Proceedings of the Standing Senate Committee on
National Finance
Issue 5 - Evidence - Meeting of November 1, 2006
OTTAWA, Wednesday, November 1, 2006
The Standing Senate Committee on National Finance met this day at 6:16 p.m. to examine and report on issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada.
Senator Joseph A. Day (Chairman) in the chair.
[English]
The Chairman: Good evening. This meeting is to continue our work on the vertical and horizontal fiscal balances among the various orders of government in Canada. This is a timely study of an issue that is attracting a lot of public attention. The issue is of direct and immediate relevance to the governments and provinces and territories, so we have extended invitations to all the provinces and territories to provide input, either in writing or through an appearance.
We are pleased today to welcome representatives of Canada's newest territory, Nunavut: Mr. David Simailak, a member of the legislative assembly and Minister of Finance in the territorial government, and Mr. Robert Vardy, Associate Deputy Minister of Finance.
Hon. David Simailak, M.L.A., Minister of Finance, Territory of Nunavut: Thank you for your invitation. Also with me this evening is Mr. Chris Lalande, my executive assistant. He is travelling with us this week.
It is timely to appear before your committee to bring you up to date on some of the exciting developments taking place in Nunavut and to help you with your examination of issues relating to the fiscal imbalance that exists in Canada.
For most Canadians, the northern part of their country is an enigma. Few have ever been there, and even fewer understand its problems or, more importantly, appreciate its capacity to overcome them.
I am here today to talk about our territory's promise, about the potential of Nunavut to become a contributing partner within Canada and about the fulfillment of federal promises made to northerners over the past 50 years. As far back as the 1950s, the Government of Canada recognized that the North should not be ignored. Former Prime Minister St. Laurent told the House of Commons in 1953:
...the territories are vastly important to Canada and it is time that more attention was focused upon their possibilities and what they will mean to the Canadian nation.
Prime Minister Diefenbaker echoed this sentiment in 1958 in announcing ``Roads to Resources'' when he said, ``I see a new Canada — a Canada of the North!''
As recently as this past summer, when Prime Minister Harper visited Iqaluit, he renewed this call. He talked about the potential of the North and its critical importance to Canadian sovereignty. He outlined his vision of the North, not as it is but rather as it could be, a North that is stronger, more prosperous and liberated from the paternalistic policies of the past. The Prime Minister pledged to help Canada to achieve this dream.
The government and people of Nunavut welcome this recognition and support. We are anxious to play a vital role in the life of our great country, just as we are determined to build a self-reliant territory. The chances of achieving these goals have never been better. Most Canadians are aware of the economic development underway in the Northwest Territories. The NWT has Canada's highest per capita GDP, far exceeding that of Alberta. This rapid growth in the territory's economy has been fuelled by diamond mining and oil and gas exploration over relatively few years.
What many people, including parliamentarians, do not realize is that Nunavut has the same, if not greater, potential as the NWT. The Eastern Arctic is an area of tremendous untapped wealth, both in terms of its natural resources and its human resources, the Nunavummiut.
Nunavut has opened its first diamond mine, Tahera, and two new gold mines are expected to open, Doris North and Meadowbank, just 70 kilometres north of my home community of Baker Lake. The Meadowbank Mine alone will provide about 200 jobs and contribute about $200 million per year to the Nunavut economy, representing a 20 per cent increase in the GDP. There are many other promising exploration and development projects. There is a good possibility of additional diamond and gold mines, as well as silver, zinc, copper, iron, sapphire and uranium prospects. Over the longer term, we anticipate oil and gas development.
The business environment in Nunavut is also improving. Our government has taken steps to ensure a competitive tax environment, remove obstacles to business growth and promote economic development in Nunavut. We have established a policy to provide tax rebates for mine fuel and we are preparing a minerals and mining strategy. We are also building a sustainable fishery to take full advantage of our offshore shrimp and turbot fisheries. As well, we are promoting tourism to encourage Canadians to explore our beautiful land. There is broad support for responsible development from our communities and from Nunavut Tunngavik Incorporated, NTI, which is responsible for the management of all Inuit-owned lands in Nunavut. For example, NTI is re-examining its position on uranium mining, a clean energy source of interest to all Canadians in this age of global warming.
Nunavut has the people power to bring this vision to fruition. Our population is young and the fastest growing in the country. If we harness this valuable resource and equip our youth with the necessary skills and education, they will achieve both their individual and our territory's potential. The opportunities in Nunavut are enormous. If we seize them, it will be the beginning of unparalleled economic growth and social development, which will reinforce Canada's efforts to strengthen Arctic sovereignty.
However, certain conditions are required to realize these goals. As the newest jurisdiction in Canada, Nunavut is still in its infancy and cannot achieve its full potential on its own. In the short term, Nunavut will continue to require strategic investments from the federal government.
Last May, the federal Expert Panel on Equalization and Territorial Formula Financing recommended a new approach to territorial formula financing that would reflect the differences among the territories and would fill the gap between expenditure needs and their own fiscal capacity.
Nunavut has been working from a position of disadvantage since its creation. The initial grant to Nunavut was inadequate to meet the most basic needs of the citizens of Nunavut in areas such as housing, health, education and infrastructure. In line with the expert panel, we believe that the gross expenditure base for the territory needs to be increased as part of a catch-up effort and to enable us to make strategic investments to further develop Nunavut's economic potential.
We are optimistic that this matter will be resolved within the federal government's commitment to restoring fiscal balance. We are encouraged that the federal government acknowledges the problem. Achieving fiscal balance among federal, provincial and territorial governments is essential in providing our government with adequate resources for reasonably comparable levels of public service at reasonably comparable levels of taxation. Nunavut expects comparable and equitable treatment.
Our government supports, in general, the recommendations of the Council of the Federation report on addressing the fiscal imbalance. We note that it specifically recommended that Nunavut receive extraordinary investment in areas of housing, infrastructure, and economic and social development. Both the federal and provincial-territorial reports provide a good starting point for reviewing territorial formula financing. Of course, money alone will not resolve our challenges. Unless we take steps to reduce our dependence on government spending, we will forever be in a position where our future is in the hands of the federal government and not in our own hands. That is not the kind of future we want for our territory and for future generations of Nunavummiut.
We want to work in partnership with the Government of Canada and Canadians to generate real economic growth and jobs in the territory. We want to increase employment and revenues and to reduce our dependence on federal transfers.
Although strategies we develop together might require some needed investments, we are also seeking support in other areas. For instance, environmental and socio-economic requirements are currently very stringent. We want to balance this with supportive policies to ensure that investors feel welcome by a timely, fair and cost-effective regulatory regime. We want to build on public support for mining and to encourage more private sector investment in exploration and development by streamlining regulatory and approval processes; tax measures; public education and awareness; training and career programs; access to geoscience data; and critical infrastructure. We would like to complement this with a coordinated joint public relations campaign to tell the world that we are open for business. We are optimistic about the future and our territory as a good place to invest. We want to generate good news and hope for a brighter future in Nunavut to change our image within Canada from a liability to a national asset.
Mr. Chairman, as you can see, we do not want handouts; we want a hand up so that we can assume our rightful place as equal partners in Confederation. A new approach is required in the Government of Nunavut's financial relationship with the Government of Canada. We need to change the dialogue from dependency to increasing self- reliance. This is precisely why we are here to meet with you today. Thank you, Mr. Chairman.
The Chairman: Thank you, Mr. Simailak.
Senator Adams: I welcome the Finance Minister from Nunavut. The good thing about Senate committees is that the rules allow us to speak at any committee.
[Senator Adams spoke in Inuktitut.]
Mr. Chairman, in Inuktitut I welcomed the minister to Ottawa.
The Chairman: Thank you for making him feel comfortable and at home here. I appreciate that.
Senator Adams: I want to ask some questions of the finance minister concerning the small population of Nunavut and the 26 communities. I do not know exactly how many kilometres there are between Iqaluit and Ikaluktutiak, but to get there I would have to go through Rankin Inlet, then to Yellowknife and from Yellowknife up to Cambridge Bay. We call it Ikaluktutiak. That is the farthest community from the capital of Nunavut.
With the land claim we found out that the area of Nunavut was 1,900,000 square kilometres with 26 communities. I also found out, as a member of the Fisheries Committee, that in Nunavut we have 60 per cent of the coastal water of Canada. In the rest of Canada, including Newfoundland, Nova Scotia, Yukon and B.C., there is 40 per cent. Therefore you can understand how big Nunavut is.
Our population, if I am not mistaken, Mr. Minister, is somewhere around 35,000 people living in Nunavut. Inuit make up 85 per cent of that population, and the rest is 15 per cent non-native Canadians. I was up there about two and a half weeks ago for meetings with various Inuit associations. The premier attended with the Inuit organizations from Baffin. He told us that since the land claims we have 47 per cent Inuit so far working for the Nunavut government. We still have a long way to go yet. In some parts where people were living we settled the land claim, but we had many Inuit drop out of school. According to the policy of the Government of Canada, we had to have grade 12 education.
The Government of Nunavut has set up the policy that we can have three languages in the school: French, English and Inuktitut. As far as official languages for Canada, Inuktitut is not recognized. Most people in Nunavut understand our mother tongue, as do Mr. Simailak and I. Most of the time, MLAs speak in their own language, as do those in the administration in Iqaluit, Nunavut.
The Chairman: Senator Adams, Mr. Simailak has come a long way. I wonder if you could put a question to him so that we can hear from him.
Senator Adams: Mr. Chairman, I am concerned about how the system works, between the federal government and Nunavut, and the three territories. My question concerns the increasing cost of living, especially with oil and gas prices rising nearly 50 per cent. We have people from the Government of Canada doing some costing for people living in Nunavut.
Could the minister comment on the cost of living in Nunavut? It is very expensive. In Nunavut, if you are not earning more than $120,000 a year you cannot afford to buy a house. The cost of everything is high, including fuel, electricity, property taxes and the community water and sewer systems. Up to 70 per cent of the people may be living in government housing. How will we operate in the future with people living up there with such an economy and trying to raise families? It is very difficult. We do not have any collateral up there, like down in the South, and we are still living in the communities on commissioned land. In the meantime, we pay property taxes and if you want to build a house now in any municipality you have to buy land for $50,000 to $70,000.
I am wondering, minister, are you familiar with the situation and do you have any comment?
The Chairman: Mr. Minister, if you could comment on the current territorial formula and the two recommendations that are floating around, the advisory panel and the council's recommendations, and indicate if you have a preference and just what the weaknesses are in each, we would be grateful to you.
Mr. Simailak: We agree with the recommendations in both reports, actually, the expert panel and also the Council of the Federation report. The recommendations in both are pretty much in line. We do know that Nunavut needs a significant amount of investment by the Government of Canada to catch up to where we should be. However, I do not have an exact amount right now of what we need to catch up. At the official level, a lot of work is being done by our people and also by the Government of Canada to determine that number.
Nunavut still needs a lot of infrastructure, it still needs a lot of housing, it still needs major investments in education, economic development, and all of that, to bring it up to where it should be and to become a full partner in Canada.
The Chairman: Thank you, we appreciate your comments.
Senator Mitchell: I have a number of questions. With regard to changing the funding formula, you mentioned in the end that you need to change the dialogue from dependency to self-reliance. That is precisely why we are here to meet with you, but you are saying that you do not have a specific figure for how much current funding formulas would fall short. Can you give more clarification on that at all? However, I do not mean to beat that horse.
Mr. Simailak: No, we do not have that number right now. As I said, at the official level, much work is being done between Nunavut and Canada to find out what those numbers are.
Senator Mitchell: We are hearing a lot these days about climate change and what that is doing to the North. Currently CBC's Peter Mansbridge is in the North. Could you give us your insight into whether you are beginning to think about how that might be impacting your communities, what that means for increased costs, the cost of adaptation, and what in turn that might mean for equalization or the need to support you?
Mr. Simailak: I can give you a perfect example of what is happening. My home community is Baker Lake, which is about 1,000 miles straight up from Winnipeg. We are normally laying our fish nets under the ice on Thanksgiving weekend. We are driving our snowmobiles around on the lakes and on the land by Thanksgiving weekend. When I left yesterday morning, there was still absolutely no ice on the lake at all. Whether that is global warming or just freak weather conditions, I do not know, but the elders are saying there have been major changes in the weather in the last few years. They say it is warming up.
I guess I could say I love it. It is not as cold as it usually is. That is a very selfish reason. In terms of adaptation, hopefully it will reduce much of our need for heating our houses and buildings. In terms of sovereignty, it will mean opening up the Northwest Passage, and Canada will need to say, ``Hey, this is Canada. These are our waters.'' I believe Nunavut can play a major role there.
Senator Mitchell: We heard from a group called AIMS, the Atlantic Institute for Market Studies, which is a right- wing economic think tank from the Atlantic area. They made the aggressive claim, and I do not agree with it, that equalization actually is an incentive to create debt amongst the provinces and territories. What is your budget circumstance now? What is the level of debt? Do you have deficit budgets?
Mr. Simailak: Our budget is a little over $1 billion a year. Our debt load now is about $150 million. Our debt limit as Nunavut is $200 million.
Senator Mitchell: You can accumulate only $50 million more in deficit, I guess.
Mr. Simailak: We are calculating this year about a $13-million deficit.
Senator Mitchell: That is not much.
The Chairman: I forgot to mention when I introduced Senator Mitchell as the next questioner that he was from Alberta. You know that Senator Adams is from Nunavut. Your next questioner is Senator Cowan, from Nova Scotia, where that AIMS group comes from.
Senator Cowan: I take no responsibility for AIMS. If AIMS heard that I was defending their views, they would be shocked. We agree to disagree.
I wanted to ask you about natural resources. Perhaps you could explain what the current regime is with respect to the ownership of your natural resources. I understand there are some discussions and negotiations going on between the Government of Nunavut and the Government of Canada with respect to devolution and revenue sharing. Can you give us a brief overview of the current situation and the status of those discussions? I assume that with the vast natural resources you have up there, getting control of those resources, or at least the revenue from them, would have a huge impact on your financial well-being and self-reliance.
Mr. Simailak: At present, all non-renewable resources in Nunavut are owned by the Government of Canada. I would think that we would get a very small royalty, as it is right now. Also, Nunavut Tunngavik Incorporated, our land claims body, would also receive royalties for some surface and some subsurface lands.
Senator Cowan: What is the magnitude of that on an annual basis, approximately?
Mr. Simailak: I do not have that number. Development has just started.
Senator Cowan: Do you have an idea what the percentage is?
Mr. Simailak: At the moment, Ottawa would get all of the royalties, and then they would give us back a bit, but I am not sure what the percentage would be. At present, it is minimal at best. Devolution and resource revenue-sharing negotiations have not begun yet. We have appointed our chief negotiator, and Ottawa is still in the process of appointing theirs.
The Chairman: Are any royalties involved in the formula-based calculation for transfers in either of the proposed formulas?
Robert Vardy, Associate Deputy Minister of Finance, Government of Nunavut: Under the expert panel recommendation, 70 per cent of own-source revenue would be going into the calculation. As it stands right now, there would be 100 per cent tax back of any royalties if we had a regime in place and actually generated revenues. The expert panel recommended 70 per cent.
The Chairman: Is that 70 per cent tax back? Inclusion, and therefore a tax back, in effect?
Mr. Vardy: Senator, that is my understanding of their recommendation.
The Chairman: Yes, 70 per cent. That was the expert panel's recommendation.
Mr. Vardy: Yes.
The Chairman: And does the advisory group take a different approach on that?
Mr. Vardy: They say that a revenue-sharing arrangement should be put in place. I think both panels recognized that there are significant costs, both direct costs as well as indirect costs, of resource development, and that there should be significant enough return to the territory to compensate for those losses. The situation in the Northwest Territories right now is that they get a lot of activity; all of the royalties go to the federal government, and most of the corporate tax, and the territory is burdened with the expenditures associated with development.
Senator Di Nino: I am from Ontario. Give me 25 seconds to do a little editorial. The first time I went to Nunavut, actually Iqaluit, although I did spend some time on the land, I was tremendously impressed particularly with the natural beauty. I have been to all three territories more than once. In talking about my experience, I would describe Canada's North as a sleeping giant ready to bust out. I must admit I have been disappointed that progress has been very slow. That is just commentary, because I praise the Arctic every time I can, particularly when I am out of the country. Truly it is a unique place in the world that offers some incredible experiences that I would think should be exploited more. I am not here to give you comments, but I wanted to tell you that I have been to the Iqaluit area three times, to Whitehorse three times and to Yellowknife at least once.
When I talked about the sleeping giant, I meant the whole North. Do the three territories work together? Do you have a common cause and approach when dealing with these issues with the federal government?
Mr. Simailak: Yes, we do. We have been working very closely with the Northwest Territories and the Yukon when it comes to territorial formula financing, equalization, and so on. We also work very closely because we are neighbours, and for a long time we were part of the Northwest Territories itself.
Senator Di Nino: You do have a common cause so that when dealing with the federal government you can present a united front instead of separate issues?
Mr. Simailak: Yes, we do.
Senator Di Nino: I have a couple of questions on the expert panels' recommendations. Both of the panels made a comment about how the provision of funding should be dealt with. I think I am right when I read here that they are saying that Nunavut's needs should be provided for through targeted programs rather than through adjustments to the TFF formula.
Is that something you subscribe to?
Mr. Simailak: Yes, we do very much.
Senator Di Nino: You would be prepared to accept their recommendation on that basis?
Mr. Simailak: Yes.
Senator Di Nino: Hopefully this is not overly sensitive, but the expert panel also states that issues of governance, accountability and dispute resolution need to be addressed, be expanded and be more transparent. Has this been a problem in Nunavut or in the North as well?
Mr. Simailak: No, it has not been a major problem at all in Nunavut, particularly. The Auditor General would like us to have our financial statements done on time. We are working towards that and we will be doing that in the very near future to get them out on time.
Senator Di Nino: You do not see a problem in achieving the objectives they are recommending?
Mr. Simailak: I do not think so.
Senator Di Nino: One problem that I see in all of the Arctic is the lack of population density. Is there a program or is there a desire in Nunavut in particular to bring more people to Nunavut, or does that present a variety of other problems?
Mr. Simailak: As I said in my opening comments, Nunavut is open for business. We welcome investment, whether that investment is money or people, or whatever it takes to make Nunavut grow. We want to train our own people; we want our own people to get jobs. For example, the Meadowbank Mine is opening just 70 kilometres north of my home community. That represents about 300 jobs during construction and about 200 jobs during production, with an 8 to 10-year life at present. Yes, Nunavut is open for business and we need that investment.
Senator Di Nino: As far as you are concerned, there are no road blocks along the way, not only for commerce and business, but also for people who may want to go there to retire and look for jobs? That is, the welcome mat is always there for them?
Mr. Simailak: Yes. Anybody who can help Nunavut grow is welcome. The only constraint we have is lack of infrastructure. As Senator Adams mentioned, there are no highways in Nunavut, so everything is done by air, which can be very expensive and time consuming.
Senator Di Nino: I wish to share a personal experience. One of the trips I took was in the middle of winter. We did some cross-country skiing and some travel on the land. They do have a highway system. It is all ice highways, and they are wonderful. If you have not been, go there. It is a wonderful experience. Go to the ice floes and maybe you will be lucky and see a bear.
The Chairman: As I understand it, in recent history you have gone from a formula-based territorial transfer program to an envelope under the new regime of two years ago, and now there is recommendation to go back to one or the other formula-based program. In the original formula-based program, unlike the provinces, you had calculated into the funds to be available to be transferred to you the cost of delivery of services, which does not apply. We have heard that debate a number of times for the provinces, and some of the smaller provinces claim that that should be a factor. Will that be a factor if one of the new formula-based approaches is adopted and you no longer have the envelope approach?
Mr. Vardy: The formula financing program of the 1980s was based on the calculation of what the needs would be in each of the two territories that existed at that time. It would then grow by an escalator that was mostly based on the growth rate in expenditures in territories, province's local governments, and adjusted for population growth. There was an expenditure needs element built into the formula. When Nunavut and the Northwest Territories divided, they split the base between the two territories, but it was based on actual expenditures that existed in the years preceding development. From Nunavut's perspective, we did not think it was an accurate reflection of the actual needs, especially given the entire start-up infrastructure that was required of a new territory, a stand-alone jurisdiction. Things like hospitals, jails and courthouses did not exist to any extent.
Nunavut needed to be able to accommodate our full population. We could no longer transfer our needs to another centre. Under the new arrangement they are talking about, they froze the amount at a fixed amount and then grew it at a 3.5 per cent escalator. They are talking about restoring the population provincial-local government escalator into the formula, but that would not be enough to look after Nunavut's needs. It would be better than the current arrangement, but it would not be enough to catch up. As both panels agreed, the gap would not be closed between our level of services and the levels in other jurisdictions.
The Chairman: I think the formula-based approach was called the new framework of 2004. Are you saying that if a formula-based approach were reintroduced, that still would not be enough and you would need to negotiate a lump sum in addition to that?
Mr. Vardy: Yes. That is what we are saying. Both panels agreed that there are special needs. It does not matter whether it comes through the formula financing arrangement or cost-share programs, or whatever the mechanism. The start-up needs of the new territory have not been met, for example, in energy, where we are totally relying on petroleum products for all of our energy needs and where government picks up almost the total energy bill. There is nothing in the formula, even with an escalator restored, that would allow us to compensate for the increase in prices from $20 to $70 a barrel.
We would argue strongly, and the other territories agree, that the needs in Nunavut are different than those in the Yukon or in the Northwest Territories. As I mentioned, both panels agreed.
The Chairman: Why would you not just negotiate a lump sum or an envelope and get an escalator, like you had in the new framework only a little larger, rather than going into a formula?
Mr. Vardy: We would love for that to happen and we have been trying since 1998 to get that. We are in a debate right now with the federal Department of Finance and hopefully we can demonstrate again the need for that type of approach. The extra needs of a new territory are not being met by the current funding mechanisms.
Senator Murray: Minister, were you involved in the original negotiations that created Nunavut or were you too young for that?
Mr. Simailak: I wish I had been too young. No, I was in the private sector at that time.
Senator Murray: We did not do a very good job, did we, as Mr. Vardy politely suggested, in foreseeing what the needs would be of a new territory with de facto Inuit government serving 30,000 people in a territory six times the size of Nova Scotia. We did not foresee it, did we? In addition to the ongoing territorial formula financing, you need some of the money that should have been provided up front for the start-up costs of a new territory. That is what you need; is it not?
Mr. Simailak: Yes.
Senator Murray: Of the 30,000 people, how many are clustered in two or three communities, or are they scattered?
Mr. Simailak: There are 30,000 people in 26 communities, of which the three largest are Iqaluit, with over 6,000 people; Rankin Inlet, which has 2800 people; and Cambridge Bay. Many of those 26 communities have small populations of fewer than 1,000 people.
Senator Murray: It is very important for you to have brought the positive message that you did tonight. I think it is important that everyone at this table and Canadians, interested and watching on television, hear what you have to say about the potential of Nunavut and the determination of the government there to promote and help realize that potential.
Still, regarding the needs, I think it is important that people, here in Ottawa especially, understand the extent of some of the problems that you face. When I was on the panel of the Council of the Federation, we reported that infant mortality rates in Yukon are triple the rates in the rest of Canada. Average life expectancies are as much as 10 years lower in Nunavut. Education levels are significantly lower for Aboriginal people. Your Aboriginal population is about 80 per cent?
Mr. Simailak: About 85 per cent.
Senator Murray: Suicide rates in Nunavut are seven times the national average.
Let us start with education. You mentioned it among the challenges you face. How are you getting along? Do you have the teachers? Do you have the educational infrastructure? Are the kids staying in school? What are the dropout rates?
Mr. Simailak: The dropout rate in Nunavut is very high — about 75 per cent by the time you get to high school. We have no trade schools in Nunavut at all. We are building one in Rankin Inlet. They are renovating a public works building into a trade school. We have Grade 12 in all the communities now. We have the teachers, but getting the kids to stay in school is a real challenge.
Senator Murray: Why is that, for the record?
Mr. Simailak: It goes back to when our people were moved into the communities and off the land. My parents still tell me they were promised that all the children would be educated and all would get jobs. That has not been happening.
I think we are starting to reverse that trend. This year we have had more Nunavut students than ever in the universities in the South. We have a nursing program now that has become successful in Nunavut. We have a law school program that is becoming very successful.
Senator Murray: You graduated your first lawyer. I met her when I was there.
Mr. Simailak: There is a lot of interest in the trades. We have quite a number of journeymen across Nunavut now. I think the trend is reversing and we need to keep working at that.
Senator Murray: What is the percentage of employment in the territory that is accounted for by government, roughly?
Mr. Simailak: I would think well over half.
Senator Murray: Will you get to the stage where, with all due respect to people like Mr. Vardy, you will be able to fill some of the more senior positions in the public service there with your own people?
Mr. Simailak: We will eventually. At the moment we are only at 47 per cent Inuit employment within the government of Nunavut, but we have them in senior management now.
Senator Murray: They are getting there.
Senator Mitchell was asking about global warming, the environment and so on. In your statement, you say that:
Although strategies we develop together may require some needed investments, we are also seeking support in other areas. For instance, environmental and socio-economic requirements are currently very stringent. We want to balance this with supportive policies to ensure that investors feel welcome...
When you say that environmental and socio-economic requirements are currently very stringent, do you mean Ottawa's environmental and socio-economic requirements?
Mr. Simailak: That is right.
Senator Murray: Do you have a criticism to make of the federal government's environmental and socio-economic requirements? This is the place to articulate it.
Mr. Simailak: We are working hard with Ottawa to ensure that Nunavut is open for business, but that that business be responsible development.
Senator Murray: Is Ottawa too stringent on environmental and socio-economic requirements? What are the socio- economic requirements? What are you talking about there?
Mr. Simailak: It is not only Ottawa. There are conditions in the land claims agreement that are very stringent also, and I guess hindsight being 20/20 we want to make improvements in any and all areas and there is a need for that improvement.
Senator Murray: I hear what you are saying, but I do not have a better grasp of where it is too stringent. Is it too involved by way of process? I understand that.
Mr. Vardy: Part is linked to the land claims process and there is extra red tape involved in the development.
Federal requirements put an extra burden on the government. I am not a spokesman for the Department of Environment, but from finance perspective, we have 30,000 people over 2 million square kilometres of land. There are 26 communities, each with a sewage treatment plant. It is expensive, and there are requirements concerning safety. There are 26 airports. Much of the capital budget is chewed up meeting requirements that are getting stricter all the time, nationally and globally. Each time requirements change, it puts extra pressure on the government from a finance perspective.
Senator Murray: There is no time to get into the details. Are you saying that regulations that are suitable in the south of the country are being imposed on you and that those regulations are perhaps excessive or not completely necessary in the territory?
Mr. Vardy: Again, from the perspective of a Department of Finance bureaucrat, it is more expensive.
Senator Murray: We know that. Everything is more expensive.
Mr. Vardy: Yes. Construction costs, particularly in the North, are a huge burden.
Senator Murray: I will leave it to people who know more about environmental policy and so on to ask the questions and make the judgments as to whether it is wise of the federal government to take a more stringent position with regard to environmental standards and that sort of thing. I do not know the answer to the question. I will leave it at that. Thank you very much.
Senator Adams: How can we increase employment? The Government of Canada has many departments operating in the North, including Indian and Northern Affairs Canada, the Department of Fisheries and Oceans, and Environment Canada. How do you hire more Inuit people? Have the Government of Canada and Nunavut tested them? I think at the time the Indian and Northern Affairs Canada office was built, 60 people could work there. I was wondering how the system works, and how the Inuit people could get more employment from the Government of Canada.
Mr. Simailak: In our own government we try to train our people as well as we can. We try to retain them for as long as we can. Each individual is on their own. It is entirely up to them where they want to work, but we do try to retain them as much as we can.
Senator Adams: Does the government or Indian and Northern Affairs Canada, INAC, approach you or politicians saying that they need more people for their staff?
Mr. Simailak: Not especially. Any job that is open is advertised in Nunavut. Anybody is free to apply for that job, whether he or she is presently working for us or wants to move over to INAC or some other federal department. Sometimes we steal some of their people. It goes both ways.
The Chairman: Minister Simailak and Mr. Vardy, thank you for being here. I know you travelled a long way to be here and we appreciate that. The message you brought us is an encouraging one. We look forward to continuing the dialogue. It is appropriate that the senator representing Nunavut in the Canadian Senate opened the questioning and closed the questioning and I am sure he will, as he does on a regular basis, bring forth issues to the attention of the Senate on your behalf.
Our next witnesses are from the Government of the Province of Prince Edward Island. I would like to welcome the Honourable Mitch Murphy and Mr. Nigel Burns.
Hon. Mitch Murphy, M.L.A., Provincial Treasurer, Province of Prince Edward Island: I would like to start by thanking the Senate for the invitation to speak on what we consider an extremely important topic for the Senate to be having hearings on.
I am pleased to have the opportunity to represent Prince Edward Island's views about fiscal balance in Canada and in particular the role that equalization plays in maintaining the horizontal balance.
I would note that equalization has undergone major changes since I last had the pleasure of appearing before this committee in April 2004. The program was renewed, then abandoned in favour of a new framework, and several studies were launched. My hope is that this focus will result in a strengthened equalization program for the benefit of the entire country.
I will begin my remarks by saying that we have a major vested interest in ensuring that the equalization program is understood, accepted, properly measured and adequately financed. We count on the federal government to ensure that the program adequately meets its constitutional objectives.
I also wanted this opportunity to appear before this committee because I follow all the presentations that the committee has heard into this matter and would welcome the opportunity, perhaps during our discussion in question and answer period, to respond to some of the earlier presenters and the points of view to which I take exception.
Prince Edward Island has the highest reliance on federal transfers of any province. This is primarily due to our reliance on equalization. As the committee would be aware, equalization is Prince Edward Island's largest revenue source, presently at $291 million, and represents a quarter of total provincial government revenues.
To put this in perspective, equalization is 43 per cent larger than the personal income tax we collect and 60 per cent larger than provincial sales tax revenue. This is supplemented, of course, by other federal transfers, primarily for health and social programs on a per capita basis. I would note that our reliance on equalization has not held us back in trying to develop our economic potential. A significant portion of our own budget is devoted to just that.
I would like to highlight a few of the success stories on Prince Edward Island. Since 1995, we have led Atlantic Canada in employment growth and we claim the largest decline in the unemployment rate of any province in the federation. Personal income and GDP per capita on Prince Edward Island increased at a faster rate than in Ontario over that time period. In economic development, we feel the province is moving in the right direction on several fronts.
Primary industries and food processing, consisting of processed potatoes, fish products and dairy, dominate our manufacturing sectors. However, the economy is diversifying. Many senators will be familiar with the success of the growth of the aerospace industry in Prince Edward Island. I often ask colleagues and people from outside the province to guess our third largest export from Prince Edward Island. After agricultural products and fisheries products, it is aerospace parts. That has been extremely successful, with over 800 full-time jobs and sales in the order of $275 million per year. We are about to repeat, and, if I may be a little boastful, exceed that success in the bioscience sector by creating a supportive environment for business to establish better and higher paying jobs.
We are proud of our accomplishment in developing the economic and social fabric of the island. However, these accomplishments have come at a cost. According to federal calculations, we are the only province currently in a deficit position.
I would add a caveat that not all provinces keep the books the same way as other provinces do, and we can discuss that later on if we wish.
Correcting the horizontal imbalance amongst provinces is our primary concern. Provincial deficits are the result of three things: provincial spending, own-source revenues and federal-source revenues.
Some would like to argue that the increase in provincial spending and revenue policies are to blame for deficits. A simple comparison of provincial per capita spending, however, does not support that claim. Based on consolidated provincial local expenditures per capita, you can see that the overall government spending on Prince Edward Island is not out of line with other provinces. We spend about $900 less per capita than Newfoundland and Labrador and slightly more than New Brunswick and Nova Scotia, only marginally more than Ontario, and $1,600 less than Saskatchewan and $1,200 less than Alberta.
The composition of provincial spending varies among provinces. It is, however, surprising how consistent per capita health care spending is right across the country.
The areas where Prince Edward Island appears to be spending a higher level than the other provinces can mostly be attributed to diseconomies of scale. This is most notable in the provision of general government services to a small population base, not that much different from what we heard from the previous presenter. As a small province in a modern economy, we need a government infrastructure that can provide expertise and similar advice to that received in other provinces.
In 2005-06, government undertook a full review of all our government programs in an effort to reduce expenditures to free up funds for the growing demands in the departments of health and education. There are certain fixed costs of operating a provincial government, like the legislature, courts, roads, maintaining the public service that we feel simply cannot be reduced any further.
I should point out that our spending per capita in some areas is less than that of other provinces. Even after making record investments in elementary and secondary education and social services, we continue to lag in average spending in these categories by a fairly wide margin compared with some other provinces in Canada. It is difficult to argue that our deficit position is the result of provincial spending decisions.
Prince Edward Island relies on its own-source revenues to a higher degree than almost all of the other provinces. Prince Edward Island's tax effort is over 10 per cent higher than the national average. Our reliance on sales tax far exceeds the average of other provinces. Our sales tax rate is effectively 10.7 per cent, compared to 8 per cent in the other eastern provinces and 7 per cent in the west. Simply put, if we adopted the tax regimes of other provinces, except for Quebec and Saskatchewan, for tax bases that exist on Prince Edward Island, our revenues would be reduced. Recently announced tax reductions in Saskatchewan will narrow this in the future. On average, Prince Edward Island raises $67 million more from its own tax base than what we could raise by using the national average tax rates.
We are disadvantaged by a complete lack of natural resource revenues. For the provinces that have natural resources, like vast timber reserves, hydro-electric capacity, oil, natural gas and mining, these revenues are used to improve public services or keep other taxes low. Alberta does not have a sales tax and often muses about doing away with other taxes.
While some low-tax provinces have the ability to raise additional revenues from their own tax bases, Prince Edward Island simply does not have that luxury. As I mentioned before, our sales tax is 51 per cent higher than what the three western provinces that have sales taxes are charging. A buoyant economic picture and surging resource revenues in Saskatchewan have allowed them to reduce their sales tax rate from 7 per cent to 5 per cent.
The Government of Prince Edward Island reduced corporate income taxes for small business in the 2006 budget and is looking at ways to reduce taxes more generally to remain competitive with other provinces. However, offering substantive tax reductions is challenging when trying to balance the need for quality public services and the fiscal resources that are available to us.
On balance, when we examine Prince Edward Island's spending and own-source revenues, it becomes evident that neither can be attributed to the deficit position of the province. I would argue that if Prince Edward Island's tax rates were about the national average, our fiscal position would be worse.
As steward of the province's finances, I have an obligation to ensure that there is a balance in the areas that we as a province can control. That leaves federal equalization support to provinces as the lynchpin in keeping provinces with below-average fiscal capacity, such as Prince Edward Island, intact.
The fiscal imbalance among provinces seems to be most evident when all but one province are out of deficit. Not all provinces' finances were created equally, and P.E.I. simply cannot run deficits, raise additional taxes or offer substandard public services. The public tells us that is unacceptable, and it is also unacceptable to any government in the province.
Given that provincial spending is not out of line with that of sister provinces and that the province is relying sufficiently on its own tax bases to raise revenues, the balance of any province's fiscal framework is federal supports, which in my view are clearly inadequate to keep the province in a relative fiscal position with other provinces.
Additional federal supports to Prince Edward Island are required simply to balance the books, but it does not stop there. Improving services in areas where Prince Edward Island is currently spending less than the average and reforming provincial taxes will require significant additional support. Clearly, correcting the horizontal fiscal imbalance is the most pressing fiscal issue for the province.
There is no shortage of advice on how the horizontal balance should be corrected. Three reports on equalization and fiscal balance in Canada were released this year. The Council of the Federation, the federal government's expert panel and the federal government's budget document, ``Restoring Fiscal Balance in Canada,'' all provide a fairly clear picture of the horizontal balance issues facing the provinces.
However consistent their views on the horizontal fiscal imbalance were, they came to different recommendations on how to strengthen the equalization program. In my view, the report by the Advisory Panel on Fiscal Imbalance got it right in their assessment and recommendations to restore both the vertical and horizontal balance. This is because of their wider mandate to examine both the horizontal and the vertical fiscal imbalances and how they are interrelated.
I fully agree with their recommendation 6.1 to base the equalization program on a 10-province standard and comprehensive revenue coverage with the inclusion of 100 per cent of natural resource revenues. That is the most accurate way to measure and compensate provinces for their fiscal disparities. The O'Brien report also recognized this fact but failed when it recommended the removal of 50 per cent of natural resources and all user-fee revenues from the formula. Measuring provincial capacity accurately and completely is the foundation of an equalization program. Establishing a standard amount that provinces should be equalized up to should reflect national norms or averages.
The panels all found wide support for using the 10-province standard and maintaining the representative tax system to measure individual tax bases. I also support making the program more predictable. However, adequacy of the program will always trump predictability. It is clear to me that the adequacy of the program is what needs to be improved. The report on equalization that this committee released in 2002 came to much the same conclusion.
It is important to remember that we need the program to function adequately in order to allow provinces to deliver provincial government services that are reasonably comparable without resorting to extraordinary levels of taxation. The whole purpose of the program is to provide a level playing field for our people and businesses so that the Canadian economy is able to function at its optimum capacity. The program is about the horizontal balance between the provinces. If the program fails in some measure, then levels of education, standards of health care, highway conditions and other provincial services will deteriorate and taxes will be forced up, causing provincial economies to suffer.
As a provincial treasurer, I can understand why the federal government would like automatic controls on the program's cost. However, I have a difficulty with the recommendation to scale back the standard, should the federal government have concerns about the affordability of the program. It is my firm belief that the federal government continues to perpetuate the myth that poorer provinces have been treated particularly well in order to justify continuing cost containment of the program.
I want to be clear that the equalization program did not confer favourable treatment to less wealthy provinces during the cutbacks of the 1990s, as suggested in the federal budget paper, ``Restoring Fiscal Balance in Canada.'' In fact, the payout from the program was essentially in decline through most of the decade when all levels of government were struggling with deficits and shrinking revenues. In 1982, the equalization program was 1.3 per cent of GDP or about 8 per cent of federal revenues. By 1999-2000, it was 1.1 per cent of GDP or 6.6 per cent of federal revenues.
Remember that in 1982, the federal government was in deficit. By 1999-2000, the federal government was well on its way to record significant surpluses and to embark on massive multi-year tax reductions. By 2006-07, the program had fallen to 0.8 per cent of GDP, or 5.1 per cent of federal revenues; it went from a high of 1.3 per cent of national GDP in 1982 to 0.8 per cent of GDP currently. Using 1999-2000 as a benchmark, federal affordability would exceed $16 billion this year. This amount is sufficient to fund the strengthened program that is based on the 10-province standard and comprehensive revenue coverage.
While the federal government may claim that the program was not explicitly targeted for cutbacks in this period, it should be recognized that the formula itself delivered reductions automatically. The most dramatic reduction occurred in 2002-03, resulting from revised housing stock and population estimates. I have long held the view that the reductions in equalization since 2000 have paid for the increased health transfers to provinces.
Recommending the removal of any portion of natural resource revenues and remaining user-fee revenues from the equalization program, as suggested in the O'Brien report, would further weaken federal supports to PEI in absolute terms and in relative terms to the rest of the country. Page 9 of the O'Brien report shows that PEI would have the lowest fiscal capacity before and after equalization. This would have negative consequences for future deficits, service levels and tax competitiveness.
Reducing revenue coverage from natural resources and user fees is a poor choice to control costs of the program for two reasons. First, it is not necessary because the program is absolutely affordable. Second, all of the federal savings are on the backs of the weakest provinces by systematically discriminating against provinces that do not have natural resources. The justification for O'Brien's recommendations on natural resources clearly does not hold up to serious scrutiny. The most thorough analysis of the arguments, including natural resources and equalization, is by Queen's University professor Robin Boadway. He appeared before this committee to discuss this issue on October 3 and his recent critique of O'Brien's recommendations appears in the September issue of Policy Options. It is sufficient to say that these arguments for including natural resources are known to the committee and I support their inclusion.
It is clear that the federal government can afford an equalization program that is based on a 10-province standard and comprehensive revenue coverage. The federal surplus in 2005-06 was $13.8 billion even after several billions of one-off expenses for trust funds to provinces and foreign aid. The fiscal monitor shows the year-to-date federal surplus is in the order of $6.7 billion. We know what needs to be done. It is time for the federal government to address the fiscal disparity.
As I stated at a finance ministers' meeting at Niagara-on-the-Lake this summer and in correspondence with the federal Minister of Finance, I cannot accept the recommendations of report to cut natural resource revenues in half and totally eliminate user-fee revenues from the formula. This result is most difficult for PEI, since it would be the worst off compared to all other provinces by an estimated $65 million a year.
In terms of addressing the vertical fiscal imbalance between the federal government and provincial orders of government, I think that there is a clear need for improved long-term federal funding arrangements to support post- secondary education and public infrastructure. The federal government intends to bring this forward this fall their proposals for a new approach for long-term funding support for post-secondary education and training and a new framework for long-term funding support for infrastructure.
The federal government has left the door open for the possibility of transferring additional federal tax room to the provinces. I am concerned that shifting additional federal tax points to the provinces will cause more harm to the federation in the long term than it could potentially solve. First, shifting federal tax points to the provinces would further increase the share of revenues that is raised by sub-national governments. Consequently, the fiscal disparities among provinces would increase. For instance, for every $1 per capita of federal GST transferred to Alberta, PEI would receive an estimated 66 cents. That undoubtedly would increase fiscal disparities among provinces and increase the amount of equalization required. Second, it would have adverse effects on the efficiency of the Canadian tax system, thereby jeopardizing a crucial prerequisite for the more competitive economy that collectively we are striving for. Finally, it would reduce federal government spending power to achieve national equity and efficiency objectives. Serious consideration for the long-term implication of additional tax point transfers must be taken.
From my perspective, any proposed tax point transfer would be better used first to strengthen equalization and then to make the necessary investments in post-secondary education and skills training and infrastructure. Those investments would lead to a more protective and competitive Canada right now and for the long term.
I support the direction the government is taking to strengthen the economic union of Canada. I also think that the success of this endeavour depends on governments cooperating better to remove the barriers to competitiveness and efficiency of Canada's economic and social union. However, if this were an easy task, it would already be done. It is difficult, because provinces are impacted by the consequences of each other's fiscal and economic policies. This only further underscores the importance of ending the bickering and fixing the fiscal arrangements by strengthening equalization and making the necessary investments in education and infrastructure to lay the foundation for a more competitive and productive Canada in the 21st century.
The Chairman: Thank you, minister.
Senator Ringuette: Thank you for your presentation. Before you started I had a question prepared: Considering all the expert panels and recommendations that have been put forward, which formula is your preference? You stated in your presentation that it is the recommendation from the Council of the Federation's advisory panel that is your preference.
Mr. Murphy: That is correct.
Senator Ringuette: It is probably not a coincidence. The more I analyze the issue the more I see that it is probably the best solution. Because of the density of the population on PEI, health and post-secondary education funding approved on a per capita basis leaves you less able than other provinces to invest in those two areas.
Mr. Murphy: I would agree wholeheartedly with your point, senator. We could extend that to all of Atlantic Canada. Per capita transfers in those areas are challenging for all the governments simply because it is done on a population basis. When you have a relatively small population spread over a significant geographical area, the basic cost for providing services is higher to begin with. The per capita transfers challenge us and that is why we have insisted strongly that equalization has to be addressed in terms of predictability, adequacy and stability. You mentioned health. The equalization transfers that we receive on Prince Edward Island are health care dollars. We have a health care budget that runs at about $460 million on an annual basis; and equalization transfers of $291 million. They add up to roughly 50 per cent of the health care budget, if you will, plus transportation, courts and other public services you have to provide. At times I get the impression that some of our colleagues in different parts of the country do not understand how the equalization dollars are applied in our economy, but they simply go to provide public services.
Senator Ringuette: Have you expressed your views to the different panels on the non-economies of scale in providing those services? Have you stressed that? What has been the result with your counterparts?
Mr. Murphy: The premiers had an agreement in 2004 on a recommendation to move to a 10-province standard on equalization. The inclusion of natural resource revenues has always been a contentious issue, as you know. I would say that collectively, as a region, until the accords were signed in Nova Scotia and Newfoundland and Labrador, the Atlantic region had always advocated for that. The Maritime provinces are still advocating for that. Newfoundland and Labrador is in a position that it does not want natural resource revenues fully covered. Manitoba, Quebec, Prince Edward Island, Nova Scotia and New Brunswick would have the same position on the 10-province standard and all natural resources in full revenue coverage. There are different opinions in the rest of the country.
Senator Ringuette: You mentioned Quebec, which I thought wanted to move to a per capita basis.
Mr. Murphy: Yes, I believe Quebec wants to do that for social transfers, the Canada Health Transfer and the Canada Social Transfer. With regard to their position on equalization, I would say that we would be consistent with the position of the Province of Quebec.
Senator Ringuette: I am intrigued by the conflicting message. I am looking at a statement that you made before the House of Commons Subcommittee on Fiscal Imbalance in February 2005. You said:
Shifting tax points from the federal level to provincial is an option, so long as the horizontal impacts are taken into account.
I am surprised by that statement, especially given the tax level that you are at in comparison to other provinces. In your presentation tonight, you said, ``Consequently, the fiscal disparities among provinces would increase. For instance, for every $1 per capita of federal GST transferred to Alberta, PEI would receive an estimated 66 cents.''
The amount of 1 per cent GST, from your perspective and probably that of many other provinces', is not a preferred option.
Mr. Murphy: I am talking about the transfer of tax points where the federal government will give up taxing power and leave that room for the provinces. I was not talking about a GST cut, per se. My comments before the House of Commons committee are consistent with what I have said this evening but expressed in a different manner. A tax point transfer to PEI does not equate a tax point transfer to another region of the country. If tax points were ever to be considered an option, they would have to be weighed on their economic consequences for each province. We would expect, because of our economies of scale, to be compensated more than $1 — equalized, yes. With regards to the GST, perhaps we are talking about two different issues. I am talking about tax transfer and tax room given up to the provinces, not necessarily about a tax cut or a GST cut.
The Chairman: I would like a clarification regarding the two reports. There is the report from the provincial governments' Council of the Federation Advisory Panel on Fiscal Imbalance and the report of the federal government's Expert Panel on Equalization and Territorial Formula Financing. You have indicated that you prefer the provincial advisory panel's report on an approach over that of the federal expert panel. If you had your choice between that report and the 2004 new framework updated — the envelope of money with a predictable 3.5 per cent increase each year — which one of those would you go for?
Mr. Murphy: I will answer the question this way: I thought there were many similarities in Mr. O'Brien's report and the Council of the Federation's report.
The Chairman: Mr. O'Brien is the chair of the expert panel.
Mr. Murphy: The big difference is how to deal with the fiscal imbalance or the fiscal disparity between provinces. I favour the council's report recommending a 10-province standard, with natural resources in. That is the main aspect where the reports differ.
My concern with the 2004 adjustments to equalization is that they cease to become formula-driven. Regarding the old equalization program, I have argued in the past about adequacy and predictability. I have never taken exception to the fact that it was a formula-driven program based on 33 factors in a representative tax system, because under the old system it was a five-province standard. The Ontario economy was one of those provinces in the formula — Atlantic Canada was out and Alberta was not in the calculation — and because of its size the Ontario economy had such influence on that formula that when things went well in Ontario, the standard went up and we were recipients. When things did not go that well in Ontario, the standard went down and we lost. However, it was a formula-driven system and we knew that that would happen. We always argued at the time to do a three- or five-year averaging to take some of the peaks and valleys out of it. I have never taken issue with the fact that it was a formula-driven system.
My big concern with the 2004 changes, the fiscal framework presented in 2004, was that the framework basically abandoned the formula-driven process; it started at a base and said the base would grow at 3.5 per cent a year. That does not really address the issue of adequacy. That is my big concern. It starts from an arbitrary number that is based on a fiscal year and says henceforth, we will grow at this rate.
The Chairman: It was not totally arbitrary; it was the earlier formula-driven amount plus a little bit that was put in the envelope.
Mr. Murphy: You are correct, because the base they started from was derived from a formula, but basically the formula was thrown out the window at that point.
My other concern, and this gets back to Senator Ringuette's earlier point, was that not 100 per cent of the increase would be strictly formula-based. It now would be done on a per capita basis, which, in my opinion, would penalize recipient provinces, especially those with small populations such as we have in Atlantic Canada.
The Chairman: That is helpful. That brings in the per capita we hear about from time to time. You are not in favour of that.
Mr. Murphy: No.
Senator Murray: It was never clear just how the federal government intended to distribute the pot. It started at $10.9 billion, or something like that, and the overall pot was to increase by 3.5 per cent per year. It was left completely up in the air how the money would be divided among the recipient provinces. That was left to some future committee to decide or to recommend. The new framework bore no relationship necessarily to relative fiscal capacity. Your capacity could go up or down — it would not matter — and it was arbitrary.
The Chairman: It became more arbitrary as time went on.
Senator Murray: Most of the recipient provinces complained about the old five-province standard, formula-driven, et cetera, but once it was gone and they had this new framework, they wished they had the old system back, at least in principle, in terms of it being formula-driven.
Mr. Murphy: I would concur, other than to say that we always have argued that the five-province standard was not a true measure and was not reflective of fiscal disparity or capacity. I would concur with Senator Murray's comments. In 2004, as he related, on a go-forward basis, the distribution of the money did not have a whole lot to do with fiscal capacity. It had a lot to do with where you were when the $10 million pot was set to grow at 3.5 per cent.
Senator Murray: Exactly. Minister, just as a matter for the record, can you tell us why Prince Edward Island has stayed apart from the harmonized sales tax? Your three fellow Atlantic provinces joined. Was it your government or Senator Callbeck's that made the decision?
Mr. Murphy: It was right around election time in 1996. Premier Milligan, who had replaced Premier Callbeck, had indicated that the government of the day, Premier Milligan's government, would not move in that direction. That was also the position we had taken.
Senator Murray: That was your party.
Mr. Murphy: Yes. We have maintained that position while we have been in office, mainly for tax autonomy. We want to have some decision-making powers over our own taxation policy. There are some areas that we do not believe should have provincial sales tax on them, such as home heating oil and electricity, for example. There is GST in those areas. There is no PST. We made a decision several years ago to try to grow the retail sector by removing PST on clothing and footwear. We made an announcement last week that we are effectively removing corporate tax on the bioscience sector for the next 10 years.
Our reason has mainly been around tax autonomy. We have not seen the big advantage of moving forward on the harmonized tax. Within the region, some of our sister provinces have a capital tax. We do not. There are things within the taxation system that we think mitigate some of the extra cost of business or some of the advantages that business may get out of the harmonized tax.
Senator Murray: I presume you have crunched the numbers, have you?
Mr. Murphy: We have crunched the numbers. If we harmonized, we would give up approximately $45 million to $50 million a year.
Senator Murray: You would lose money on harmonization?
Mr. Murphy: Yes, we would.
The Chairman: That would reduce your sales tax from 10-point-something per cent down to 8 per cent.
Senator Murray: That is the big cost.
Mr. Murphy: Yes.
Senator Murray: Even with the broader base, would you lose money?
Mr. Murphy: Yes.
Senator Murray: That is the answer to the question. You have heard some of the witnesses talk about the cap recommended by what I will call the O'Brien panel. You have heard the argument that the cap is needed because no recipient province should ever end up with a number that is in excess of the fiscal capacity of the lowest non-recipient province, Ontario.
You have not mentioned that in your statement, because it does not affect you. Do you have a view on it?
Mr. Murphy: I will tread a little lightly here. If you go back to a formula-based, formula-driven approach, then I think the cap becomes a non-issue, because it is a reflection of the performance of the Canadian economy. If you are using a 10-province standard, then all provinces are paying into this federal pot that we call equalization. The money is going to general revenue and is redistributed to the provinces through the equalization program. If it is formula-driven, based on those 33 factors, then in my personal opinion the cap becomes a non-issue because as the economy performs more strongly, the fiscal ability of the federal government to fund the program becomes greater; as the economy slows down, then the formula itself automatically has a reduction.
Senator Murray: I perhaps should not have asked you because what we are talking about here, and what the panel is talking about, is taking 100 per cent of resource revenues into account for purposes of the cap while only counting 50 per cent for distribution; but 100 per cent for purposes of the cap negates to some extent the effect of the offshore agreements with Newfoundland and eventually with Nova Scotia. That is the issue, is it not?
Mr. Murphy: Our position on that as a government is that those agreements were negotiated with Newfoundland and Labrador and Nova Scotia. I sense there has been much confusion around those agreements and people indicate they have huge impacts on equalization and special agreements. That is not so if you understand the agreements that were negotiated with those two particular provinces. I disagree with people that take that position. It is the same argument that Saskatchewan is advocating for more control over their natural resources.
Our basic fundamental belief is not complex. If the purpose of the program is to provide, through a transfer, the ability of provinces to meet the conditions in the Constitution, then you are best able to do that by being reflective of true national fiscal capacity by including the 10 provinces and the things in those provinces that generate revenue that make up that fiscal capacity, both natural resources and user fees.
Senator Murray: Why do you make such an issue of user fees? Do they account for that much?
Mr. Murphy: They do. Think of your daily business in dealing with government. If you get your driver's licence, you pay a fee. If you get a marriage certificate, you pay a fee. A lot of business now with government has fees. In fact, the Superior Court in Ontario would say that if the fees outstrip the expenditure in a program, then it is a tax and it must be passed through legislation.
Senator Murray: The example of tuition fees at universities was mentioned. It is a difficult thing to measure, is it not?
Mr. Murphy: It is a difficult thing to measure. Our discussions at the finance ministers level focused on government- centred fees. We did not expand to tuition fees and things of that nature. We considered only instances of doing direct business with government. Our argument is that it is a measure of fiscal capacity. Part of the revenue that governments collect in the country is based on fees that citizens pay for government services. In certain provinces, fiscal capacity is greatly influenced by the measure of fees they collect. If you want a true measure of fiscal capacity, and hence the difference in fiscal capacity, then you must include user fees.
Senator Murray: You never call them a tax, though, when you put them in your budget, do you?
Mr. Murphy: Only if they meet the test of the Superior Court decision in Ontario.
Senator Murray: This is a table in the O'Brien panel report. I find, somewhat to my surprise, that, in terms of per capita revenues collected by the federal government in 2003, Prince Edward Island contributes more per capita revenue to the federal government than any other Atlantic province, and more than Manitoba, as I read page 27. Why is that? I presume average incomes are higher in Prince Edward Island?
Mr. Murphy: That is my wish.
Senator Murray: It is all those federal employees.
Mr. Murphy: That is a good question; I do not have the answer off the top of my head but we will endeavour to find out.
Senator Murray: Since you are here, I thought you might satisfy my curiosity on that.
The Chairman: There are fewer children. Everyone is working and paying tax.
Senator Murray: Perhaps they are more efficient.
Mr. Murphy: I think we provided in our brief a chart that had federal government revenue as a percentage of provincial GDP in 2003.
The Chairman: We have it; it is a bar graph.
Senator Murray: You are pretty high.
Mr. Murphy: We do have an answer. I will ask Mr. Burns to provide that explanation.
Nigel Burns, Senior Analyst, Federal Fiscal Relations, Government of Prince Edward Island: The chart we provided shows federal government revenues by province as a percentage of GDP, which is another denominator of the table in the O'Brien report. It does show that federal government revenues collected from Prince Edward Island are quite a bit higher as a percentage of our economy than revenues from other provinces.
The provinces that really stand out are Newfoundland, Saskatchewan and Alberta. It largely has to do with resource composition. Federal revenues coming from natural resources are quite a bit less than what the federal government derives from, say, personal income tax or corporate taxes or sales taxes.
Mr. Murphy: It would be a reflection of our lack of natural resources. That is another argument, by the way, for why natural resources should be in the formula.
Senator Murray: I suppose I should not be basing a question on rumour, but the most frequent information circulating around town is that the federal government will come down with the O'Brien report, 50 per cent. You are aware that Mr. Harper had promised a 10-province standard but zero inclusion of non-renewable resources. That would cause a lot of problems, both financial and political. The O'Brien report has suggested a compromise between zero and 100 per cent, and they picked 50 per cent. There are other bells and whistles in the report, as you know. The program is entirely federal. It is up to the federal government what to do.
What would it take for you to be able to live with that report?
Mr. Murphy: I am not going to say that I am willing to live with that recommendation at this point in time. You have to put that in the context of what will happen on post-secondary funding or infrastructure funding.
Senator Murray: The vertical.
Mr. Murphy: The vertical imbalance. However, I disagree with that approach and will disagree with it if that is what is recommended. In my opinion, it is not the best recommendation that has come out of a panel report that has looked at this over the years. Some members contributed to the Senate report in 2002. The argument and points still do not change. If I have 30 students in my classroom, to get an average mark, I am far better off to add all 30 students' marks together and divide them than to pick 20 students and divide them. What gives me the truer measure? That is my basic point here, to get the best measure of fiscal capacity, to best meet the issue of the test of the Constitution, we have the 10-province standard, 100 per cent natural resource revenues and user fees included. We will have to deal with the consequences of what is recommended.
I want to make this point, if I may, Mr. Chairman, because I skipped over it in my submission. Part of moving ahead is growing your economy, and our own-source revenues are ultimately the answer to federal fiscal transfers.
I know some people have appeared before this committee and put forth the position that the best thing that could happen in Maritime Canada or Atlantic Canada is to phase out or do away with equalization. That suggestion has been made here, but obviously not by anyone who has been in the position of trying to deliver public services. I come at it from this point of view: All provinces in Atlantic Canada are striving to make their tax regimes more competitive. I believe the New Brunswick has the lowest corporate tax on small business of any place in the country. They made the decision to move in that direction because they want to attract business and grow their economy.
In my last budget I announced that over five years we are going to 1 per cent corporate tax on small business. We still have the highest corporate general tax rate in the country. I think we are tied with Saskatchewan. We are higher now, and they have made a commitment to lower theirs. Fiscal capacity is about delivering quality public services. It is also about growing your economy. Those supports are needed while those provinces find means to grow their economy.
I am fully confident that in the next decade, or 15 years, the fiscal gap between the rest of Canada and Prince Edward Island, and Atlantic Canada in general, will narrow considerably if not close altogether. I am fully confident of that because the economies are growing. Right now we have a labour shortage on Prince Edward Island. There are jobs that cannot be filled. The economy is growing. We have seen major announcements in our sister province of New Brunswick around energy development. We know that good things are happening in Nova Scotia and in Newfoundland.
However, you cannot, as the Atlantic Institute for Market Studies would suggest, all of a sudden take away the federal transfers and tell us to grow our economy, close the fiscal gap with the rest of the country overnight. I think we will transition over the next decade or two, and we will see a vast improvement if not an elimination of the fiscal gap between our part of Canada and the rest of Canada. I am truly confident that that will take place, but there has to be a planned process, which is why I support a formula-driven mechanism of equalization that takes the broadest range of fiscal capacity factors into consideration.
We will automatically lower our fiscal transfers as our economy grows. I support that 100 per cent. That is why equalization is set up. If we generate more own-source revenues and our fiscal capacity narrows in regards to the rest of Canada, should our equalization be lower? Absolutely; that is the way the program was intended to work. I appeal to the federal government to let the program work the way it was intended to.
Senator Mitchell: You are saying that the formula-driven approach would be your preference and that it is okay if it results in a reduction, just as it is okay, obviously, if it results in an increase, as economies ebb and flow. Is an absolute reduction okay or are you saying that you would have some floor but your share could be relatively less given one year or another?
Mr. Murphy: If the mechanism is put in place, and from my point of view that is a 10-province standard, all natural resources in, then that is a measure of fiscal capacity across the country. As the economy does well, the federal government has more monies flowing into its coffers. They redistribute that money through the equalization program. If the economy performs badly, then the issue of affordability certainly does become a factor. I am certainly cognizant of the fact that Ottawa has many responsibilities that the provinces do not have. Big national issues like defence are their responsibility. I am not suggesting we rob the federal treasury. I am saying that if the program is formula-driven then it is consistent. Then it is not arbitrary decisions made by the government of the day. It is not starting from an arbitrary base, growing at an arbitrary number, for which there is no measure to determine whether it is adequate or not.
There have been years when I have been in government when our equalization transfers went down based on a five- province standard and the economic performance that goes into that standard. As a government, we had to make decisions about what we would not do because of that loss of revenue or increase taxes to make up for the loss. That was part of the formula. Our problem at that time was that it was not a true measure of national fiscal capacity because it did not include Alberta or the Atlantic provinces. I am not arguing that it should have included only Alberta. It should have included everyone. Ten provinces make up the standard.
That will happen but it will happen because of the formula that was agreed on and it will happen because all provinces' fiscal capacity is counted in. It is an unreasonable position for a recipient province to take to say that if for whatever reason the economy in Western Canada slowed down or went into recession we should expect our equalization entitlements to increase. I would never argue that.
Senator Mitchell: Regarding tax transfers on page 8 of you presentation, you mentioned that for every $1 per capita of federal GST transferred to Alberta, Prince Edward Island would receive an estimated 66 cents. Am I to understand that I can draw a straight line and simply say that therefore the average person in Prince Edward Island spends two thirds as much as the average person in Alberta? If that is the case, can I tell my kids about that?
Mr. Murphy: It has to do with per capita income and spending in the province.
Senator Mitchell: GST is on expenditure.
Mr. Murphy: Yes, that is correct, but it is also on consumption and the amount of money that is spent, and the size of your economy.
Senator Mitchell: Did you apply any kind of incentives to attract or to assist in the development of the aerospace industry?
Mr. Murphy: Yes, there was a military base that was closed, so the agreement in the aerospace sector, which I believe is for 14 years or for 20 years, is basically a rebate of corporate tax, sales tax and property tax. There is a tax incentive program to attract companies to situate on the old military base.
Senator Mitchell: With respect to post-secondary education, can you give me some idea of how you feel about restrictions on how that money is spent, about how directed it can be by the federal government, and where the emphasis should be? Yesterday we had a presenter who made the point that the federal government should be stimulating post-secondary education by, among other ways, research and development assistance and direct spending and that they literally cut it off at this point.
Mr. Murphy: I would agree with that. The previous administration had put in some research chairs, which was a good investment for the country.
Senator Mitchell: That was the Liberal government.
Mr. Murphy: Yes, and they had spent money on research and development. I am just a believer that it is almost impossible that we as a country could spend enough money on research and development. In a global economy that is an essential expenditure. If additional post-secondary transfers are coming, I know, with the additional health transfers there is accountability, a framework set up where we as a province report back on where that money was invested and how it was spent. I have no issue with that. That is an accountability issue: the federal government and Canadians have every right to expect to see very clearly where their tax dollars were spent and what the outcomes of that investment were as well.
Senator Cowan: I want to ask you a question or two about what is happening in Nova Scotia with the Cape Breton Regional Municipality taking on the provincial government. That has to do with equalization within the province. I assume there is some pressure from your municipalities to get more money from the provincial government, and the dependence of the provincial government on federal government revenues, transfer payments of one type or another, creates some difficulty for you.
Have you been sued like the provincial government in Nova Scotia?
Mr. Murphy: No, but it is an issue with the municipalities in the province. We run a federal-municipal equalization program as well. It is a challenge when we feel that adequacy is an issue between the federal and provincial levels. The municipalities are no different in their relationship with the provinces than we are in our relationship with the federal government. They would like to see the program enhanced to address their infrastructure needs, et cetera.
Because it is provincial jurisdiction, there are differences in jurisdiction. For example, in Prince Edward Island the province is responsible for all roads and schools. Perhaps it is the same in Nova Scotia. Local taxes would not go toward that, although in some provinces they would. We would provide I believe a broader range of services to our municipalities than most jurisdictions in the country would. Even most municipalities in Prince Edward Island would have a proportion of roads for which the province is responsible. The province is 100 per cent responsible for all education and health. The province to a large extent covers those expenditures. That differs in other jurisdictions.
The direct answer to your question is yes, it is an issue for us. The municipalities of Prince Edward Island have a legitimate position. Yes, their costs are increasing. I would like to be in a position to provide more municipal equalization to them.
The Chairman: You might be interested to know that after we finish the horizontal balance equalization discussion and generate an interim report, this committee will study the vertical fiscal balance issue; stay tuned for our reports.
Senator Di Nino: Many years ago when I was showing my kids Canada we went to the Maritime provinces, although not to Newfoundland. When we got to Prince Edward Island we wanted to spend the day, which is all I had because my wife was meeting us at Cape Breton. They said we can get you to Prince Edward Island but we cannot promise that we can bring you back. What impact has the bridge had on the economy of Prince Edward Island?
Mr. Murphy: It has had a significant positive impact on the economy of Prince Edward Island. I can give you some statistics to support that statement. Our tourism numbers were running at about 750,000 visitors a summer before the bridge opened. They have been averaging well over a million visitors since the bridge has opened. From an economy point of view, especially economy with primary resource, agriculture and fishery products, a large market for our fishery products is in the Boston area. It is difficult to get a contract with a supplier or a purchaser in Boston and guarantee on-time delivery if there is the potential of being stuck in the ice for 18 hours during the winter. Thus, the bridge has opened up markets across North America.
Frankly, I do not see any negatives as a result of the bridge being built. There was quite a debate in the province at the time, but it has had a significant positive economic impact for the province.
Senator Di Nino: This is another question out of right field. Natural resources are opportunities for regions to create revenue. One of the differences between Prince Edward Island and Saskatchewan, as an example, is that you have beautiful beaches that attract people, giving you opportunities to create revenues. Should those be included in the definition of natural resource revenues?
Mr. Murphy: That is an interesting point. It is part of the argument that we had put forward, that I would agree to say the beaches of Prince Edward Island are a natural resource. Our tourism product generates about $400 million a year in direct expenditure in the province, but we do not have oil and natural gas. Yet, in calculating our fiscal capacity, the money generated from tourism is part of our fiscal capacity and natural resources and others are not. It is an interesting concept. How do you define a natural resource? Where does it stop? That is part of our dilemma.
I applaud the other provinces that generate revenue from their natural resources and provide better public services for their citizens. I do not take issue with that. However, the impact is not just on public services. My colleague in Saskatchewan was able to announce this week that he is reducing his provincial sales tax from 7 per cent to 5 per cent, largely driven to compete with his neighbour to the west. That has put pressure on his neighbour to the east, my colleague in Manitoba, to respond to that.
When your revenue is growing as a result of natural resource development, it has an impact on providing public services and on tax competitiveness in the region, et cetera. It has a broad-based impact.
That is why you need to include all the revenue sources when you come up with a formula. With all due respect to Mr. O'Brien, I do not understand the logic behind the recommendation to include 50 per cent of natural resource revenues. Why do you only want to measure 50 per cent of a province's potential capacity in that area? That does not jibe logically with the purpose of the program.
Senator Di Nino: I agree that Mr. Murphy has presented his position eloquently.
The Chairman: Minister Murphy, let me echo the words of Senator Di Nino. On behalf of all my colleagues here on the Standing Senate Committee on National Finance, we appreciate you and Mr. Burns coming here and providing us with a clear and convincing position. We look forward to a continuing dialogue.
The committee adjourned.