Proceedings of the Standing Senate Committee on
National Finance
Issue 18 - Evidence - Evening meeting of June 19, 2007
OTTAWA, Tuesday, June 19, 2007
The Standing Senate Committee on National Finance, met this day at 6:23 p.m. to examine Bill C-52, 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.
[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 are examining Bill C-52, an act to implement certain provisions of the budget tabled in Parliament on March 19, 2007.
This evening, it is my pleasure to welcome the Honourable John C. Crosbie, consultant and counsel to the law firm of Cox & Palmer. Accompanying Mr. Crosbie is Roland Martin, Chairman of Martillac Limited.
Mr. Crosbie was appointed an Officer of the Order of Canada in 1998. Formally a minister of various portfolios in the Government of Newfoundland and Labrador, from 1966 to 1976; and in the Government of Canada, as Minister of Finance from 1979 and 1980 and then from 1984 to 1993, including Minister of Justice and Attorney General of Canada, from September 1984 to June 1986; Minister of Transport, Minister of International Trade; Minister of Fisheries and Oceans; and Minister responsible for ACOA.
Mr. Martin is an experienced executive in both the private and government sectors. These experiences include being president and CEO of a number of organizations, including a Toronto Stock Exchange listed company and Deputy Minister of Finance for the Province of Newfoundland and Labrador. He has taught finance, investment and business policy at a Canadian university; he has also been a stockbroker and written on public policy issues. For over 20 years, he was a director of the fourth largest electrical utility in Canada.
Gentlemen, we are honoured that you are able to be here to help us with Bill C-52. I look forward to your comments and then we will go into a question and answer period.
Hon. John C. Crosbie, P.C., Q.C., Partner, Cox & Palmer, as an individual: Thank you very much, Mr. Chairman. I might say in starting that when Mr. Chrétien was still Prime Minister, he visited us in St. John's. He received an honorary degree from Memorial University of which I am chancellor. While he was there, I pointed out to him that the only Senate I had ever been appointed to was the Senate of Memorial and that he could remedy that whenever he wished. However, he did not take the hint. The only way I will get to the Senate at my age is by appearing before you. In any event, no one need worry because I am now past the age when I could go to the Senate. It is a pleasure to appear before you, because my experience is that Senate committees are very knowledgeable. I am not trying to butter you up; there is a great deal of experience gathered here. That is why we are eager to appear before you.
Mr. Martin and I have had considerable experience with reference to these accords. There is very little accord about the accords. We are not representing anyone here today. We are not representing the Government of Newfoundland and Labrador or of Nova Scotia. We are coming here to speak for ourselves as interested citizens who have some experience in these matters. In former years, we were involved in negotiations that took place in 1985 and 1986 and since then with respect to the accords with both the Government of Nova Scotia and the Government of Newfoundland and Labrador unofficially. Today, we are speaking for ourselves because we are concerned about these particular issues.
We are particularly interested in the provisions of the budget as it affects the whole business of the accord entered into in 2005 by the Government of Canada and the Government of Newfoundland and Labrador and the Government of Nova Scotia.
I want to make my position clear: I am firmly of the belief, as are a great many other people, that those accords have been breached by the present legislation before you. Provincial and federal governments entered into these accords and they state that they are not to be amended without the consent of both parties. Before you are major amendments to the accord, which have not been approved by either the Province of Newfoundland and Labrador or the Province of Nova Scotia.
There is no doubt that the intention and the whole main purpose of the accord of 2005 was to ensure that Newfoundland and Nova Scotia became the primary beneficiaries of revenues from their offshore resources. That was the major purpose of those accords and of their predecessors.
There were other objectives and purposes which the Government of Canada achieved, for example, the Government of Canada was interested in settling disputes on the offshore because of the security of supply. Most of the purposes expressed in the accords with respect to the federal government have been carried out, but it is not the same with respect to the some of the provisions for the purposes of the accord as they relate to the two provinces.
As we point out in this memo, what we complain about in this budget is that it violates the 2005 agreement on offshore revenues that was signed and approved in legislation by the Government of Canada.
The federal Department of Finance's website describes the 2005 agreement. When you read it, you will see it supports what is said in our brief. That website says:
On February 14, 2005, the arrangement was reached that built on the 1986 accord and, for a time-limited period, provides 100 per cent protection from equalization reductions resulting from the inclusion of offshore resource revenues in the equalization program. This was in recognition of the unique economic and fiscal challenges facing the province.
On this website, the Government of Canada is admitting that this is the case. It points out that offset payments under both the 1985 and the 1986 accords and the arrangement of 2005 are separate from the equalization program.
It is very discouraging that the disputes about the accord are mixed up with equalization. The subject that you are considering and that is of controversy at moment is the accords. Equalization is incidental to the accords. All this complicated debate goes on about equalization, which I am sure the federal government feels confuses Canadians sufficiently so they do not consider the real issue. The real issue is that a bilateral agreement entered into by two provinces with the Government of Canada has been breached by the Government of Canada contrary to its terms.
Insofar as equalization is concerned, as I point out in passing, Newfoundland and Labrador are likely to no longer qualify for equalization within the next two or three years. We are not trying to have our cake and eat it too. We know the effect that the equalization program is supposed to have, and when we have the same per capita income as the average Canadian province, then we expect that we will no longer be eligible for equalization. There is no dispute about that, but we have not quite reached that point. We are not trying to somehow get equalization and have the benefits of the accord as well. The Globe and Mail mistakenly described it as having our cake and eating it too. The Globe and Mail is a wonderful newspaper, but it does make mistakes, as we notice from time to time.
Despite the signed agreement and the legislation since, and even despite how the federal Department of Finance itself describes it, the bill that is before you unilaterally changes the arrangement and dictates a different fiscal arrangement for Nova Scotia and Newfoundland and Labrador. They say that we were given a choice, but as you know, the two provinces were not given any real choice because once the choice is made, it is to be permanent. Nova Scotia secured a one-year delay on it, as has Newfoundland. There should be no choice. The Government of Canada should honour its agreement in its entirety, to the letter, spirit and intent of these bilateral economic development agreements. This is what they are. They are time-limited, and once either province ceases to be eligible for equalization, it no longer qualifies for the unique economic and fiscal offset payments. We accept that and so does the province. When we are on the same basis as far as our fiscal capacity is concerned with the average across Canada, why would we object to the cessation of equalization? We know that is the whole purpose of the arrangement.
The bill before you changes negatively the fiscal consequences that were in the 2005 agreement. The 2005 agreement was necessary because the 1985 and 1986 agreements did not result in Nova Scotia and Newfoundland being the primary beneficiaries of revenues from their offshore oil and gas resources. Rather, at one point in the case of Newfoundland, 12 per cent of revenues were going to Newfoundland from the offshore as a result of the clawbacks, et cetera, while the Government of Canada, through its taxes, and other provinces between them, were getting about 88 per cent of the revenues from the offshore. It was not working. It did not achieve its objectives.
Negotiations took place from 1985 to 1986 and onwards, principally during the period that Mr. Martin was Minister of Finance, and no change was achieved until 2005. This has been going on for a long time. When you look at the history of the thing, you find out this was first discussed under Mr. Trudeau, who went to the Supreme Court of Canada, which found that the offshore resources were owned by the Government of Canada. The Government of Canada then made proposals to the provinces as to how this could be handled in the form of joint management and fiscal arrangements. These matters have been under discussion and consideration for a very long time, and there have been various suggestions about what the benefits should be for the provinces. I do not have the time to go into them now, but some of them are more resounding than saying we should be the principal beneficiaries, that we should get the giant's share, and various descriptions of what the provinces should get.
There will be significant negative fiscal consequences if Bill C-52 passes as it is now couched. The facts are that the government has changed two signed agreements without any discussion with the other partners. The bill is not introducing a new principle-based equalization formula; it is changing the equalization formula in a way that violates the accord that was signed in 2005.
Section 2 of the February 14, 2005 accord states:
. . . the Government of Canada intends to provide additional offset payments to the province in respect of offshore-related Equalization reductions, effectively allowing it to retain the benefits of 100 per cent of its offshore resource revenues.
In other words, there were to be no clawbacks or caps. However, as you know, in this arrangement there are caps and there will be clawbacks.
Both provinces honoured the principles of the 2005 arrangement. They took the upfront payments and paid down their debt — $830 million in Nova Scotia, $2 billion in Newfoundland and Labrador. They did the proper thing and what they were required to do; they reduced their high debt burden. However, experts now say there is a real risk that some of those upfront payments could be clawed back under the 2007 Budget that is now before you. This is less of a danger for Newfoundland than it is for Nova Scotia because Newfoundland gets greater revenue from the offshore oil resource it has than does Nova Scotia.
The core public policy expressed in the accords in 1985 and 1986 was the right for the two provinces to be the principal beneficiaries of the petroleum resources in their offshore areas. Clause 60 of the Atlantic accord states:
Except by mutual consent, neither government will introduce amendments to the legislation or regulations implementing the accord.
There is a clear violation of this right before you for consideration.
In our opinion, the Government of Canada could still fully honour the 2005 agreements if they made one simple amendment, which is on page 4 of our document.
The fiscal capacity cap in the new equalization formula would continue to apply to all natural resource revenues, except those offshore revenues as defined in the 2005 agreements and any related offset payments, for the life of those agreements.
If the government would agree to that simple amendment, the problem would be solved and they would no longer be violating the two accords entered into with these two provinces. The benefits are shown in the next paragraph, which I will not repeat.
It would also restore trust and credibility in existing and future bilateral federal-provincial agreements and help Canadians to believe that when the Government of Canada gives its word, it will stick to it with no false choices and no tricky interpretations of signed bilateral agreements. For the government to claim that there were no changes to the accord of 2005 is not only disingenuous but also dishonest. Of course there were. The whole intent of those two agreements was violated. It is in the interests of trust and credibility that this change should be made.
The effect of our amendment would be quite a bit like the effect of the amendment that the Premier MacDonald suggested to you today.
I am a Conservative, but I am not supporting the Conservative government in the action they have taken in connection with the 2005 agreement. I am hoping that it is not too late for them to make changes to their legislation. I intend to continue supporting the Conservative Party, despite the fact that it has disappointed me with respect to this matter, because there are many other reasons why I do not wish to support an alternative party. I am a believer that the Canadian political system almost became dysfunctional because one party — and we know which one it was — was so strong for such a long period of time. For other reasons, not germane to this debate, I intend to continue to support the Conservative government that is in office today. However, I will not pretend that this accord is not violated when it is clearly violated. I will not accept any codswallop that says that it has not been changed. We are not that stupid, the public is that not stupid, the senators are certainly not that stupid — well, maybe there is the odd stupid senator.
Senator Angus: I am stupid to walk into that trap.
Mr. Crosbie: It is a blow to my ideals to realize that could be true, but there you are. I better finish my remarks because I do not want to be too long.
That is why I am before you. My party has brought this in and I am appealing to the Prime Minister and to his government to make this change. It will not cost the people of Canada any huge sums of money. We will not have our cake and eat it, too. We have not had the frigging cake yet. Let us have the cake first. That is all we want. We want the cake and the cake is being removed from us. We are told that we are guilty of having the cake and wanting to have equalization, too. Look, our equalization has already gone down the last few years from $1.2 billion to $477 million. That is just over the last few years. We cannot complain about that because revenues of the Newfoundland government have increased tremendously because of the offshore. I will not deplore the fact that our equalization has gone down. I am delighted to see it going down because it means that we are becoming more independent and that the money we have is not being transferred to us but it is our own money. It is worth a lot more than getting transfers from the Canadian government.
So, gentlemen, I hope that you will see some way to pass the amendment we are suggesting and that the government cooperates with you on it. I am still hoping that the government may change its mind in this area. Thank you for the chance to appear before you.
The Chairman: Thank you very much, Mr. Crosbie. Mr. Martin, do you have words or will you just answer the questions?
Roland Martin, Chairman, Martillac Limited: Trying to follow John Crosbie would be quite a task. I agree with Mr. Crosbie. We worked with Dr. Hamm, Premier Grimes and Premier Williams to rectify the lack of success on the fiscal side of the 1985 and 1986 accords. As a result, I think Canada was better for it when we had the 2005 agreements.
It is quite interesting to take a quick look back, to the address by the Minister of Finance for Canada, on the day before they signed the agreement, February 13, 2005. The letter is to Loyola Sullivan, who had raised a concern about maybe the interpretation of this agreement. Here is what Mr. Goodale said — and I will extract just two pieces from this letter; you are welcome to it. He said:
. . . you have indicated concern that the legislation regarding the calculation may turn out to be ambiguous or be open to unforeseen interpretations should the equalization program be significantly altered in the future . . .
. . . I am also making, on behalf of the Government of Canada, by way of this letter, the following commitment to your government: to seek and consider the opinion of a recognized independent expert should, over the life of our agreement, a disagreement arise regarding the calculation under clause 4 . . . .
Clause 4 is so simple, but this is all about clause 4. Clause 4 has been aborted at this point and we now have a complicated piece of legislation that I would challenge almost anyone to try to figure out. That piece of legislation goes a step further. Not only does it violate the 2005 agreement, but also it goes right back to the 1985 Atlantic accord and its implementation act and it unilaterally proposes to change it. If anyone wants to talk about legalities, that is a legal issue; there is legislation on that.
There is a very significant precedent for federal transfers, which has not really been picked up on. This is an aside, but it is one of these things that have come out of this unfortunate event. The inclusion of the offset payment in the calculation of the fiscal capacity cap in the new equalization formula for Newfoundland and Labrador sets a precedent. They are taking an offset payment, which is a federal transfer payment, and then when they do step four they actually include it in calculating the fiscal capacity of a province. We have never, in my knowledge, ever had a federal transfer payment like an aerospace grant, an auto grant, a gateway grant, or a wheat grant. We have so many things that are great about Canada and how we work with each other, but imagine if Mr. McGuinty or anyone else had to sit here and say, "We cannot have all those transfer payments put into our fiscal capacity.'' That is what has been done to Newfoundland and Labrador and to Nova Scotia. That is an incredibly significant breach of protocol in federal-provincial fiscal relations.
We are obviously passionate about this as citizens. We are really disappointed that the Government of Canada has not seen fit to make changes, but we are still living in hope that they will see the light.
The Chairman: Thank you very much, Mr. Martin. That is a good point that you raised.
I have now the names of 10 senators who are interested in posing questions. I will start with the sponsor of the bill on behalf of the government in the Senate, Senator Angus from Montreal, Quebec.
Senator Angus: Mr. Crosbie, as you know, I have known you as a Liberal, a Conservative, a colleague at the bar and a friend. It is great to see you here. You are in cracking good form.
The two of you make a formidable team. I am just curious at the outset about how the two of you came together to team up.
Mr. Crosbie: Years ago, when I was Minister of Finance in Newfoundland, I invited Mr. Martin, who was teaching at Memorial University, to do some work for us in the department. He then went on to do a study of our liquor system. We had always been interested in liquor. I had very deplorable setup with respect to liquor control and Mr. Martin did a report on that. He was in the Department of Finance and did so well there that later, after I left, he was chosen to be Deputy Minister of Finance for the province for a few years. He is an unusual type because he did not dig his way into the bureaucracy and stay there. He left the bureaucracy on his own hook and went off into the private sector and has done well there. We have worked together on these things, as I mentioned, for a number of years now, unofficially really, trying to help the Newfoundland premiers involved and the premiers of Nova Scotia in this area. He does not like to be called an expert, but I consider him to be very experienced and knowledgeable on public finance and, in particular, federal-provincial financial relations.
That is our relationship. I have not made a dollar off him yet and he has not made a dollar off me, but we have enjoyed it all. That is why we are here, because we believe that Newfoundland and Nova Scotia have a just cause. We are not just ciphers or leaches trying to get our teeth into the Canadian taxpayer. No, we do not mind getting our teeth into the Canadian taxpayer, but we do not mind relaxing our teeth occasionally.
In other words, we do not want to suck all the blood out of the Canadian carcass; we want it to continue supplying blood. That is what we hope we will do.
Senator Angus: Mr. Crosbie has said, Mr. Martin, that he is here as a public citizen, on a pro bono basis. I assume the same applies to you.
Mr. Martin: Absolutely.
Senator Angus: I was rather disappointed to hear that. You told me earlier you are still practising law and I was hoping you were making a buck or two here.
Mr. Crosbie: They do not check my billable hours; I can relax.
Senator Angus: You have missed an opportunity perhaps but you are here, which I think is a great thing. You talk about the codswallop and many things I do not know in Quebec French, but you attacked The Globe and Mail, which I thought was rather charming. Yet you and Mr. Martin wrote up a big piece in The Globe and Mail this morning; is that a way to set them straight?
Mr. Crosbie: It is pretty difficult to set The Globe and Mail straight, but the effort must be made.
Senator Angus: In the other paper that you must read quite often if you are still a Conservative, the National Post, this morning had a headline that said, "Greed knows no bounds in Atlantic Canada.'' The story was by Lorne Gunter of Edmonton and he was talking about this issue, which we are all interested in and trying to understand — and you have helped us a lot.
Mr. Gunter wrote:
According to Halifax's Atlantic Institute for Market Studies, Ontario is third in fiscal capacity, behind Alberta and B.C., before equalization, but dead last after. As a result, as my colleague Andre Coyne pointed out last week, `for 2007-08, Newfoundland's per capita revenues, equalization included, total $7,094 to Ontario's $6,631.'
The article goes on to say:
Ontario has 2.7 hospital beds per thousand population while P.E.I. has 3.4, Nova Scotia 4.0 and New Brunswick has 5.3. It has 30 per cent fewer nurses per capita than the Atlantic-province average and significantly fewer doctors too.
Remember all this when Newfoundland Premier Danny Williams and Nova Scotia Premier Rodney MacDonald clamour about Prime Minister Stephen Harper breaking the Atlantic accord.
It goes on to say, "Harper did no such thing.''
Gentlemen, your main thesis is that there was a breach of the agreement. I am not sure if you mean all three or the 2005 one or all of the above, but you will get to that. The National Post article says that Prime Minister Harper:
. . . told the Atlantic provinces they could keep the Atlantic accord, which shielded their new resource wealth from equalization calculations, or they could go with the new higher equalization in this spring's budget, but they would have to count 50 per cent of their resource revenues. They could choose whatever was better for them, and they could even switch back and forth between the two formulae each year to maximize their equalization.
It concluded, "To call that a broken promise is to take demagoguery to new heights.''
I am sure you will have an interesting rejoinder to that, but as I said in the Senate the other day, I know Danny Williams personally and Mr. MacDonald and yourself, and also Mr. Flaherty and Mr. Harper. You are all very intelligent, coherent, bright individuals who are acting in good faith, I think.
How can you have such diverse interpretations of the same material, unless maybe someone is not acting in good faith? That is where I have a dilemma and maybe you can help me on that point.
Mr. Martin: I do not know Mr. Gunther, but he is not correct. First, there is not a choice to go back and forth, so the last part of his statement is incorrect. To only use fiscal capacity to judge an economy of 50 years is rather short- sighted on the part of whomever, including AIMS, who might go down that road — and Mr. Crosbie is a vice chairman of AIMS, so we will excuse him for that lapse.
Nova Scotia and Newfoundland have the highest per capita debt in the country. We have low per capita income and our unemployment rates are still far above anywhere else in the country with Newfoundland at 14.8 per cent; Canada's average is 6.3 per cent. Nova Scotia's unemployment rate is 7.9 per cent and Halifax is booming, so if you went out to some of the other areas, it would be different.
When you look at other indicators, you see that we have been improving slowly, whether it is our percentage of corporate tax compared to the average in Canada or personal income tax compared to the average. Newfoundland, when you take GDP, is like Ireland; everybody runs around saying look at the GDP. However, the GDP is a measurement of economic activity, meaning goods and services; it does not mean it lands. When you think of all that oil at US $68 a barrel that comes up and comes over to St. John or goes down to the States, that gets included in GDP. While it has a positive economic impact, it distorts tremendously all the GDP figures. It is just like looking at Ireland; you will have the same conclusion, if you do any work there.
It is not a matter of interpretation. This is an agreement. When Mr. Harper set the policy, which was an equalization policy, he actually quoted me in his first press release as to why he thought non-renewable resources should come out of equalization. He was then the single biggest champion against Mr. Martin — no relation and when Mr. Paul Martin finally saw the light about the fact that Newfoundland and Nova Scotia were not principal beneficiaries, he totally supported it and totally supported the agreement. So, how did we get to this impasse?
We got here because the O'Brien commission, appointed by Mr. Martin to review equalization, after Mr. Martin himself for the first time actually made such a mess of equalization by making it a fixed amount escalating at 3.5 per cent a year, he destroyed all the principles of it. However, give him full credit; he then said he would appoint a commission that would tell us what to do. Of course, he left and in comes Mr. Harper gets a report and in that report, we go right back to full circle on one key point. I do not think anyone would argue that this is a good equalization formula. It gets rid of so much complexity and unfairness of 33 tax bases; it is predictable — all these are good things. The provinces are all in there; the revenues are actual revenues for most cases, with two major exceptions — hydro electricity in Quebec and hydro electricity in Manitoba. There are a number of these issues that are not in there but, quite honestly, it is a good program until, for some reason, O'Brien's panel killed one of the key principles of equalization.
For equalization, a key principle is no caps. There should not be caps because the whole purpose is we might have a downturn in the auto industry and if we had a downturn and the pool got smaller because Ontario's economy went down, then the pool goes down; likewise, it goes up, so there should not be any caps and there should not be any floors. We now have a cap that only applies to three provinces, and it only applies significantly right now to two bilateral agreements.
It is not about interpretation; it is about an agreement that no longer is the agreement the two parties signed.
Senator Angus: In terms of interpretation, what I have been hearing is the Minister of Finance saying that the agreements have not been breached and that there is a choice. You just said there was no choice and that you cannot go back and forth.
The minister sat in that chair this morning and said you can go back and forth, so I am trying to understand what the deal is. Then he says they are negotiating on the rest and discussing it.
The Chairman: We heard evidence that there is no opportunity to go back and forth yet; it is just a matter of negotiation.
Mr. Martin: There is only one time and that time has been elected so far. Not to disagree with you senator, but I think why we say there is no choice is that if you put yourself back 26 months ago when you had these negotiations with the Prime Minister and two premiers and all their advisers — most of whom are quite knowledgeable — they reached an agreement. With this mess on their hands with the Paul Martin equalization formula, everyone knew that mess would be fixed. When it got fixed, it would be different than it was on February 14. Could you imagine yourself sitting at that table saying, "I do not think I will look for the one coming down the road''?
When you are given a choice of something that is fixed, which is what we have been given, we have not been given the choice that we signed, which was an agreement with whatever equalization formula was in place, with no cap. The way we get that is through the offset payments so that we get 100 per cent. We no longer get 100 per cent, and if you do not get 100 per cent, something has been broken.
Senator Angus: Under the old formula, you would still get 100 per cent.
Senator Rompkey: I want to welcome both of our witnesses. I was not going to bring up Stephen Harper because the poor man has been pilloried enough today as it is, but because Senator Angus raised it, I think I have to deal with it. I assure him that there is no difference between what Stephen Harper thought and what has just been enunciated by our two guests.
I introduce as Exhibit A — and lawyers will appreciate that courtroom gesture — the brochure that we saw earlier today that the Conservative Party issued before the last election. The brochure states:
There is no greater fraud than a promise not kept. The Conservative Party of Canada believes that offshore oil and gas revenues are the key to real economic growth in Atlantic Canada. That is why we would leave you with 100 per cent of your oil and gas revenues, no small print, no excuses, no caps.
I wanted to read from those remarks because Mr. Harper amplified them. When Mr. Harper was Leader of the Opposition on November 4, 2004, he stood in the other place and referred to a commitment to 100 per cent of renewable resource royalties. He said:
This is a commitment that was made by me in my capacity as leader of the Canadian Alliance when I first arrived here —
Mr. Crosby, you will recognize that part, even though you are a Conservative. There used to be a party called the Canadian Alliance at one time in this country.
— and has its origins in the intentions of the Atlantic accord signed by former Prime Minister Mulroney in the mid-1980s.
He then talks about the Liberal position. He is attacking the Liberal position and quotes from a letter to Premier Williams from the then Liberal government. He said that finally, on October 24, two days before the first ministers' conference, the Minister of Finance finally replied offering additional annual payments that will ensure the province effectively retains 100 per cent of its offshore revenues. Then the minister added two big exceptions limiting the offer
. . . for an eight-year period covering 2004-05 through to 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.
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 in particular that these are in any case non-renewable resources that will run out. Why is the government so eager to ensure that Newfoundland and Labrador always remain below the economic level of Ontario?
Mr. Harper went on to say:
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 agreed to remain have not provinces forever.
Mr. Harper says, that is unacceptable, which is exactly what Mr. Crosbie has said. There is no difference between what Mr. Harper thought and what Mr. Crosbie thinks now. The only difference is Mr. Harper changed his tune, and he put in the budget the wherewithal to change those budgets. That is the history and that is the case.
I wanted to raise a couple of other issues. I quote from the article in The Globe and Mail this morning from Mr. Crosbie and Mr. Martin. I think this is an important point for us. We went through this earlier today, but we have to go through it again because it is not understood. A paragraph in this letter says:
That is because these two bilateral agreements are economic development arrangements, no difference 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.
I asked the Minister of Finance this morning — Senator Murray has pointed this out time and time again to us — that these accords were negotiated under subsection 36(1) of the Constitution. They are economic development in nature. I asked the minister if he accepted that and he said he did not. We are on shaky ground because we failed to agree.
Is it your position that these are economic development accords, separate from equalization? Obviously, equalization impacts them, but they are essentially economic development accords like many others across Canada.
Mr. Martin: I will let Mr. Crosbie speak to this also.
We quoted the minister's own website today. You log on and it answers part of that question, Senator Rompkey. These arrangements are separate from the equalization program. Those are the words of his department, and we brought that to his attention. As you know from previous leaked documents, Mr. Crosbie and I tried to bring some of this information to other discussions over the last couple of months, and we pointed this out. It is not a surprise that he actually knows it is there.
Are they economic development agreements? You have to go back a long way, but if you go back to Mr. Trudeau, he proposed, despite not owning the resource once we did the accords, that we could have the revenues and only start sharing them when we reached 130 per cent or 140 per cent of the national average. There has always been an economic development side to the accords.
To make sure no one misunderstood that, the 2005 agreement actually says that this is to address unique economic and fiscal challenges. To take it further in the private correspondence, one of which I read, Mr. Martin's government was so concerned that this would be looked upon as giving away the money that they sought in negotiations and received in negotiations assurances that a large amount of this money would go to pay down the debt. Dr. Hamm took the cheque, put 100 per cent down, and the only reason Mr. Williams did not do it the same day is Newfoundland and Labrador had a more complex and far worse financial position. They had to negotiate pension issues, and he took all $2 billion and paid down the debt. It has been an economic development agreement.
Senator Rompkey: I wanted to ask some followup questions to Senator Di Nino's questions this afternoon because we were focusing on equalization. The problem people have understanding is why we keep receiving these after we reach a certain level.
The fact is there is such a thing called the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act, and I want you to talk about it. The money under these accords came from offsets. The offsets were there because if you made a dollar on oil and you lost a dollar on equalization, you were no further ahead and would never get anywhere. The offsets were put in place to remedy that situation. The offsets make up for the clawback and are under a separate act. In fact, the funds come from the Natural Resources Canada, not from the Department of Finance Canada and are not under equalization at all. Is that not correct?
Mr. Martin: The offsets come from NRCan. That was a mechanism because of the way the boards were set up. The revenues flow in and come to NRCan. They had equalization offset periods under the two original accords, 1985 and 1986. In the case of Nova Scotia, it was for 10 years and in the case of Newfoundland, it was for 12 years. Unfortunately, Nova Scotia had something called COPAN, Cohasset-Panuke, which was a small oil field. I say "unfortunate'' because between the time they started negotiating the accords and when we got through it, the old national energy policy went out the window with all of its taxation systems. When we ended up getting the accord, we got triggered on production and not revenues. Some things happened because of that. All the revenues go to NRCan and in both of those accords the money comes back to the provinces. In the case of the 2005 agreement, it is my understanding that the offsets also come from NRCan.
Senator Rompkey: It is important to have that on the record. The impression is that all of this happens through equalization, which is not the case at all. The offsets act was put in place to remedy that situation; that is, the clawback from equalization in order to honour legitimate economic development agreements.
The last point I want to make is important to underline, too. Again, people focus on the fiscal capacity of Newfoundland compared to the fiscal capacity of Ontario. We will not talk about the letter that Senator Baker raised this morning, but the economic development accords are really to help us get on our own two feet and to become contributing provinces in Canada. You have alluded to this already, and I want you to underline it — we have the highest debt in the country. It is like a mortgage; if you cannot pay down your mortgage, you have no disposable income to improve your lifestyle and you never get anywhere unless you pay down your debts. That is the purpose of the accord: To get us in a position to be economically self-sufficient. We heard from Premier MacDonald that the first cheque went to pay down the debt and how much that was. The same is true of Newfoundland.
I want you to comment on that. It is important for people to understand that this is an opportunity for us to become self-sufficient, become contributors, and pay into the pot that distributes equalization in Canada.
Mr. Crosbie: I would agree with you that this is what this is. The two provincial governments did the right thing by not going on a spending spree; instead, the provinces payed down their debt, which was the sensible thing to do. As you know, however, they are still deeply in debt on a per capita basis. They are not home free yet, which is also one reason why I think that the government should make the amendment we are suggesting. These two provinces are not riding off with their sidesaddles full of money. They are not on easy street. As you know, being from Newfoundland we have lost a huge number of people and it is still a major problem. We are not on the pig's back yet, economically. We will be doing better but the present situation is this: As the provincial government's budget showed this year, they had a positive budget but the revenues will go up and in the next couple of years, they will go down again. There is no agreement on the next field yet, so we will have a sudden increase in revenues in the next couple of years and then a sudden decrease in revenues. Even if things go better than we expect and we no longer receive equalization, it is also obvious that we may be back on equalization a few years after that, unless this revenue continues longer than we see it continuing now. We are still in a perilous situation. There must be billions spent out there in exploration yet to discover other fields. The standoff now on Hebron means that Newfoundland itself will have a more difficult time economically in the next couple of years . We are not home free by any means. That must be remembered as well, when you are considering what the government has done.
You mentioned promises. As you know Senator Rompkey, every national party has made promises that they cannot keep. They make promises when they are out of power and when they are in power they discover that they made a mistake and that it would ruin the country if they were to carry them out. We all remember the little anomalies. These are political promises. Sometimes political parties find it is more dangerous for the country to carry them out so they have to suffer the ridicule and criticism they get for not carrying them out. Thank God, in a lot of cases, they do not carry them out. Some promises are in that category.
I look at it differently. The accord is an agreement between two governments, approved in legislation by the Government of Canada. That, to my mind, is something far more sacred that should be carried out than a mere promise. We all make promises sometimes. I have even done it myself occasionally. I could not carry it out so the best thing to do was to try to get everyone to forget. But there is always someone in the opposite party who will not let you forget. The accords are more serious. That is a contract that was entered into. I do not think the government should be allowed to get away with not carrying out their duty, especially when they have agreed that they will not change it without the other party's consent. We are prepared to be more merciful — I do not want to attack the offending party who made a stupid promise such as, for example, they will eliminate the GST. I have forgotten what party that is, but you may remember what it was. That was an impractical promise. How could the country survive without the revenues coming in from the GST?
I do not want to engage in partisanship here because I know that you are beyond it in the Senate.
Senator Cowan: Welcome Mr. Crosbie and Mr. Martin.
My friend Senator Angus suggested that this was a difference of interpretation and that was the basis of it. I want to go back to clause 4. I only have the offshore accord with Nova Scotia, but I believe the accord for Newfoundland is in essentially the same terms. I am quoting from clause 4 of the February 14, 2005 agreement and then from clause 8 of the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act. Clause 4 states, ". . . the offset payment would be calculated as the difference between the equalization payments that would be received by the province under the equalization formula, as it exists at the time . . .''
Section 8 of the implementation act states that in any year when you are calculating what that offset payment would be you are doing it for the fiscal year under the equalization formula in effect at that time.
When I read that, the plain meaning of that is that it is whatever equalization formula happens to be in effect in the year in which you are doing the calculation. It is not fixed to the equalization formula as it existed at the date of the signing of accord in February of 2005 or at the end of the previous fiscal year. The minister recognized that this morning, and in your testimony, you as well have discussed the equalization formula changes from time to time.
I invite your comment on Senator Angus's suggestion that there could be a legitimate difference of opinion in the meaning of those phrases in the accord and in the implementation of legislation.
Mr. Martin: As we pointed out in The Globe and Mail, who also took that line, when they called us mice looking and wanting to gobble cheese —
Senator Angus: And not good cheese.
Mr. Martin: Yes, that would have been better.
We pointed out to them that those words are there, but the overriding words in clause 4 are, ". . . the annual offset payments shall be equal to 100 per cent of any reductions in equalization payments resulting from offshore resource revenues.''
The words "as it exists'' are meant to clarify, Senator Cowan, not the Paul Martin 3.5 per cent, not the one the next year, but whatever it is, it is as long as you get 100 per cent and therefore no reductions from equalization. It makes sense because it all came down to the fact we were getting full offsets. Now, you take the new equalization formula and that mysterious cap reappears and you go through the calculations, the last step takes away the offset. Particularly it takes it away if you bumped up against the Ontario cap. It is really the cap that has caused the dysfunctional nature of the 2005 agreement. It is not the words "as it exists'' because "100 per cent'' should have taken care of that.
Senator Moore: Thank you Mr. Crosbie and Mr. Martin for being here today.
I am interested in the post-secondary education and the impact of this budget when it changes the formula for distribution to a per capita basis. Under the budget for this fiscal year, Newfoundland will get almost $3.6 million and Alberta will get $344 million. Over 10 years you are going to get 35 million and they will get $3.44 billion.
Have you looked at that or considered that when you studied this legislation and its impact in terms of the services that we will have to offer to our people, the educational opportunities we will have to offer and the huge widening of the gap occurring across the land?
Mr. Martin: Not directly, Senator Moore, in terms of the 2005 agreement, but I understand the point you are making. This is something that has not received much attention. There has been a significant shift in health and social spending, the two programs, and particularly health, because it is on a 10-year plan that will finally click in to per capita, but you are right, these numbers are significant.
If you go to principle-based equalization and get rid of the so-called second layer of equalization that we have had for a long time, it is a good move from the point of view of equalization. Then we have to address if we have the right transfer programs for secondary education or health or other things.
The biggest concern that Mr. Crosbie and I would have is that, particularly for Nova Scotia, as he said, if Nova Scotia gets clawed back $400 million to $600 million, they will have to borrow money for existing secondary education and existing health and will go down in cash because of the way they have accounted for it. They have accounted for it in a sensible way by paying down the debt. Now they do not have the cash, but they will have to repay some of it. Not directly, but yes, we are familiar with your point.
Senator Moore: This new way of transferring funds will apply to the Canada Health Transfer, starting April 1, 2014. I have to look at the situation and wonder, how are will maintain a fair level of service to our people, whether it is health, education, or social and community programs. You did not look at that when you were considering the impact of this legislation.
Mr. Martin: Not specifically.
[Translation]
Senator Biron: I can assure you that the Right Honourable Jean Chrétien has a great deal of respect for you.
[English]
I understand your position and if the Senate amends Bill C-52, as you suggest, the government could accept the amendment, reject it, or call an election. Knowing your great political experience, may I ask your opinion on which option the government will exercise if we make your amendment, or would you prefer Senator Angus's answer and speculate what the government will do?
Mr. Crosbie: I will not speculate what the government will do because I am not a confidant of the Prime Minister. I do not think he will call an election and I would be surprised if he did so; I would not advise it if I he asked my opinion.
Let us suppose that the Senate and House of Commons passed the amendment despite the objections of the government. I cannot see the government taking any action. What would be the harm in it? Why would they get all fussed up and call an election because this has happened?
I do not think that the Senate should get involved in the battle with the government over the budget, to reject the budget et cetera, because the Senate is not an elected body. That would be improper. However, I think the government should simply consider an amendment that does not have anything to do with non-confidence in the government, and see if it is acceptable. It is not too late for them, in my opinion, to say, after all this debate, this is a good suggestion and perhaps we have gone too far. If the Senate approved an amendment, I do not see any reason why the government should not act sensibly and if it is a sensible amendment, it gets them out of the dilemma they put themselves in. I think they should leap to seize your amendment if you pass it. That is what I would do if I were the Prime Minister and wanted to survive.
Senator Baker: I think that it is marvellous that we have this testimony from two outstanding Newfoundlanders. In the case of Mr. Crosbie, I think that many Newfoundlanders regard him as the father of the Atlantic accord because he signed the original accord with Prime Minister Mulroney many years ago. The participants were Prime Minister Mulroney, John Crosbie, Brian Peckford the provincial premier and William Marshall, who later became a member of the Court of Appeal and did a marvellous job for the province.
Even prior to that, I recall John Crosbie talking about offshore oil and the accord back in 1966, 1967, when he entered the House of Assembly. In fact, I taught him the rules of procedure back then because I was the law clerk and the chief clerk and I think I did the job too well.
Mr. Crosbie: You were an outstanding mentor.
Senator Stratton: How old are you?
Senator Baker: How old am I? Six years before that, down at the stadium I was clobbered into the boards by Roly Martin, who was a great hockey player.
After John Crosbie and Prime Minister Brian Mulroney signed this Atlantic accord, the implementation act came in. Mr. Crosbie, in your testimony, you said that clause 60 of the Atlantic accord, which is the one that you authored, states,
Except by mutual concept, neither government will introduce amendments to the legislation or regulations implementing the accord.
You then went on to pass the implementation act, and I have it before me. You can take it off the Department of Justice website. The Canada-Newfoundland Atlantic Accord Implementation Act is a very thick act. It has substantial amendments in this bill before us. The preamble to that act, authored by the same government, the same administration, says that:
Whereas the Government of Canada and the Government of Newfoundland and Labrador have entered into the Atlantic accord and have agreed that neither Government will introduce amendments to this act or any regulation made thereunder without the consent of both governments:
Mr. Crosbie, you have guaranteed that the province must have its opinion taken into account if the act is amended, which has four pages of amendments in the act that we have before us. Here is my legal question and Senator Angus will be interested in this. In section 4, Mr. Crosbie added that in case of any inconsistency or conflict between this act and any other act of Parliament, this act and the regulations made thereunder take precedence.
Now, you see, Senator Angus has seen the light in that the present act we are passing is, perhaps illegal — contrary to law. Mr. Crosbie, since you put in all of these things to protect the province and its opinion, and since we are now passing an act in which the province says it was not asked for its opinion and did not give consent, do you think that perhaps the present act would not stand up in court? Do you think that the sections that amend this implementation act, the four pages, are, perhaps, contrary to law and would not stand up a test in court? What is your opinion, without deciding?
Mr. Crosbie: I think you should be retained.
Senator Baker: Seriously, Mr. Crosbie, getting to the actual question though, do you think that perhaps, as Senator Angus has just suggested, we do not need an amendment? I will give you the amendment in a second, but do you think that what the Government of Canada is doing right now is, perhaps, contrary to law?
Mr. Crosbie: I would not be able to give an opinion on that without considerable thought and work and a huge retainer. As a member of the law profession, I do not want to give an opinion without doing that. I will certainly study this question intently for the next few weeks.
Senator Baker: You will note that I said to give your opinion without deciding. Normally, that is the phrase used when you do not want to decide something.
Anyway, let us get to the amendment that you are suggesting.
Senator Angus: That, we do not need.
Senator Baker: The amendment, Senator Angus has put on the record, we do not need.
Your amendment is under the heading "What is the solution?'' You give a suggestion that is not on your submission, and then you said, "It is the same effect as the Nova Scotia government's amendment before the committee in which they ask that section 81 be struck from the act.'' Now, section 81 in the present act we are considering is followed by section 82, which contains the exact same words for Newfoundland as section 81 does for Nova Scotia. However, as Mr. Martin pointed out a moment ago, this act even goes further as far as Newfoundland is concerned because it substantially amends the implementation act for the Atlantic accord, which it does not do for the Nova Scotia accord.
On the face of it, Mr. Martin — that is, if Mr. Crosbie does not want to give a legal opinion — would you suggest that perhaps those sections dealing with the amendments to the implementation act and the Nova Scotia Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act be struck from the present bill? Do you see any negative results if an amendment were made to that effect? Mr. Crosbie, I would like you to comment on that as well.
Mr. Martin: When Mr. Crosbie said that our amendment was similar to the Nova Scotia amendment, I am assuming that he meant the effect of it was similar. We thought that this was a simple, elegant solution dealing with equalization. It is saying that contrary to what we said about equalization, when you define your fiscal cap, your simple way out of the mess you have yourself in is to exclude offshore revenues as per the 2005 agreement and any offset payments to prevent this circular action, for the life of the agreements. If I were Mr. Flaherty, I would say that there are only two provinces with offshore revenues. We have an agreement with them. If, in equalization, in defining the fiscal cap we exclude those, then we have solved everything. Whereas the province of Nova Scotia, as I understand it, has said that there is a more complex way to do it. We will not go into it here, but basically they are saying we will do two sets of offset payments. We will do the offset payment we have and then we will go back and recalculate and do another offset payment and get all our money back. In order to do that, they have to deal with section 81.
We understand that, but we thought we would come with a simpler solution.
Senator Baker: Your simpler solution would have to be, of course, put into the act. Have you looked at where this should be inserted?
Mr. Martin: No.
Senator Baker: You have not. Mr. Crosbie?
Mr. Crosbie: I have not looked, either.
Senator Baker: We will certainly have a look at it. I will certainly propose an amendment, I can tell you that. I will have a look at it and if you have any further opinions to give to the chair, then you could. I congratulate you both for your excellent presentation, as always from Mr. Crosbie and as well from Mr. Martin.
Senator Stratton: As you happen to know, gentlemen, Manitoba does not have oil. I guess we find it hard to understand it when you have equalization payments, plus you want oil revenue, which Manitoba does not have. We think that is a little unfair, to say the least; however, that is not the issue today.
The issue is really that there are two base basic options for the two provinces. One is the old accord, the existing accord, 2005, and the equalization payments; the other is the new accord. Those are the two options offered.
That 2005 agreement is still there. It has not been changed. It exists, so how can you be saying that the Prime Minister broke a promise? It is still there. That is your option. You can go there. Why not? That is right there. That is offered, no promises broken. Where you have a problem is in the offer of the new one, where there is a cap. The old accord does not have a cap and it is sitting right there. Why, then, would you argue and say to us that the Prime Minister broke a promise when that existing agreement is sitting there unchanged?
Mr. Crosbie: Because it has changed the whole intention of the 2005 accord.
Senator Stratton: Excuse me, sir; the 2005 accord has not been changed.
Mr. Crosbie: It is specious to say it has not been changed. There has not been a word changed in it, but the guts have been removed from it.
Senator Stratton: How?
Mr. Crosbie: A cap has been put on.
Senator Stratton: That is the new accord.
Mr. Crosbie: Yes, it is in the new accord, but it vitiates the intention of the old accord, which was to free these two provinces from the clawbacks so that they get 100 per cent.
I have eight examples of where we were told what the objectives were, from Mr. Trudeau on up. I asked Mr. Trudeau a question in the House on July 16, 1980 — this is ancient history — and he said that the province would get the overwhelming part of the revenues from the offshore resources until we received the average income in Canada. Then in 1982, he said that we should enjoy the major share of the revenue that offshore resources are expected to generate.
We have had 20 years of promises of the kind of revenue we would get; then the formula became principal beneficiaries. We discovered when we entered into the 1985 and 1986 accords, that we were not the principal beneficiaries; we were minor children beneficiaries. We were getting 12 per cent and the federal government and other provinces were getting 88 per cent; 12 per cent does not make you a primary beneficiary — it has to be over 50 per cent, to my simple mind. This change that comes along here now again prevents us from becoming the principal beneficiary.
Senator Stratton: I disagree, sir, and so does the Minister of Finance. The existing 2005 agreement exists and the provinces have the option of going to that agreement.
Mr. Martin: It exists as he interprets the 2005 agreement. You will hear from professors Lock and Hobson, I understand, tomorrow, who will show you why there has been a hoisting on one's petard. No one ever expected that you would have this Martin equalization formula, which he then appointed the O'Brien commission on, and we came in with a new equalization. No one ever expected that the old equalization formula, growing at 3.5 per cent, would ever go beyond the O'Brien commission. Therefore, when you are offered the old equalization formula, you are offered a formula that will grow at 3.5 per cent, compounded until 2020. They will show you tomorrow that there is more money in that than there is in the O'Brien formula with a cap.
I do not think, with all due respect to the Minister of Finance, that he understood that he was offering something that he cannot deliver. Surely, other provinces will now step in and say, wait a second; you mean you have offered them something that does not really exist because it has disappeared and it is going to grow at 3.5 per cent till 2020? Obviously, they did not think of that when they put in this particular change.
You can say maybe the words are in the agreement, but the overriding purpose of the agreement was that the two provinces would retain 100 per cent of their revenues from offshore revenues after reductions — no clawbacks, no caps. That does not exist under either of those options. As I understand it, and I did not hear the premier this afternoon, he also for the first time gave you the number that would be the cost to Nova Scotia of the O'Brien formula and the 2005 agreement — and that is a $1.3-billion difference. Now you have three different things: you have the old Martin 3.5 per cent growing, which is what Mr. Flaherty gave us; you have O'Brien with a cap; but you do not have the 2005 agreement. When you do not have that agreement, meaning as it exists without a cap, Nova Scotia is out $1.3 billion.
Now you have all these numbers in front of you. All we are saying is if you remove those offshore revenues from the fiscal cap, you will truly have the 2005 agreement. Therefore, with all due respect, we would differ with you.
Senator Stratton: With all due respect, we will differ with you, sir.
Mr. Martin: I understand.
Senator Stratton: Do you have the support of the Province of Newfoundland and Labrador with respect to the amendment you are proposing?
Mr. Crosbie: No. We have not discussed it with the province. The premier has not asked us to be involved so you cannot very well involve yourself. We are just on our own; this is our suggestion. It is not a suggestion from the administration.
Senator Moore: Mr. Crosbie, I want to follow up on a question of Senator Baker. When you and Prime Minister Mulroney signed the accord in 1985, what portfolio were you holding then, sir?
Mr. Crosbie: I think it was transport.
Senator Moore: Did you form a view about the provision requiring the consent of both governments to any amendments? In other words, did the federal government enter into this with the view that the province would have legal recourse in the event of unilateral action, such as Bill C-52? Why did you put that clause in there?
Mr. Crosbie: I was not close to the drafting of it, but I assume it meant what it said, that neither party could change it without the other party's consent. I never considered whether one could sue the other. In fact, that is something that people are looking at right now, to see whether these things are enforceable under the law or whether they are not — whether they are simply agreements that do not have any legal force. Frankly, I have not studied the question, but that is a very interesting issue to be studied. What is the point of having governments enter into solemn contracts with one another if they can breach them and there is no penalty?
There is the political penalty. Mr. Williams says he is not interested in the legal penalties; he is interested in the political penalties, which can be severe. In my innocence, I would have thought you could take legal action, but that may not be the case; I do not know.
The Chairman: Senators, this concludes our hearings on Bill C-52 for today. We resume tomorrow at 12 p.m. We have an eight and a half hour day tomorrow, starting with the premier of Saskatchewan. Thank you, Mr. Crosbie and Mr. Martin.
The committee adjourned.