million to promote environmentally sustainable practices in the Great Bear Rain Forest and Queen Charlotte Islands in British Columbia; and $21 million to Manitoba and $18 million to Saskatchewan for labour market training. I am meeting with my provincial Minister of Finance colleagues tomorrow. I am sure that they will reiterate their desires to have the funds flow, assuming this budget is passed on a timely basis.
Senator Angus: In regard to the list you have outlined, plus others, it has been suggested by you, by me and by others that these benefits could be lost if the budget does not pass now. It has been argued by various other senators, including the Leader of the Opposition in the Senate, that this is not true; that these provisions will apply. Can you make it clear that the benefits will be lost if the budget does not pass?
Mr. Flaherty: These are trust provisions entered into between the Government of Canada and the respective provinces and territories. If the bill does not pass on a timely basis they lapse; they will not occur.
Senator Angus: I put away my Kleenex, but I was listening to Senator Rompkey and Senator Moore kind of echoing him about the situation in the Maritimes. I understand you have had some discussions with the Premier of Nova Scotia.
Senator Rompkey: Point of order, Mr. Chairman. The area is referred to as the Atlantic. Three provinces, Nova Scotia, Prince Edward Island and New Brunswick, are the Maritimes.
Senator Angus: Oh. Well, I apologize. I am looking forward to learning more about Prince Edward Island.
The Chairman: Order. The record has been corrected. Carry on, Senator Angus.
Senator Angus: First, I understand you have had some discussions with the Premier of Nova Scotia, Mr. Rodney MacDonald. At one stage not long ago, he said was comfortable with the budget as it is. He then changed his mind. I am confused about that. To put it in perspective, I would like to quote from one of the senior people in Nova Scotia, Angus MacIsaac, who said:
We're very excited by the new infrastructure-related funding programs announced in the recent federal budget. Nova Scotia's entitlement under the programs is expected to total several hundred million dollars over the next seven years. Nova Scotia and other provinces and territories have lobbied the government of Canada for long- term, stable and predictable infrastructure funding for many years. Up until the recent federal budget, these appeals fell on deaf ears. However, the new cost-sharing programs announced in the Federal budget this year will go a long way toward enabling Nova Scotia to achieve its full potential as an international transportation gateway and to facilitate much needed road improvements.
Indeed, Premier Rodney MacDonald said:
The Atlantic Gateway is one of those once-in-a-generation opportunities to create a lasting and profound impact on the economic future of our region.
How do you reconcile that with the doom and gloom that we were hearing from my colleagues opposite?
The Chairman: Mr. Minister, I will point out that we will be hearing from the man who spoke those words. The premier, Rodney MacDonald, will be here at two o'clock today.
Senator Angus: The minister will not be here, so I wanted to give him the benefit of that.
Mr. Flaherty: There is massive infrastructure spending in this budget — $33 billion — which, levered with the provinces, municipalities and private sector in this country, will produce the greatest expenditures on infrastructure in the history of Canada in the next seven years, more than $100 billion, in all likelihood, as we go forward. One important part of that is the gateway initiative, which is not only the Asia Pacific Gateway, about which we hear much, but also the Atlantic gateway in Atlantic Canada. It is very important for the City of Halifax, for the province of Nova Scotia and for Atlantic Canada overall. That is part of this budget.
I have had those discussions with Minister MacIsaac and with Premier MacDonald as well. As I mentioned earlier in response to Senator Murray's question, their concern is in regard to implementation. They want to ensure that they protect the interests of the people of Nova Scotia, running from now to 2019. It is a legitimate concern. This is a complex issue to deal with, and we have been struggling to deal with that.
Senator Nancy Ruth: As always, I am interested in looking at the budget from the perspective of women and the poor. I am delighted to see the excise tax go off midwifery and the HPV vaccine that will save the lives of at least 400 women and girls in Canada.
Bill C-52 contains a proposed new federal statute, the tax-back guarantee act. It commits the Government of Canada to dedicate all effective interest savings from federal debt reduction each year to ongoing personal tax reductions and to report on both the savings and the personal income tax relief.
Am I correct that the interest payment on a public debt is the single largest item in the federal budget, about 15 cents on every dollar? Can you give us some estimation of how much interest savings will be created by the tax-back guarantee act over a certain period of time, say three, five or 10 years? In what fiscal year will the savings and reporting start? Will the tax deductions be broadly based, or are they targeted to specific groups or individuals? How will the public reporting on the resulting personal income tax relief be presented? Will the public be able to see who has benefited by income level, place, residence, age, gender or attachment to the workforce? In other words, I would like to see those most in need of the benefit get it. How will I be able to assess that?
Mr. Flaherty: There are many questions there.
The Chairman: Can you answer that in five minutes?
Mr. Flaherty: I will start with the bigger premise. We do a gender analysis not only on all our tax measures but also on all the proposed tax measures, because we get thousands of ideas every year put forward about tax measures that the Government of Canada can take, and we use that lens to look at measures.
Obviously, measures, such as the HPV virus vaccine funding, directly benefit women and girls in Canada. The tax- back guarantee in 2007-08 is $1.1 billion. In 2008-09, the guarantee is predicted to be $1.3 billion. The commitment is to reduce the personal tax burden in Canada with respect to the savings on interest payments on what is really our national mortgage, our accumulated public debt. We will identify and report where we are reducing taxes with that money.
As the senator described, there are many ways to reduce the personal tax burden in Canada. We can reduce marginal rates, we can increase basic personal exemptions and we can have specific personal tax benefits or credits. We will report on that, which will be clear to senators, to members of the House and to the people of Canada.
Senator Nancy Ruth: My concern is what the impact would be on the lowest taxpayers in Canada and those who do not pay tax, who are in need of monies.
Mr. Flaherty: We will look at that as part of the budget development process. We will continue those discussions. I am happy that the budget this year includes the Working Income Tax Benefit. That will be in the fall budget bill, as will the Registered Disability Savings Plan, which will assist some of the poorest people in Canada.
Senator Eggleton: I have questions in two areas, one dealing with another aspect of the federal-provincial fiscal arrangements, specifically on the per capita transfers. The O'Brien report stated that we should stop backdoor equalization, that there should be one equalization program and that the transfers for health and social education purposes should be on a per capita basis. Of course, the Province of Ontario has argued that its citizens are not getting a fair share on a per capita basis. Some of my colleagues have argued, yes, but in other parts of the country, the costs are higher. When it comes to the basic argument about fiscal capacity, that really gets into the equalization formula. As Mr. O'Brien said, this has been a backdoor equalization program.
Could you talk a little about the rationale and how you feel about this cost factor coming into the equation in terms of these transfers?
The second area of questioning is on income trusts. There are two aspects to income trusts. One is the question of what was promised. It has been clearly said by those who are critics of what the government is doing that the Conservative Party promised in the election campaign that it would preserve income trusts by not imposing any new taxes on them. Mr. Harper, during the election campaign, also said that any proposal to do so was an attack on the savings of Canadians and seniors. I believe those words speak for themselves in terms of the question of a broken promise.
The second aspect deals with the question of whether this is fiscally sound. There have been a number of criticisms, people saying that one of the reasons you have argued doing this was this very punitive 31.5 per cent levy. Of course, the distribution tax comes over a number of years, but nevertheless, that is really what it amounts to. You are saying it had to do with Bell Canada Enterprises, BCE, and TELUS. Yet, the other effects of this is that there have been many takeovers, because many of these companies are now on the block selling cheap.
There is the $25 billion, of course, with which many middle-income investors have been involved that has been lost as a result of this action. It says here that HLB Decision Economics Inc. that worked with the Department of Finance to calculate the tax leakages, estimates there is no tax leakage. In fact, some people are suggesting that this will go in the opposite direction of what you expect, that it will be a tax loss. Then they also cite that the oil and gas industry say that there are similar provisions in the United States that still work quite successfully; why are they being penalized in this way? They feel they were getting a much better handle on the economic control of the investment by Canadians in their industry, which they say is now reversing.
It does not look, from their comments, as if it is wise fiscal policy. Under the circumstances, with the minefield that equalization is, and while I appreciate many of the comments made by my colleagues from Atlantic Canada, the O'Brien formula was the right way to go. Second, congratulations on the Mental Health Commission. Senator Kirby, the previous chairman of the committee that I chair, was instrumental in putting that together. That is a good move.
Please comment on those two areas, the per capita transfer and the income trusts.
Mr. Flaherty: I would rather talk about the other two areas, actually. You say nice things.
I will go to the issue of per capita transfers. That is an important one. I will speak in some generality about this, but we have moved toward per capita transfers in equalization, particularly with respect to transfers relating to education, social services and health. That is fair. Again, it is the concept of fairness in the federation. It does not matter where you live in Canada; there is a certain cost to a university or college education, for example, so that is not a geographically sensitive, regionally sensitive issue, unlike other issues.
We have reserved some non-per capita transfers, such as the gateway funding that Senator Angus was talking about before. If one were to do gateway funding in Atlantic Canada, for example, on a per capita basis, it would be underfunded. It would not be possible to construct what needs to be built in Atlantic Canada for the gateway.
Similarly, the transfers for eco-infrastructure of $25 million per province was a lump sum transfer and not based on per capita; again, because that is an infrastructure cost that is not directly related to the number of people who live in the jurisdiction but, rather, to the need to get the infrastructure built.
On the broader issue of income trusts, it was a difficult decision, of course, and it raises an important question: What is the duty of a government? You are parliamentarians, as I am. What is the duty of a government when it is faced with a dramatic change in economic activity in the country that is distorting the economy, that threatens to distort it more, that is based on a synthetic high yield, that is based on the principle of money flowing out and not flowing in to research, development and increased productivity? This is a great challenge for a government. We addressed the issue. Had we not done so, we would probably be sitting here now looking at our banks becoming income trusts, most of our energy companies becoming income trusts, probably most of the telecommunications firms of any size in Canada also being income trusts, and on and on.
I ask you whether you feel that would have been a desirable development for the people of Canada and for our children and grandchildren going forward, and if that is the kind of economy you believe a young, growing nation such as Canada should seek to foster by tax policy.
Some people call it a punitive tax. It is levelling the playing field. It says that if one operates as an income trust, one will pay the same taxes that one would pay if one operates as a corporation. I do not believe most Canadians have much trouble understanding that. What they had trouble understanding is why one form of corporate organization should have a substantial tax benefit over another form of corporate organization.
In terms of $25 billion lost, many numbers get thrown around. If we look at the pages and look at the income trusts, where they are trading now and where they were trading last November 1, we will see that most of them have come back very well. You say some are selling cheap, but we see that most are actually selling at a higher level.
There is much loose talk, with respect, about numbers and about who lost what. Quite frankly, if one looks at what has happened to the market over the course of the past number of months since October 31, the reality of the numbers does not bear out that type of description.
Senator Mitchell: Mr. Minister, turning to the environment and the economy, it is striking how frequently we hear — and have heard it repeated dutifully by your Conservative senators in the Senate — that somehow investing in the environment, pursuing Kyoto, taking strong initiatives to reduce the effects of climate change and so on will be an economic disaster.
As an aside, it is amazing to me that when your government talks about spending literally billions of dollars on helicopters, bullets and war halfway around the world, that that does not hurt the economy, that in fact it stimulates the economy. In fact, it does stimulate the economy, probably for very unfortunate reasons.
You have a number of initiatives in this budget — not enough, but a number — that are directed at climate change, one being Sustainable Development Technology Canada, at about $500 million over seven years, which is not much but it is something, and the Canada ecoTrust for Clean Air and Climate Change, at about $1.5 billion. Are you suggesting for a moment that those investments to reduce or offset the impact of climate change will actually hurt the Canadian economy?
Mr. Flaherty: Of course, one has to have the balance. I like to talk about the three Es: the environment, the economy and energy. You are referring to regulating industry and business in Canada. There is an economic cost to that. Our intent is to accomplish that balance. Yes, there will be some impact on the environment by regulating every business and industry in Canada, which we will do for the first time in the history of Canada with respect to greenhouse gas emissions. There is a cost to that. We are trying to get that balance right so that people do not lose their jobs and homes because of environmental agenda items. At the same time, we will move forward and reduce greenhouse gas emissions by 20 per cent by 2020 and air pollutants by 50 per cent by 2015. That balanced approach is what Canada needs going forward.
Senator Mitchell: You focus strictly on the costs of that. I have seen no strong analysis that would suggest that there is in fact cost. The membership of Canadian Manufacturers and Exporters has reduced their carbon footprint by 7.4 per cent from 1990 levels and their productivity has increased 48 per cent. The Canadian Chemical Producers' Association membership has reduced their carbon levels by 56 per cent from 1990 levels. Their productivity has increased. The Canadian Forestry Association has reduced its carbon footprint by 44 per cent of 1990 levels, with nothing but good for their businesses economically.
It seems to me you assess only the cost; it is half empty. You never seem to assess, first, the impact of the investment, and second, what the costs would be if we do not do it and do it effectively.
However, my specific question is, what are the costs? It is interesting that your lead senator suggested that it would cost $30 billion a year, 2.5 per cent of GDP of this country, to achieve Kyoto targets. In fact, it is $30 billion even by your own estimates and by industry estimates over five and a half years. It is slightly more than $5 billion a year, which is about what your revenues were reduced by the 1 per cent reduction in the GST. I am concerned that you are actually assessing the cost of Kyoto incorrectly when I hear a senior senator in the Senate suggest it is five and a half times higher than it is. Do you have a real fix on what the costs are?
Mr. Flaherty: We do, senator, because we employed some outside experts to give the environment department advice on this subject. I am sure you have seen their reports. As in many of these matters, prudence is important. Just as it is difficult for the Canadian manufacturers to handle sudden changes in the value and range of the Canadian dollar, for example, it is difficult for Canadian manufacturers and others to handle sudden regulation at a high cost to an industry.
Are we going in the same direction? Yes. The question is how fast do we get to these desirable targets and at what sacrifice to the daily lives of Canadians and their families? As I say, we are trying to get that balance right.
When we looked at it, the estimate of the impact on the GDP was about half a percentage point. If we were to act suddenly on our goals and plan going forward, frankly, we would run the risk of putting our economy into a recession, with all of the consequences that come with it.
The Chairman: The minister has another important meeting to attend. We appreciate his staying over the time that he indicated. I understand Ms. Anderson and Mr. Ernewein have to leave as well, but we do have Mr. LeBlanc, Mr. Vermaeten and Mr. Lalonde who will stay and we will carry on.
Minister, we have six people more on the list who wanted to ask questions, plus two in a second round. We will see how we do with your officials, but we appreciate the time you were able to give us today.
Mr. Flaherty: Thank you. I make myself available always for your committee, of course. I do have to be with my provincial colleagues today on securities and tomorrow on finance, but if there is a need to return, I will be happy to accommodate it in some way.
The Chairman: Thank you very much. I have already introduced each of the witnesses at the beginning. We appreciate you being here. You have heard the earlier discussion, so we will carry on. Senator Mitchell was cut off in mid-sentence; I apologize for that. He has the floor to conclude his questions.
Senator Mitchell: I was actually about to say something positive about the minister as well. I do not want to get carried away, but I want to get credit for what I am about to do. I believe it is a very positive initiative that he is trying to get a single national securities regulator. My province, Alberta, is resisting that, and it is disappointing to me that it would.
One subset of a national market would be a carbon credit market. The government has studiously avoided doing that. There is a tremendous economic opportunity for many industrial actors in this agricultural area as well for developing carbon credits and selling them. In fact, Cascades Inc., a major Quebec firm, is actually selling carbon credits in Europe.
This is an initiative that could be brought to Canada to create a new market, create some energy and synergy around the development of carbon credits and climate change initiatives. Is any consideration being given to the development of a carbon trading market in Canada? I might add, at this point, that Calgary would be a great place to put it.
Paul Rochon, Acting Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance Canada: I am not the expert on the issue, but I can tell you that the government's regulatory plan for climate change includes a proposal for trading credits within Canada; in fact, a substantial part of the plan relates to that. That is something you might want to pursue with Environment Canada officials.
Senator Mitchell: A high dollar is, in many respects, a disadvantage economically to a country such as Canada, which exports goods and imports tourism. It is clearly hurting the central Canadian manufacturing industry. Yet, one the advantages of a strong dollar for manufacturers is that they can go abroad and buy capital equipment less expensively and begin to enhance productivity during what would otherwise be seen to be a difficult time.
However, there is evidence that manufacturing concerns simply are not doing this kind of investing. Is that true, to the best your knowledge in your studies? If it is, what steps can the government take to encourage this initiative to enhance productivity in the Canadian manufacturing sector? Productivity is becoming increasingly a serious concern for our economy. Despite the fact that the economy is strong at this point, it is largely commodity driven.
Mr. Rochon: Investment in Canada actually has been quite strong in the last two or three years. You are right that one of the benefits of a high dollar is that it makes purchase of machinery cheaper — equipment, in particular, as a significant portion of that is imported.
On what we can do for the manufacturing sector, the 2007 budget included a measure for an accelerated capital cost allowance, specifically for the manufacturing sector. The government has a much broader agenda on improving productivity related to getting the tax mix and tax levels right, improving the regulatory system and a number of other measures that are outlined in Advantage Canada.
[Translation]
I would like to welcome Mr. Lalonde, Assistant Director, Tax Policy Branch, Department of Finance Canada. I now recognize Senator Biron.
Senator Biron: With respect to the Tax Fairness Plan and Income Trusts, the bill will have a detrimental effect on an important traditional source of funding for the oil and gas industries. It will considerably reduce the future value of the shares. This bill will make Canadian companies less competitive against American companies that pay no income taxes. This makes them ripe for foreign takeovers by companies that do not pay tax. This could result in a loss of part of our energy heritage, which goes against Canada's claim to become an energy superpower.
In order to avoid paying so much in taxes, we believe that, by 2011, many of these companies will fall into the hands of American owners. In so doing, they will no longer be paying taxes to the Canadian government and jobs will be lost.
The oil and gas sectors represent non-renewable resources and must distribute their revenue. Therefore, in order to counter any negative effects that will be felt by these companies and their investors, could the government not grant the oil and gas sectors the same exemptions that have been provided to the real estate investment trusts?
[English]
Gérard Lalonde, Assistant Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: There were a number of suggestions in your question, and at least two or three questions folded into it as well. The primary point is the one made by the minister. The impetus behind the proposals affecting income trusts is to treat income trusts that are publicly traded in the same way as public corporations and on a level playing field with corporations. Corporations are entitled to a number of provisions under the act that provide special regimes for oil and gas exploration, for example, and development expenses, and the same kinds of expenses are available in respect of income trusts. There should not be any dichotomy between income trusts that are subject to the SIFT — specified investment flow-through — provisions and Canadian corporations. With respect to foreign corporations that may come into Canada to carry on an oil and gas business, Canada taxes non-resident corporations on their income from business carried on in Canada, so they would be taxable in Canada in the same way as corporations are taxable. To the extent that the income trust provisions try to recreate, for income trusts, a regime similar to that applicable to corporations, so too would they be taxable on that basis.
[Translation]
Senator Biron: A letter from the Canadian Energy Trust states that there has been an increase in mergers and acquisitions in that sector, and because of lower future values, it is becoming a target for takeovers by tax-exempt Canadian and foreign companies, as well as by private investment funds.
[English]
Mr. Lalonde: You probably noticed in the newspapers, at least, that over the last little while there have been a number of grand designs for takeovers of many businesses, including corporations. This is not a feature particular to income trusts. It is a feature particular to the availability of large pools of capital all over the world. It is not a Canadian phenomenon. Again, the proposals in this bill will put income trusts on the same level playing field as other Canadian corporations that carry on business in a wide variety of fields.
[Translation]
Senator Ringuette: My questions are mostly for the minister, but I also have some for the department officials.
Last year, I was part of a group of senators who spent a number of hours studying Bill C-2, the accountability bill, which, among other things, was designed to provide greater transparency in documents. A citizen from Calgary provided me with this document — and I would be happy to show it to my colleagues if they would like to see it — that was requested under access to information from the Department of Finance; it involves income trusts. You can see, here, the Department of Finance cover page.
Can you tell me why we spent a number of months studying the bill and hearing from hundreds of witnesses discuss a greater access to information if citizens and parliamentarians are provided with this type of document?
[English]
The Chairman: The senator is showing us a bundle of pages that have most of the printing blacked out. Do honourable senators wish to have that as an exhibit?
Senator Murray: I think we get the point.
Senator Ringuette: Since the officials have no comment on that, I will carry on. Their silence speaks volumes.
Mr. Lalonde: I have not been given a chance to respond yet, but I can if you would like me to. As a department of the Crown, we are subject to the Access to Information Act. We spend an inordinate amount of time dealing with access to information requests. We also have to comply with the provisions of the Access to Information Act, and one of those provisions is section — pardon me?
Senator Ringuette: We broadened the provisions so that Canadian citizens could have greater access.
Mr. Lalonde: As I was saying, one of provisions of that act is section 69, which is not a discretionary provision. It is a mandatory provision that talks about cabinet confidences. To the extent that there is information in documents that relates to legislation or pending legislation or advice to ministers for particular use by ministers, that cannot be released. The law says that it cannot be released. It is not a discretionary exclusion or severance; it is a mandatory exclusion. We have to comply with the law.
Senator Ringuette: I understand that you have to comply with the law. However, I do believe that if the minister refers to such a document publicly, then the document should become public. I understand that you are not political people, and I respect that, but there is a balance in the transparency and accountability process. Perhaps we will soon have another bill. I know that not all the provisions in Bill C-2 are in effect yet, even though it has been quite a few months since we passed that bill.
I will move on to my other question. You are the perfect group to answer this. Have you done and can you make available, or is it subject to cabinet confidentiality, a province-by-province and territory-by-territory analysis of per capita costs of social programs and post-secondary education? Have you done that analysis of cost province by province?
Frank Vermaeten, General Director, Federal-Provincial Relations and Social Policy Branch, Department of Finance Canada: Over the years, many studies have been undertaken, both internal to the department and outside. These studies ultimately run into large methodological and data issues regarding how you determine the cost of providing the service. There are a number of aspects to it. You take, for example, the cost of education. On the one hand, you want to look at the demand in one province for the provision of education. That component can increase or decrease the cost. Then there is the cost of providing that service in terms of paying teachers and how much it costs to maintain a building in each province. I guess the same thing can be said for social services.
Studies have been undertaken. I do not think a definitive study was completed that said here are the results that would let you define the exact needs. The overall assumption is that in these areas, roughly it is an equal per capita need across provinces unless there is some other evidence that says no, they are different. The government has decided that for the CST, a good approximation is the equal per capita —
Senator Ringuette: I have not asked you to give me a political or bureaucratic spin regarding my question. I have asked you if you have made an analysis of the cost per capita of social programs and post-secondary education per province. I cannot believe that your department, which is responsible for interprovincial transfers and which has all your human resources and expertise, has not done a complete analysis.
Mr. Vermaeten: As I said, it has been analyzed. I do not believe there is —
Senator Ringuette: Have you done one complete analysis, let us say, in the last two or three years?
Mr. Vermaeten: There is data —
An Hon. Senator: No —
Senator Ringuette: Please, let him answer. It is a simple question.
Mr. Rochon: There is one direct answer to your question, which is that Statistics Canada publishes, in the provincial economic accounts, the expenses on the various programs as well as the federal contribution by province to those programs.
Senator Ringuette: Have you done, in the last three years, a cost analysis? Yes or no?
Mr. Vermaeten: No, we have not completed a study that we could say we think is methodologically sound stating that these are the differences in costs or differences in needs across provinces.
Senator Ringuette: You have not done so.
You are saying that your recommendation — and I assume it is your recommendation to the minister — is to change the social transfer system to an equal per capita system without any form of proper analysis. If there is none, and you just said there was not, then it was a purely political decision. If you do not have the facts to back up this change to a system that has been in place for 30 years, then this is a purely political decision.
Mr. Vermaeten: The decision was based on the recommendations of the O'Brien panel, which looked at the issue.
Senator Ringuette: The O'Brien panel has nothing to do with the social transfer.
Mr. Vermaeten: I think if you read the O'Brien report, there is a specific recommendation. Indeed, the budget makes specific reference to the O'Brien recommendations, saying that O'Brien recommended, along with a strengthened equalization program, that we should remove the back door equalization that was in the Canada Social Transfer and the Canada Health Transfer.
The Chairman: I did not hear that. Remove the what?
Mr. Vermaeten: Remove what is often referred to as the back door equalization in the CST and the CHT. Those transfers implicitly measured fiscal capacity in the determination of that transfer. O'Brien said that once you have a strengthened equalization program, you no longer need to measure that fiscal capacity.
In terms of the need component, the allocation, the entitlement has been on an equal per capita basis for quite some time now. I believe it was 1999 or 2000 when we moved to a new equal per capita entitlement allocation. The only issue now in those transfers of the CST and the CHT is whether we continue to measure fiscal capacity. O'Brien recommended that there is no need to measure that fiscal capacity any more because the differences in fiscal capacity have been compensated through a strengthened equalization program.
Senator Ringuette: No, that is not true.
The Chairman: To clarify the record, can we refer to back door equalization as associated equalization?
Senator Eggleton: That is what O'Brien called it.
Senator Murray: He may have called it that. He picked it up from Mr. McGuinty who first uttered the phrase. It was used by Mr. O'Brien as chair of the committee and later repeated, apparently with approval by Mr. Flaherty, in the budget documents. However, to call it back door equalization is a piece of nonsense.
In 1977, when Mr. Trudeau decided that the federal government henceforth would pay half of the federal costs of those programs by a transfer of tax points, naturally Ontario and Alberta were delighted because the value of the tax points was considerable. No one ever assumed anything else but that the tax points would be equalized. To call it back door equalization is inaccurate and unfair.
The second question is whether the so-called enriched equalization program will compensate the recipient provinces, and we are talking about seven or eight provinces now. Whether the enriched equalization program will compensate for what they are losing in associated equalization, the evidence is not there to say. In the early going it may, but some of the provinces have done their sums; they have sharpened their pencils and they have tables. I think we will be hearing more about it from one or other of them this afternoon and tomorrow. To call it back door equalization is a complete misnomer.
Mr. Vermaeten: Could I make one clarification on the issue of removing the associated equalization?
The Chairman: Thank you for using that term.
Mr. Vermaeten: In fact the budget does refer to both associated equalization and back door equalization.
The point I wanted to make is that it is not that the provinces are losing money as a result of eliminating the associated equalization. In fact, the government invested $687 million a year.
Senator Murray: That is this year.
Mr. Vermaeten: No, that is an ongoing amount to provide additional monies to Ontario, Alberta and the N.W.T. because they were getting less than the other provinces. In fact, it is raising those provinces up to the same standard as the others.
Senator Moore: God knows they need it.
Senator Ringuette: You know what? The bureaucrats in front of us here have not proven us wrong yet, Senator Eggleton.
There is no cost analysis and you have repeated at least three times in the last five minutes that there is also no need to measure fiscal capacity.
I would refer you to the Constitution of Canada. Subsection 36(2) reads as follows:
Parliament and the government of Canada are committed 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.
That is fiscal capacity. If there is no need, as you say, to measure the fiscal capacity to make those transfers, then you are in clear breach of subsection 36(2) of the Constitution of Canada.
The Chairman: Do you feel capable of answering a question on the Constitution?
Mr. Vermaeten: I feel capable of trying.
I repeat that in 1999 we moved to an equal per capita allocation, and from the studies at the time that continue, there is no evidence or a sound methodological way that shows that the needs are anything but equal per capita. Again, it was an allocation adopted in 1999.
Senator Ringuette: You have not analyzed it, and you have not provided this committee with any documents so far.
Mr. Vermaeten: The equal per capita allocation was determined in 1999, and you will see again that O'Brien did look at the issue about whether an expenditure need could be done. There is widespread agreement that it is methodologically extremely difficult.
On the second issue of not measuring fiscal capacity, I said that the equalization program measures fiscal capacity. O'Brien said that once we have a strong equalization program that provides support to those provinces with the lower fiscal capacity, then we do not repeat that element in each transfer. That does not mean that all transfers and all support are equal per capita. The minister was mentioning, for example, that more would go to the Atlantic gateway for that type of support than a landlocked province.
Senator Ringuette: I would like to stop you there at the issue of the Atlantic gateway. I have been following that issue closely, because it would be a major economic tool for Atlantic Canada. However, so far, after I have read at least three studies on the Halifax port expansion, there is no financial commitment to the Atlantic gateway. I am sorry, but I read my stuff; I am an interested senator. In the Atlantic region, through this new equalization program, starting from this budget, for 10 years, Nova Scotia will be losing $1.44 billion; Newfoundland and Labrador will be losing $1.422 billion; New Brunswick will be losing $1.085 billion; and P.E.I. will be losing $196 million. You have the minister coming in, and I am sure that one or many of you wrote his opening comments, and one of the first things he said is that all provinces will be better off in this new system. I am still waiting for the proof, gentlemen. If you have the proof, I would certainly welcome it before we end the study of this budget.
The Chairman: Can someone help us with the answer?
Mr. Vermaeten: I would refer you to the budget document called Restoring Fiscal Balance for a Stronger Federation. There are tables at the end of the document that show transfers to provinces over time. At page 67 in the Restoring Fiscal Balance for a Stronger Federation booklet, there are by-province tables which show the increase of transfers. It is not all transfers, but they do show over time that, as a result of the fiscal balance package, they have major increases in transfers over time.
Senator Ringuette: That is definitely smoke and mirrors. I have tried through our research assistant of the Library of Parliament to get the numbers for the new program, and the answer I got was the official of the Department of Finance does not want to give the numbers because the numbers are only assumptions.
Can you provide me with the numbers so that we can look at it? Can you provide me the numbers up until 2019-20?
Mr. Vermaeten: The budget includes numbers for 2007-08 and 2008-09.
Senator Ringuette: Yes, and after that it is downhill all the way.
Mr. Vermaeten: Those are available on page 17; there are firm estimates for that. If we try to speculate until 2019-20 what equalization entitlements will be, it becomes extremely difficult. To do that, we need to know not just what provincial incomes will be but also resource prices, exchange rates, production levels and rates of taxation.
Senator Ringuette: You must have run different scenarios. I am sorry, but we cannot get analysis or the fiscal capacity. They say there is no need to do fiscal capacity where it is clear in the Constitution that it is needed. We cannot get the numbers. Therefore, it is borderline ridiculous to ask this committee to review a budget that has long-term detrimental implication for eight of the 10 provinces of this country, one of which I represent. I cannot have the numbers, I cannot have the facts and it is — I would not say "frustrating'' because it is a word used to signify a woman with character — but I will say, Mr. Chairman, that maybe the minister will come back here to answer questions of this committee and bring facts, because I have not yet seen facts that would tell me that this is a good budget for all Canadians.
The Chairman: I understand the answer that there was no specific analysis done that would lead to the political decision. One cannot get water out of a stone, and if it is not there, it is not there.
Mr. Vermaeten: There are extensive studies on the equalization program and extensive studies by O'Brien on what would be the best formula-based equalization program. It is formula-based, so we see in 2007-08 that there was enrichment to the program that brings provinces to a higher fiscal capacity level. That we do know for 2007-08, and we have projections for 2008-09. Going forward, it is a formula-based program, and the provinces will receive entitlements based on their measure of fiscal capacity, which evolves over the time. That is the way the equalization program was designed.
The Chairman: We understand. We have done extensive studies on the equalization side of things. There was more interest on the Canada Health and Social transfers, the decision to go per capita and to drop the associated equalization with respect to the tax transfers.
Senator Di Nino: I certainly respect the fact that a number of our colleagues have a passion about this issue, as Senator Eggleton said. Coming from Ontario, I have a different viewpoint and do not necessarily agree with them.
Bill C-52, the implementation bill, contains many important components for people across this country. The equal trust initiative, which I applaud, is timely. It will go a long way toward helping to satisfy, not all and not completely, some of the concerns on this issue.
Every time we create a program of this nature, there is the potential of abuse or misuse. My first question deals with accountability and the mechanisms that would be established for evaluation and compliance.
First, I would like to know what they are and, second, whose responsibility is it to evaluate and oversee? Is it the federal government or the provinces?
Mr. Rochon: I can provide you with a general answer to that. I am not an expert in the area, but the Canada ecoTrust will be administered jointly between the federal government and provincial government with private sector expertise.
We have similar organizations in place now — Canada Health Infoway is the one that comes to mind — that are operated in this way. They have a governance structure that is set out in their founding constitution involving a good level of accountability. Ultimately, the members of that board, which would include the governments and private sector members, would be accountable for ensuring good governance of the organization.
Senator Di Nino: That does not take away my concern. When you talk about a joint responsibility, I guess I would like to see a clearer focus on who will be responsible to ensure these funds are used for the appropriate purposes and are evaluated in a way in which we can be satisfied — this is a big number, at least $1.5 billion — that the money is being used for the appropriate purposes in an appropriate manner.
Mr. Lalonde: Mr. Richard Botham from the Department of Finance is here. He can address this issue more directly than I.
Richard Botham, Director, Microeconomic Policy Analysis, Economic Development and Corporate Finance Branch, Department of Finance Canada: The primary accountability mechanism is from the recipient, which would be the province or territory. The accountability mechanism is with the residents in either the province or territory.
The second way accountability is implemented is that provinces and territories that are recipients of the trust have indicated through an exchange of letters with the Government of Canada the projects identified as priorities that they would undertake using these funds. Those are the two main mechanisms associated with the trust.
Senator Di Nino: Who will be auditing this?
Mr. Botham: The audit function would be undertaken by the recipient, which is either the province or territory.
Senator Di Nino: At least I have highlighted my concern on this issue. I will go to another item that I beleive is important to a huge number of conditions. I also applaud this measure.
The income splitting of pensions for seniors, which has been very well received, will also go a long way to helping some of the neediest members of society. However, if you have pensioners who are splitting income, why stop at pension income? Why not include all income of seniors?
Mr. Lalonde: That is a very good question, but I am not sure it is one that I, as a public servant, can answer. Obviously, in the run-up to a budget there are a variety of options available to a government. I believe the minister has on a number of occasions indicated that that has been reviewed and thought has been given to that matter.
However, in accounting for a budget, the same way as one does their personal budget, one has wants, needs and doables, and one has to design the budget and come up with the best balance possible, and that is what the minister came up with.
Senator Di Nino: Mr. Chairman, this would have been a question I would have liked to have asked the minister. It is a policy issue. Unfortunately, he had to leave and my name was too far down the list, but at least it is on the record for us to consider for future discussion.
Senator Cowan: In his remarks this morning, the minister said he had met with the provincial Minister of Finance and officials in Nova Scotia to discuss changes to the accord prior to March 19.
The premier will be here this afternoon. I would ask you to contact the minister's office as soon as you leave here and table with this committee, in advance of the premier's appearance this afternoon, the dates and times and officials that the department met with in Nova Scotia prior to March 19 to discuss changes to the accord.
Second, the minister referred with pride to moving toward a principle-based equalization formula. He also said, obviously, that the equalization formula changes from time to time and is not set in stone. I do not remember whether he used that term precisely, but I believe that is what he meant and we all understand that.
If you cannot provide the answer to this, I would ask you produce someone who can.
Clause 4 of the accord arrangement signed on February 14, 2005, talks about the calculation of the offset payment and it refers to the equalization payment that would be received by the province under the equalization formula as it existed at the time.
Section 8 of the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act says that when calculating this fiscal equalization offset payment, ". . . it shall be made to the Province for a fiscal year . . . .'' Then it goes on to say, ". . . for the fiscal year under the equalization formula in effect at that time . . . .''
My own view is that the obvious meaning of those phrases is that it is not the equalization formula that was in place on February 14, 2005, or the end of December 2004. It would have been very simple to say, in effect, at the time the accord was signed, if that was the intent. Clearly it is not. They use those words very carefully.
I refer you to the paragraph in an article in today's The Globe and Mail written by Mr. Crosbie and Mr. Martin. They say:
It would be hard to imagine that in the middle of these fundamental fiscal policy actions by the federal government, Nova Scotia Premier John Hamm and Newfoundland Premier Danny Williams and all of their ministers and advisers would agree to enter into the February, 2005, Offshore Agreement and not insist that any deal protect their provinces against future changes in the equalization program, changes that might cancel out the benefits of these bilateral economic agreements.
I am asking you whether anyone here can provide me with a legal opinion that supports the minister's position that the Atlantic accord and the implementing legislation fixes on the equalization formula that was in place at the time the accord was signed rather than the equalization formula that is in place from time to time.
This is the essential point of difference between the federal government and the provincial government and why I suggest that this choice that the government is offering to Nova Scotia and Newfoundland and Labrador is a false choice. There is an agreement in place; it is enshrined in legislation. There is no choice to be made in my view, unless you have a contrary view that is supported by a legal opinion or you can produce someone before this committee who can provide a legal opinion that would say to the contrary.
Alfred LeBlanc, Director, Federal-Provincial Relations and Social Policy Branch, Department of Finance Canada: You highlight that at that time it could be subject to interpretation backwards or forwards and I believe, regardless, the equalization arrangements that are set out in Bill C-52 include two formulas. One that is available to Newfoundland and Nova Scotia is the status quo formula, which provides full protection under the accord. It remains an integral part of the equalization arrangements.
Senator Cowan: Perhaps I did not make myself clear, but is it your opinion, or can you provide a witness or legal opinion before this committee that says that my interpretation of the Atlantic accord and section 8 of the legislation to which I referred is wrong? To me, it has a plain meaning; it is at the time that one is making the calculation. I believe Mr. Crosbie and Mr. Martin make the same point, so we need someone to clarify that. I would have put it to the minister had he been here longer.
Mr. LeBlanc: I am saying the equalization formula that will be in place with the passage of Bill C-52, today, tomorrow, includes two formulas; it includes the O'Brien formula with a cap and the status quo formula. This is available to Newfoundland and Nova Scotia and provides full protection to them for their accords. They will operate under the status quo formula until they choose in writing to indicate their preference to operate under the O'Brien formula.
Senator Cowan: Mr. LeBlanc, the point I am trying to make is that there is no choice to be made for the two provinces. Those two provinces have signed agreements with the Government of Canada that entitle them to the benefits of this principle-based equalization formula that the minister brags about that is available to any qualifying province. There are not, never have been nor should there ever be, two different equalization formulas. There is one, and under these agreements, which are enshrined in the legislation, I suggest, those two provinces are entitled to the benefits of whatever equalization program is in place from time to time and, in addition, entitled to keep the benefits of this principle-based equalization formula.
Mr. LeBlanc: The equalization program that will be in place with the passage of the bill has two formulas.
Senator Cowan: It changes. That is not their entitlement. That is the false choice.
Mr. LeBlanc: They can operate under the status quo arrangement, which remains an integral part of the program, and provides them full protection for their offshore accords.
Senator Cowan: Do you disagree with my interpretation of this accord?
If you do not agree, I invite you or someone to provide legal opinion or testify as to the correct interpretation of the accord and the legislation. However, the plain meaning of those two documents in my view is — and I believe this is a view shared by Newfoundland and Labrador and by Nova Scotia — that as provinces in Canada, they are entitled to benefit from the equalization formula that is in place from time to time, and it changes from time to time. They are not stuck with the program that existed at the time of the accord.
Mr. LeBlanc: I am not using that to refer back to 2005. I am saying that the status quo formula remains an integral part of the equalization arrangements that are being put forward in Bill C-52. Therefore, they continue to be in operation; they continue to be an integral part of the equalization arrangements. They are available to Nova Scotia and Newfoundland to provide them full protection. They have a choice, if they so choose, and they have to indicate their choice to operate under the other formula within the equalization.
Senator Cowan: I suggest it is completely a false choice. They can take the accord as it is written and the benefits of the equalization formula that was in place at that time, or, the minister is saying they can give up the accord and take advantage of the enhanced equalization formula.
I believe the plain meaning of the accord — and not just the accord but the legislation, and that is the reason for all these consequential amendments contained in Bill C-52 — is that we are not able to get the benefits of the enhanced equalization formula unless we give up the benefits of the accord. That is wrong.
Mr. Vermaeten: With respect to the "at the time'' phrase, there will be different views on what that means, and from the government's perspective the accords have been fully respected because Newfoundland and Nova Scotia will continue to be able to get every penny of those accords.
Senator Cowan: Does that include the enhanced equalization program, to which they are entitled as a province in Canada?
Mr. Vermaeten: Well, second, they have the opportunity to get the enhanced equalization formula.
Senator Cowan: If they give up the benefits of the accord.
Mr. Vermaeten: That is something that people often, for ease of communication, will talk about: Newfoundland and Nova Scotia can stay in the accord or move on to the O'Brien-based formula. In fact, it is a little different. There is a status quo equalization formula and there is an O'Brien equalization formula. The accords continue to exist under both formulas, essentially the same. There are small technical amendments that would be made if they opt into the O'Brien formula, but the accords continue to operate essentially the same and continue to provide benefits. In fact, the accord payments under either the status quo system or the new O'Brien-based equalization formula, whichever regime they opt into, are not capped. There is a cap on the equalization, but the accords continue to operate essentially the same under both provisions.
The Chairman: Senator Cowan, I believe you have made your point. There is clearly a disagreement on this issue. If you do have any legal position from justice or wherever, that backs your position and the position of the minister that would be helpful to us in understanding an interpretation that is different from that of Senator Cowan.
Senator Cowan: I also want the list of the times and dates and officials that were consulted, because our information is quite to the contrary.
The Chairman: If you could provide us with that, that would be helpful. If you do not have anything, we understand that too, but we would like to know that.
Senator Cowan: The minister said it, so obviously he will have something.
Senator Stratton: I very much appreciate your staying and taking the time with us. I would like to talk a bit on the positive side because Manitoba is a have-not province, has been for a while and will continue to be. It does not have oil and that seems to be something to argue about. It appears the problem is having oil. Manitoba is in favour of this agreement, this new equalization, and is quite positive to the extent that the premier of the province disagrees with the leader of the New Democratic Party, who is against this new agreement, and is against the Premier of Saskatchewan, just fundamentally on the basis of fairness across the board.
I would like to thank Senator Eggleton, who is the former Toronto mayor, for basically agreeing with what has been struck, because it is a very difficult thing to do, as has been said by the finance minister.
Could you tell us, without taking too much time, about those provinces that are on the positive side, such as Quebec and Manitoba in particular, but have not been banging the drum with respect to that? What benefits do they gain or we gain, particularly in Manitoba, that makes it a positive thing and an ongoing thing for my province?
Mr. LeBlanc: As Mr. Vermaeten said, the benefits by province are set out in this booklet.
Senator Stratton: Yes, but it would be nice to have a few statements read out with respect to that. I understand it is in the document.
Mr. LeBlanc: Yes, $39 billion over seven years is invested to restore fiscal balance with a strengthened equalization program based on fiscal capacity. It is a formula so payments will vary as fiscal capacities of provinces vary. Some other funding is provided more or less on an equal per capita basis and some other funding is provided on a merit basis. There is a large investment, as the minister mentioned, on infrastructure as part of fiscal balance. Some funds are provided through trusts for the environment, patient wait times and to bring the Canada Social Transfer, CST, to equal per capita cash allocations plus additional investments in the CST, including an escalator to increase funding for post-secondary education and child care. Manitoba will receive its share of those funds, as will the other provinces.
Senator Stratton: It was quite apparent in the statement by the premier that he is positive about this agreement.
However, something fundamentally bothers me. Nova Scotia and Newfoundland and Labrador had the choice of either choosing the old or the new agreement. They want to be able to select partly from the old and, it would appear, partly from the new as well.
Senator Moore: We just want the old system.
Senator Stratton: Okay.
Senator Moore: We want them to keep their word on the signed agreement — to keep a promise.
Senator Stratton: I fundamentally disagree, because you cannot have a greater fiscal capacity yet you are saying that you should have a greater fiscal capacity. If Manitoba has a debt, as Newfoundland has a debt, how will Manitoba get out of debt? Manitoba has to do it the good old-fashioned way.
The Chairman: Senator Stratton, please ask your questions of the witnesses and we will have debate at third reading.
Senator Moore: I want to pick up on what Senator Stratton was saying. I might have missed it, but is there a clause in the Atlantic accord that provides a choice?
Mr. Vermaeten: No.
Senator Moore: I believe that Senator Baker cited three instances where it sets out that the agreement is not to be changed unless the province agrees to the change. It is not good enough for the Minister of Finance of Canada to come here and say that it is not written in stone. You have a contract between the federal government and two provinces, and it has been breached. What is the justification for that? You are trying to convert a matter of contract and legal agreement to a policy issue, which is so detrimental to my people that I represent in Nova Scotia, it is scandalous; it is insidious. How do you justify that?
The Chairman: Would anyone like to answer?
Mr. Vermaeten: I will make a couple of comments. We have already discussed the issue of the specific phrase "at the time'' of the program that was in place. You can have different views on that, but I would like to take a step back and talk about the context with which the 2005 accords were signed that, in part, speaks to the spirit of the agreement. We have dealt with the technical language.
The spirit of the agreement when the accord was signed in 2005 was such that we had a fixed equalization framework in place that did not pay out as much as the O'Brien formula. The issue up for discussion at the time was how the amounts would be allocated. In fact, the O'Brien panel was struck to look simply at the allocation of that. Those accords were written with a view to looking at the allocation. It was never envisaged that there would be an enrichment.
Senator Moore: I will stop you there. I heard the Minister of Finance say "striving to be a have province is a good thing.'' Well, hallelujah! What is the intent of this proposed legislation, of this budget? Is it to keep us, in Nova Scotia, where we are today? We do not like this. We would like to be a have province. If Manitoba has a problem, I would like that province to be a have province. Our people have to have the opportunity, and you are taking that away.
Mr. Vermaeten: With respect to that specific issue, both Newfoundland and Nova Scotia have projections that are consistent with what is in the budget. You see that under the status quo allocation, which they are entitled to keep, their fiscal capacity indeed rises above that of Ontario. I believe Newfoundland's internal projections also show that for the foreseeable future, they will have the second highest fiscal capacity, second only to Alberta. Nova Scotia is in the enviable position of having a fiscal capacity that is above that of Ontario for the foreseeable future. The status quo formula allows them to have a fiscal capacity that is very strong.
Senator Moore: You are looking at regions with decreasing populations and increasing health costs, and this goes on and on. To me, and I have said this earlier, this is strictly spreadsheet federalism. That is all this is. I want to talk about the CST.
I am very interested in post-secondary education, PSE. Under the new deal, my province will receive an extra $7 per head, so we will pick up $6.5 million and Alberta will pick up $344 million. Over 10 years, we will receive $65 million and Alberta will receive $3.44 billion. Senator Ringuette asked whether you did an impact study on those numbers, and I have asked the same question in the Senate of Canada but have received no reply.
My province of Nova Scotia has 10 universities. Educating the young people of Canada is a business in my province. We have been at it for over 200 years and are very good at it. We have the latest numbers from Statistics Canada indicating that about 45,000 students are enrolled in our 10 universities. Alberta has six universities with about 86,000 students enrolled. Have you looked at these numbers? Somehow, someone in your department must have said, "Oh my God, $65 million versus $3.44 billion — there is a gap.''
How do we get by? How do we compete? How do we not lose our best professors? How do we not lose our best students? How do we not lose our best researchers? The same formula will kick in for health care beginning April 1, 2014. We have increasing costs in health care and a decreasing population. What is the impact of that? Is it expected that we will all move to another province so we can have the same standard of health care and to have our young people educated? Who has looked at that in your department?
Mr. Vermaeten: I will clarify what I said earlier, that the entitlements for PSE have been on an equal per capita allocation for quite some time. In fact, for PSE specifically, it has been an equal per capita allocation since 1977, I believe. That allocation has been the same.
Then in 1999, the equal per capita allocation was also determined to be the right one for social assistance and social services, and again with early childhood development. We have had an equal per capita entitlement for a long time.
Senator Rompkey: Did you say since 1977?
Mr. Vermaeten: Since 1977, it has been an equal per capita allocation for PSE.
Senator Moore: Based on a per cent of the population?
Mr. Vermaeten: That is right.
Senator Moore: Under that deal, if we were still there, we would be getting $24 million instead of $6.5 million.
Mr. Vermaeten: I am referring to the allocation. Whether you believe there is fiscal balance or not is another issue. In terms of the equal per capita entitlements, we have been there for a long time, particular with respect to PSE — on the social services side, since 1999. It is believed that is the fairest way to allocate support to Canadians; there is no reputable study that shows there is a better way to allocate, certainly not one to which provinces could agree.
Senator Moore: There must be a demonstrated need that Alberta needs $344 million this year for its CST and we need $6.5 million. Have we got a gusher coming that I do not know about? How do you justify that?
The whole idea of Confederation and federalism is sharing — having an equal opportunity for services, a minimum standard of services across the country. How does that happen with these numbers with respect to post-secondary education in my province?
Mr. Vermaeten: As I said earlier, there are a couple of things. First, there was a strengthening of the equalization program. As a result, based on the O'Brien recommendations, we moved to an equal per capita cash allocation for the CST and CHT.
Second, it is true that Alberta would have received an additional amount, but this was only to bring them up to the same level as Nova Scotia. Beyond that, all provinces are benefiting from a long-term 3 per cent escalator that will provide additional funds, the same per capita amounts to all provinces.
The Chairman: Has there been some analysis on that 3 per cent escalator to determine whether it is sufficient to keep up with inflation and other costs?
Mr. Vermaeten: The amounts roughly reflect population and inflation increases. Usually, we consider inflation to be around 2 per cent and population to be around 1 per cent; so 3 per cent will ensure that the entitlements keep up with those variables.
The Chairman: The Canada Health Transfer was 6.5 per cent, is that right?
Mr. Vermaeten: At the time of the agreement on the health transfer, there were numerous studies and cost pressures, looking historically at how fast health costs have been increased. It was believed, in conjunction with the provinces, that 6 per cent would be sufficient to reflect increases in costs over time.
Senator Murray: Did you look at the spending increases of the provinces in post-secondary education when you decided on a 3 per cent escalator, starting a couple of years from now? The provinces have been spending more. The costs, certainly in post-secondary education, have been more than 3 per cent per year, as you know. There is very serious doubt that the 3 per cent will be adequate, especially since they have been playing catch-up since 1985.
Mr. Vermaeten: It is a general purpose transfer that increases by 3 per cent, both for PSE and for the social side. On top of that, there is additional funding with respect to research, et cetera; and provinces are free to allocate that in the way they want.
Certainly, there are cost pressures on PSE. One could also argue there has been, over time, reduced pressure on the social services side as our unemployment rate hits a historic low.
Senator Murray: This committee is drafting a very helpful report for you people on that very subject. I hope you will take a good look at it.
The Chairman: We had hoped to deal with that report in this committee, but we have run out of time, colleagues. I will suggest that the committee deal with that this afternoon after Premier Rodney MacDonald. If everyone is in agreement, we have a half hour at 3:30 p.m. to deal with vertical fiscal balance. This could be helpful for our witnesses here today to know what this committee has been thinking on that particular subject.
I would like to thank our witnesses from the Department of Finance. You will let the minister know we may well be taking him up on his offer to return. Also, you have given an undertaking to produce certain documents. The quicker you produce those documents, the faster we can be in our deliberations on this bill. Thank you.
The committee adjourned.