Past Session:

Proceedings of the Standing Senate Committee on
National Finance

Issue 9 - Evidence

OTTAWA, Wednesday, May 12, 2004

The Standing Senate Committee on National Finance, to which was referred Bill C-30, to implement certain provisions of the budget tabled in Parliament on March 23, 2004, met this day at 6:15 p.m. to give consideration to the bill.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we have before us Bill C-30, to implement certain provisions of the budget tabled in Parliament on March 23, 2004. The bill received second reading in the Senate yesterday and was referred to this committee.

Our witness tonight is the Minister of Finance, the Hon. Ralph Goodale.

[Translation]

Accompanying Mr. Goodale is Mr. Louis Lévesque, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, and Mr. Serge Dumont, General Director, Assistant Deputy Minister's Office, Tax Policy Branch. I am also confident that you have brought along a talented team of associates with you.

[English]

I will introduce the others as and when they are needed to come to the assistance of the minister.

The minister has a brief opening statement. We will have his undivided attention here for about an hour. After he has made his opening statement, we will open the floor for comments and questions.

Thank you for coming, minister. Please proceed.

The Honourable Ralph Goodale, Minister of Finance: Honourable senators, I appreciate the opportunity to meet with you tonight in your consideration of Bill C-30. I will try to keep my opening remarks very brief so that most of the time tonight can be devoted to answering questions.

The 2004 budget of the Government of Canada had two basic themes. The first was about fiscal strength and discipline, and the second was about advancing the government's Speech from the Throne agenda in some tangible and measurable ways, that is, making some strategic down payments now on things we want to accomplish over the next five to ten years.

On the fiscal theme, to set the fiscal framework, we have used sensible, prudent planning assumptions, endorsed and validated by the private sector. We have maintained a contingency reserve as a cushion against the unpredictable, plus a measure of extra prudence has been added. For the first time, we have also established a formal target for reducing the debt-to-GDP ratio. That ratio, as honourable senators will know, peaked at 68 per cent in the early 1990s. We have now brought it down to about 45 per cent. We want it to drop further, to 25 per cent, within 10 years.

To further buttress our fiscal position, we have re-created the Office of Comptroller General of Canada, and we have launched an evergreen expenditure review process to achieve at least $3 billion in ongoing internal savings, to be reallocated from lower to higher priorities over the coming four years.

With respect to spending, our core objective is to keep overall growth in government spending in line with growth in nominal GDP. That is a key point, Mr. Chairman. Some modellers and forecasters have published projections about the coming five years that suggest accumulating federal surpluses in the $60 billion or $80 billion or $90 billion range. This all sounds very exciting, but the analysis is based upon some faulty assumptions.

The only way to project surpluses that large within that time frame is to assume a growth rate in existing and known expenditures at or below 3 per cent. Such an assumption is flawed because it fails to account for costs that are inevitable and, in fact, are already built into our ongoing requirements, such as elderly benefits and the Canada Health Transfer, which are growing at rates well above 3 per cent. Indeed, the Canada Health Transfer is growing at about 8 per cent per year.

Deliberately underestimating spending requirements is exactly what governments did year after year for the better part of the last three decades, leading to the deficits and the debt of the early 1990s. I do not think we should return to that era. Instead, since 1997, Canada and Canadians have clearly benefited from realistic assumptions, prudent planning and sensible cushions against unforeseeable external shocks. This approach has produced the elimination of the federal deficit and seven consecutive balanced budgets, which is unprecedented in Canadian history and, indeed, unique today among all G-7 countries.

Our approach has also resulted in strong economic growth rates for Canada plus a solid employment performance, both in terms of the participation rate in our workforce and our job creation record. Inflation and interest rates remain moderate and stable. Business and consumer confidence are high. Federal taxes have come down by some $100 billion. The nation's overall economic prospects are strong, as has been confirmed by internal forecasters as well as the International Monetary Fund and the OECD.

With respect to the future agenda and our down payments on strategic, long-term social and economic priorities, I will not belabour the full details of the budget plan.

I will simply say that it touches upon a number of important areas: a new deal for communities and municipalities; innovation and commercialization; Canada's place in the world; the 3Ds plus T, as they call it in the world of acronyms — diplomacy, development, defence and trade. The agenda moves the yardsticks on lifelong learning, from early childhood development through to the golden years, and there is a special focus on access to post-secondary education. The agenda invests in health, both under the 2003 accord on health care, and beyond it in the realm of public health, learning from the experience of SARS.

The list goes on, Mr. Chairman. Bill C-30 touches upon some — not all — of these areas, some of the most urgent and time-sensitive budget measures. As you know from looking through the bill, some of it is highly technical and very detailed. That is why I have with me this cast of learned characters who will be able to assist in answering all of your questions tonight.

I will leave my introduction at that and spend the rest of the time trying to respond to your questions.

Senator Lynch-Staunton: This is a highly technical bill in parts, and one that I do not wish or dare to enter. However, as a layman who tries to follow government finances, it seems to me that this has not been a good year. Would you comment on what I am about to say and your role in it?

When we got the Main Estimates, we were told, thanks to a press release — there was no announcement by the President of the Treasury Board himself when he tabled them — that the Main Estimates were to be replaced by another set of Mains because they did not reflect the reorganization that was announced on December 13. According to the House order, they had to be tabled by the end of March. For the first time that I can recall, we are faced with a set of Main Estimates that will have to be drastically changed, or are being drastically changed right now.

Also, we never got the Part 3s, the plans and priorities. We were told that some of them, if my memory is correct, would be available at the end of May and the others not until some time in the fall, again because of reorganization.

If we do not have a proper set of Estimates and we do not have plans and priorities at the time the Estimates are tabled, how can we be expected to assess the government's spending program and priorities for the current fiscal year?

If I may add another thing — and it has happened before, but as an exception — the interim supply bill is for nine months this year instead of the usual three or four months. The interim supply bill that we passed in March is valid until the end of December. That is highly unusual and, I think, not correct.

Mr. Goodale: The points that you raise are certainly interesting and important ones in government finance. There have indeed been difficulties this year associated with the arrival of a new government on December 12. Some government reorganization went with that. Then there was the necessity that I take some reasonable length of time — two or three weeks more than usual — in the period between December and March in the preparation of the budget. Indeed, we put the budget together in record time, but unfortunately, the starting gun did not go off until December 12. Our time was very contracted.

There were some things in this budget cycle and in this cycle of parliamentary approval that got out of the usual order and sequencing that people are used to. Certainly from my point of view, and I know from Mr. Alcock's point of view as President of the Treasury Board, we would want to see a more standard flow of events in terms of the time frame and the sequencing in the new fiscal year, both so we in government can do the things we have to do and in the proper order and in the proper way, but also to ensure that parliamentarians, both here and in the other place, have the full opportunity to scrutinize the Estimates and to do the proper job that Canadians would expect of parliamentarians when it comes to going over the numbers.

Senator Lynch-Staunton: What I fail to appreciate is why it was necessary to announce the reorganization within 24 hours of the new government being sworn in, when it was known at the time that the budgetary changes and the Main Estimate changes that were needed would not be ready for months. Why was it essential to announce that reorganization when it was? Why could it not have waited another six months or a year? It has disrupted many things, as we know, and many agencies and government departments are still trying to adjust. It is a massive reorganization. The last one I remember that massive was Prime Minister Campbell's, which she too announced right after taking office. How can our civil servants and others do a proper job when these sudden dislocations arise, which also, unfortunately, as you say, make it more difficult for us to appreciate the Estimates because they have been affected in a very serious way?

Frankly, the information we have received will have to be revised later on. I will get on to your budget bill, but I want to get your appreciation of why it was essential to do the reorganization when the other factors were not yet ready.

Mr. Goodale: Senator, the government no doubt wanted to make a quick start and to demonstrate in a tangible way to Canadians that progress was being made on the agenda that had been laid out.

Some of the reorganizational matters perhaps could have been delayed or taken more time. Others were urgent. I think, for example, of the reorganization around Public Safety and Emergency Preparedness, the new portfolio that is under the ambit of the Deputy Prime Minister. This clearly is a matter of considerable urgency for Canadians. It affects not only our domestic situation but also our international standing. It was important, to use that as an example, to move quickly on that particular set of issues to address a range of concerns that were associated with the ultimate production of our new national security policy that was released, as you know, two or three weeks ago.

It is probably fair to say that some of the reorganizational changes might have been approached at a more leisurely pace, but there were some — such as national security — that demanded rapid attention and quick movement. The decision at the time was that it was better to try to move them all as a package, rather than just one or two.

Senator Lynch-Staunton: I thank you for that. I repeat what I said over and over again: It is too bad that Parliament is not part of these decisions. I appreciate the fact that the legislation allows the executive to do these things and that Parliament will ratify them in time. I hope the day comes when Parliament will be part of the process and there will be a joint effort, and we will not have to go through this tribulation that some of us feel is unnecessary.

I will stop there. I do have specific questions on the budget bill itself. I do not want to take up the time of my colleagues. I thank the minister for his answers.

Senator Day: Mr. Minister, during second reading debate in the Senate, there was a question with respect to booking some of the funds in a previous fiscal year. Could you take some time to explain to us how that comes about?

Mr. Goodale: Senator, as you know, when a surplus remains on the books of the government at the end of a fiscal year, by virtue of accounting principles, it automatically gets applied against the debt. That is the debt paydown.

Over the course of the last seven years the total accumulated is $52 billion, which has been a material improvement in the financial position of the Government of Canada. That debt reduction, alone, means that we are saving $3 billion per year on an annual basis. That money can now be dedicated to health, education or other worthy social or economic purposes. It does not go just to pay debt interest charges.

Paying down the debt is a very important fiscal, economic, and, I would even argue, social achievement. It frees up resources that can then be devoted to better purposes. The pattern of the government over the last number of years has been to pay down the debt from that surplus.

However, there are other, competing priorities that the government needs to address. When you get to the final stages of the fiscal year, there is always discussion within the government, and indeed in the public, about how much is left of the surplus and how close you are coming to the line between surplus and no surplus. As you know, our general practice is to have a contingency reserve of $3 billion; that gives us the cushion to know that we will always be on the black side of the ledger.

There have also been criticisms that we have had too large a cushion. Some people have said that was the case in some years and that other good and worthy objectives could have been funded with that money rather than putting it all against the debt.

When you get into the last part of a fiscal year, there is a legitimate public policy debate as to what priorities of the government could be met with any extra amount that might be available, over and above that $3 billion in the contingency reserve. When you are into the last several weeks or couple of months of the fiscal year, your decision- making ability is constrained. Not everything can be dealt with in those last few weeks.

It has to pass muster with the Auditor General, in terms of whether that year-end investment you might want to make is a good and valid investment. The Auditor General will engage in a conversation with the government about what is appropriate and what is not.

This year, when we got into those last several weeks, we were facing a number of urgent situations. We had an outstanding request from the provinces for a $2-billion one-time payment on health care. The Auditor General thought that was perfectly legitimate. It fell into the category of what you could book at the year-end.

We were facing a very serious situation with BSE, or mad cow disease, that started in May of last year. That emergency was accelerated in December when a second animal was discovered, not in Canada but in the United States. However, the allegation was made that the animal came from Canada, which compounded our trade problems with the United States. Thus, the Auditor General concluded that that was a valid emergency arising in the previous fiscal year that could legitimately be booked in 2003-04.

There were other expenditures associated with health care and the public health agency that fell into the same category.

In total, I think those payments added up to $3.5 billion. There was $2 billion for health; $1 billion for mad cow; and $500 million for the municipalities, which is in the bill.

They have to be of an urgent nature to pass muster. The legislation has to be introduced in Parliament before the end of the fiscal year. The legislation has to be enacted before the books are closed and sent off to the Auditor General for auditing and for her normal report.

My officials may well be able to add other, technical requirements, but those were the broad parameters. They were matters of an urgent nature that related to the previous fiscal year. The legislation authorizing the expenditure has to be introduced before the end of the fiscal year, which Bill C-30 was. It then needs to get through the parliamentary process and receive Royal Assent before we close the books for fiscal 2003-04. We then send them off to Ms. Fraser for her final audit.

The Chairman: When is that?

Mr. Goodale: We expect her to do it in August-September. That is typical of past years.

Senator Day: There is a provision in Bill C-30 for the Governor General in Council to fix the rate for Employment Insurance for next year. Could you comment on that? That is another question that has been posed in the Senate.

Mr. Goodale: The issue of rate setting has been outstanding for a number of years. The government undertook a set of consultations over the course of the last year. The results of those consultations are now under consideration in terms of how to deal with this issue in the future. All things being considered, and in an ideal world, I wanted to finish that consultation and include the advice arising from it in this or some other budget bill related to Budget 2004. Unfortunately, given the contracted time frame that I mentioned in answer to Senator Lynch-Staunton's questions, I did not have the opportunity to deal fully with that issue before the budget was presented. I intend to come back to it later this year. I want to deal with it before the end of this current calendar year.

In case, for some reason, we do not get through the legislative process by that time, it is important to have the regulatory authority to deal with the rates for the next calendar year. My goal is to resolve this issue of the rate-setting mechanism once and for all later this year, and to do it by means of legislation.

Senator Tkachuk: Mr. Minister, welcome. One issue I wish to ask you questions about concerns the price of gasoline. The 7 per cent GST and the excise tax are charged on a litre of gasoline. Every time the price of gas at the pumps goes up a penny, how much more money accrues to the federal treasury in this country?

Mr. Goodale: In terms of the excise tax, there is no difference because it is a flat tax.

It is 10 cents a litre on gasoline. It is 4 cents on diesel. The fact that the crude price changes or the refiner's price changes has no effect on the excise tax. It is 10 cents flat across the board. In terms of the GST, it is 7 per cent, so if the base price goes up by a penny, the GST impact is 7 per cent of a penny.

Senator Tkachuk: Does the federal government have any idea how much extra money they take in every time the price of gas goes up a penny, or a nickel? Is there someone who does those calculations amongst this group here?

Mr. Goodale: Senator Tkachuk, we do not have those figures with us tonight, but obviously there are some rough rules of thumb that apply to what a nickel per litre or 2 cents a litre would produce in terms of revenue. We can work out a chart on that and send it to the committee, if that would be helpful.

Senator Tkachuk: Is there a benefit to Canada's policy on the Kyoto accord if the price of gas continues to go up?

Mr. Goodale: In terms of direct, immediate impacts in the order of magnitude that we have seen in the last little while, I do not think there is an appreciable difference. The academic studies have indicated that before there would be any significant change in consumer behaviour, you would have to see prices in the order of magnitude of those on the street in Europe, and that is certainly not the direction in which the Government of Canada intends to go.

Senator Tkachuk: When you were Minister of Natural Resources you gave quite a spirited defence of Kyoto, so I thought that perhaps you might welcome what is happening with the price of gas, because you talk about the need for alternative fuels, renewable power, hydro, solar, wind, earth and bio-energy. Would this increase in gasoline prices not make those alternative fuels more attractive?

Mr. Goodale: It might in relative terms, but I think we achieve that objective by other means, Mr. Tkachuk. That would be my objective.

Senator Tkachuk: How would we do that?

Mr. Goodale: Part of it is through production and market promotion and penetration. Today, ethanol is a pretty competitive fuel. You can get it in Saskatchewan at any Mohawk or Husky station. You can get it here in Ontario at a McEwan's or a Pioneer Co-op, but the problems constraining ethanol are not so much price-related as they are production and distribution challenges. We do not produce enough and have not developed the market for its consumption, but some of us are doing our bit. I have here in Ottawa a Dodge van that uses E85 ethanol, which is a commercially priced fuel available just down the street.

Senator Tkachuk: We subsidize the production of ethanol because it is a more expensive fuel to produce, so in other words, this increase in gas prices is actually a positive thing because it would lessen the need to subsidize alternative fuels like ethanol, and perhaps others, that run our economy.

Mr. Goodale: I know you are trying to draw me into a quotation in favour of higher fuel prices, and as Minister of Finance I will not be drawn into that. I am not going to go there. I am in favour of renewable fuels, I think that we can there through production development, market incentives, and I maintain my very enthusiastic support for ethanol because not only is it good for the environment and for the energy sector, it is darn good for Saskatchewan farmers, and I think that is a worthy thing to work for.

Senator Tkachuk: It is very good for Saskatchewan farmers. I am trying to have a discussion on government policy because the Kyoto accord is part of that policy and you are supportive of it. I respect the marketplace and I know full well that there is nothing much you can do about the price of gasoline right now — we need increased energy supplies to bring down the price — so I just wanted to have a discussion.

From what I gather, about $30 million would be raised per penny per year if the price were maintained, according to our research. I am sure we are probably a few million out, but I think that is a ballpark figure.

Mr. Goodale: We will check the arithmetic and get back to you.

Senator Tkachuk: I have two other areas to cover quickly. You said you wanted to take the current debt-to-GDP ratio of 40 per cent down to 25 per cent. Are you supportive of paying down the debt, or would you rather see the economy grow the percentage increase?

Mr. Goodale: I believe we have to achieve it through both. Obviously I am in favour of economic growth, and the kinds of growth rates that we have seen over the last number of years — in the 3 per cent range, a little higher, a little lower — would make a material contribution to bringing down the debt-to-GDP ratio. Obviously I am in favour of economic growth as part of the equation here, but I am also very supportive of ongoing, annual debt reduction payments. Thus far, over the last seven years those payments have totalled $52 billion, and that is saving us $3 billion a year in ongoing interest charges. Therefore it has to be a combination of both growth and absolute dollar reduction.

Senator Tkachuk: Is the 25 per cent that you talked about at the beginning of your address based on growth in the economy reaching that number, or is it based on a combination of cash and growth? How much cash would be needed to achieve that 25 per cent number?

Mr. Goodale: It is difficult to predict that in advance from year to year. We have set the target. We want the debt-to- GDP ratio to be no more than 25 per cent in 10 years from now.

Senator Tkachuk: I understand. So do I.

Mr. Goodale: We can achieve that by a combination of both economic growth and absolute debt paydown. We have not isolated the two avenues toward that goal in watertight compartments. We want to get there by means of both.

Senator Tkachuk: Surely someone would have needed to crunch numbers for the Minister of Finance here. What was it based on? Was it based on an annual contribution?

Mr. Goodale: Our ongoing assumption is that we will be devoting the contingency reserve to debt paydown.

Senator Tkachuk: How much does the economy have to grow per year to achieve that 25 per cent goal and how much will be contributed out of excess revenue?

Mr. Goodale: Peter Devries is the master of the arithmetic. May I ask him if he has some comment on that?

The Chairman: Mr. Devries is the director in the assistant deputy minister's office, Economic and Fiscal Policy Branch.

Mr. Peter Devries, Director, Assistant Deputy Minister's Office, Fiscal Policy Division, Economic and Fiscal Policy Branch, Department of Finance: The target of 25 per cent within 10 years is based on an assumption of economic growth of just over 4.75 per cent. That is nominal growth, not real growth. It includes both real growth and inflation.

Senator Tkachuk: You are confusing me. What is real growth then?

Mr. Devries: It would be around 3 per cent per year over that time period, which is about the potential of the Canadian economy. That is what you would find in most econometric models in the private sector. Based on an inflation rate of just under 2 per cent, you get nominal GDP growth averaging around 4.75 per cent over that period.

That growth will get the debt-to-GDP ratio down to 25 per cent within 10 years without any further absolute reduction in debt.

Senator Tkachuk: This was not based on the Government of Canada contributing a certain amount of cash to pay down the debt, as has done in the last number of years?

Mr. Devries: This is consistent with the government's overall fiscal target, which is a balanced budget in each of the two years of the budget plan. It is backed by a contingency reserve of $3 billion a year, plus economic prudence. Of course, if the contingency reserve is not required, then it would be used to reduce the debt.

In the budget documents, I think on page 55, there is a chart that lays that out. It shows the path of the debt-to- GDP ratio to the year 2014-15, which has it coming down to 25 per cent with no further debt reduction. It shows what would happen if, in each year of that time period, debt was reduced by $3 billion. We would advance the debt reduction by an additional year.

Mr. Goodale: I would add one thing to those comments. As Mr. Devries has said, the assumption is a growth rate of 3 per cent, which has been typical over the last number of years. However, we are just coming off a year in which our growth dropped to 1.7 per cent. You cannot always assume that the 3 per cent will be achieved if you get hit with SARS, mad cow, a hurricane and a power blackout.

Senator Tkachuk: I understand that. From page 55 of the Budget Speech, 2004, my assumption would be that virtually none of the decrease to 25 per cent would be cash, or very little of it. In other words, achieving that target is mostly based on 3 per cent real growth.

Let us say that we are successful in achieving that in the next 10 years, and we have a reduction to 25 per cent. It seems to me that we will have tremendous surpluses, God willing. Would those be used then for expenditures on new programs or for income tax reductions?

Mr. Goodale: That remains for future policy decisions. I would expect it would be a combination of both, assuming we have the flexibility.

As I said in my opening remarks, the critical variable is the starting assumption about the level of current expenditures already locked into place. Some big expenditures are locked in. Transfers to provinces account for a big chunk, as do transfers to individuals, such as pensions and Employment Insurance, and debt service charges.

The one area with some variability is discretionary spending. In many ways, big chunks of our spending are predetermined and not subject to annual discretion. Health care is one of those. At present, based on the 2003 accord, which has been legislated, the rate of growth in federal transfers to the provinces for health care is escalating at an annual rate of 8 per cent. That, as you can see, is well above nominal GDP, as well as real GDP. The critical variable in how much room there will be 5 or 10 years from now depends on your assumption about the growth rate in program spending.

Senator Tkachuk: It is not my assumption.

Mr. Goodale: ``You'' is a generic term.

Senator Tkachuk: You used economic models to forecast the 25 per cent. You used private sector models to talk about the growth in the economy. You also said that private sector models have predicted a significant surplus.

Could you tell me what the private sector models have said the potential surpluses will be? Was it $30 billion, $90 billion?

Mr. Goodale: One particular forecaster had $60 billion.

Senator Tkachuk: Someone else may be at $30 billion. It seems to me, all things being equal, there will be some cash surpluses.

Mr. Goodale: Let me tell you how sensitive this is. Over the next five years, if you assume growth in program spending at 3 per cent, you will get surplus space in five years in the $60-billion category. That means you will have to roll back the 2003 health accord because that is not factored into the 3 per cent. That is growing at 8 per cent.

Senator Tkachuk: I will come back to questions, if there is time.

Senator Austin: Minister, I want to return to the bill and the issue under the Federal-Provincial Fiscal Arrangements Act of the equalization formula. I am particularly interested in how it affects the Province of British Columbia in the five-year period of 2005-10. I would be interested generally in your comments about equalization. This issue is raised often in the Senate, and not surprisingly, because senators feel a responsibility for their regions.

I would appreciate it if you could comment. Include in it a reference to the position that B.C. will find itself in and the state of play with the provincial government of British Columbia.

Mr. Goodale: Senator Austin, equalization is a complex subject, to say the least. Started in 1957, it has been part of the Constitution since 1982. It is horrifically complicated.

There are 33 different tax bases in 10 different provinces that have to be taken into account to calculate equalization. Some of these are very well established, well-known tax bases, like income or sales taxes, for example. Others are relatively new, particularly in fields like the taxation of certain non-renewable resources that have only recently begun to be developed.

In some cases, experience accumulated over the years makes the calculation of the tax base pretty precise. In some cases, in the newer areas, it is somewhat less precise.

In any event, you calculate each province's fiscal capacity across these 33 different tax bases, and then compare all of them to each other to determine how any given province is doing relative to all of the others. You then try to determine from all of that the standard fiscal capacity of provinces across the country.

The standard used is the five middle provinces, with Alberta, on the high side, not included in that calculation, and the four Atlantic Provinces, on the low side, not included in the calculation. The other five provinces are part of what is called the five-province standard. That is sort of the average fiscal capacity. If a province falls below that, which at the moment eight of them do — only Alberta and Ontario are above the standard — then it is entitled to equalization. This very complicated formula with 33 different tax bases tries to determine how much you are entitled to.

As a result of the nature of the data that go into this, at any given moment, four taxation years are open and being either calculated or revised based on more recent information. That makes it even more complex because you must constantly determine if you are speaking about this tax year or a tax year three years ago.

The Government of Canada has tried, in successive renewals of equalization, to enhance the integrity of the formula and to strengthen the integrity of the data that go into it. Thus, these equalization payments can be increasingly more reliable from renewal to renewal. The renewal process takes place once every five years. We are in that process now. We have begun a new renewal period.

Roughly speaking, as a rule of thumb, somewhere between $9 billion and $11 billion flows out to the provinces through the equalization formula every year. It can, on occasion, be a little less than that. I do not think it has been higher than $11 billion yet, but it is headed that way. Equalization is worth in the neighbourhood of $10 billion. It flows from the federal government to the provinces according to this very complicated formula.

In the most recent renewal discussions, we have again tried to enhance the formula. We have tried to improve the data. We have particularly tried to smooth out the process of change in the data. This is one thing the provinces have often complained about, that there will be a sudden change in the arithmetic and all of a sudden they are not getting as much as they were previously, or they were overpaid and they have to refund some. They have to do that all in one year. We are now implementing a smoothing mechanism that will spread this out more gradually.

Senator Austin: Is that the three-year moving average that is in the bill?

Mr. Goodale: That is it, exactly.

The biggest change in the tax bases for this last period relates to property tax. As you can imagine, there is a wide variation in property tax methodology across the country. I can ask Mr. Louis Lévesque to go into the painful detail of this, but this is a change that has had an impact on British Columbia. There is total agreement across the country, some of it more grudging than others, that the old methodology for taking into account fiscal capacity in relation to property taxes was flawed and that we needed a new methodology.

Beginning with this renewal cycle, we are going to that new methodology, which is a more accurate way of reflecting a province's fiscal capacity with respect to property taxation. That means that some provinces will get more because of this change in the formula; other provinces will get less.

The most significant impact on the downside, quite frankly, is in relation to the Province of British Columbia.

Senator Austin: Is that because British Columbia's tax take from property is higher than the national average?

Mr. Goodale: Let me ask Mr. Lévesque to comment on that.

Mr. Louis Lévesque, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance: It is related more to the market value of properties, which is much higher in British Columbia than in any other province. What is being proposed is a move to a market value as a starting point for the measurement of fiscal capacity, but adjusted for the differences in property values to reflect the fact that dollars of property value do not translate into dollars of fiscal capacity. There is broad agreement on that general outline. There is a specific element to the B.C. housing market that must be recognized. We worked with academics on that. We did not find the precise relationship. There is no agreement, if you ask 10 academics, on the exact methodology, but there is general agreement that there is a difference in the British Columbia housing market and there is a specific adjustment proposed in the methodology to take that into account and reduce the impact of the introduction of the new base on British Columbia. Still, British Columbia will be getting less because of that change. The specific nature of the B.C. housing market is being recognized. In all the discussions, it was clearly an element on which most people agreed, that if there is something different, for instance, housing and property values are much higher in B.C., you need to take that into account.

Mr. Goodale: Mr. Gary Collins, Minister of Finance in British Columbia, made a number of representations about how the impact of this change on British Columbia could be moderated. We were able to respond to most of his representations, including the introduction of the adjustment factor that Mr. Lévesque has just mentioned, together with a gradual phase-in, so that as big a change as this will be for British Columbia, it is being managed in a gradual way, which the British Columbia government has acknowledged has been very helpful to them.

Senator Austin: I have one short question and it should be a short answer. I take it, then, that you have agreement on the provincial expectations, because provinces want to book a number reasonably close to the equalization revenue expectation. What I hear you saying is that you have almost reached that, or you have reached that?

Mr. Goodale: Senator Austin, I am not sure ``agreement'' is the right word to use in relation to equalization. However, we have put within the fiscal framework a clear description of what we anticipate in relation to equalization over the next five years. It is important, obviously, for my framework to have it there. It is a $10-billion item every year. We need to know where we are at and the provinces need to know where they are at. I shared this information with them over a period of probably two months, but in specific detail when we came down to the final arithmetic just prior to the budget, so that they would not be taken by surprise.

The Chairman: Minister, with regard to equalization, after this bill was introduced into Parliament, there was a meeting between Prime Minister Martin and Premier Calvert of Saskatchewan, in the course of which the Prime Minister apparently committed himself to revisiting certain aspects of this formula, indeed of this bill.

I am aware of the $120 million that the federal government will pay to Saskatchewan to compensate for the adverse working of the formula with regard to the sale of Crown leases. However, there were other important matters that were discussed at this committee by Professor Courchene, and later by your Saskatchewan counterpart, Mr. Harry Van Mulligen. I am trying to find a delicate way to put this, but are we to understand that this re-visitation that has been promised by Mr. Martin will take place in 2009 rather than now?

Mr. Goodale: The normal renewal cycle is five years. Among other reasons, the five-year time frame is used partly because these things are so enormously complex.

For example, I think there were more than 40 federal-provincial meetings leading up to the latest renewal phase.

The Chairman: You were present at one of those, I understand.

Mr. Goodale: I was present at two of them.

The Chairman: You came in and told them what the formula would be for the next five years.

Mr. Goodale: They had gone through 38 meetings before I arrived.

You have the Government of Canada, ten provinces and three territories around the table, all with slightly different interests. No one is exactly the same. That is one of the great challenges and wonderful things about our country; we are all amazingly diverse. When we are all around one table, it will naturally take a while to sort through all the permutations of how this little change in British Columbia will impact Quebec or New Brunswick or Saskatchewan.

The renewal processes are on a five-year cycle. Obviously, if a consensus can be reached, it is always possible to move forward quickly rather than be absolutely locked in to five-year cycles. I would hesitate to raise an expectation.

The Chairman: With respect, that has been done, Mr. Minister, by the Prime Minister.

Mr. Goodale: As I understand it, the Prime Minister told Premier Calvert that because of the work of Professor Courchene, an obvious error on the face of the record had been discovered in relation to Crown leases. We checked it. We went back through the audited numbers to 1986 and determined that the point being made by Professor Courchene with respect to Crown leases was correct; it was an aberration.

There was a period, between 1999 and 2001, where the formula churned out some very odd results. Before 1999, it seemed to work pretty well. Since 2001, it seems to be working pretty well again on Crown leases. In that three-year period, it really went sideways. On that basis, it was a legitimate point for the professor to raise. Obviously, the compensation, or the back-payment, if you will, to Saskatchewan was needed.

The premier said he thought there were other things of that nature, beyond the $120 million. As I understand it, he was not specific in the conversation as to what they were, but he thought there were other errors or peculiarities in the way the formula may have functioned. The Prime Minister undertook to examine any instance of that. If indeed other examples of errors, mistakes or miscalculations are found, we will move to correct them.

There was one other commitment made by the Prime Minister that is consistent with the commitment I made to the provincial finance ministers. That is, we will look afresh at this whole treatment of non-renewable natural resources.

The Chairman: That is the one about which Saskatchewan has its biggest grievance, as you know. Alberta is not one of the provinces included in the five-province standard. I think Saskatchewan is. In any case, it is their view, supported by Professor Courchene, that they are deemed to have a bigger share, as it were, of natural resource revenue than they do because of the five-province standard. There is a consensus, at least among the provinces, that Saskatchewan's problem, and a number of other problems, would be solved by a return to the 10-province standard.

That is a large subject and I wish there were time to pursue it. I do think, however, there should be some clarity. Mr. van Mulligen was clear that at least two of the other matters must be addressed in the context of the formula that is before us tonight.

Mr. Goodale: The Prime Minister has undertaken to examine these matters. There have been meetings thus far between federal officials and Saskatchewan officials. The issue is being pursued conscientiously, as the premier and the Prime Minister had agreed. The work is by no means done yet, but it has certainly started. As I understand it, we are waiting at this moment for some further data from Saskatchewan, which they have undertaken to provide.

Mr. Lévesque: We had a discussion with Saskatchewan on the issue raised by Premier Calvert, that the compensation offered on Crown leases was not adequate. We have just started to discuss with Saskatchewan officials the basis for that. It would be premature to comment on it.

The Chairman: In the meantime, you want Royal Assent for this bill as soon as possible?

Mr. Goodale: These measures, Mr. Chairman, go as far as we can presently calculate. Obviously, if another problem were identified, either in relation to Saskatchewan or some other province, we would move to make the correction.

The Chairman: You mentioned what you considered to be flawed assumptions in some of the projections of federal revenues with regard to federal spending responsibilities, and provincial revenues versus provincial spending responsibilities. I take that as an allusion to the Séguin report and work done by the Conference Board and others on that subject. I would like to know — and I am sure there are working documents in the Department of Finance that could tell us — about the presumably more valid assumptions going forward five years or whatever you have.

Senator Lynch-Staunton: I would urge that exchanges between cabinet ministers be restricted to the cabinet room or to cabinet committees, so that some of us who are less privileged have the valuable time available to ourselves. About 10 minutes was taken up there.

Senator Austin: Can I just say, as a senator from British Columbia, I do not have an opportunity to put my comments on the record when discussions are in cabinet.

The Chairman: Be careful about solidarity now.

Senator Lynch-Staunton: I am not here to plead for my parish; I am here to understand the system. That is what we should be about.

Minister, I hear you engaged in a significant amount of pre-budget consultation but, in effect, there is no post- budget consultation. In the United States, the president announces his budget one day and the Congress can argue over it for months and months to come. What is it about our system that requires so little, if any, legislative contribution to the budget process? Why is it that we cannot have a similar system — maybe not the same one, but a system that would allow a budget to be tabled and Parliament to be given a certain period of time to discuss it, make recommendations and then have it approved? Why this secrecy around the budget?

Mr. Goodale: Senator, it is certainly not something that was invented by this government.

Senator Lynch-Staunton: No, but I know you are into democratic reform now.

Mr. Goodale: It is a long parliamentary tradition.

Senator Lynch-Staunton: Yes, I know.

Mr. Goodale: There is common agreement that a vote on the budget is one thing by which the government either stands or falls.

Senator Lynch-Staunton: Perfect.

Mr. Goodale: That is engrained in our system of parliamentary government. I have tried to be more engaging of parliamentarians, although this year did not allow significant time for that. I would be happy to develop systems, both pre-budget and post-budget, whereby parliamentarians would feel that they have greater input into the process.

Without getting into the fine points of parliamentary procedure, what requires Royal Recommendation and other important traditions for the way we function in this place, I would be happy to receive the recommendations of the Senate Finance Committee in that respect. It would be something new and novel in any parliamentary system. Your point is well taken.

The American system has quite a different approach and quite a different outcome, because the darnedest things are attached to budget measures that go through the U.S. Congress, and that have absolutely nothing to do with the subject matter at hand. I do not think we would want to go to that extreme. There may well be some innovations in their approach that make it possible for legislators, whether on our side or their side, to feel more engaged. If the Senate has recommendations on that I would be happy to take them into account.

Over the last 10 years, we have moved away from the old traditions of intense budget secrecy. When was it that Doug Small went to jail for one night because he found a page of somebody's budget? There are still some important rules to be followed, but the more we engage Canadians, and especially parliamentarians, in the preparation of the budget and the review of specific budget proposals, the healthier the system would be.

Senator Lynch-Staunton: I would be happy to follow up on that, if I may. What is the urgency of this bill compared to previous budget implementation bills that have come before the Senate perhaps two or three years after the budget was referred? Were there still matters arising from previous budgets that had yet to be legislated? What is in this bill that cannot wait? How long can it not wait?

Mr. Goodale: Bill C-30 focuses on items that I would consider urgent. It particularly includes measures that relate to the last fiscal year.

As I explained earlier, to meet the standards and the tests of how one can properly book those items in relation to the last fiscal year, this measure would need to be enacted before we could close the books and send them to the Auditor General.

Senators will know from the announcements in the budget that Bill C-30 does not deal with everything in that budget. We will have at least one — maybe more — budget implementation bill later on. Those will deal with items for which there are no immediate time frames. The ones in this bill, such as equalization, the reimbursement of Saskatchewan, public health and the GST rebate to municipalities, are important to get on with because they are time- sensitive.

Senator Lynch-Staunton: We have until June. If we have it done by August, then we have it from August through June. There is no particular rush this week.

Mr. Goodale: The sooner the better, sir.

The Chairman: Thank you, minister and officials, for appearing before the committee.

Mr. Goodale: Thank you, honourable senators.

Might I add that as difficult as some of the questions around the table are from time to time, there is a much different tone in the Senate, which is perhaps more focused on the subject matter than the theatre. As a member of the other place, I enjoy the opportunity to visit with Senate committees because sometimes you are more to the point.

The Chairman: Senators, the Chair will entertain a motion that the committee move to clause-by-clause consideration of Bill C-30.

Senator Day: I so move.

The Chairman: Are senators agreed?

Senator Lynch-Staunton: I expressed my thoughts on that this afternoon.

The Chairman: I was not present to hear your sentiments, but I will read them in Debates of the Senate.

Honourable senators, is it your pleasure to adopt this motion?

Hon. Senators: Agreed.

The Chairman: Shall the title stand?