Proceedings of the Standing Senate Committee on
National Finance
Issue 19 - Evidence - Evening meeting of June 20, 2007
OTTAWA, Wednesday, June 20, 2007
The Standing Senate Committee on National Finance sat today at 6:17 p.m. to consider 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 this meeting of the Senate Standing Committee on National Finance. My name is Joseph Day. I represent the Province of New Brunswick in the Senate, and I am the chair 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. This evening we are continuing our examination of Bill C-52, to implement certain provisions of the budget, tabled in Parliament on March 19, 2007.
It is my pleasure to welcome The Honourable Patrick G. Binns, Leader of the Progressive Conservative Party of Prince Edward Island. Mr. Binns was first elected to the Prince Edward Island Legislative Assembly in 1978, where he served until 1984. From 1984 to 1988, Mr. Binns served as a member of Parliament, representing the riding of Cardigan. He then returned to Prince Edward Island, where he was re-elected, and he became premier in 1996.
I am also pleased to introduce Professor Paul Hobson from Acadia University. Dr. Hobson is a professor in Acadia's Department of Economics. He has been on the faculty at Acadia since 1981. He is currently president of the Atlantic Canada Economics Association. Dr. Hobson has lectured and published widely on the subject of Canadian fiscal federalism as well as on property taxation and issues in local public finance.
I would also like to welcome Professor Wade Locke from Memorial University. Dr. Locke teaches economics and specializes in the Newfoundland economy, resources, public finance, public policy, innovation indicators, productivity, economic impact assessment and cost-benefit analysis. He has undertaken research on the economics related to oil and gas activities in Newfoundland and Labrador and Atlantic Canada, all of which are of interest to this group, I should mention. Dr. Locke has worked extensively on economic impact and financial analysis related to oil and gas projects and mineral projects. As well, his recent research focus has been on regional economic development issues and intergovernmental fiscal arrangements. He is also a past president of the Atlantic Canada Economics Association and he is a senior policy advisor to the Atlantic Provinces Economic Council.
Mr. Binns, would you like to begin? We have received some material from you, a Government of Canada press release dated October 26, 2004, to which you may make reference.
I should point out, honourable senators, that we have received materials from Mr. Hobson and Mr. Locke and have not had an opportunity to get them fully translated, for which we apologize. We have tables and an executive summary translated. The rest will be translated and circulated to you.
Finally, we have received correspondence from the Premier of Newfoundland and Labrador, Danny Williams. He indicates that he is not able to attend but he has been following our deliberations and wanted to comment on several points that were raised. I will see that that gets circulated. It is being translated.
Hon. Patrick G. Binns, M.L.A., as an individual: Honourable senators, former colleagues from the House of Commons and ladies and gentlemen, I am here, as others have been, to help you decide whether or not to support the new budget. As a Prince Edward Islander, I would say yes to the budget. As a Canadian, I would say yes. If I were you, I believe I would say yes.
Why would I come to this conclusion? I believe it is affordable. It recognizes that there is a fiscal imbalance and it helps to fix the fiscal imbalance.
In regard to affordability, Prime Minister Chrétien and Prime Minister Martin always started first ministers' negotiations by citing tight financial resources and the need to avoid deficits. They did increase transfers in my time but also extended the time frameworks for support while we as provinces ran deficits, even though everyone expected positive federal numbers.
Prime Minister Harper has also shown some restraint with his budget, but he has made significant increases in the Canada Health Transfer, the Canada Social Transfer, equalization and new funds such as the Canada ecoTrust, wait time guarantees and infrastructure programs. He is also the first to acknowledge that a fiscal imbalance does exist.
I attended approximately 25 meetings on fiscal imbalance with premiers and first ministers. I have always looked for more federal money but, as a believer in a strong central government, I tried to ask only for fairness. At annual premiers' conferences, as well as at Council of the Federation meetings, I urged my colleagues to deal with both the health and social transfers and equalization in tandem.
Non-equalization-receiving provinces never wanted equalization on the table because, I believe, they felt that enhancing equalization would reduce other federal transfers where they would ordinarily be automatic recipients. That is why a permanent formula is necessary.
A further frustration of mine was that there was the tendency of some provincial leaders to imply that more equalization meant that this would mean a draw on their resource revenues. It was implied to Canadians by these leaders that resource-rich provinces would have to write cheques to equalization recipients that were funded by their provincial resource revenues. This, of course, is nonsense, as equalization is funded by all Canadian taxpayers, including those in Prince Edward Island, and the question is how the federal government distributes its tax revenues.
The impact has been fewer dollars in the equalization fund since the mid-1990s, compared to historic levels when it ran at close to 1.1 per cent of Canada's GDP.
The Council of the Federation report, Reconciling the Irreconcilable: Addressing Canada's Fiscal Imbalance, recommended a formula using a 10-province standard and the inclusion of all resource revenues as optimal. This has been the long-standing position of Prince Edward Island. This is the only true long-term solution, as it truly compares relative wealth of each jurisdiction and would allocate equalization funds accordingly. Prince Edward Island also agrees with their position on volatility and affordability, wherein the standard established could be scaled back and a three-year average of revenue bases lagged two years could apply.
You can surmise correctly that I have been reluctant to accept the O'Brien formula, which uses 50 per cent resource revenues, as I do not believe it will be a permanent fix. However, it is a compromise and is much better than no resource revenues in the formula, and it is formula-based.
The recent study by the Atlantic Provinces Economic Council, APEC, should not be used to compare equalization transfers over time. The Council of the Federation panel and the O'Brien expert panel were both commissioned because all jurisdictions agreed that a new formula-based approach was necessary.
On October 26, 2004, Prime Minister Martin advised by communiqué, which you have had circulated, that a growth rate of 3.5 per cent would exist until 2009-10. The communiqué also provided a table, which is attached, through to 2013-14, but noted that it was for illustrative purposes only and that the 2010-11 levels would be reviewed on indicators of disparities developed by the expert panel.
Personally, I do recall that at the first ministers meeting, previous to that communiqué, that 3.5 per cent was to be even more short-lived and would last only until a new formula was developed.
APEC did not examine increased federal transfers for CHT, CST, infrastructure, wait time guarantees, Canada ecoTrust and labour market training, which are part of this budget. These will all have significant impacts on provincial finances. I believe you have to put all of these transfers into the framework to get the total picture.
Prince Edward Island will gain significantly through these measures. A particular gain for us is the new base funding that has been provided which recognizes high administration costs in a small jurisdiction. This will have a significant economic impact on our ability to provide relatively equal services at comparable levels of taxation and does supplement equalization.
Wade Locke, Professor, Memorial University of Newfoundland and Labrador, as an individual: It is an honour and a privilege for us to be invited to speak to the Senate of Canada and to this esteemed committee. We are pleased to have that privilege. In the interests of time, we will not go through the details of our report but would entertain any questions that the senators have.
Let me take you through some of our credentials that have not already been highlighted. Mr. Hobson and I have been involved in public policy and equalization issues combined about 50 years now, so we have been looking at this for a long time. We find this interesting and have tried to make a positive contribution in terms of public policy within Canada.
When the budget came out changing the equalization formula, we, being advisers to APEC, decided that it is a legitimate public policy issue and we should look at what changes to equalization might mean for each of the Atlantic provinces. On top of that, there were decisions and choices that had to be made by at least two of the provinces. When we looked around, there was little hard information. There was a dearth of concrete information. One of the components in making a decision would be the numbers. Since we had the capacity, ability and interest to generate some numbers in a simulation exercise — not a forecast — we decided we would do that. We will leave the specific results, which are publicly known, to any questions you might have.
Before I turn to Mr. Hobson, I point out that we have been listening to some of the hearings here and reports in the media. It has been suggested that much of this is because of the O'Brien panel. I will point out to senators that many of the changes implemented in Bill C-52 were discretionary government policy and not dictated by the O'Brien panel. Whenever there was a discretionary change to be made that was not dictated by the O'Brien panel, it was made in a way that was detrimental and negatively affecting places like Newfoundland. I will let Mr. Hobson continue.
Paul Hobson, Professor, Acadia University, as an individual: Good evening, senators. I too, would say what a privilege and honour it is to appear before the Standing Senate Committee on National Finance this evening.
As Mr. Locke said, we undertook to simulate in our work for APEC the effects of the budget proposals with regard to equalization for the four Atlantic provinces. We will look forward to responding to your questions about our specific results. Let me just leave you with three fundamental messages that are contained in our paper.
First, our numerical analysis would suggest that, at least for Nova Scotia, the option of remaining within the fixed framework may indeed be the superior option from the province's fiscal point of view. If that is the case, and we believe that there is a strong possibility that is what the province will eventually opt for when they come to make their decision, the country will be operating under two equalization programs at one time. Going forward, we do not believe that that is sustainable.
The second message I would leave with you is in regard to section 36, always worth referencing in discussions like this. It has always been our understanding that accord payments are a result of an economic development agreement designed to reduce disparity and increase opportunities, with payments made clearly under section 31 of the Constitution. They are not part of equalization.
With regard to section 36(2) and the new program, I remind you that 36(2) commits Parliament and Government of Canada to the principle of making equalization payments. For the first time with this new program, we have a distinction between eligibility and actual payments, but they are committed to making equalization payments to ensure sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.
Under the new program, the end result would be that if we look at post-cap fiscal capacities, for some provinces — Newfoundland, Saskatchewan, Nova Scotia in some years where the cap bites — those fiscal capacities will be same and at the level of the Province of Ontario. For other provinces, such as New Brunswick, Prince Edward Island, Quebec and Manitoba, their fiscal capacities are total fiscal capacities, 100 per cent resources included, and the measure of fiscal capacity used for cap purposes will be different. Where is equality of fiscal capacities under this new program?
We would want perhaps to come back to the messages around sections 36(1) and (2).
Finally, we make the point in our paper that the new program violates both the spirit and the letter of the accord, both the Atlantic accord and the 2005 additional offset payments accord. It violates them in two ways. One is through the operation of the cap process under the new equalization program, which claws back accord payments, and the second is in the use of pre-cap measures, under 1985 and 2007 calculations of accord payments, and of course also the total fiscal capacity measure that is used for exclusion from cap payments. We can talk about the language of sections on the accords through questions that we may receive.
The Chairman: Thank you, Mr. Hobson. I am sorry, but I did not understand the point that you were making. Perhaps you would not mind explaining the inequality of the application of the cap where 100 per cent of natural resources are used to calculate, and you named a certain number of provinces, and then your conclusion from that.
Mr. Hobson: Let me perhaps lead into it and Mr. Locke will take you through some of that. First of all, partly in response to Premier Binns' comment, our paper is specifically about the equalization aspects of the budget. That is what we focused on. Premier Binns' point is entirely correct that there are many other things in the budget. We are focused entirely on the equalization side of it, and in particular the interaction between equalization and the accords. We have a solid understanding of the accord process. Let me ask Mr. Locke to address your question.
Mr. Locke: Given that 50 per cent of natural resources will be excluded for the purposes of calculating the equalization, any resource-rich province that is not rich enough to put them over the cap will receive an equalization payment based upon 50 per cent, and then when you add the other 50 per cent to it, their total fiscal capacity with the enhanced equalization will put them at a different level so long as they do not reach the cap. Prince Edward Island will be the lowest province in terms of total fiscal capacity, taking account of all payments. New Brunswick will be second. Quebec will be different, and Manitoba will be different. Saskatchewan will be the same as Ontario because they are at the cap. Newfoundland and Nova Scotia will be different because of the operation of the accords.
Senator Murray: Is it too simplistic to express it this way: 50 per cent to reckon your entitlements, but 100 per cent to reckon your fiscal capacity?
Mr. Locke: There is asymmetric definition of fiscal capacity, and that changes the ability of provinces to fund. There is different ability of different provinces. Any province below the cap will have a different ability depending on the richness of their fiscal capacity in terms of resources.
The Chairman: I have a list of senators who are anxious to enter into discussion with you. Do you feel comfortable, each of you, in discussing, in addition to equalization and the offshore, the other aspect of Bill C-52 dealing with per capita transfers and the vertical transfer of funds?
Mr. Locke: Mr. Hobson will answer those questions on our behalf.
Senator Rompkey: I welcome all of our guests, and I would like to begin with questions about the accord.
We heard from the Minister of Finance that Newfoundland could have the accord, if it wanted to, untouched and unchanged. We heard from other people, namely John Crosbie last night, that in fact the changes in the budget gut the accord. In fact, that was exactly the same word used by the Prime Minister before he became Prime Minister — that the imposition of a cap and other measures would gut the accord. Premier MacDonald confirmed that there were changes in the budget that would nullify the effects of the accord.
I wanted to ask you to go over with us the various clauses in the bill that apply to the accord. Whether what they did was legal or not is another question. My colleague Senator Baker is more able than I to deal with the legalities. He was law clerk of the provincial legislature, as you know, and John Crosbie almost retained him last night, but he is sticking with us.
Senator Cowan: It was the other way around.
Senator Rompkey: He is more knowledgeable about that. I want you to explain this to us. There are five pages in the budget, starting on page 91 with clause 78, that affect the accord. I want you to go through those clauses with us and explain how they affect the accord, because we are told that we can have the accords and they are not touched.
Mr. Locke: I will ask Mr. Hobson to do that. I will say that we are of the opinion, both of us, that the accord definitely has been changed. There is no argument there. The qualifying trigger put in place for qualifying for the Atlantic accord under the new system is new, and it has a dramatic and negative impact on places like Newfoundland and Labrador. In addition, the change in the 1985 accord, which uses pre-cap equalization for the purposes of calculating that, is certainly a change. I will let Professor Hobson take you through the specific changes.
Mr. Hobson: That is a major undertaking, so let us get started. We have to look at more than the language pertaining to the accords beginning on page 91, as Senator Rompkey points out.
Senator Rompkey: Before you begin, just to clarify a couple of other fundamental issues that I found important in what you said, you established your position that the accords are economic development agreements under section 36(1) of the Constitution. I asked the minister the same question, and he said no, they are not. I was interested in your confirmation that these in fact are economic development agreements under section 36(1).
Having said that, equalization has an impact. It is there. It is a national policy that we cannot escape, so it impacts the accords. Please go on with your analysis of how.
Mr. Hobson: I will throw in, senator, that in reading the language of the 1985 Atlantic accord and the Canada-Nova Scotia accord, you will see clear references to economic development in section 36(1).
There is an element of truth in what everyone is saying — in what Minister Flaherty is saying, in what Mr. MacDonald is saying and in what Mr. Crosbie said to you.
Let me begin with my understanding of Minister Flaherty's position. Yes, Nova Scotia and Newfoundland have the option to remain under the existing fixed framework equalization program. They can do that indefinitely through to 2019-20, the year in which the accords expire. That is an option. Should Newfoundland stay on the fixed framework, which would appear to be their best option by our numbers, they would remain on that for the coming two years, after which they would no longer qualify for equalization payments even under the fixed framework.
Payments under Part I of the 1985 accord will phase out gradually through to the year 2011-12 under that framework. They will then find themselves in 2011-12, 2012-13 out of equalization and therefore not qualifying for an extension of the accords. They do come back into equalization in subsequent years by our calculations, but by then their entitlements to accord payments will have expired. To that extent, nothing has changed for Newfoundland and Labrador.
The same is true for Nova Scotia. They, too, can remain under the fixed framework. Let me use this as an opportunity to present our numbers in that respect.
Our numbers indicate that for this year, Nova Scotia has done the sensible thing. They were given a choice in the budget, not of opting into the new program — although it is sometimes framed that way — but they were given a choice of simply picking a combination of numbers. Equalization payments and accord payments under the fixed framework; equalization numbers and accord payments under the new program. The best combination was the larger combination, which is what they have opted for. Those numbers do come from the new program, but Nova Scotia has not opted into that new program; it did not have to. It could just pick a number and it did.
For 2008-09, however, Nova Scotia would be better off under the new program. I refer senators to a summary table at the end of the executive summary of our paper, page 4, and then I would refer you to tables A1 through A6, in particular.
If Nova Scotia opts into the new program in 2008-09, it will find itself some $64 million to the benefit by doing so. The issue for Nova Scotia is that to get that money, they have to opt in formally. Having opted in, they lose the protection of the fixed framework. Under Bill C-52, they cannot go back. I know there has been some talk about changing that, but under the language of Bill C-52, they cannot go back. It is an irrevocable decision. In that sense, the accords carry on as they have since 2005.
What if Nova Scotia opts into the new program in 2008-09? For that one year, by our calculations, the province will benefit to the tune of $64 million and will not be subject to the cap. There is no clawback on its accord payment. The accord payment will be calculated with reference to the new equalization program, and that brings you to the language of pages 91 and onward, the consequential changes to the accords.
However, in the years going forward from 2008-09, Nova Scotia would, by our calculations, be better off remaining under the fixed framework. In that sense, the accord continues. If they did opt into the new program, they would in the years 2009-10 through 2013-14, by our calculations, be subject to a clawback of accord payments through the equalization cap process. It is in that sense that the accord is being violated. I believe that is the sense in which Mr. Crosbie was discussing this point last night.
In addition, that is the sense, I believe, in which Nova Scotia is concerned about the accords being violated, because accord payments are being clawed back through equalization. The whole idea of the accords was that any clawback of offshore revenues through equalization would be restored to the province, and that has been turned on its head under the new program.
One aspect of violating the accords is through the cap process, and it works for Nova Scotia and for Newfoundland and Labrador.
Because Newfoundland and Labrador is out of equalization in two years even under the fixed framework, and similarly, under the new program, although that would never be its choice given our numbers, of more consequence to Newfoundland and Labrador is the language that you will find if you turn to page 91 of Bill C-52, which is what Senator Rompkey asked us to do.
It is not quite page 91. The key bit is at page 93. Everything is documented in our paper. We have a section on changes to the Federal-Provincial Fiscal Arrangements Act and changes to the accords. There is a lot of history about the accords and how they have been changed. It is laid out in a clear way in the paper.
If you go to clause 80 on page 93 of Bill C-52, you will see the changes to the way in which the 1985 accord is to be modified. What you see, first off, is proposed section 220.1. You see that the accord calculations are to be done pre-cap under the new program.
There is always this question about the accords: Should the accord payments have been calculated using the pre-cap or post-cap amounts? That is the question.
The post-cap amount is part of how the equalization program works. The accords are all about compensating for losses in offshore revenues through equalization. You want to reflect how equalization actually works, which includes the cap process. Using pre-cap figures creates a problem. In fact, it is of some numerical consequence and not just words. Dollars and cents are involved in that calculation.
The stuff in clause 80 is all about changing the 1985 Atlantic accord. That pertains to Newfoundland and Labrador.
The Chairman: I hate to interrupt you but our time is running and we have an awful lot of senators. Senator Rompkey asked you an extensive question, but can you wrap it up?
Mr. Hobson: I was just trying to do so.
Let me refer senators to clause 83, which talks about the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act. That is the 2005 act. Again, you have the pre-cap calculations being used to calculate accord entitlements and you have the new, arbitrary trigger that has been introduced to exclude a province from accord entitlement.
Clause 84 talks about it from the point of view of Nova Scotia, while clause 83 talks about it from the point of view of Newfoundland and Labrador. These are consequential changes to the language.
The Chairman: It may be that the numbering has changed somewhat from the House of Commons to here. You are using a House of Commons numbering and you are referring us to numbers that do not appear in the bill we have in front of us. They lag one another by one or two numbers, just to help honourable senators.
Senator Rompkey, I am sorry, but the question you asked has used up quite a bit of the honourable senators' time.
Senator Rompkey: I know, but if we could simplify the answers, the budget does change the accord.
Mr. Hobson: That is correct.
Senator Rompkey: There is a financial change to both accords as a result of these sections of the budget, whatever they are.
The Chairman: Senator Rompkey, I will put you on in the second round. Senator Angus, the sponsor of this bill in the Senate, is next.
Senator Angus: Thank you chairman. Welcome, gentlemen, all three of you. It is good to have your input on this discussion.
I understand that you, Dr. Hobson and Dr. Locke, are professors. You work together on the Atlantic Provinces Economic Council. This paper you have presented tonight appends a document you issued earlier on in April; is that correct?
Mr. Locke: No, it was a week ago.
Senator Angus: I had not really focused much on this until the budget bill, Bill C-52, came into the Senate. I find the whole issue of equalization and its effect on the Canadian mosaic quite fascinating and obviously fundamental to the working of our federation, so I hope you can help me.
Mr. Locke, on April 4 you gave a presentation on the implications of the budget for equalization and accord payments to Newfoundland and Labrador, projecting that over the next 13 years Newfoundland and Labrador would receive $5.6 billion in additional benefits as a result of the budget. Do you recall doing that?
Mr. Locke: That is correct, senator. The numbers were later revised after discussions with the Department of Finance.
Senator Angus: That is what I understand. There was some discussion with officials from the Department of Finance. I got here a short time letter on April 13 and you publicly revised your numbers and projected that Newfoundland and Labrador would not gain from adopting the new equalization system.
Your previous projections had a significant impact on this debate, as I think you know. It became quite in focus and not altogether positive from the Conservative government's point of view, I gather. You attempted to remove yourself at that stage from the debate by issuing a press release on April 13 with the following statement:
Although I will continue to deal with this in a professional, non-political manner, it is my intention that after explaining the contents this press release to interested individuals I will have nothing else to say on this particular issue. Nor will I be undertaking further analysis in this specific area. I will leave it to federal and provincial officials to inform the public.
Apparently something has changed for you, and you and Dr. Hobson are here tonight with another attempt to measure the impact of the new equalization framework. I am asking why you felt it necessary to re-enter the debate and why you feel comfortable parading highly speculative — I gather it is speculative to try to project these numbers over a decade — numbers out there as conclusive proof of one particular assessment.
Mr. Locke: You have made a number of points and I will respond to each in turn.
It is the case that we provided information on April 4, as you suggested, based upon our discussion with federal finance officials at that point in time. All of this revolves around particular interpretations and government policies as they relates to qualifying triggers for the Atlantic accord. When we went forward initially, we were giving information about an interpretation that was consistent with the provincial government's interpretation. When it came forward publicly, at some point we received a number of phone calls and emails. I think somewhere in the range of 40 emails were exchanged between myself and senior officials in the Department of Finance. Upon assessing and assimilating all the information, it was clear that the trigger mechanism being driven by government policy was changed. Consequently, that effectually precluded Newfoundland from qualifying for the Atlantic accord. The reason you had a $5-billion or $6-billion impact previously had to do with the fact that the accord was working under the new system, which was no longer working with the change in the assumptions.
With regard to not wanting to be involved with this any more, it was a pretty stressful time. I released that press release at two o'clock in the morning. I was feeling pretty alone at that point in time. I work in the basement on my own on these particular issues. I do not have a team of people like federal or provincial finance departments do. I had hoped that both provincial and federal finance people would release their own numbers. Unfortunately, no one did. The debate was not going away. As a matter of fact, it was heating up. As senior policy advisers to the Atlantic Provinces Economic Council, we had a responsibility to the council and we were asked if we could look at the impacts for each of the provinces.
Time does heal a lot of things. As time went on, I felt that since no one else would do it and we could do it, we would provide an assimilation exercise. The way the choice is put forward for Newfoundland and Nova Scotia, the choice cannot be made without an assimilation exercise. At no point did we put these forward as the only numbers or the specific numbers. We said that this is a simulation exercise based upon reasonable assumptions. If other provinces or other groups choose to do an alternative scenario, then we would welcome that.
As a matter of fact, as you know, when the Premier of Nova Scotia was here yesterday discussing the numbers, they released their own numbers. Their numbers are based upon a different scenario. While the specific numbers are different — and we expect them to be different — the basic conclusion to which the Nova Scotia numbers lead you is no different in a fundamental way than what we did. While we never put our numbers forward as "the numbers,'' we did put them forward to encourage and facilitate debate in a more focused way.
We got back into it because we thought we could make a positive, meaningful and non-partisan contribution. That is always what we try to do. Our experience in our 50 years combined here is that playing politics gets you nowhere; it is a no-win situation. However, we do believe that with our combined expertise and ability to understand the offshore oil and gas sector in both Newfoundland and Labrador and Nova Scotia, we had something positive to contribute. I will leave it to others to determine whether it is a positive contribution. However, we think that having an opportunity to draw on our numbers and to look at them would allow people then to say, "We do not agree with this scenario, so we will run another scenario.''
We never did put these forward as forecasted numbers. Unfortunately, given the information in the budget, both provinces would have to have some kind of simulation or forecasting of revenues in order to be able to make the appropriate decision.
In addition, we were interested in whether New Brunswick and Prince Edward Island, for example, were positively or negatively affected by not having the choice available to Nova Scotia and Newfoundland.
Senator Angus: Thank you. That was helpful.
I gather that the Atlantic Provinces Economic Council would qualify as a think tank? You are not advocating for a particular interest group; you are not on anyone's payroll; you do not have members whom you represent, or do you?
I know that you are highly respected and well known academics.
Mr. Locke: This is pro bono work. We have given you our CVs so that you will know whom we have worked for in the past. We have done work for the federal government on many occasions, for the Newfoundland government, most provincial and territorial governments, for industry and many others. This is something we believe we ought to do because we are members of the university and the academic community. This is meant to provide, as much as possible, an objective, independent assessment. We will let others decide whether it requires fine tuning or other alternatives. It is meant to facilitate, enhance and contribute to a better debate on public policy on an issue that is important for Canada and the region.
Senator Angus: I believe that you are aware that the Minister of Finance and officials of Finance Canada, with whom you are in regular contact, do not agree with you.
Mr. Hobson: I have heard from Finance Canada that they consider forecasting to be a highly flawed exercise, and we would not disagree.
We have simply simulated the proposals in the budget using data. We have no question that Finance Canada has done this as well, or that Nova Scotia has done it as well. Indeed, they presented some of their numbers to you yesterday.
Let us be very clear that no one has said our numbers are wrong. Finance Canada has not said that and Nova Scotia has not said that. Numbers will vary, but let us be very clear that no one has said our numbers are wrong.
Senator Angus: Your revised numbers.
Senator Mitchell: Why were they revised?
Senator Angus: Because they were wrong.
The Chairman: Order, please.
Mr. Locke: May I respond?
The Chairman: Dr. Locke, you have the floor to respond to the question posed by Senator Angus. You may respond to any of the comments he made as well.
Mr. Locke: We shared our numbers with the federal Department of Finance on April 4 and April 13. Finance Canada was aware that we were going to release a new study on Atlantic Canada. We showed our revised numbers — as opposed to corrected — based on new assumptions and a better understanding of what was done with respect to government policy in terms of the trigger for the accord. All of this was driven by that; that is why the numbers had to be revised.
We realized that there was an arbitrary trigger put place that did not come from O'Brien. It was not what one would normally think of, and it was not even a trigger based on how the accord payments were calculated in the budget or in the budget implementation act. Once we realized that, we felt compelled to revise the numbers.
Having said that, we did share our numbers in conference calls with senior officials of Finance Canada and we were informed that, while they did not run this specific scenario, it was clearly understood what the issues were at this time.
Senator Angus: With regard to this exchange, would it be fair to say that you do not disagree with the New Brunswick Minister of Finance, who dismissed your study by saying that that is just one scenario, that if you change a few statistics in that formula you will get a different number? I think that is what you are saying.
Mr. Locke: To be clear, we would agree that if you change the scenario you will get a different number. There are no credible, reasonable scenarios that could be run that would change the basic direction of the results presented in the APEC paper.
We have never suggested that these are the numbers. While you will get different results — or different numbers, to use your words — the basic conclusion, that for the first two years Nova Scotia, New Brunswick Prince Edward Island are better off under the new system and after that period, be it two or three years, they will be better off under the fixed framework, is unlikely to change unless there are very peculiar scenarios.
Senator Angus: I think we all agree that this is a highly complex area. Even Premier Williams and the Government of Newfoundland and Labrador refused to make public their equalization projections because of the assumptions and changing variables involved. Explaining their decision, their Minister of Finance, Tom Marshall, said, "There is a plethora of numbers and there is a plethora of assumptions that one would have to make to do these calculations. If we make these assumptions . . . we are going to get caught in a debate involving the minutia of our assumptions.'' That is not a wild comment? You would agree with that?
Mr. Locke: People can run different scenarios with different assumptions and get different numbers. The purpose of the numbers is not to say that these are the numbers and you should accept our scenario versus another one. The numbers are to help focus debate to understand the issues of what would happen if, for example, you had an arbitrary figure based on government policy that excluded Newfoundland from the accord. That allows you to understand that if certain things transpire, certain other things happen in terms of direction.
These are meant to be orders of magnitude and we are not pushing these as the numbers. We would encourage Finance Canada and each of the provinces to release their numbers, and we would be happy to accede to that.
Senator Angus: I wish to thank Mr. Binns, who is an old friend.
I did not take the opportunity to question you because you were so eloquent in your initial comments, and I thank you for them.
Senator Ringuette: Thank you for being here this evening.
I believe that every member of this committee would concur with the lack of numbers provided by the Department of Finance. Officials of the department appeared before this committee this week. We are the Senate National Finance Committee looking at this budget, and yet they could not provide us with numbers on equalization.
The other major issue is the social and post-secondary education transfer, for which there has been no analysis of the cost per province. Clearly this was a purely political decision. They have indicated three times in the short period that we have had to question witnesses that there is no need to measure fiscal capacity.
Not only does this budget not respect the legal accord with Newfoundland and Labrador and with Nova Scotia, but it also does not respect the Constitution of Canada under section 36(1) for the accords and section 36(2) for transfers to provinces and in regards to fiscal capacity to provide equal services to Canadians wherever they live, whether in Prince Edward Island, New Brunswick or Saskatchewan. Saskatchewan has made quite a few presentations to the committee during our study on vertical and horizontal fiscal balances. Saskatchewan made a powerful presentation on the impact of per capita for small provinces like Prince Edward Island, New Brunswick and Nova Scotia. Certainly, there is a major lack of cooperation from the Department of Finance in ensuring that Parliamentarians, who are responsible to the taxpayers, and all Canadians know the numbers. They do not want us to know the numbers; and that is a fact.
I realize that the study prepared for APEC pertains only to equalization for the Atlantic provinces. I find it astonishing that, when you consider only the equalization payments, Prince Edward Island will lose $196 million and New Brunswick will lose $1.1 million under the proposed new system compared to the old fixed framework.
Is it possible for you to run the numbers for Quebec? Is it possible to do the numbers for the other provinces? Nova Scotia, New Brunswick and Newfoundland and Labrador have concurred so your scenario seems to be on solid ground.
Mr. Hobson: Well, senator, to simulate the outcomes for the four Atlantic provinces, because of the nature of the equalization program, you have to simulate all ten provinces under both the fixed framework and the new program. Obviously, we have results for other provinces.
Because we are speaking primarily to our APEC paper, I will simply answer your question by saying that the same pattern prevails for Quebec. In the first three years, Quebec is better off under the new program. Thereafter, it would have been better had it had the option under the fixed framework. That is a common pattern across provinces and that is why we did it for New Brunswick. It is not an option for New Brunswick, but had it been an option, what would they have done? Nova Scotia has a real choice. Part of the point of our paper is that Nova Scotia will probably go for the fixed framework; then we have two equalization programs. Do you think that two or three years down the road someone will be asking why Nova Scotia has a richer program than the others have?
Senator Ringuette: Other provinces will sue the federal government.
Mr. Hobson: It has to do with the 3.5 per cent annual growth built into the fixed framework. Premier Binns is right that when the fixed framework was established, the 3.5 per cent growth was to cease in 2010-11. Under this budget, at least for Nova Scotia and Newfoundland and Labrador, the section on Newfoundland and Labrador at page 72 of the document indicates that for each subsequent fiscal year, the equalization will grow by 3.5 per cent annual growth. I have heard the finance minister categorically state that that will be maintained through 2019-20. Of course, the fixed framework would dominate, despite the fact that no one ever expected it to be around. It is in this budget as a real option and our numbers would indicate, and I believe Nova Scotia's numbers indicate, that it is a very real choice for them and one that in all likelihood they will take, unless some alternative deal can be arranged.
Senator Ringuette: New Brunswick concurs with your numbers. I have a rather large request. Is it possible for you to provide the committee with the simulation numbers for the other provinces and territories? You have run the ones for Quebec and have the numbers for the four Atlantic provinces.
Mr. Locke: Than answer is clearly yes, but it is a matter of time and when you require them.
The Chairman: If this is a matter of entering into a contract with you to have those documents produced, then we would have to discuss this off-line but we will talk about that.
Senator Ringuette: We have talked about equalization, so I would like to move to the per capita transfer system for social and post-secondary education, and then for health care and the infrastructure program.
Specifically for the social transfer and post-secondary education, the old system used tax points. There was an associated equalization to leverage the tax point discrepancy for the provinces and then there was a top-up. That is gone. Bill C-52 proposes cash only for all provinces. Never mind equalization and fiscal capacity. Section 36(2) of the Constitution is gone from this budget because fiscal capacity is no longer considered. Have you done any numbers for the scenario of the social transfer?
Mr. Hobson: No, senator, not as part of our APEC study, although we have thought about this issue. I will answer your question briefly. You have to go back to 1977. I have often heard Senator Murray speak quite eloquently on established programs financing and its history, but let me remind senators that under the established programs financing arrangements, there was a series of cost-shared programs in terms of cash payments to provinces with associated tax point transfers in different programs at different times. Everything was consolidated in 1977 for health care and post-secondary education. The idea was that 50 per cent of the amount of the transfer would come to the provinces in the form of cash and 50 per cent would come in the form of value from the previously transferred tax points and additional tax points transferred at that time. The idea was to create greater accountability for provinces in funding for those programs.
By moving away from the framework where the per capita cash transfer to a province is calculated on a residual basis, the idea was that provinces would be equal per capita in terms of the value of the tax points and cash transfers.
Moving away from that involves a huge shift of resources in that program in favour of, in particular, Ontario and Alberta, and distorts the whole system of funding post-secondary education in particular. There are of course the issues around what was left of the Canada Assistance Plan when it was wrapped up in 1995. We simply want to make the point that this involves a huge shift of resources in favour of Ontario and Alberta.
Senator Ringuette: What would the impact of such a change be in a 30-year program helping provinces to supply equal levels of services? I look at what will happen in this budget concerning the social transfer and post-secondary education. Prince Edward Island will only be getting an extra $7 per capita. Ontario will be getting an extra $40 per capita. Alberta will be getting an extra $102 per capita.
If you look at next year, Alberta will be receiving an additional $333 million, not $7 per capita. Ontario will be receiving $445 million, and the eight other provinces will be sharing an additional $14 million. Tell me once more that we have to support this budget.
The Chairman: You do not have to answer that. That was a comment.
Senator Ringuette: I asked the gentlemen if they had the numbers from the transfer.
Mr. Binns: I would like to respond. Senator Ringuette made several comments in regard to the 30-year program and its demise as though this has just happened with this budget.
The major demise to the program happened earlier, back in 1994-95, when the program was essentially gutted. For many years, the program was running close to 1.1 per cent of GDP, and it remained at that for a long time. After 1994- 95, the amount of money from equalization generally began to fall to as little as 0.8 of 1 per cent of GDP, and that was what gutted the program.
The program was not suddenly gutted this year. The amount of money this year for equalization has been increasing over the last few years. It is not back to 1.1 per cent. I support what the senator is saying in that regard. That is where I think it should be. It seemed to work for many years.
To suggest the constitutional obligation is suddenly not being met now when it was being met for the last 30 years is not, in my view, correct.
Senator Nancy Ruth: Mr. Binns, I imagine you have been looking at equalization almost as long as these professors, but from a different perspective, as a premier who had to implement the services equalization helped provide. In part, I am interested in the hands-on, how you do it and what the money is used for.
I also believe you probably lived through many Atlantic discords and other discords at various first ministers' meetings. I am curious to know how this discord and disharmony on equalization from your perspective as a Prince Edward Islander is affecting the Atlantic region.
It is late at night, and we have had a lot of discord in the last few days. You did talk about the equalization formula as being good because it was a formula, and it was clear for you. I wonder if you could again refresh what components of that are good and why it was not as good previously.
Mr. Binns: I go back to the principle that a 10-province standard with all resource revenues in would be the optimal situation.
I feel that the fixed framework was never enshrined as a long-term solution. It was only envisaged as a short-term solution. The federal government had agreed to put $10 billion in the pot in 2004-05 and $10.9 billion in 2005-06. Because we did not come to agreement as to a formula for the future amount of money or cost sharing and that debate was raging on, the Council of the Federation wanted to have an opinion on this and therefore put together a panel to look at it. Of course, the federal government put its own panel together for the same purpose.
All I am saying is that because those reports were not concluded in a short period of time — although perhaps a reasonable period of time, but we will not get into that — people agreed there had to be an increase to the $10.9 billion from 2005-06 to 2006-07. There had to be some reasonable growth rate. Therefore, it was agreed by first ministers that, at least for the period until a new formula was put in place, a 3.5 per cent growth rate was not unreasonable. It was on that basis that we agreed.
We should not be viewing the fact that there was a sort of fixed framework for equalization that everyone agreed on any more than for a very short period of time to get through that period until a new formula was established as a long- term support for this. When you talk about fixed framework and its impact going out to 2014 or even 2020, it has no validity. In my view, it was never viewed by first ministers on that basis.
Mr. Hobson: I absolutely agree with Premier Binns that no one ever expected the fixed framework to be long-lived. Indeed, it was a stopgap measure.
However, I reiterate that the fixed framework has been offered under this budget, as indicated on page 72. The changes to the Federal-Provincial Fiscal Arrangements Act that would be involved are in proposed new section 3(7) at the bottom of page 72 of the bill. That has been offered to Nova Scotia and to Newfoundland and Labrador as a real choice.
For Nova Scotia, it is a real choice. Nova Scotia may well opt to remain under the fixed framework through to 2020. Page 72 also makes it clear that 3.5 per cent annual growth on the associated equalization pot is part of that arrangement. The Minister of Finance has made that very clear in his statements within the last couple of weeks.
Senator Nancy Ruth: I want to go back to Mr. Binns. In Mr. Locke and
Mr. Hobson's chart, they have Prince Edward Island down $196 million over the
next dozen years.
Mr. Binns, both you and Premier Ghiz are in support of the equalization program. Can you interpret what you think of this number? How valid or real is it? Why would both you and Premier Ghiz agree to the present system, if that is so?
Mr. Binns: As I said earlier, that number would have validity if a fixed framework were in fact the reality through to 2020. I should not say the difference of $196 million, but if you added 3.5 per cent each year to the pot from the base, you would get to the amount shown here for the fixed framework.
My point is that this does not take into account all of the other aspects that are in the budget. That is why the comparison between the two numbers really has no validity in the long term, in my view.
Senator Nancy Ruth: What about those other numbers — the Canada Health Transfer, post-secondary education and things like that?
Mr. Binns: There have been definite supports provided in this budget — for example, in Prince Edward Island's case, to things like wait times, to the ecoTrust, to the infrastructure, which are all federal transfers that have been significantly enhanced — and in our case, with some base funding that gives us proportionally more money and recognizes the fact that we are a small jurisdiction. That has to be taken into account when looking at the overall numbers.
Senator Murray: Mr. Locke and Mr. Hobson, you put out a larger document with these projections. You explained the assumptions on which the projections are based. If anyone wants to challenge your numbers, they should challenge the assumptions. I do not do so, but others might.
I want to ask you one question and it has to do not with the accords or Nova Scotia and Newfoundland and Labrador, but with New Brunswick and Prince Edward Island. Can you explain why those two provinces seem to take a hit if you compare the new program with the fixed framework? Is it because there were 100 per cent of resources included in the old five-province standard, or is there some other reason?
Mr. Locke: Why they took a hit?
Senator Murray: Your comparison is between the new program and the fixed framework. Why are they down? There is a 10-province standard with the new program; that is an improvement. I am the first to acknowledge that there are various improvements in the equalization — it is formula based, et cetera. Why are they taking a hit? What is the factor at work here?
Mr. Locke: The primary driver of the differential in results is the fact that on the fixed framework, the pot of money available for equalization will grow at 3.5 per cent. Therefore you have a growing equalization entitlement — not entitlement, but money available for equalization — that is growing relatively quickly. From a low base, it grows quickly; and under the new system, you have an elevated base that grows slower. Any fast-growing system, even starting from a lower base, will eventually overtake a slow-growing system. It has to do with the implicit growth rates in the monies available for equalization.
Senator Murray: Of course, it was the pot that was growing at 3.5 per cent. As Mr. Binns knows, there was no guarantee that any particular province was going to get a 3.5 per cent increase. It is the overall fund.
Mr. Locke: That is correct and that is reflected.
Senator Murray: Mr. Binns, it is good to see you here, bloody but unbowed after the recent election in Prince Edward Island. Everyone that I talked to says that your long-serving government went out because the winds of change were prevalent; and no one that I knew had a bad word to say about Premier Binns. You have gone out with your head high for that and all kinds of other reasons. I wanted to pay tribute to you on that account.
Your quarrel with your friends sitting next to you is that they compared the new program to the fixed framework. Well, yes, but they had to compare it to something. They could have compared it to the old five-province standard. I am not sure what that would have shown. Maybe they could tell us whether the numbers would be very different; I do not know.
The other point I wanted to make is that I said that it was a pot that grew by 3.5 per cent, but if Nova Scotia is the only province that opts for the fixed framework, one assumes that the pot pertains only to Nova Scotia and it would grow by 3.5 per cent, is that correct?
Mr. Locke: No. They would do the calculation as if all 10 provinces would be considered under the fixed framework.
Senator Murray: Does Nova Scotia know this?
Mr. Hobson: Yes, that language is very clear on page 71.
Senator Murray: Let me look at this. I think what you are saying, and what you attribute to your successor, Premier Ghiz, is that you are certainly getting somewhat less on the Canada Social Transfer. You know that; from the status quo, you are getting $4 million less this year and next year and $5 million less the year after. In this year and the succeeding two years, you are out by $13 million on the Canada Social Transfer.
If these people are right in their projections, by comparison with the fixed framework, you are taking a hit on equalization. However, your evidence, and that of your successor, seems to be we are getting $35 million in infrastructure this year and $38 million the year after; and we are getting $5 million on the Canada ecoTrust this year and another $5 million next year, so those gains make up what we may be losing on the other front. Is that what you and Mr. Ghiz are saying?
Mr. Binns: I cannot speak for the new premier, nor am I intending to. My experience is that what a province looks at is what the overall transfers are from the federal government on a year-to-year basis. We were all very upset, even though I was not there in 1994-95, when the provinces took a big hit because of the federal government running substantial deficits. However, we perhaps realized that that had to happen at the time, to a certain extent.
The fight really started, in my view, after 1994-95. It is not over yet because people are trying to regain what they feel they lost from federal transfers of that era. As I say, I think there is still a ways to go here. We have not found a final solution, if you like; but what I always looked at as a premier is what are the global federal transfers that are unencumbered by programs. We have some flexibility as to where we can use those — to top up health care and education and so on to meet those needs.
What we have seen in recent years is that we are starting to gain some money back. We have seen the health and social transfers come up nicely in the last few years; and we have seen equalization numbers getting back to where they were in 2001-02. They have now surpassed that, but they have not kept up with inflation since that time either.
My view is that this budget continues to address the fiscal imbalance. It has not solved the fiscal balance issue, but it is, to a certain extent, a compromise. Some compromises have been made outside the strict equalization part. The reference you made, Senator Murray, is a correct one.
I will be the first to admit that the base funding we are receiving, for example on wait times, is very helpful in Prince Edward Island. On a straight per capita basis, we received roughly $2 million. Because of the base funding, we received $12 million. That is a significant help to our situation in meeting some of our health care costs.
All I am saying here is that you have to put all of that in the package of federal transfers to determine where a province actually stands relative to where they were.
Senator Murray: Some of us have a strong view about equalization going forward as being the key program in terms of fiscal disparities. I will leave it at that.
Senator Cowan: Mr. Binns, you were premier for many years. You attended many first ministers' conferences and had lots of discussions about equalization programs and their evolution over the years. Does it cause you concern that, as Mr. Hobson and Mr. Locke have explained, if Nova Scotia and/or Newfoundland were to choose the fixed framework, we would have two equalization programs operating simultaneously in the country?
Mr. Binns: I always view these things as fluid and never necessarily fixed. My view is that this current budget and the indications or legislation here is part of an ongoing process. These provinces are big enough to speak for themselves, to make their own representations to find a solution with the federal government. I hope they do. All I am looking for in this, as one of the provinces not part of an accord, is that at the end of the day they receive fairness but that that fairness does not impact the rest of us in a negative way.
Senator Cowan: You are quite comfortable with two programs operating, at least for a period of time, within the same federation? As a person who has had a lot of experience over the years, is that something you would have thought would happen?
Mr. Binns: The ideal, as I have suggested, is other than what is being proposed as a compromise. However, the compromise is better than where we were. My ideal is still a 10-province standard with all resource revenues in. The federal government can handle the affordability as well. My long-standing contention is that the global amount of money available should get back to something like 1.1 per cent of the country's GDP. Not everyone has agreed to that. Sometimes you have to compromise.
There is some sorting-out to do here, obviously, with Nova Scotia and Newfoundland and Labrador and the federal government.
Senator Cowan: You think that this comparison between the new program and fixed framework for Prince Edward Island is not a valid number because Prince Edward Island does not have the option of the fixed framework anymore.
Did you do any modelling, when you were in government, as to the effect of the new program? If so, did your numbers differ significantly from what Mr. Locke and Mr. Hobson set out in their report?
Mr. Binns: The modelling we did was more directed towards resource revenues, and depending on the percentage that would be included in the formula, what impact that would have on the number for us.
Senator Cowan: Are there economic development programs in effect between Prince Edward Island and Canada?
Mr. Binns: Not many. I mentioned earlier the changes in federal transfers after 1994-95. Not only were CHST and equalization dramatically reduced, but we also saw a reduction in other transfers, economic development programs.
Senator Cowan: Were the transfers under those programs included in the calculations of Prince Edward Island's fiscal capacity?
Mr. Binns: Fiscal capacity would be based on our own tax base as opposed to transfers coming in, I believe.
Senator Cowan: One would not think that transfers under economic development agreements would be included in the base for purposes of calculating a province's fiscal capacity.
Mr. Binns: Right.
Senator Cowan: I have one question for Mr. Locke and Mr. Hobson. As I understand it, one of the difficulties, from the point of view of Nova Scotia and Newfoundland and Labrador, is that payments under the offshore accord are included in the calculation of the fiscal capacity of those provinces. Am I correct?
Mr. Hobson: That is correct; the total fiscal capacity for purposes of the cap.
Senator Cowan: Mr. Binns referred to modest programs in Prince Edward Island, and his understanding was that the transfers under those programs were not included in calculating Prince Edward Island's fiscal capacity.
If we move to other programs such as the auto pact with Ontario or the loan guarantees and transfers to Quebec or for the aerospace industry, were those included in the calculation of the fiscal capacity of those provinces?
Mr. Hobson: The answer is no.
Senator Cowan: Do you know of any economic development programs anywhere in the country where the transfers under those programs have been included in calculating the fiscal capacity of the recipient provinces?
Mr. Hobson: The answer is no.
Senator Cochrane: Thank you for appearing. I too want to congratulate Mr. Binns, because I know he has done a good job for the province of Prince Edward Island. I have known Pat Binns for quite a while; since he was an MP. I want to congratulate you for being such a great premier of Prince Edward Island.
My question is for Mr. Locke, because he is from my great university, Memorial, in my province.
We have heard time and again that no province will be any worse off as the result of this budget. I am interested in seeing the province benefit and prosper from their natural resources, and they are the non-renewable natural resources that were brought into the Canadian federation.
I would like you to help me through the rhetoric and spin that we face here. What impact does this budget have on Newfoundland and Labrador's bottom line? What do the numbers tell us? Are we really no worse off as a result of the so-called consequential amendments included in this budget?
Mr. Locke: We are worse off. Significantly worse off as a result of it. As a result of the changes to the consequential legislation, Newfoundland no longer qualifies for the accord under the new system. Newfoundland will not be allowed to keep, for example, the fixed framework after 2012 because it will no longer qualify for the accord. That is part of the information in the consequential amendments.
If they could stay with the fixed framework and not have to revert back to the new system, they would be better off even though they did not qualify for equalization after 2009. They would still be better off in later years. It is not a true statement that they will not be adversely affected by the changes in the consequential legislation.
Senator Cochrane: You had mentioned earlier that within a couple of years my province will be a have province. Do you have any sense of how long we will continue to be a have province? Will we continue to enjoy a have status in the medium and long term? More specifically, what happens to our have status a few years further down the line if certain oil projects are not developed? What happens to us?
Mr. Locke: It will depend upon development of oil fields, gas developments and a number of other issues. It is not an unreasonable scenario to consider that Newfoundland will go outside of equalization in 2009 and will stay out until approximately 2013. Then they will require equalization again unless there is a substantial increase in oil revenues as a result of new developments not yet started.
Senator Cochrane: What really does happen if the province becomes a have province but later returns to a have-not status? It may be only a couple of years down the road. We become a have province a couple of years down the road, but two years after that we will become a have-not province again. What happens then?
Mr. Locke: Then we are forced back into the new framework as a result of the information in the consequential legislation. We have no choice at that point in time. The accord is gone and the fixed framework is gone.
Senator Di Nino: I want to concentrate on one item: the issue of the cap. One of our colleagues talked about what she believed to be the inappropriateness of the cap and she mentioned the fact that Ontario, as well as Alberta, would benefit from that.
First, I want to speak on behalf of the Province of Ontario and I certainly I want to speak on behalf of the Premier of Ontario who has said, "I just want to make it clear on behalf of Ontarians, and clear to all Canadians, that we're a strong partner, we are a supportive partner, but we will not be a silent partner if we find ourselves in a position where we are contributing to equalization payments to provinces which have a fiscal capacity which exceeds ours.'' I want to make sure that it is on the record.
Ontario also has its problems. It has had problems certainly with its industrial base. There have been literally hundreds of thousands of jobs lost over the last two to five years.
We have to take seriously the fact that there are only two provinces right now that are contributing to equalization. I think there has to be an understanding that if there is a province or more than one province that becomes a have province in whatever way, they should not expect to continue to receive equalization from those that still have the capacity to give it.
Specifically on the cap, there has been a great deal of discussion and I would just like to quote to you what Janice MacKinnon, a former Saskatchewan NDP finance minister said on that. She called the cap "a basic, common principle,'' and she said, and I quote, "Without the cap, resource rich and prosperous Western provinces could receive billions from oil while Ontario taxpayers paid them with equalization.''
When looking at the O'Brien report, we see they included the cap because they felt it created a fairness in certain situations if those situations were to occur. I would like your comment on that and then I may have a quick follow-up question.
Mr. Locke: First, I would like to point out that equalization is a federally funded program and all provinces contribute to that particular program, not only one or two.
Senator Di Nino: We know the reality.
Mr. Locke: You made a point and I just want to be clear on that.
The O'Brien panel adopted the principle that any province that receives equalization ought not, by virtue of receiving equalization, be put in the position that they are above the lowest non-receiving province. That is the principle. There are other principles one could espouse, but that is certainly one they adopted. Consequently, the panel also accepted and incorporated an asymmetric definition of fiscal capacity, one for equalization purposes and one for defining whether you are over the cap.
That creates some problems. The big issue is not whether the cap is binding and ought not to be binding. It creates other problems: each province that is not hit by the cap has a different per capita fiscal capacity if it has different per capita resource revenues. That is another principle we might be concerned about — that each province should have relatively the same capacity to provide good and services.
However, the real issue is the accord, and the accord is no different from the auto pact, no different from Technology Partnerships Canada funding for industry in Quebec or in Ontario. If we included all economic development initiatives that would be fair, but it is not fair to include only a particular one when determining fiscal capacity. That is the biggest concern I have. I do not think I would object to the issue that, with equalization in and of itself, without the accord payments being excluded from fiscal capacity, you ought not to receive equalization if it puts you above the lowest non-receiving province. That is under the assumption that the accord is removed from the definition of fiscal capacity and the accord is treated as it was defined in the legislation in 1985 and 2005.
Senator Di Nino: The Minister of Finance said that the accord is not of economic benefit in that sense; do you agree with that?
Mr. Locke: No, I do not.
Senator Rompkey: He did not say "economic benefit;'' he said it was not an "economic development agreement.''
Senator Di Nino: It was not an economic development item.
The Chairman: I believe Mr. Locke understood the question.
Senator Di Nino: That is fine. That was just to make sure. There was a difference of opinion on that.
Let me just ask one other question dealing with this. I think it was Premier Calvert who said today that we are selling our assets. I agree with him. Those assets are being sold, but the proceeds of those assets are proceeds that come back into the province to be — I am not sure if the word "invested'' is appropriate — used for other purposes that would increase the wealth and value of that province. There is some continuing value to the proceeds of — to use his phrase — the sale of those assets. Would you not agree that we continue to build the wealth of the province?
Mr. Locke: Sure it is. However, should a province be at the cap and going over the cap as a result of resources, then, as Mr. Courchene's letter in the paper explained to the Canadian public, the incentive structure changes quite dramatically. The current equalization formula says payments of revenues from resources. You have an incentive to distort how you might take the value of those kinds of things. For example, you might say we will build a hospital or build transmission lines. That is a real problem we have to come to grips with. More important, we need to come to grips with the fact that provinces like Newfoundland and Nova Scotia have fundamental weaknesses that the boost from the accord will help them get over, for example, in terms of debt servicing per capita. The boost from the accord will allow them to get their act together so that when they no longer need equalization they have the ability to sustain that ongoing development in a way that is beneficial not only to themselves but to Canada as a whole.
Senator Di Nino: I do not think you will find any disagreement. It is just a question of how you classify it.
Senator Baker: I want to congratulate the three witnesses here today for each being remarkable in his profession.
Before I ask a question, I want to comment on Senator Di Nino's statement about equalization and to note, Mr. Chairman, that in the bill we are dealing with, on the page before the list of equalization payments for this year to each province, $400 million is being awarded to Ontario to assist them in a single corporate tax system. Why is that significant? Do you know that is exactly the amount that Newfoundland and Labrador gets for equalization this year? That is very noteworthy, is it not?
Also, Senator Stratton, who sits next to Senator Di Nino, is from the province of Manitoba. Which province in Canada receives the most under this bill per capita in equalization? Manitoba. Not Nova Scotia, not Newfoundland, not New Brunswick or Prince Edward Island, but Manitoba receives more per capita for equalization than any other province in Canada. In total amounts, we see that Quebec receives the highest total amount and Manitoba is the second highest. Per capita, Manitoba is one of the Western provinces that receives more per capita for equalization. I just thought I would mention that.
Senator Di Nino: Thank you for that. Have you considered how much we contribute?
Senator Baker: I knew you would appreciate that, Senator Di Nino.
Premier Binns, you are a past premier, but we still refer to you as "premier.'' I wrote down your exact words from your opening remarks. You said, "As a Prince Edward Islander, I support this budget.'' Then you said, "And as a Canadian, I support this budget.'' You put the fact that you were a Prince Edward Islander first. I notice you mention that a lot in your speeches: "as a Prince Edward Islander.'' That seems to come before anything else.
Do you wish to comment on that? Is that a normal way that you express yourself?
Mr. Binns: I am not sure where this is leading, but I am curious to find out. Senator Baker, I have been the Premier of Prince Edward Island, so the first job I had every morning in the past was to represent Prince Edward Island. Interestingly, I was not born in Prince Edward Island. I was born in Saskatchewan and I grew up in Alberta. I moved to Prince Edward Island by choice, but I think of myself both as an Islander and as a Canadian.
Senator Baker: However, as a Prince Edward Islander, you pass judgment on a bill that comes before the House first and you put yourself first as a Prince Edward Islander.
As a Nova Scotian, as the Premier of Nova Scotia, would you say this is a bill you would support?
Mr. Binns: I think Nova Scotia and Ottawa have to sort out their differences, and I would suggest the same for Newfoundland and Labrador and the federal government.
I feel that where we are with this budget for this particular year makes most of us better off than we were in the past. I said before that I think all of these things are a work in progress. At the end of the day, what everyone will be looking at is fairness and whether we are able to continue to achieve that.
What I see still happening is a certain amount of negotiation and discussion behind closed doors, and some open doors, which will lead to further changes down the road. That is why I return to the current situation and the offer that is on the table. My view is that for Prince Edward Island, this budget is a substantial improvement over where we were. However, I do not think it is the ultimate fix and I think Prince Edward Island should continue to ensure that fairness is received in the long term. It is an uncompleted piece of work, in my view.
Senator Baker: In other words, if you were the Premier of Nova Scotia, you might think differently than if you were the Premier of Prince Edward Island, and you accept this budget although the evidence clearly shows that Prince Edward Island will lose in the long term, though they will gain in one case in the short term. Is that an accurate analysis?
Mr. Binns: No.
Senator Baker: You say that three or four years down the road they will gain in equalization?
Mr. Binns: I was talking about the aggregate federal transfers. In my view, we will continue to gain for a number of years. As I said, these things are always a work in progress. In my view, we should continue to lobby for an improved or enhanced equalization program. Again, the objective should be for everyone to get off of equalization at some point.
Senator Baker: I do not think I will pursue it any further with the premier.
Let me now turn to the other guests. Dr. Locke, you mentioned that you had some difficulty getting the accurate figures out of the federal Department of Finance. The word "accurate'' is, of course, very important. There was a letter written to the Premier of Newfoundland on June 5, which said that instead of any province, the cap would be the fiscal capacity of the highest non-receiving province.
The Minister of Finance appeared before the committee after the Premier had written a letter to the Prime Minister asking for clarification. The Minister of Finance said to this committee that it was a typo and that in fact he did not mean to say "the highest non-receiving province'' but, rather, "any province.'' That is quite a typo.
With that news in Newfoundland, how much was that worth? What he meant was you could say the lowest, but you put in the highest. This goes through 50 hands, and you, as minister, sign something. I would say that is a contract probably worth going to court over.
Mr. Locke, how much would that have been worth? Did you have a look at it at all for that moment when this letter came from the Minister of Finance, which had a typo? Would that have solved their problem?
Mr. Locke: I did not look at that specifically, but it is effectively the same as if there is no cap. It would have been worth in the billions. It could have been as much as $5 billion or $10 billion. It is a big number. We have not looked at that specifically, but we have looked at a situation where Mr. Williams had stated what he thought he had got in the promise. We were not concerned about whether the promise was kept or not, but we just wanted to understand what some of the dynamics were. We looked at that, and it was worth about $10 billion.
Senator Baker: That is amazing. The Prime Minister must have been elated when he received that letter, and now, in listening to this committee proceeding, he discovers it was a typo. That must have been quite a letdown for him.
Mr. Binns mentioned that there were ongoing negotiations. We have a letter from the premier that you were going to circulate, which indicates that Mr. Flaherty told the Senate Finance Committee that he is in discussions with Nova Scotia, New Brunswick and Newfoundland to work out a way for these provinces to opt in and out of the accords to receive the highest amount of federal transfers. As I have pointed out in correspondence to the minister today, that statement is not accurate. The Premier of Newfoundland cannot be here because he is hosting the National Aboriginal Women's Summit in Corner Brook, Newfoundland, this week, and that is where he should be.
In conclusion, I want to congratulate the economists before us today. You gentlemen have done a marvellous job and I think your piece of work here is completely accurate. I do not agree with Mr. Binns and the Minister of Finance that it is not accurate.
Senator Mitchell: Premier Binns, the Prime Minister, Mr. Harper, before he was Prime Minister, made a great deal of his commitment to improving relations with the provinces. Clearly, he has not accomplished that. In fact, relations have deteriorated significantly, to the point where one of your former colleagues is actually suing the Prime Minister. That seems to be very unfortunate, and certainly one would wonder what would have happened had the Prime Minister made a commitment to diminishing the quality of relations. I do not know if it could have gotten worse.
The fact is that he has not done that and at the same time he has made huge changes in federal policy that have impacted provinces. He has changed the equalization formula, which we have been discussing for days; he has cancelled child care agreements that were negotiated with each province; he has cancelled the Kelowna agreement, which was negotiated with the provinces, the territories and the leaders of the native communities; and he has reneged on the accords. One would think, at the very least, he would want to consult premiers, his counterparts, his first ministers in some sort of structured formal way before he made those decisions that would impact on his colleagues so significantly. In fact it almost seems rude not to do that.
There has not been any kind of formal, structured first ministers' conference with the Prime Minister since he became Prime Minister; is that right? I know there was an informal dinner at 24 Sussex Drive earlier on, but there have not really been any formal, structured discussions that the Prime Minister might undertake as prime ministers in the past have done with premiers.
Mr. Binns: I would suggest that first ministers' meetings with the new Prime Minister are at this stage probably as frequent as they were in the past. I can remember a number of times going over a year without a first ministers' meeting.
Senator Mitchell: It has been 17 months, but I guess you have to ask yourselves whether change in equalization, cancelled child care agreements, cancelled Kelowna and reneges on accords would have been done in the past without any kind of formal discussion with the premiers with whom he has stated he wants to have a better relationship.
Is he given to picking up the phone and calling premiers and saying what do you think about this? Did he do that with you periodically? Did he ask you what you thought about equalization, what you thought about him cancelling Kelowna? Would he do that on a one-on-one basis or is that completely unilateral?
Mr. Binns: I could argue with a number of the assertions you have suggested.
Senator Mitchell: Feel free.
Mr. Binns: There are areas where programs have been enhanced. I cannot say he has picked up the phone and talked to other premiers, but I know he has done that to me on a number of occasions and I found the door relatively open.
Senator Mitchell: It is evident that he has not gone back to talk to Mr. Williams or Mr. MacDonald. In fact, Premier MacDonald was here and he said very clearly that there have been no discussions. It is just remarkable.
Senator Moore: I want to follow up on Senator Ringuette's questions in regard to the Canada Social Transfer. Based on the October Statistics Canada figures as to the population of Nova Scotia, this year my province will get an extra $6.5 million and Alberta gets $344 million. Just to show the widening of the gap, in ten years we would get $65 million and Alberta would get $3.44 billion.
I would like to hear what the professors have to say in regard to the obvious widening gap. I think of the jeopardy that it puts our universities in. I do not know how we will be able to compete and how we will retain our best professors, our best students and researchers. I am very concerned about this. There is no question about the huge divide that this has created in the country. I have heard the word "fairness'' from Mr. Binns. There is no fairness in this; there is no equity in this.
You are both on campuses. You will probably have looked at the impact of these things. Would you like to comment on that, please?
Mr. Hobson: There is no question that this has huge implications for the funding of post-secondary education in all provinces. It is a huge boost for Ontario and for Alberta. From Nova Scotia's point of view, I think what we are getting is approximately a quarter of what we would have gotten in terms of our share of the additional money going into the Canada Social Transfer and that will have ramifications for post-secondary education funding in Nova Scotia, New Brunswick, Prince Edward Island and Newfoundland and Labrador.
Senator Moore: We heard yesterday from Minister Baker, Nova Scotia's Minister of Finance, that under the old arrangement we would receive $28 million; now we are getting $6.5 million. Have you looked at that in terms of other provinces or in terms of Newfoundland and Labrador and the impact on Memorial University?
Mr. Hobson: Again, our paper is focussed on the equalization side of it. It is not difficult to do the calculations you are asking about. We could have those for you in 24 hours.
Senator Moore: It would be interesting to see the numbers because I am very alarmed by it. I know that our universities have the same concerns I am expressing. If you could provide numbers like that, it would be helpful.
Senator Biron: Yesterday the Honourable John Crosbie proposed an amendment as a solution that would restore trust and credibility in existing and future bilateral federal-provincial agreements. He said that if the Senate accepted this amendment he did not see any reason why the government should not act sensibly. He thinks the government should leap to seize this amendment if we pass it.
That is what Mr. Crosbie said he would do if he were the Prime Minister and wanted to survive. Does the Atlantic Provinces Economic Council support Mr. Crosbie's amendment?
Mr. Hobson: Senator, we cannot speak on behalf of the Atlantic Provinces Economic Council; we are simply senior policy advisors. You would need to speak directly to the president, Elizabeth Beale, and she would no doubt consult with her board.
We are not lawyers and so we would hesitate to venture into this territory, but my sense of the spirit of what I have been shown here by way of the amendment is that this would be one way of fully respecting the spirit and letter of the accords.
The proposed amendment says that no offshore revenue should be included in the total fiscal capacity calculation. Well, the accords are all about offshore revenue, so you get that out of the equalization calculation for cap purposes and any amount that may be paid under the Atlantic accord, which pertains to the payments payable to Newfoundland and Labrador under the 1985 accord and any amount paid to either province under the 2005 accord.
If you take all that stuff out obviously you are fully respecting the spirit and the letter of the accord. My brief reading of this is it would indeed be one way of ensuring that the accords are fully respected under the new equalization program.
Senator Biron: Personally, then, you would support that amendment?
Mr. Locke: Recognizing that we have not had a chance to think on this very far, it does appear to be consistent with our way of thinking, yes.
Senator Angus: This may be a point of order; you can decide. It is just in relation to this email that has been referred to from Premier Danny Williams, part of which was read into the record by Senator Baker. Premier Williams was correcting a misrepresentation reported yesterday by CanWest reporting that Minister Flaherty told the Senate Finance Committee that he is in discussions with Nova Scotia, New Brunswick and Newfoundland and Labrador, whereas, in fact, and I have carefully reviewed the transcript, he said he was in discussions with Nova Scotia. If anyone made a mistake, it was the CanWest news service. I am not suggesting that anybody else in this room is party to that. I wanted to make the record clear as a point of order.
The Chairman: We are on the point of order.
Senator Cowan: In the interests of clarifying the record, Premier MacDonald, who appeared yesterday afternoon, was asked that specific question. He said that there were no consultations going on between the federal government and the Government of Nova Scotia, and that Mr. Flaherty was wrong when he said that yesterday morning.
Senator Angus: That may be another point of order. As I have seen in the record here, which I have in my hands — it is the official transcript — he did say that he was having discussions with Nova Scotia but not with the other two provinces. That is my point of order.
The Chairman: I understand your point.
Is there anything further on that point of order? If CanWest Global has made a mistake, I am sure they will pick it up on the telecast this evening.
Senator Baker: I have a different point of order, Mr. Chairman. What the witnesses read out when Senator Biron asked the question about Mr. Crosbie's suggested amendment, Mr. Crosbie did not put it in those exact words, but I had the legal department arrange an amendment to the bill as per the Crosbie recommendation, and that is what the witnesses read out. You may just see the Crosbie amendment proposed to the bill when we get back to the Senate.
The Chairman: Thank you for that. I will not take that as a point of order, but it is an interesting point nonetheless. It may be seen in due course. We saw the Honourable Mr. John Crosbie yesterday and he produced what he thought would solve the impasse.
Honourable senators, we are almost at the end of our time; in fact, we are a little bit over. I do not like to end off this session without giving honourable senators an opportunity to ask questions. Please keep your questions short and snappy.
Senator Rompkey: I wanted to follow up with Mr. Locke along the line of questioning that Senator Angus started with Mr. Locke with regard to the two reports he made, the first report and the changed report, and the reasons for the change, as I am not sure it was clear to the committee exactly what happened.
You made a report, which you made public, based on certain information that you got. The provincial government had the same information. Once the report was out, new information came to you that you had not received before and that the provincial government had not received before. On the basis of that new information, you presented a new and different report. Tell us what happened between the first report and the second report. We want the record to be clear.
Mr. Locke: I cannot speak for what the provincial government was told. I can speak to what involved me personally.
Before releasing the initial analysis that was referred to, the April 4 analysis, I had consulted widely with people in the know, including provincial and federal finance departments, including the sending of emails for a crucial assumption, which was whether or not qualifying pre-cap for equalization enabled you to qualify for the accord. The response I received in writing through email from two separate individuals indicated that yes, that interpretation was correct, from federal finance. When I checked with the provincial finance, that was their interpretation as well. It seemed reasonable given the fact that the accord payments were calculated pre-cap as well.
I then proceeded to finalize the analysis. I was going to release it in a public information session to help inform debate. I gave copies to federal finance and to provincial finance in advance of doing so. I wanted people to know what we are doing. This was not meant to be a political thing, but to provide a public service as part of being at the university.
I first got my phone call from federal finance at two o'clock in the afternoon on the day of the presentation, saying that they have now had a chance to review the numbers and that I should be concerned that the budget implementation act put forward before the House, Bill C-52, on Thursday — and this was Tuesday — and that the assumption that I used in terms of getting information from officials in the federal finance department and confirmed with provincial finance, was not what was put forward as part of Bill C-52, the implementation bill. In fact, they had put in what we would consider to be an arbitrary trigger for the accord. The arbitrary trigger said that if the total fiscal capacity per capita of a province such as Newfoundland exceeded the lowest non-receiving province, it did not qualify to be calculated for the accord payment.
That one change alone — a discretionary change that had nothing to do with O'Brien — effectively precluded Newfoundland on a go-forward basis from qualifying for the accord under the new system.
Senator Rompkey: That information was not given to you by the federal finance department before you released your first report; it was given to you only when they saw the contents of you report and felt they had to correct it, otherwise they would be embarrassed once your report came out. They knew that the initial information you got was not the full story. You only got the full story when you gave them a copy of your release. That is when they gave you the full story.
That is in line with one of the comments that you first made, that whenever they had a chance for discretionary changes, they were detrimental to Newfoundland and Labrador. I remember you saying that in your original testimony. I just wanted to get that on the record because it is very important. The initial information from federal finance was not full, complete and accurate. It only became full, complete and accurate once you showed them a copy of your first release.
That is my first question. I promised to be brief. Can I have a second short, snappy question?
I want to congratulate Senator Di Nino, a fair man. He asked about Premier Calvert's testimony and the fact that Premier Calvert said that these resources were provincial and they were to be used to help that province become a have province, to pay down its debt and become a contributor. Senator Di Nino got that and I am glad he did. That is the essence of our argument. Premier Calvert does not have an accord, but he has resources. We have resources and we have an accord, as does Nova Scotia. We are in the same position. I am glad that Senator Di Nino has got that because it is the message we have been trying to get through. These resources are a lifeline for us. They will be used to make us contributors and not takers.
Senator Ringuette: I have been asking for a lot of information and data and you promised to supply it in 24 hours. My chairman was looking at me asking whether there would be a cost. Will there be a cost for us?
Mr. Locke: No.
Senator Ringuette: You are more generous than the bureaucrats at the Department of Finance.
Mr. Hobson: We said we could do it. We did not promise to do it.
Senator Cowan: Premier Binns, you signed a number of agreements over your time as premier of the province with the Government of Canada, for many things, from bridges to highways, education, health and early childhood education. Am I correct?
Mr. Binns: Yes, you are right.
Senator Cowan: Many of those agreements you signed provided for transfers of funds to Prince Edward Island from the federal treasury.
Mr. Binns: Correct.
Senator Cowan: On the basis of those agreements, many of which were multi-year agreements, you made significant budgeting decisions in the province of Prince Edward Island.
Mr. Binns: Correct.
Senator Cowan: Did the federal government ever, in your experience, break a written agreement between the Government of Prince Edward Island and the Government of Canada?
Mr. Binns: Well, I had an experience with equalization in fact, where it was understood that —
Senator Cowan: I am talking about signed agreements, Premier Binns.
Mr. Binns: Many of these agreements referred to as signed were not necessarily signed but were hammered out around the table and so on. We had an understanding of receiving X amount of dollars for equalization, and we found later that that would not be the case and that we would receive less money.
Senator Cowan: Did you ever have an agreement to which you put your signature, or one of your ministers put their signature, and either the Prime Minister or a minister in the federal government had signed, that provided for monies to be transferred to your province and you did not receive those moneys?
Mr. Binns: You are wanting me to speak to the situation regarding Nova Scotia?
Senator Cowan: No, I am not. I am not talking about the Atlantic accord at all. I am talking about your experience as a long-serving premier of a province.
Mr. Binns: You are asking the question because you want to bring me into their argument.
Senator Cowan: Is the answer yes or no?
The Chairman: Are you able to answer that question, Mr. Binns? Mr. Binns does not wish to answer the question.
Senator Cowan: That is all I wish to ask.
Senator Moore: On April 1, 2014, the current health transfer arrangement expires and that then converts to a per capita basis of distribution. Have you looked at those numbers? I again look at the situation in my province in Nova Scotia and the other Atlantic provinces with aging populations, decreasing populations and increasing health costs. I look at the obvious, huge gap that will occur in the availability of funds to provide some semblance of equal service for health, let alone education. Have you looked at those numbers and what the impact might be?
Mr. Hobson: The answer is the same as for the Canada Social Transfer. No, we have not, but I repeat my earlier answer in that whole area. What is involved in going to equal per capita cash is a huge transfer of fiscal resources to the provinces of Ontario and Alberta.
The Chairman: Mr. Hobson, Mr. Locke and Mr. Binns, I thank you very much for being here. I appreciate your staying on longer than the assigned time so that all senators could have a chance to ask their questions. The evidence and the information that you have given us will be helpful in our deliberations. Thank you.
Senators, you will have received a notice that we will be meeting in this room at 10 o'clock, at which time I will be putting to you whether you are prepared to proceed with clause-by-clause consideration of this bill. The meeting is now adjourned.
The committee adjourned.