Proceedings of the Standing Senate Committee on
National Finance
Issue 28 - Evidence
OTTAWA, Wednesday, November 7, 2001
The Standing Senate Committee on National Finance met this day at 6:15 p.m. to examine the effectiveness of and possible improvements to the present equalization policy in ensuring that provincial governments have sufficient revenues to provide reasonably comparable levels of public service at reasonably comparable levels of taxation.
Senator Lowell Murray (Chairman) in the Chair.
[English]
The Chairman: We have a quorum.
Honourable senators, this is our seventh public meeting on the subject of equalization. Our mandate is to examine and report on the effectiveness of and possible improvements to the present equalization policy in ensuring that provincial governments have sufficient revenues to provide reasonably comparable levels of public service at reasonably comparable levels of taxation.
We are required to report on this matter no later than December 21, 2001.
We have two witnesses tonight. The first is Professor Michel Boucher.
[Translation]
Mr. Boucher is a professor of economics at the École nationale d'administration publique of the Université du Québec, since 1975. He studied at Laval University and at the London School of Economics and Political Science. His areas of interest and fields of research are public finance and the analysis of government policy, as well as public institutions and their governance.
He has published numerous articles in national and foreign scientific publications. He is also the author of several monographs and two books that were published recently, one of which is about democracy in a market economy, and is entitled: Ici le peuple gouverne [Here the people govern], and another on performance in Quebec entitled: La libéralisation des marchés de l'électricité [The liberalisation of electricity markets].
Mr. Michel Boucher, École nationale d'administration publique, Université du Québec: I want to thank you for this invitation, which allows me to share my general thoughts on the role of equalization on the behaviour of the various levels of government in Canada.
I am an economist specializing in the analysis of government policy, and the analytical perspective I have adopted consists in considering any policy as deriving from the political rules of the game.
In short, my point of departure is that Canadian politicians, whoever they may be, want to maximize the probability that they will be elected or re-elected. They do not differ in any way from other Canadians who are pursuing their own happiness and who are attempting in that quest to maximize what they value the most. I intend to discuss with you the long-term, perverse effects of equalization on the behaviour of the various Canadian governments. Any government policy creates positive or negative incentives, so that the economic agents that are affected change their behaviour to take advantage of the positive aspects of whatever policy is in effect. The governments that benefit also comply with the incentives contained in the policies. Federal political equalization, whose objective is to provide all Canadians with relatively comparable public services, is no exception to that rule. Its effects must be analyzed in the Canadian political and economic context.
I have tabled a brief that raises the possibility that Canadian governments could collude politically and thus reduce the political competition among the provinces. The taxpayers concerned must then shoulder a tax burden that is not in keeping with the true value of the public services they receive. Equalization constitutes, in the perspective I adopt, the instrument the federal government has at its disposal to discipline the provinces. However, the liberalization of international trade pursuant to the two free trade agreements in 1989 and 1994 led the Canadian governments to reduce the relative share of their own expenses on the gross domestic product. The federal and provincial governments then noted that the increased mobility of resources was weighing down their redistribution policy as compared to the political advantages obtained. In a word, international competition encourages the various Canadian governments to take the preferences of Canadians in general into account, and not only those of special interest groups.
I would now like to highlight the variety of adverse effects and negative incentives that are a part and parcel of equalization. Aside from the possibility of Canadian governments forming a cartel to reduce competition among the provinces, equalization which is part of the harmonization measures of pan-Canadian services that prevent individuals from exercising their mobility and "voting with their feet", that is to say from leaving the province that abuses its powers. Equalization not only immobilizes resources in their unproductive location, it also leads provincial governments to resist changes in their policy, and equalization brings about that result by preventing provinces from having to deal with the costly consequences of their own policy. Equalization means that the cost of an ineffective provincial measure is passed along not only to its consumers and producers, but also to the residents of other regions.
I will give you an example. When the Government of Quebec increases the minimum wage, it shrinks the number of jobs. By reducing the number of jobs, it reduces the tax base and consequently, it receives additional equalization payments. That is one example of a perverse effect.
This leads to the empirical conclusion that the provinces that receive payments adjust less quickly than the donor provinces.
I have now been working for a few months on the equalization formula with a view to writing some scientific articles. The provinces that give money - Alberta and Ontario, for instance - adjusted more quickly to the free trade agreements because they were penalized if they did not become competitive. The Government of Quebec only recently reduced tax on personal income. It only did so in the beginning of July. I often use Quebec as an example because I live there.
Equalization can thus lead provincial governments to manipulate the tax base and extract additional sums from the equalization formula which they could not obtain otherwise.
I will give you an example. During Mr. Lévesque's first mandate in Quebec there was a strike by Société des alcools, the liquor board, that lasted 10 or 11 months. Why would Mr. Parizeau, the Minister of Finance at the time, an intelligent man, have tolerated this strike during for so long? The reason is that the province of Quebec, because of the shortfall caused by the strike, was compensated for 90 per cent of the amount it would normally have collected. That means that during 10 months, Quebecers who wanted to drink had to resort to contraband alcohol.
Another element of manipulation can be seen at work currently in the Atlantic provinces, with regard to oil and natural gas. Why do people think things through very carefully before developing their natural resources? You have to look at the equalization formula in context, rather than in isolation.
Another long-term consequence of equalization is that it freezes the political environment over the long term and guarantees that the political status quo will be maintained. By restricting the mobility of resources toward the sectors where they would be better employed, equalization means that the number of electors in provinces in decline diminishes more slowly, as well as the number of their representatives in the House of Commons.
In conclusion, the political and economic analysis of equalization reveals that its real effects are far from being those that were intended. Far from leading to a decentralization which would reflect the preferences of individuals, equalization leads to a standardization of public services throughout Canada and generates behaviours on the part of provincial governments which were not intended. Whatever the situation, when the interests of the parties involved do not converge, perverse effects will follow. As long as the interests of those who design the equalization formula are not in tune with the interests of the provinces, there will always be-and those who preceded me came to the same conclusion-perverse effects, unforeseen occurrences. Thus, there are some well-founded doubts that lead one to question the benefits of equalization as compared to its costs. It is impossible to assess equalization if you isolate it from its political and economic context.
The text I sent you is a description and an empirical demonstration of the perverse effects equalization can have on the behaviour of governments.
Senator Bolduc: Mr. Boucher, you gave minimum wage as an example. Do you have any other examples in mind which would help us to better understand your reasoning?
Mr. Boucher: Yes. It is exactly the problem the provinces of Nova Scotia and Newfoundland are facing at the present time. You have only to look at what the Quebec government is doing with regard to water use, even if that is not exactly the same thing. I did some research recently. I estimated that the current value of water charges in Quebec was around $1.5 billion per year. But the province of Quebec only collects $60 million per year. What does it do with the money? It is quite simple. A law which was passed in 1999 allows the Government of Quebec to say to aluminum plants or pulp and paper mills: "Rather than collecting charges that should be redistributed to Quebecers, invest a few billion dollars and we will not collect any tax." You would see a similar situation with Voisey's Bay or any other such undertaking. This means that one fine morning in Labrador, the Premier could say: "It is just too bad, there will not be any fees, but you will invest an equivalent amount in building and development."
There are a lot of similar mechanisms that allow provinces to play with or manipulate tax revenue. There are 33. These are the perverse effects that occur. I am talking to you about those that I know. You could find similar effects outside the equalization formula. Think for instance about employment insurance benefits.
Senator Bolduc: For about 20 years, Quebec has had language policies that have tightened the rules of the game for anglophones, and because of that some have left. Since these were people with high incomes, the average salary in Quebec went down, and the province benefited from higher equalization payments. Would this be an example?
Mr. Boucher: It is a good example. I will once again use the example of the former Minister of Finance of Quebec. When English-speaking Quebecers left the province because of language policies, Mr. Parizeau boasted that in the short term this had had no impact because even though these high-income residents were leaving Quebec, since the tax base was reduced, the province would be compensated through equalization payments.
With the equalization formula, since the federal government is not keeping a close eye on policies overall, someone with half a brain can manipulate the system and come up with advantageous policies. In the case of language policy, Quebecers and other Canadians paid the bill. Think about it. You are an English-speaking Quebecer. For a variety of reasons, among these the fact that you are more mobile than the average francophone - you are going to relocate.
Your relocation should normally bring about a vacuum and force the province of Quebec to readjust if the equalization system no longer existed. But it does exist. Whenever a person with a high income left the province, the government of Quebec was rewarded, because its equalization payments increased.
Senator Bolduc: But there are limits to this way of doing things.
Mr. Boucher: Yes.
Senator Bolduc: Quebec, for instance, only receives half of the equalization, which represents five billion out of 10.
Mr. Boucher: You are correct, but you can see the effect of equalization.
Senator Bolduc: The theoretical model is interesting.
Mr. Boucher: If there were no equalization, Quebec would be forced to face the consequences of its policies and the costs incurred by those policies. But Quebec has not had to face the consequences of its policies because the equalization formula offsets its losses. In that way the equalization formula subsidizes the Quebec government for lost tax revenue. However, it is the average Quebec citizen who must deal with the real constraints, not the government of Quebec. Why are Quebecers doing more clandestine work? They are no less intelligent than other Canadians, but they have to deal with so many constraints that as consumers or producers, they are attempting to reduce the cost of these political consequences by turning to the parallel economy. That is an example of a perverse effect.
I found another example purely by happenstance. Among the provinces, Quebec is among those that adjusted the most slowly to the equalization formula. When there is less growth in a province, the population diminishes and fewer immigrants are interested in settling there. What do we then observe? If there were no equalization formula, the redistribution of Canadian electoral districts would be different. There would be fewer Quebec MPs. We would see the same phenomenon in the maritime provinces, which are in a less favourable situation than more dynamic provinces such as Ontario, Alberta and British Columbia.
The equalization formula slows downs political adjustment. One has only to look at the number of electors per riding in Canada. If you take eastern Ontario as an example, you would see that there would be far fewer MPs from that region if the equalization system did not exist.
Take the adjustments Nova Scotia and Newfoundland had to make, for instance. They have a lot of natural resources, especially in Labrador. If those resources contain as much oil and natural gas as people believe they do, they will surely become the engines of development in Canada over the next 20 years. However, these riches create a dilemma. If these provinces attempt to exploit their resources, they run the risk of seeing a certain percentage of the revenue generated by those resources get swallowed up by the equalization system.
I submit that natural resources do not belong to the provinces, but to individuals.
The Chairman: And how would that work out in practice?
Mr. Boucher: Let us say that charges on natural resources in Nova Scotia amount to $2 billion a year. If the resources belong to the citizens, they will be richer. Divide that amount by the number of citizens in Nova Scotia. This was verified in Alaska at the beginning of the 1980s. The Supreme Court rejected the principle, but another mechanism was found. There was an impact on the tax base. This is what you can see in the Canadian West with oil. Even though the government has for a few years now used the riches generated by natural resources to pay its debts rather than adding them to the Heritage Fund, those riches are capitalized in the cost of houses, land and in people's incomes. That is the point that must be grasped.
I am simply trying to tell you that the equalization system should have had a certain number of consequences, but these consequences did not occur. Why not? The provinces noticed one day that they could play with these concepts, manipulate them.
Furthermore, with the liberalization of trade between Canada and the United States, and the World Trade Organization, the cost of redistribution policies, and thus of the equalization system, is going to become prohibitive. This is what we have discovered through empirical means. Since the liberalization of trade leads to a greater mobility of resources, and a greater mobility of capital, and since on the other hand inputs are less costly, you will observe that political parties, federal as well as provincial, will be asking themselves what the costs will be of the redistribution policies they create.
Politicians are human beings. They look at advantages and disadvantages. According to the cartel theory, when there is more competition in Canada, as has been the case since the 1989 and 1994 free trade agreements, it was more to the federal government's advantage to take care of its own expenses than to play the role of the one who disciplines the cartel. The proof of this is that if you look at the relative share of the federal government's expenses, it has decreased, whereas the relative share of the provinces' expenses has increased. This means that the federal government reduced its expenditures, because part of its expenditures went to the provinces, not for reasons of efficiency, whereas the provinces, with the adjustment that occurred, increased their expenditures, because they were forced to concern themselves more with the interests of their citizens.
I attempted to understand what role the equalization system played in Canadian society and to see what happens when there is increased competition. The greater the competition in a private market, the more the producers seek to lower their prices, because if they do not do so someone else will.
On the basis of data from 1981 to 1999, we noted, empirically speaking, that when there is more competition, the federal government takes a greater interest in the expenditures that concern all Canadians, and there are fewer incentives for it to act as director through equalization. Moreover, we also noted that the provinces became more accountable.
To my mind, that is the major point. The equalization system lessens the accountability of provincial governments in some respects. One has only to look at Quebec. Why are our taxes the highest in the country? It is because we have the least mobile population.
Now, whenever there are more or less inefficient policies, Quebecers must shoulder the costs. It would seem normal to me that Quebecers have to deal with the perverse effects of their government's policies, but I find it far less normal that because of the equalization system other Canadians also have to shoulder those consequences.
[English]
Senator Banks: Are there provinces that you think would nefariously or in a Machiavellian way, do that as a matter of determined policy?
[Translation]
Mr. Boucher: That is not how politicians make decisions or arbitrate, favouring one policy over another. These are arbitrations that bring about unanticipated effects. Politicians are not more Machiavellian than producers, consumers or university professors. It all depends on the interests you are trying to defend.
As a university professor, I cannot be dismissed, so I say whatever I think. But on the other hand, I try to think things out and not say the first thing that goes through my head. Some of you have been politicians, and if I were in your shoes, I would behave the same way. Because one fine morning, to get elected, you have to be able to find the special interest groups who will support you and help you. In return, you will devise policies for these people. But taken as a whole, these policies will become contradictory. The great American sociologist Merton called this the "law of unintended consequences". You thought something was going to happen and it did not. For example, Dupont de Nemours, a member of the French National Assembly, said in 1792 that "the road to hell is paved with good intentions".
It is not just that the policies as a whole become contradictory. Because of that, there are unintended results, and little by little, over time, things deteriorate. For instance, the federal government and the Government of Quebec from 1972 to 1998 spent $1.6 billion on the MIL Davie company in Quebec.
[English]
Senator Bolduc: You were lobbying the government to get more money every year.
[Translation]
Mr. Boucher: It is not Machiavellian, it is the policies that are chosen and the consequences that derive from them.
[English]
Senator Banks: You are pointing out to us this inadvertent negative effect. Do you think that there is an alternative that would be better?
[Translation]
Mr. Boucher: In light of the rules of the Canadian political game, it is not very likely. I have never had the pretension of claiming to be the King's counsellor and to know more than you do, because this is your trade. I can give you suggestions, but you can see that they are unrealistic in the Canadian context.
A first suggestion would be to give direct subsidies to the poor in the equalization-receiving provinces, and not to the provincial governments. You have to remember that even the very neutral CD Howe Institute was forced to admit to its utmost despair a few years ago that the poor in Alberta subsidized the rich in Quebec. On the average, this is true.
Another suggestion could be that the rich provinces grant loans to the poor provinces. Why could Alberta not say to Quebec, one fine morning: "You are having some difficulties, we are going to lend you some money, and in lending you this money, we will keep an eye on you." You can see how unrealistic this is in the Canadian context.
Another suggestion concerns voluntary donations from the rich provinces to the poor provinces.
[English]
Senator Banks: That is unrealistic.
[Translation]
Mr. Boucher: You get the general idea. All of the proposals have the same objective, which is to make the provinces more responsible. You will not make the provinces more accountable by giving them money through the equalization formula, because they will make choices on the basis of their interests, which is entirely normal. Except that there is someone behind them, the "federal big brother" who will compensate them for some of their stupid choices.
The Chairman: In the absence of equalization, the provinces will choose their own policies and they will always export somewhere. It is inevitable that their policies will have some adverse effects.
Mr. Boucher: That is true, but since they cannot export the adverse effects of their policies, the burden falls to the residents of the provinces. Take, for example, the gap between Ontario and Quebec in 1994. Quebec revenues were 21 per cent lower than Ontario revenues in terms of per capita GDP. The gap had widened to 25 per cent in 1999. Since Ontario's policies are much more competitive than Quebec's, it is clear that Quebecers are paying dearly for their restrictive policies.
I am being honest with you. The gap has widened, albeit gradually. Consider another example, that of language policy. Gradually, over the space of several years, the Government of Quebec was compensated for its language policy. After four or five years, the burden then shifted to Quebecers. When you ask why it is that Quebec revenues are lower, part of the reason is the inefficient policies that we have had to endure.
The Chairman: For instance, between 1985 and 1990, the pace of spending by the Ontario government was excessive, forcing the central bank to raise interest rates. This is one way of exporting the adverse effects of your policies and of shifting the burden onto the rest of Canada.
Mr. Boucher: You are absolutely right.
The Chairman: There are different ways of exporting these adverse effects.
Mr. Boucher: True, but generally speaking, the burden of policies falls squarely on the shoulders of the provinces and their citizens.
The Chairman: It is not my job to defend Quebec's language policies (or the policies of other provinces for that matter) which are as much social as they are economic in nature. It is very difficult, if not impossible, to assess strictly the economic or financial impact of these policies.
Mr. Boucher: I am the kind of economist who believes it is always possible to assign a cost, monetary or otherwise, to policies. When you take it upon yourself to promote a particular policy, you must be prepared to pay the price. Take, for example, the policies now affecting Canada regarding -
The Chairman: You seem to think that Quebec's language policies have been 100 per cent ineffective. You know better than I that they have contributed to the growth of Francophones and to the emergence of a entrepreneurial class in Quebec. In that respect, the policies have had a beneficial effect.
Mr. Boucher: Perhaps I did not make myself clear. There have been positive as well as negative effects.
The Chairman: From an economic as well as from a financial standpoint.
Mr. Boucher: Yes. I am among those who believe that the costs outweigh the benefits.
The Chairman: By how much?
Mr. Boucher: I cannot say. However, one of the adverse effects of these policies is the migration of Anglophone Quebecers. Young Quebecers have become increasingly mobile. They learn to speak another language, then they quietly leave the province.
The Chairman: However, the fact that Quebec exports its citizens has a positive effect on the rest of Canada.
Mr. Boucher: That is quite true. For instance, one of my sons teaches in Ontario.
The Chairman: Then the results have been mixed.
Mr. Boucher: I was only stating my position on the matter, which I believe I am capable of defending. If the situation were that rosy, I think the economies of Canada and Quebec would be healthier. I hear what you are saying. For almost thirty years now, I have been trying to promote the idea of relatively competitive Quebec and Canadian economies with fewer government constraints. However, some of your observations were quite pertinent, and I do have a tendency to exaggerate sometimes.
Getting back to the topic of equalization, if there were fewer adverse effects, I think Canadians would be much better off. Because of Menton's law of unanticipated consequences, interests are not aligned. There will always be some adverse effects.
The Chairman: In your opinion, should there be a system for redistributing wealth in our federation?
Mr. Boucher: I am not completely in favour of this idea. Under this kind of system, individuals, not governments, would have to be subsidized. Individuals, knowing what they want, will spend.
The Chairman: What about the fact that it would be persons, not governments, who would thus be dependent?
Mr. Boucher: I would prefer this to be the case.
Senator Ferretti Barth: Mr. Boucher, you mentioned the strike by the Société des alcools that led to a budget shortfall in Quebec, a shortfall that was covered by equalization payments. You later talked about unemployment insurance, but you did not say much on the subject. Would you care to elaborate?
Mr. Boucher: In the case of unemployment insurance, the government devised a very sound policy. Efforts were made to minimize any adverse effects. The duration of EI payments was reduced and it was systematically observed that more and more young people from Atlantic Canada, and from the Gaspé region as well, were seeking to educate themselves. They stayed in school longer and gradually, they began to leave eastern Canada. The adverse effects of the policy are well known. At one time, in Newfoundland, everyone worked ten weeks of the year, and then collected EI. Recently, the law has changed. What have we observed? People are falling back into their old habits. Young people are less interested in getting an education. As a result, they are not as mobile and will remain in Atlantic Canada. These people could earn good salaries in other parts of the country. The best example we have is in Alberta where young oil rig workers can earn from $80,000 to $100,000 a year. The only job prerequisite is that the young workers be in good health.
Statistics Canada released some figures two or three weeks ago. Newfoundlanders who move to western Canada to find a job increase their income anywhere from 90 per cent to 100 per cent.
Two weeks ago, Professor James Buchanan visited Montreal. He was responsible for devising an equalization formula for the United States. He pointed out that approximately 100,000 Canadians move across the country every year. Initially, there was opposition to the equalization formula because economists believed people would move to take advantage of better times in Alberta where there was no sales tax.
Consider Canada's immigration policy. Canada's population stands at approximately 30 million. If our objective is to have an immigration rate of one per cent, this means that Canada will take in approximately 300,000 immigrants a year. Where will these people settle? Not in Quebec or in the Maritimes, but in places like Toronto, Calgary, Edmonton or British Colombia.
When new immigrants begin working, they affect the equalization formula, rendering it almost useless because they settle directly in areas where revenues are higher. That is the new problem that Canada will be facing.
Qualified immigrants will settle in larger urban centres, where they will seek employment. Major cities in Ontario, Alberta and British Colombia will therefore become dynamic centres. One of the adverse effects of this shift will be a drop in the number of members representing certain provinces.
This is one long-term effect that will emerge over a period of 15 to 20 years. The impact on the country's economic and political landscape will be gradual.
I do not have any solutions to this problem, but I did want to give you an overall view of the situation. Various witnesses have expressed their views. Canada will have no choice but to make some adjustments, given the increase in free trade and in the movement of people and capital. I am prepared to wager that this will happen. What will be the outcome? Who can say for certain. However, new redistribution methods will need to be considered. Research has shown that the 1989 and 1994 free trade agreements changed the way governments behaved.
This is only the tip of the iceberg. Beginning in 2009, Mexican fruits and vegetables will enter Canada duty free. The United States demanded a 15-year grace period to give Florida time to adjust to this new reality. Imagine how much Canadian strawberries will cost when strawberries from Mexico and Argentina begin appearing on market shelves? There will be no avoiding this situation in 2009.
Senator Ferretti Barth: If I understand you correctly, you are opposed to free trade. Is that correct?
Mr. Boucher: No, I am in favour of free trade. I believe the Canadian economy must be flexible and must adjust so as to allow for greater manpower mobility between provinces. Some restrictions are still in place on the movement of workers. A Quebec lawyer who wants to practice law in Ontario must past the common law examinations. A system of incentives must be introduced so that Canadians will react positively to the system of rewards and sanctions in our society. Under the system of equalization, provinces make choices, not individuals.
However, the relative importance of the equalization formula declines in relation to overall revenues. This is a sign the federal government realizes that it cannot sustain the equalization formula at very high levels. Inevitably, the percentage used in the equalization formula will decline on overall federal government revenues.
[English]
Senator Furey: Thank you for coming. I have two questions. Professor, I am not sure if you are telling us that you are a proponent of ending the reallocation of tax revenues or if you are telling us that, because of certain economic and political forces at play, it is an inevitability in Canada.
[Translation]
Mr. Boucher: Given the current rules of the games, you are correct. Newfoundland is now grappling with this problem. If oil and gas reserves in Newfoundland and Labrador are systematically developed, then the province will face "sanctions" as a result of the equalization formula.
Another unfortunate reality for Newfoundland is that the price of natural resources, in real terms, has been declining steadily since 1850. The longer the development of these resources is delayed, the more the price of these resources will drop over the long term. The ideal situation would be to develop these resources as quickly as possible to derive revenues. However, for a variety of political and economic reasons, the provinces are not able to do this.
[English]
Senator Furey: Would you agree that it would be better in the long run for the province and the federation that, while we have a program of equalization and while a poorer province is developing a non-renewable resource, they continue to receive the equalization payments until they become what we often refer to as a "have province" and they begin to pay into this reallocation of tax revenues, as opposed to taking out of it?
[Translation]
Mr. Boucher: It is fairly difficult to answer in the affirmative because as I stated, the ideal situation would be to give back the right of ownership of the province to the residents. I realize that this will not happen, but that would be the ideal solution.
Citizens would thus be free to choose to save resource revenues for their children, or to spend this money. For the past several years, the Alberta government has been using these revenues to pay down the province's debt. The problem, however, is that the resources belong to several generations.
I do not have the answer for you. I think that if you allow this to happen in the case of East Coast natural resources, the political process being what it is, the federal government and the other provinces will be forced to work out some kind of agreement. New adverse effects will inevitably follow. Perhaps a solution can be found, but I would be surprised if that were possible.
[English]
The Chairman: We have had a very stimulating and interesting hour with you, Professor.
[Translation]
Thank you very much on behalf of the committee.
[English]
We now call on the representative from the government of Manitoba. We are happy to welcome the Minister of Finance of Manitoba, the Honourable Gregory Selinger, who is accompanied by Mr. Ron Neumann. We know Mr. Neumann from a previous bill on equalization.
In addition to his duties as Minister of Finance, the minister is responsible for French language services, Manitoba Hydro, the Crown Corporations Council and the Civil Service Commission. He became Minister of Finance on October 5, 1999. He is an associate professor in the faculty of social work at the University of Manitoba. He has taught courses in social work and community development, had a municipal career before he went into provincial politics, was a councillor in St. Boniface, and chaired the city's committee on finance and administration. He has a Ph.D. from the London School of Economics, a master's degree in public administration from Queens and a bachelor degree of social work degree from the University of Manitoba.
I am happy to report to you that Manitoba has provided its brief to the committee in both of our official languages. I invite the minister to make an opening statement.
Mr. Gregory Selinger, Minister of Finance of Manitoba: Thank you very much, it is a privilege to be here this evening on this very important topic of how the fiscal arrangements of the country can better serve all of our purposes in developing a prosperous and equitable Canadian federation.
In Manitoba, we view equalization as a critical program. Since its inception in 1957, its importance has increased decade after decade. It has become a well-entrenched program within the federation and sometimes, when a program becomes well entrenched, we forget the importance of it. We take it for granted. That is one of the reasons we have to revisit it tonight and look at the fundamental contribution it makes to fiscal equality across the country.
We should not hesitate to imagine what it would be like without the program. I was listening carefully to the comments of the speaker before me. Without that program we would have a much more unequal country. We would have a much less prosperous country, and many of the regions would be in much worse shape. We might have greater wealth concentrated in certain centres of the country but it would not be to the benefit of the country to have the wealth concentrated in two or three regions in the country. We know that this program has provided a base for many of the regions to develop their capacity and the potential of both their citizens and their resources. It has helped regions to increase their productive capacity to make a contribution to the national wealth.
This evening I will speak on the importance of the equalization program and present some evidence of its success. I will then discuss how it might be improved and strengthened in order to be a better instrument to serve our interests as a country.
[Translation]
I will now talk about Canada, a decentralized federation, as well as about expenditure and revenue assignments, fiscal imbalances and federal transfers.
The Canadian Constitution assigns important duties to the provinces. Health care, education and other social programs, the maintenance of local and municipal governments, justice, cultural and other important programs all fall within the authority of provincial governments.
These programs do much to define our nation, and they have been of growing importance throughout the period since the Second World War. Fifty years ago, the federal government directly delivered well over 50 per cent of all public expenditures in Canada. In 1980, the federal government still delivered 38 per cent.
Today, the provincial, territorial and local governments provide almost two-thirds of total public programming in Canada. Few nations in the world have sub-national governments which are charged with such extensive responsibilities. Charts 1 and 2 clearly illustrate these trends.
[English]
Within your presentation you will have certain diagrams or charts that will help you in the discussion tonight. I will not give you the full brief. I will give you an abbreviated version, but my comments so far have indicated that the federal share of direct spending in this country has dropped since the Second World War from about 50 per cent to 38 per cent of the direct funding of programs that we provide to our citizens.
The Constitution provides the federal government with access to both direct and indirect taxation. Provinces are restricted to direct taxation only. There is of course a long history of sharing tax fields in Canada. The practical effect of taxation arrangements in Canada is that major tax fields are often shared.
There has been some ebb and flow since the Second World War, but the principle movement has been for provincial and local governments to raise an even greater share of the total and to rely less on federal transfer payments. Today, provincial and local governments raise 88 per cent of their own revenue. Federal transfers provide 12 per cent, the lowest share among all the major federations in the world. That is important to underline, and it is illustrated in chart 3. All federations provide more resources to their sub-national government unit than Canada does.
Of course, revenue sharing capacity differs between the provinces. Measured by the representative tax system of the equalization program at national average tax rates, the fiscal capacity of provinces varies from 60 per cent of the national average in Newfoundland and Labrador, to 173 per cent in Alberta. There is almost a threefold difference in capacity.
In these circumstances significant fiscal imbalances between responsibilities and revenue capacities are virtually inevitable. The growth and responsibilities of provinces, territories and local governments, especially for health care, has meant the federal and provincial fiscal results have diverged during the past decade. While the federal government has moved readily from deficit to surplus, most provincial governments struggle to maintain balanced budgets. They do not have the fiscal flexibility of the federal government, so evident in the measures that were announced in October 2000. All fiscal forecasters foresee continuing flexibility for the federal government as federal surpluses grow, once the current economic downturn is corrected.
Provinces face the same pressures as the federal government to provide tax relief, but have long-term expenditure pressures primarily because of the aging population and its impact on health care costs. There are also imbalances between provinces, resulting from the differences in relative fiscal capacities that I noted earlier. It is through federal transfer payments that fiscal imbalances can and should be addressed.
As the federal government is charged under the 1982 constitutional amendment with the responsibility to provide equalization payments, it must raise sufficient revenues to fulfil that responsibility as well as to meet its own direct expenditure requirements. Given that it is a constitutional commitment, it is our view that equalization must have a priority call on federal resources ahead of federal tax cuts and discretionary spending.
As Canada emerged from the Second World War and Newfoundland joined Confederation, Canadians enjoyed few of the social security benefits we enjoy today. Canadian governments turned their attention to providing social security and other public programs that were already commonplace in Europe. Hospital insurance, medicare and improved social assistance programs were established and post-secondary opportunities were greatly expanded. These new and expanded programs, all falling under the jurisdiction of provinces, improved not only the equity and opportunity for individual Canadians, but also laid a foundation for a remarkable period of personal security and economic growth and stability. However, it became apparent early on that differing fiscal capacities of provinces would limit further development of these initiatives for many Canadians.
There were two available choices. Either responsibilities could be supported by the federal government, at least for financing the programs, or a program of fiscal equalization could be introduced. In fact, in the 1950s and 1960s both were done. The federal government was intimately involved in financing health, post-secondary education and social assistance programs as these programs were introduced and brought to maturity in the 1960s. Also, in 1957, the equalization program was introduced.
I am not here today to discuss the history and debate concerning social programs and fiscal arrangements, but I will state what I believe to be the situation today and how this affects our position on equalization.
Our public health care, public education and social security programs must and will be protected. All governments are concerned that programs are delivered effectively and efficiently. Yet, over the longer term, in the face of demographic and other pressures to improve or maintain existing services, expenditures may increase. Those who wish to turn back the clock to privatise health care and to reduce public programs are not in tune with the Canadian public.
Recently, Dr. Kenny from Dalhousie University spoke in Manitoba. She made a very telling point with respect to public health care that was somewhat in contrast to the Senate Kirby report. She argued that all dual systems of private and public health care have not reduced costs and increased efficiency but have, in fact, increased costs. She noted that our single-payer system has proved to be a very efficient system, particularly in comparison to the United States. We need evidence-based solutions to our problems, not ones driven more by ideology than evidence. We need to try to solve these difficult problems based on the evidence we have gathered from around the world.
The federal government has withdrawn most of the cost-sharing it provided to these programs at their inception, in part through the transfer of tax room with respect to personal and corporate income taxes. As a result, direct financing of provincial social programs has fallen to 14 per cent with provincial revenues covering the remaining 86 per cent. The premiers of Canada have proposed that this be increased to 18 per cent. They have not asked for a return to 50 per cent.
Provincial financial requirements in support of these vital social programs have increased dramatically and the reliance on provincial revenues will not diminish significantly, if at all, over the foreseeable future. The greater reliance on provincial revenues must be matched by a stronger equalization program; otherwise national program standards and equitable protections and opportunities for all Canadians cannot be maintained.
If provinces are expected to carry the lion's share of social, health and education programs, as the Constitution foresaw they would, there must be an equalization program to allow provinces to do that equitably and to offer roughly comparable levels of services at roughly comparable levels of taxation. That is the point behind the equalization program and I know you understand that well.
There has been significant economic convergence between provinces in Canada. Productivity as measured by GDP per capita is much more even across Canada than it was in 1950. Therefore, the idea that equalization creates an attitude that we do not have to work as hard to make things better is proven wrong by the evidence. The recipient provinces have actually caught up to the wealthier provinces. They have increased their productivity and their wealth with the support of equalization.
I cannot imagine that any provincial government would use equalization as an excuse to do less. They see it as an opportunity to do more, and they use those resources to invest in infrastructure and post-secondary opportunities, to strengthen their health care system and to promote economic development. Every government does that or it is not re-elected. That is fundamental to our mission in public life. The notion that equalization creates a lax attitude is not supported by the evidence over the long haul and is certainly not supported by the evidence of the efforts made by provincial governments to move forward economically.
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This latter point is not well-recognized by some who look at how far we have yet to go in reducing economic disparities between regions, rather than at how far we have come in reducing those disparities. Equalization has been under attack from some commentators because they believe that it provides a disincentive to economic development. These commentators provide little or no evidence for their assertions. To counter these claims, in a letter written to a number of newspaper editors, the federal Minister of Intergovernmental Affairs, the Honourable Stéphane Dion, drew attention to the vast hydro developments in Quebec and in Manitoba, and to oil and gas developments in Saskatchewan and offshore in Atlantic Canada. Provincial governments are doing everything in their power to promote strong and balanced economic growth.
I cannot imagine a provincial government choosing to receive equalization payments, while sacrificing economic growth, the jobs, prosperity for provincial citizens and the tax revenue which come with development.
Far from being a disincentive to economic growth, there is a clear case for equalization contributing to Canada's economic efficiency, as well as to equity. Quality public services, an educated and healthy workforce, security for families, lower taxes, solid investments in infrastructure - these are the foundation of Canadian economic competitiveness. Equalization should allow all provinces to provide comparable services to its citizens and to its businesses at comparable tax rates. Equalization works to remove competitive disadvantages of Canada's regions resulting from unequal fiscal capacity. Canada's economic prospects are strongest when all regions of Canada are strong.
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The goals of equity and efficiency are not incompatible. The contributions of equalization to these goals are well understood by provincial premiers and finance ministers in every province and territory. There is staunch and unanimous support for strengthening the program. That has been a key recommendation of every premiers' meeting and every finance ministers' meeting in the last two years.
I will move beyond the contribution the program makes to some of the design considerations. As you have received a technical briefing on the program from the Department of Finance, I will touch on only some of the design issues that have been under debate within government circles and in the public arena.
I am sure that you are aware of the poll that came out today. The poll compiled by the Centre for Research and Information on Canada shows that four out of five Canadians support equalization. There is no region in Canada where the citizens do not support this program; it shows 80 per cent agreement in most areas and 75 per cent in Alberta. I was happy to see it was supported by 88 per cent of the people in Manitoba.
Whether Canadians live in "have" or "have-not" regions, they support the idea of equalization; they support the essence of the program. That is encouraging news and I am here today to talk to you about some of the technical dimensions of the program.
The program has a simple concept, but the details are complex. We should not listen to people that say the program is too complex and that we should get rid of it; that we should go to a simpler formula. The essence of the program has to be preserved. Let our officials and technocrats work out the details. It is our job to ensure that the essence of the program remains strong. We have capable officials across the country that can make the details work. It is not the essence of the program that is divisive.
I will comment on the representative tax system, on full revenue inclusion, and on how we deal with the standard, the ceiling and the floor. We do not have to abandon the system; it can be tuned up and made better. Some commentators suggest that we adopt the macro approach. It is our view that going to a macro approach would move away from the spirit of the program.
The equalization program is supposed to be based on the capacity of provincial governments to raise revenues. We must remember that it is that unit of analysis of provincial governments that we are focusing on, not individual income and not GDP on a provincial basis. It is the ability of each province to raise revenue that has to be represented in the formula.
Although the alternative approaches look simple, they would become more complex and would move away from the ability to measure the revenue capacity of provinces and would confound the problem to a greater degree.
The macro approach would not accurately measure provincial tax capacity. It would not resonate as well as the representative tax system with its national commitment to equalization, as expressed in our Constitution. Attempts to approve macro measures would add more complexity to the program. The macro approach is divorced from real tax practices, such as the use of a progressive income tax system that has been adopted by all levels of governments.
There has been no evidence produced that the representative tax system, RTS, creates disincentives in provinces. It would be a rash decision to toss out the existing system and change to a system that would be simpler on the surface but less connected to the reality of the provinces.
The other important dimension is full revenue inclusion. When the program was started, it was argued that we should go to the highest two-province standard. That was the original purpose behind it. Then it was argued that we should not include resource revenues, because they were too volatile, and so we only included 50 per cent of resource revenues. Then, we moved to a five-province standard. Those five provinces are Quebec, Saskatchewan, Manitoba, British Columbia and Ontario, of course; collectively they make up 50 per cent of the formula.
Those parameters have to be addressed in the way we design the program. There is no reason why we could not return to the ten-province standard in the formula. The ten-province standard would diminish the effect of resource revenues, because they would be spread out over a wider base. The volatility of resource revenues would not be as great an issue as they are, for instance, if you only include Alberta, or exclude Alberta.
A ten-province standard would harmonize all the revenue capacity of each province and reduce the volatility of resource revenues. It would allow for a more representative system of what provinces are capable of, and would allow the formula to allow all provinces to get closer to the Canadian average.
This program has to be affordable for the federal government. Would the provinces want the federal government to return to a deficit position? Of course, no province wants to make gains at the expense of another level of government. If they do, they will not admit it publicly, at least. The reality is that the formula for equalization has an automatic stabilizer built into it. If revenues are down, the formula goes down; and if revenues are up, the formula goes up.
I am suggesting that the artificial ceiling imposed by the federal government, since 1982, is not necessary. It is not necessary now at a time when the federal government is in balance and their revenues are quite healthy. Even though the economy is slowing down, and we have significant security issues to address, the cap has been an artificial barrier that has allowed that increasing development of the regions to converge on a national standard of living.
Thus, we argue that the balance between equity and affordability can now be shifted back, the cap can be lifted off, and the federal government can carry that responsibility, without any risk to its ability to balance the budget. If that risk did become apparent, we could meet, as a federation, and address that in a way so as not to penalize those provinces in greatest need of the transfer.
The ceiling is asymmetrical to the floor. It is a hard cap, but the floor is soft. The hard cap stays in place, but on an annual basis the floor is adjusted to go down to recognize the change in economic circumstances. Our argument is, if you have a cap and a floor, they should at least be equitable and symmetrical. Neither of them is truly necessary. There are better instruments for fiscal stabilization.
In the presentation that we brought today, you will note that equalization, as a percentage of GDP, has actually declined. It has become a less necessary transfer within the country. Therefore, it presents a lower risk factor for the federal government to support it at a ten-province standard without a cap. The government would then feel that it was affordable.
Equalization payments over the last two decades have tended to lower entitlements, as measured against the GDP, or provincial revenue, or expenditure. All provinces, when they met with the federal Minister of Finance several weeks ago, recommended the immediate removal of the ceiling. That removal would offer some immediate help to the provinces. It would ensure that the cap would not bite in subsequent years, and there would be no problem with the federal government managing within its resources.
Equalization is actually a form of fiscal stabilization for provinces. During the 1990s we had instruments that have been eroded in respect of fiscal stabilization. Our officials in Manitoba have some proposals that we would be happy to present to you at a later time, if you would like to discuss that topic.
When an economy goes down, no level of government should stabilize their resources on the backs of another level of government. If we can develop better instruments of fiscal stabilization, then we can take the artificial caps and floors out of equalization to let it do its job.
One of the other problems with the cap and floor system for equalization is that the floor payments to some provinces, with the cap being in place, come out of the recipient provinces. The six provinces that receive equalization are giving up resources to provide a floor payment to the seventh province that receives it. That is inequitable. The province that receives the floor payment acknowledges that. We need a program that does not have perverse incentives.
We argue that there should be a removal of the ceiling, because it would provide no significant fiscal risk to the federal government. We should look at moving back to the ten-province standard, which would reduce some of the volatility of inclusion of comprehensive revenues such as resource revenues. We should look at removing the floor provision in conjunction with an adequate fiscal stabilization program, which would protect the federation from instability on the fiscal front when we are dealing with both economic and security challenges as we go forward.
We need to have security in the country, but security for individuals also includes health and social security. That is where fiscal arrangements are critical to our stability as we go forward.
I thank you for the opportunity to appear before you.
Senator Stratton: I would like to review the question of the ceiling and the floor. You are saying to get rid of the ceiling and the floor. Do you believe that both are fundamentally wrong?
Mr. Selinger: Both of them distort the purpose of the program, and fiscal stability could be improved by using some of the instruments that lie outside of equalization. Those instruments are in place, but they have been constrained during the 1990s as the federal government wrestled with its deficit issue.
The ceiling has the effect of clawing away resources from provinces when times are good. The floor has the effect, with the ceiling being in place, of taking resources away from provinces that need them during bad times. When both the ceiling and floor are in place they have the perverse effect of providing support to provinces that have a spike in resources one year and then a dramatic decline the next year. They get the advantage of the fiscal stabilization instruments, or the floor instrument in the case of Saskatchewan, but they do it at the expense of the other recipient provinces.
Therefore, having that component in the program creates greater disparity within the country. The program should be allowed to do its job without those artificial constraints. Fiscal stability can be addressed outside of those constraints.
Senator Stratton: The federal finance minister will come down with a budget shortly, and there is not doubt that there will be constraints. I am sure you are aware of this because Manitoba will be going through the same thing.
If a ceiling is an inevitable feature of program, and if revenues crash, which they appear to be doing, where should that ceiling be set? Do you have an opinion on that?
In times of tight fiscal restraint would you expect to see a ceiling imposed again? What should that level be?
Mr. Selinger: When the economy slows down, as it is now, the ceiling does not bite, so it becomes irrelevant. It is irrelevant during an economic slow down. It has a negative impact when the economy is growing dramatically.
Senator Stratton: They may decide to impose a ceiling because of the restraints required, at a lower rate where it does bite. That is the expectation. You have examined that. Are you anticipating the potential of that?
Mr. Selinger: During the 1999-2000 budget year, just before the run-up to the federal election, the provinces in negotiations with the Prime Minister lifted the ceiling for one year. That meant about $100 million extra for a province like Manitoba, but the federal government re-imposed it the following year. That would cost us anywhere from $20 million to $100 million. That was based on revenues during a growth period.
Senator Stratton: I understand what you are saying.
Mr. Selinger: It is really not necessary. If they artificially lowered the ceiling during tough times again to clawback resources, the outcome would be even more perverse. It would create inequality during difficult times.
Senator Stratton: I appreciate your response, as I need a clear understanding of the issue. The ceiling does not bite; it could bite if they set it low enough.
Mr. Selinger: We anticipate that it will not bite at the present level, but it has been reduced every five years since 1982.
Senator Stratton: That is my fear.
Mr. Selinger: You are right. If they drag it down again it would create more regional disparity.
Senator Stratton: You are saying if we would use a 10-province standard for measurement it would provide an additional $1.6 billion annually to the recipient provinces. If you go to the 10-province standard again, that would be roughly the figure, excluding inflation that could be expected for the provinces.
Where does that money come from? Does it come from the "have" provinces of Ontario and Alberta?
Mr. Selinger: We all know that equalization is not a direct transfer from one province to another. The money comes from the wealth generated throughout the country. It is transferred to the provinces that are not meeting the Canadian average in terms of their ability to produce revenues.
It comes from Canadians and it comes from Canadian businesses, companies and wealth producers in the country. It is distributed to other parts of the country to allow them to remain competitive.
The analogy I often use is that we have a draft when we have a league. Every year certain teams get preferential picks. They get the top picks if they had not performed as well as their competitors in the previous year. The net result of the draft is that all the teams are more competitive, and the league is stronger.
That is the role that equalization plays in this country. It allows the federation to be stronger, and all provinces to be competitive. That is an advantage to the strong provinces as well as those who get the transfer. The strong provinces do not become lax with that kind of competition from their neighbours. We stay more tax competitive and productive. All of our citizens, with the mobility protections that we have in the country, have a choice as to where they work and live.
Senator Stratton: My concern is that if you increase the largess through a 10-province measurement, should not the rich provinces, or those that contribute, and the federal government have a say as to how it is spent? There has to be limitations because one province could drop taxes to boost the economy and another province could increase social programs to do the same thing. How do you keep a fence around this largesse that you want to have?
Mr. Selinger: You have raised an important point. First, the federal government already supports the sub-national governments, but it does it to a lesser extent than any other federation in the world. When compared to other governments our government is not doing as generous a job in providing support for its sub-national units that deliver the universal programs.
How do you ensure that the money goes where it is needed? We are a country of diversity. Some finance ministers reduce taxes to address economic slow down. Some invest in development projects such as hydro electricity or other infrastructure investments. Others decide to protect social programs. Most provinces do a mix of those things.
It is a question of degree. There are no absolutes here. The differences are not as great as you might imagine. All provinces are struggling to stay tax competitive. They are all struggling to retain health specialists and nurses. We need to have a certain amount of cooperation as we continue to work and compete with each other to provide the best quality of services for our citizens.
It is a question of balance, not absolutes. I do not know that the federal government could really be prescriptive on the specifics, but they have a responsibility through instruments like the Canada Health Act to ensure that everyone has access to essential services such as health care, a comprehensive, accessible, affordable publicly administered program. They have instruments to do that.
Each province must then find its particular way of achieving those objectives and meeting those legislative requirements in order to be eligible for their CHST transfer.
On the equalization side, every province provides those services differently and every province has a slightly different tax regime. However, if you stand back from it a couple of steps, they are not that different. The differences are much more minor than they are stark.
Senator Stratton: I will come back if there is a second round.
The Chairman: Minister, you use the figure 12 per cent for the federal transfers to provincial and local governments, and say that is the lowest share among all major federations in the world. Is that the cash component that you are talking about?
Mr. Selinger: Yes.
The Chairman: I have been on both sides of the argument, and I know that the provinces always refer only to the cash component. If the federal government were giving that statistic, they would include both the cash and the tax points. I understand what happens to the tax points. When you get them you have to impose those taxes and collect them from the population. Just for the record, the 12 per cent is cash only.
Mr. Selinger: Yes, it is, and I am glad you clarified that. I have heard federal officials indicate that we should count the tax points. It is a question of where you start the historical argument. In the Second World War, the provinces gave all their tax points -
The Chairman: Are you still complaining about that? Yesterday, the Minister for Finance from Nova Scotia said almost the same words.
Mr. Selinger: The point is that you cannot draw an artificial line and say: "We have given you our tax points." The provinces gave the federal government their tax points in order for us to cope with the Second World War and, under the leadership of people like C.D. Howe, to industrialize the country. We used the Second World War as an opportunity to modernize and industrialize the country and it was done with provincial tax points. The federal government should not say that they have done us a favour and given the tax points back.
The provinces do not ask for credit for all the federal expenditures on defence and infrastructure and health research and all the things they do. It is not really appropriate that the federal government ask for credit on tax points. It is a moot point. We have shared tax points. The real issue is how we share the cash to support these programs.
The Chairman: Minister, I would like to tell you what Mr. Martin said on the cap and the ceiling when he was here on his bill on June 7.
It is important to note that under no circumstances does the ceiling prevent growth in the equalization program. It simply limits it in the unusual situation when it would otherwise outpace growth in the economy. In other words, the cap goes up every year.You are a Minister of Finance and in that capacity I am sure that you do not want or like situations that are unpredictable. Mr. Martin believes that a ceiling or a cap is needed so that his department can predict what it will cost them from year to year.
As Minister of Finance of Manitoba, are you in arrangement with your municipalities, your school boards, hospital boardset cetera where there is a formula but you really do not know what it will cost you from year to year and the best you can do is guess?
Mr. Selinger: The answer to your question is yes, we have cost drivers in provincial budgets, and we cannot predict how high they will go each year. This occurs mostly in the health care sector. Fee-for-service is unit driven. The Pharmacare program is usually over budget 20 per cent to 30 per cent a year all across the country. Fee-for-service is going over budget all across the country. Those are the cost drivers that are very expensive.
All finance ministers get very grey hair trying to predict how they will balance their budgets when they do not know what the fourth quarter costs will be in some of those programs.
I have sympathy with the federal minister. He needs certain predictability. He needs to be able to plan a budget. That was why I was trying to make the point earlier that with our economic forecasting capacity, we can tell what the equalization payment transfer will be because it relates to our representative tax base. If our tax base is growing, the transfer grows. If our tax base is shrinking or static, that transfer goes down because there is provision for prior year's adjustments. Within a certain band, there is predictability. The artificial cap gives greater certainty to the federal government, but at the expense of the purpose of the program.
Do I want a blank cheque on equalization? No. We want equalization to be proportional to the ability of the economy to support it when it goes up and when it goes down. We are asking for symmetry on both ends, not a hard cap and a soft floor, which means they claw it back when times are good and pass the negative consequences back to you when times are bad. That seems to be very unfair and, in that sense, un-Canadian.
Senator Furey: You mentioned the CHST program. I dislike that program that has seen us go to a program of a strict per capita distribution system whereby the rich continue to get rich while the poor continue to get poorer. Should there be a needs component to that distribution? Should we not push to reinstitute that?
Mr. Selinger: Part of the ability to make this country work is to achieve consensus at all levels. The provinces agreed, reluctantly in some cases, to support the per capita shift on CHST if, and only if, there was a strengthening of the equalization program to offset that. We saw a shift to the per capita CHST but no real improvements to equalization.
That is why the provinces, the Atlantic Provinces in particular, feel a tremendous sense of resentment. They feel they are getting only one-half of the bargain, and they are getting the short end of the stick with the hard cap on equalization and the unwillingness to have comprehensive revenue coverage and maybe a broader standard, including more provinces. They feel that we have gone some way to address the more powerful provinces' concerns to get equal transfers on CHST, but there has not been an equal effort made to improve the equalization formula.
All provinces support the lifting of the cap on equalization, even those that have no direct benefit from it. They understand the relationship between the CHST changes and the need to improve equalization.
The Premier of Ontario has moved a long way in that regard. He has tried to have a strong link between those two programs, to recognize that one program has been improved, not to his satisfaction, obviously, but that the other program has to be improved as well. All the provinces are back on the same page on strengthening CHST again.
In an ideal world all programs would have an equalization component to it, and when they were originally designed they did. If we are making reforms, we should have balanced reforms, not reforms that widen the gap at the expense of folks who are struggling hard to provide the same services and taxes to people.
Senator Bolduc: You were talking about our health care system. Do you really think that it is sustainable in terms of public finance for the next 25 years?
Mr. Selinger: Under the present financial arrangements, it is not sustainable. Provinces all across the country are giving out signals that they are having trouble sustaining their health care system.
Senator Bolduc: I mean the system as a whole, including the federal government. We are spending $100 billion, 10 per cent of the gross national product in Canada on health care. In 20 or 25 years, when we will have two people retired for every one working, do you think it will be sustainable?
Mr. Selinger: Under the current financial arrangements, it is probably not sustainable in its present form. Provinces are looking for solutions that do not deny people service, but it is an enormous pressure point. In 25 years from now, when we have an even greater proportion of senior citizens and there is a greater demand for those services in the last two years of people's lives when they put the most pressure on the system for service, it may not be sustainable unless we make some significant reforms.
Senator Bolduc: What would you suggest that they be? It is unbelievable in a country like Canada that we cannot discuss the real foundation of the system.
Mr. Selinger: I do not think that is the case. I think all the provinces are discussing it, not only within their governments, but also with each other and with the federal government. There are many ideas on how to reform the system, ideas that relate to how we license and patent drugs in the country, something which might be quite a long point of discussion if we got into it here; ideas on how we provide primary care; ideas on how we keep people healthy which relate to how we educate them.
This discussion can go in many directions but it is clear right now, that the recipient provinces, particularly the Atlantic Provinces, and Manitoba, have said that equalization is the money they are using to provide health care to their citizens.
If you total the amount of money received by provinces for CHST and equalization, it is less than what they are paying for the health care programs in their provinces. It does not in any way match their responsibilities. An artificial restriction of equalization hurts the province's ability to provide health care services.
I have heard the Minister of Finance in Prince Edward Island make that point forcefully in presentations. She has been in front of your committee and made the same point.
The Chairman: Your preference is to the single-payer system, which you regard as superior to that in the United States. Concerning health care, do you prefer the block funding system to the old shared cost system?
Mr. Selinger: I think all provinces prefer the shared cost system because it spreads risk. Right now, the block funding system puts 100 per cent of the incremental costs of health, education and social services on the back of the provinces. The CHST transfer, as you know, in the 1995-96 budget lumped all those programs together into one unit and reduced them by 39 per cent.
This is the first recession, if we go into one, or economic slowdown, on which we have agreed, where 100 per cent of the social costs of the economic slowdown are the responsibility of the provinces. There is no cost-shared Canada Assistance Program any more. There is no cost-shared transfer payment program for helping post-secondary education. The burden of risk is now on the provinces after individuals exhaust their use of unemployment insurance benefits. That puts some provinces at risk.
The Chairman: The only place where there is a serious conditionality affecting the financial side is health care with the Canada Health Act. Whether you spend the money on post-secondary money or social assistance is really up to the province under block funding, with all the flexibility that Mr. Trudeau wanted when he introduced block funding.
Mr. Selinger: Are you asking the direct question, if we went back to shared-cost funding, would we accept conditions?
The Chairman: Yes.
Mr. Selinger: The answer is yes, we would be happy to do that. We have never been uncomfortable with the conditions of the Canada Health Act, or with the conditions under the Canada Assistance Program or the requirements to fund post-secondary education, mostly because those priorities reflect the priorities of our citizens.
The Chairman: Under the present situation with block funding, some provinces say that the only way they will be able to cope is if they are liberated from the conditions of the Canada Health Act. What do you say to that?
Mr. Selinger: We strongly support the Canada Health Act because we think it has provided good service and comprehensive coverage and accessibility to Canadians. That is really the difference between the Canadian and the American health care systems. They consume about 14 per cent of their GDP for health expenditure. We are at about 10 per cent. That is a significant difference, but we provide universal access; they do not. That makes a huge difference in terms of the equality of treatment that citizens receive in the United States versus Canada.
Our system is widely recognized as still being superior. The amount of our GDP that we dedicate to health care is greater than several European countries. There are several reasons for that. We have a more vast country with a more diverse population in remote areas where it is harder to have economies of scale in delivering services. Look at a country like England; they have about 60 million people in a geographical space smaller than Manitoba and they devote a huge amount of money from their GDP to health care.
We have some unique challenges in our health care system but it has been widely recognized around the world as being one of the better systems and it is looked at with great envy by most countries.
Senator Stratton: It bothers many of us that we cannot sustain this system as it is. Could there not be experimentation?
Mr. Selinger: Sure.
Senator Stratton: In the private sector, if a worker gets hurt or falls ill, there is an insurance that becomes affective. Workman's Compensation kicks in.
My daughter works for a corporation in Alberta that will pay to have their injured workers treated at private clinics so they can be back at work six to eight weeks earlier. Can we not at least experiment with that private sector possibility to bring people back to work more quickly? Why would you not be willing to try that?
Mr. Selinger: Should we try experiments to improve health care? My general answer would be yes. We should carefully look at the evidence to see the impact not only on the workers who are directly affected, as in your example, but also what the effect is on the broader system?
We entered into an experiment last spring in Manitoba. We bought out a private clinic and moved it into the publicly run Winnipeg Regional Health Authority and we doubled the number of surgeries being provided. That relieved pressures on hospitals and saved money because the cost structure of the hospital made the cost per unit of service more expensive.
Alberta has tried different experiments. We should look at the direct results, at the effectiveness and the savings in work time, and then look at the result on the wider system. That kind of evidence-based debate, as opposed to an ideological debate, will give us better information.
Senator Stratton: I do not want to go to an ideological debate, but this particular Alberta example, the injured worker with insurance coverage, is surely worth examining.
Senator Banks: The question with respect to health care is not who provides the services. Health care is provided privately all over the place. Every doctor's private office is a private enterprise. Street-front clinics, walk-in clinics, labs, except those found in hospitals, are all private enterprises. Who owns and who delivers the service is not the question. The question is who pays for the service. That is the only question.
Parenthetically, we can save hundreds of millions of dollars per year in this country if the health system simply learns how to communicate with all of its members. We may have to make some giant subsidies to do that. I am not exaggerating. There are hundreds of millions of dollars spent presently in overlapping or twice-delivered services.
The model given in your example showing that Canada transfers a smaller percentage of revenue to the subgroups of governments is not entirely fair because the systems are entirely different. Some of those countries are practically unitary and the tax divisions between them are totally different.
In the matter of tax division, I have found that, in the aggregate, provincial tax revenues in Canada exceed federal tax revenues in Canada. Therefore, it does not seem to me to be out of order that a larger percentage of public services are paid for by the provinces.
Mr. Selinger: You are right. There is not strict comparability among federations in terms of the respective roles of federal and subnational governments. In most federations the national government has a stronger role.
Senator Banks: A stronger role than Canada does?
Mr. Selinger: Yes, they do. However, if we want to keep the country together, there is an important role for the national government. That is the only real point that I am trying to make; that role must have some cash value behind it. He who pays the piper calls the tune. There is some truth to that. It is a shared responsibility.
The aggregate revenues raised by provinces have started to surpass the aggregate revenues raised by the federal government, but the portion of direct services offered to Canadians by provincial governments are greater than their revenues. Health care, education, and services to children and families comprise about 75 per cent of most provincial budgets, if not more. Health care is usually from 40 per cent to 45 per cent. Education is usually 20 per cent to 23 per cent, and services to families and children are in the order of 10 per cent to 12 per cent.
Three-quarters of everything a provincial government spends is on direct services to people. Their revenues, even though in aggregate greater than the federal government's, they are in just about all cases in this country, not sufficient to meet that challenge alone.
Senator Banks: Ergo equalization.
Mr. Selinger: Exactly. That is the point of coming here tonight. How can we make that instrument better? We are fortunate. We have the instrument in place. We designed it and put it in place in 1957. Other countries still come to Canada to learn how they can get started. Tonight we are considering how we can make that instrument do a better job.
Economic convergence in the country is to the advantage of the entire country. The federation is stronger as every member of it can compete more effectively and do its job of providing services to its citizens. This is the instrument that allows that to happen. If it is a strong instrument, we are stronger as a country.
Senator Banks: We agree.
Senator Tunney: If you had to make changes in the program we are talking about, what would you do? I think I heard you say you would retain the ten-province program. You did not mention non-renewable resources. Does Manitoba have much in the way of non-renewable resources?
Mr. Selinger: Yes, we have a significant mining industry that is located in northern Manitoba. It is struggling right now with low world commodity prices, but it is a very important factor in that region and very important to the overall provincial economy. It provides high value jobs and high value products.
We do have a non-renewable sector. However, Hudson Bay Mining and Smelting is going to permanently shut down its operation in the community of Leaf Rapids next spring because zinc and copper are at record lows in world commodity prices. There are some struggles going on right now and we have to provide support to that community to enable it to diversify and survive. We have a talented population there and a huge investment in the infrastructure there. If the mining company shuts down in the spring, we could lose the lion's share of jobs in that community. We will be working closely with them to find an alternative way for them to survive.
Yes, non-renewable resources are important to us and we believe they should be included in the formula because they are a significant source of wealth-creation for our province.
Senator Tunney: I am from Ontario, where our provincial government has been cutting taxes quite radically, although it is not a radical government. As it cuts taxes, it is making some very stringent demands on the federal government for more funding.
Last night, the federal Minister of Finance was chastising Mr. Harris and Minister of Finance Flaherty. It gets tiresome when governments start making demands that the people do not understand.
When the federal government responds to these demands, does it not have the effect of diminishing the effectiveness of transfer payments?
Mr. Selinger: Do you mean if the federal government responds by giving more money?
Senator Tunney: Yes. The province cuts taxes and brags about that. Then they make strenuous demands on the federal treasury; the federal government denies those demands at first and then relents.
Mr. Selinger: You have put your finger on an important element of our federation that may not always be the most functional. A lot of gamesmanship goes on. Junior levels of government always like to solve their financial problems by accessing the resources of the level of government just above them. Cities like to get access to provincial revenues; provinces like to get access to federal revenues. We should be honest and acknowledge that is a dynamic of the federation.
However, it works the other way as well. If one province or one level of government makes significant moves to reduce taxes, it puts pressure on other provinces to follow suit. We are in a period of what I call "competitive federalism," and there are some dysfunctional elements in that form of federalism. We can all race to the bottom on taxes and then all race to the bottom on the services we provide, or we can decide on a reasonable level of taxation and a reasonable level of service delivery that we can all afford across the country that will keep us a prosperous nation in a global economy.
It is always a question of the right mix of cooperation among the subunits of a federation with the federal government. Then the government and the nation have to position themselves to be prosperous in the global economy. Some people would argue that the period of globalization that we are in is putting too much emphasis on competitiveness with not enough emphasis on allowing all parts of the world to have a chance to be prosperous as well. It is a question of the right mix.
I come from a New Democratic Party government; a social democratic government. We tend to put the emphasis on cooperation and sharing, but we recognize that in the real world we must stay competitive as well. There is no question about it.
There are certain things that all provinces must provide their citizens on the tax side and on the services side regardless of their political orientation. When I get together with ministers of finance of other governments across the country, we have much more in common than we have differences.
We get along extremely well. We have similar problems and challenges. We take some different approaches to meeting those challenges, but we have the fundamentals in common. We want to provide the best services we can to our people. We want our economies to grow and strengthen, and we want to do it with fair and affordable taxation.
Senator Tunney: I would like to know what your surplus or deficit was last year? What are you predicting for the next year for revenue and expenses?
Mr. Selinger: Last year we had a $42 million surplus that we put in our rainy day fund. That was a good year for us. We have balanced the budget since 1996, with some use of a reserve fund that allows us to balance it out when revenues and expenditures are not in line.
This year, the economy has slowed down. Although we are not slowing down as rapidly in Manitoba as other provinces because of the diversity of our economy. Our ranking is moving up relative to other provinces, even though we are slowing down.
We had predicted a draw on the fiscal stabilization fund of $60 million. We will see at the end of the year whether we need to use more or less of that money.
The Manitoba economy is doing reasonably well, but we have a strong commitment to balance budgets, as well as to provide key services. We do not ask anyone else to be any different.
The Chairman: What is your debt as a proportion of the GDP?
Mr. Selinger: On general purpose debt load, our GDP is the third lowest of the country, at about 6.7 cents on the dollar.
The Chairman: What did you call it? Did you say your general level?
Mr. Selinger: I am referring to our general purpose debt. The money that we spend in our budget every year to service that debt is about 7 cents on the dollar. Our debt level is about the third lowest in the country on a per capita basis.
Senator Banks: It is interesting to note that Lorne Elliot was talking about this the other day. He noticed that the new industry in Manitoba is marijuana growing. He was careful to note that it is being grown in Flin Flon, Manitoba, where the topsoil consists of half an inch of pine needles, underneath which is pre-Cambrian rock. It is being grown down a mine shaft. He said as soon as he heard that he knew the federal government was behind it.
Senator Bolduc: We have a retirement savings plan in Canada; we have Employment Insurance. What do you think of the possibility of having something like a health saving plan. We would begin to pay at the age of 25 years, and when we reach 70, we have a fund and we can spend our own money on health care. Do you think that would be good?
Mr. Selinger: The concept of having a savings plan for health care would tend to only allow people that have savings or extra resources to have that fund available to them. It would not address the issue of accessibility to service.
If you look at the experience of registered savings plans, low income families tend not to be able to have the money available to contribute to such a plan. It really is a good instrument for middle-income and high-income families, but it does not address the equity issue that well. It could be part of a mix, but it would have to also have the ability to provide universal services to those that do not have individual savings, particularly during the child bearing years.
There is a problem with that. One of the central insights when we designed our social programs after the Second World War was the concept of universality.
Senator Bolduc: That was the Labour Party approach from Britain. We live in a different world today.
Mr. Selinger: We do live in a different world today. Universality is still fundamental to health care in this country. If we move away from the notion of universal access to health services to individual savings accounts, we will move more towards the American model where we will have very good services for those who can afford them and poor services for those who cannot.
Senator Bolduc: Are you telling me that people cannot save a few bucks a week to care for their health in their old age?
Mr. Selinger: We have a Canada Pension Plan where we save money for our old age. It might be a useful supplement for some people that want extended health care programs, but to use it to substitute for the universal health care programs would be a serious erosion of the citizenship of this country.
Senator Bolduc: I cannot resist saying that it is false to say that most people cannot take care of themselves. Maybe 8 per cent or 10 per cent of people cannot take care of themselves, but 90 per cent can take care of themselves.
Mr. Selinger: In the discussion on equalization and universal health care, the question is how do we take care of each other. That is fundamental to the notion of community, and community is the cornerstone of this country.
The Chairman: Thank you very much, Minister.
The committee adjourned.