Proceedings of the Standing Senate Committee on
National Finance
Issue 12 - Evidence
OTTAWA, Monday, March 7, 2005
The Standing Senate Committee on National Finance, to which was referred Bill C-24, to amend the Federal- Provincial Fiscal Arrangements Act and to make consequential amendments to other acts (fiscal equalization payments to the provinces and funding to the territories), met this day at 3:05 p.m. to give consideration to the bill.
Senator Donald H. Oliver ( Chairman ) in the Chair.
[ English ]
The Chairman: Honourable senators, in calling call this, our 16th meeting of the Standing Senate Committee on National Finance, to order, I would remind honourable senators that this committee's field of interest in government is spending, either directly through the estimates or indirectly through bills.
[ Translation ]
On February 22, Bill C-24, An Act to amend the Federal-Provincial Fiscal Arrangements Act, was referred by the Senate to this committee.
[ English ]
Senators, I remind you again that this committee will be very busy this month with the Supplementary Estimates (B) 2004-05 and the Main Estimates for 2005-06. It is for this reason that we are meeting today outside of our normal time slot to hear witnesses on Bill C-24. An invitation was sent to all provinces and territories who wished to make representations on this bill. The governments of Saskatchewan and Prince Edward Island have accepted our invitation.
Our first witnesses are from the Government of Saskatchewan. The Honourable Harry Van Mulligen was born in the Netherlands and immigrated to Canada with his parents at the age of nine. He was first elected as a member of the Saskatchewan legislature in 1986 and re-elected in 1991, 1995, 1999, and again in 2003. On November 21, 2003, Harry Van Mulligen was appointed the Minister of Finance, Government House Leader and Minister responsible for SaskEnergy. He previously served as minister of social services, minister responsible for disability issues and as minister responsible for seniors. He has also served the legislature as the Chair of the Public Accounts Committee and as Chair of the Crown Corporation Committee. I give you a very warm welcome. It was just a week ago that we had a chance to talk at length about this committee, when I was in Saskatchewan to give a speech.
The Honourable Harry Van Mulligen, Minister of Finance, Government of Saskatchewan: Before I begin, I want to bring to your attention not only my deputy minister, who is seated beside me, Mr. Ron Styles; but also, seated behind me, Mr. Ken Cheveldayoff. Mr. Cheveldayoff is the member of the Saskatchewan Legislative Assembly for the constituency of Saskatoon Silver Springs. He is the opposition finance critic, and he joins me here today to signify that my remarks have the support of both sides of the legislative assembly in Saskatchewan. That is the reason for his appearance today not because we need him here, because the legislature is sitting, but he is here in the spirit of solidarity.
I thank you for the opportunity to present the Government of Saskatchewan's views on Bill C-24 and, more generally, on the recent events that will shape the future of the equalization program.
Saskatchewan supports the passage of Bill C-24. It is an important piece of proposed legislation that provides interim funding to provinces during a period when the equalization program is being reviewed. It is also important that Royal Assent occur before the end of fiscal 2004-05 in order that provinces are able to book this revenue in the current year. I will have more to say about the financial implications of Bill C-24 for Saskatchewan a little later.
First, I want to take the opportunity to provide this committee with our province's perspective on the existing equalization program and how it should be reformed. Canada's equalization program has taken many twists and turns since its inception in 1957. It began with simple rules, considering only three provincial revenue sources and basing program eligibility on just two provinces. However, equalization has become more complicated with each successive five-year renewal, resulting in the current program, a complex maze of formulas, calculations, assumptions, proxies and adjustments that is fully understood by only a small number of bureaucrats and academics.
The equalization program lacks transparency, with the result that public confidence in a $10.9 billion federal program is low. The current program does not improve stability in provincial finances, as it is advertised to do, and it is not responsive to changing provincial fiscal circumstances. It is like an old car that has seen better days and no amount of repair and maintenance will make it look and run like new again.
As you know, equalization renewals occur every five years. When these renewals are undertaken, a series of adjustments are built into the program. As time has elapsed, layer upon layer of adjustments have been introduced, each causing a shift in the manner in which the equalization program attempts to achieve the fundamental principle underlying the program, which is that comparable levels of public services can be provided by provinces applying comparable levels of taxation.
We also have a program that attempts to balance federal political and fiscal necessities. This has diminished the current program's ability to effectively measure interprovincial fiscal disparities in Canada. This reality was reflected in a major change in the equalization program in 1982, when the federal government decided to fully include non- renewable resource revenues in the formula and move to a five-province standard that excluded Alberta, Canada's largest energy producer.
These changes were primarily introduced to control the federal cost of equalization and to ensure that Ontario would never be eligible to receive program benefits. However, these changes also caused significant collateral damage to Saskatchewan, as we experienced a significant decline in our net gain from energy developments after the negative effects of equalization are factored in. In some years, this equalization effect, referred to as the clawback effect, is larger than Saskatchewan's energy royalties, resulting in a net revenue loss for our province from these developments.
To illustrate, Saskatchewan's clawback rate for its energy revenues in 1981-82 was 30 per cent, which left our province with 70 per cent of our energy revenues for reinvestment. In 2001-02, the clawback rate was 103 per cent. This meant that Saskatchewan saw a negative financial return from its non-renewable energy development for that year.
A second major change to equalization, introduced in the 1999 renewal, was to collapse four mining tax bases into a single base in the interest of simplicity and to introduce the concept of economic rent into this revenue category. This change was pushed through in spite of provincial concerns over data quality and general uneasiness over the introduction of the economic rent concept that would effectively ignore actual mining royalties collected by provinces.
The result of this change has been very negative for Saskatchewan. Saskatchewan's mining sector represents about 15 per cent of all mining activity in Canada, but the new federal mining equalization calculation determines that Saskatchewan has about 40 per cent of Canada's mining tax base. Other provinces that have large mining sectors are reported as having very little or no mining tax base. This produces confusing and unfair treatment for Saskatchewan.
In 1985 and 1986 respectively, the federal government granted Newfoundland and Labrador and Nova Scotia offshore energy accords to assist these provinces in developing their energy resources. The federal government further assisted these provinces by establishing separate revenue categories for offshore energy revenues under equalization, ensuring that they would retain a minimum of 30 per cent of their energy revenues after clawbacks, and generally much more. Saskatchewan has long argued that high clawback rates on Saskatchewan's energy revenue are unfair. However, it was not until Professor Tom Courchene addressed this issue in a recently published article entitled ``Confiscatory Equalization: The Intriguing Case of Saskatchewan's Vanishing Energy Revenues'' that the federal government began to respond to Saskatchewan's concerns. To his credit, the federal finance minister has provided Saskatchewan with some compensation for excessive clawback rates in prior closed years. In addition, as part of the provisions in Bill C- 24, Saskatchewan will receive a final 2004-05 equalization payment that is much higher than the normal data and program calculations would have given us. For that we are thankful.
We support Bill C-24 on that basis. However, I also want to express a concern over the determination of the final 2005-06 provincial equalization entitlements. Saskatchewan's entitlement for the upcoming year is $82 million, a very low amount when one looks back over time. It is the result of two factors, the federal decision to look only at the last three years of provincial entitlements to determine allocation shares and the continuation of clawback rates on Saskatchewan energy revenues that approach 100 per cent. Our government is concerned that should energy prices decline to more traditional levels next year, we will have no equalization protection. While other provinces who are eligible for a 2005-06 payment may express a similar concern over the fixed nature of the 2005-06 arrangements, no other province is subject to the same level of potential risk from international price volatility, and none are beginning the fiscal year with such a small equalization amount.
While Saskatchewan is appreciative of Minister Goodale's actions to date, we are concerned about the risk we face in 2005-06. We also wish to point out that Saskatchewan's receipt of one-time funding to address high clawback rates in the past pales in comparison to what our Atlantic friends received under their special arrangements for offshore energy developments. A recent federal analysis identified that Newfoundland and Labrador retained over 100 per cent of its offshore energy revenues over the period from 1999-00 through 2003-04. During that period, Saskatchewan retained less than 10 per cent. To put it another way, had we retained 100 per cent of our energy revenues over the past 10 years when eligible for equalization, over $4 billion in additional federal transfers would have been received by Saskatchewan.
We now learn of new offshore energy agreements that will guarantee 100 per cent retention of offshore energy revenues for Newfoundland and Labrador and Nova Scotia and provide an estimated $2.6 billion and $1.1 billion respectively over the next eight years. These payments are in addition to the substantial financial benefits that will continue under the old offshore energy accords. These new agreements can also be extended for a further eight years, which would further add to the benefits being provided to these provinces.
I am not being critical of these arrangements or agreements. Instead, I embrace them, as they recognize that non- renewable resource revenues are one-time in nature and should be retained by the rightful provincial owners of those resources to strengthen their economy. Newfoundland and Labrador and Nova Scotia now have a wonderful opportunity to reinvest these one-time sources of revenue to achieve a level of self-sufficiency that could not otherwise be attained through the existing equalization program. Our government is asking for the same opportunity.
Since 1982, we have seen most of the financial rewards from the extraction of non-renewable resources flow out of our province through equalization, while we continue to face the high cost of managing and regulating this sector of our economy. We must also ensure that our royalty and taxation regimes are competitive to encourage new exploration and development in the province. This is no small challenge when one looks west at our chief competitor, who is unaffected by equalization clawbacks.
I refer back to the 103 per cent clawback rate Saskatchewan experienced in 2001-02 and ask how Saskatchewan is expected to manage its energy sector and compete with resource-rich Alberta. Our request is the same as Newfoundland and Labrador and Nova Scotia's. Let us retain the revenues from energy development for reinvestment in our province. Do not treat them as just another revenue source, as there is a fundamental difference between non- renewable resources whose value is permanently depleted once extracted from the ground and other sources of government revenue that are ongoing. This is a principle we see in the new offshore energy accords. It should be applied fairly to all regions of our country.
The federal finance minister's advice to Saskatchewan is to wait for the federally appointed expert panel to consider the treatment of resource revenues under equalization. While we will be very active in appearing before this panel on many areas of concern respecting the current program, we question whether it is fair to strike new energy agreements with one part of Canada in advance of the panel's deliberations while telling another to wait.
Saskatchewan believes in the importance of equalization to address fiscal disparities between provinces. However, Saskatchewan looks upon the existing program as being ineffective in achieving the federal constitutional commitment to ensuring that all provinces can deliver reasonably comparable levels of public services at reasonably comparable levels of taxation.
The program should be reformed in two steps. First, Saskatchewan should receive the same opportunity to fully retain its non-renewable resource revenues as Atlantic Canada through the immediate negotiation of a Saskatchewan energy accord. We see absolutely no reason for different treatment of energy revenue between provinces. Some have suggested that the special offshore energy arrangements are to recognize the weak fiscal circumstances of these provinces. I acknowledge that our friends in Newfoundland and Labrador have significant fiscal issues and I wish them well in dealing with these challenges. However, those who subscribe to this view should compare the economic and fiscal circumstances in our province with those in Nova Scotia, particularly given the difficulties we have seen in agriculture. While our debt position may be better, this recent improvement has been at a significant cost and through sacrifice by our citizens.
There are also some who suggest that offshore energy developments are much more expensive than energy development in Western Canada. This is a tired argument that remembers oil and gas development from the 1970s and 1980s, when traditional drilling applications were the norm. Today, exploration and development in Saskatchewan focuses on new extraction techniques like carbon dioxide injection, high-cost developments that the current equalization program has difficulty recognizing.
Second, there should be a comprehensive review of both the existing equalization program and alternative ways of addressing interprovincial fiscal disparities in Canada. The high clawback rate on energy is just one of many issues our government has with the representative tax system approach that has been in place for almost 50 years.
I want to acknowledge the federal government's commitment to a fixed amount for equalization at $10.9 billion in 2005-06 and an escalator of 3.5 per cent until 2009-10. However, while I think this is a helpful commitment, the future design of the equalization program should not be restricted by this financial constraint. We should first establish the preferred means of determining interprovincial fiscal disparities; then on that basis, the federal government should determine the quantum of funding it is prepared to put toward its constitutional commitment. If the federal government first establishes its financial commitment, and then determines a means of allocating this funding among the provinces, we limit the possibilities to determine a fair allocation and create a beggar-thy-neighbour mentality among provinces.
In closing, I believe the expert panel provides an excellent opportunity to accomplish an effective reform of equalization if its membership is prepared to challenge the status quo. I do not support a panel that fixates on the current program and ignores creative new approaches. We must get this panel up and running as soon as possible. The current disagreement among provinces on nominations to the panel should not delay the announcement of the federally appointed panel members.
Thank you. I would be pleased to respond to questions.
The Chairman: Thank you for a most excellent presentation. You have outlined your case brilliantly and made a number of strong points.
One point that you did not refer to is the fact that a number of newspaper articles and other articles have suggested that one of the reasons that Saskatchewan is now being treated differently is that in Canada there are have provinces, such as Alberta and Ontario, and so-called have-not provinces, such as Nova Scotia and Newfoundland in Atlantic Canada. The reports have said that Saskatchewan is now a have province. I would like you to explain for honourable senators how you became a have province and what effect that has on the treatment that you have received by way of equalization.
Mr. Van Mulligen: We are a have province because we have been able to replace federal revenues with our own- source revenues. We are a have province because the revenues from our oil, natural gas and other resources are at such a level that they trigger a discontinuation of equalization payments. On that basis, we are a have province. If that trend continues over time and resource revenues stay at a high level, then over time there may be benefit in this for Saskatchewan. In the short run, all we have done is replace one set of revenues with a different set. It does not necessarily mean that we are substantially better off. It just means that one set of revenues is displaced by another set.
The Chairman: So the devil is in the actual formula?
Mr. Van Mulligen: There is a question here of whether equalization payments should be discontinued to the extent that they are for Saskatchewan because of the increase in our resource revenues. Again, we take the point of view that there should be an allowance made for those resource revenues because they are depleting. By definition, the minute that you extract oil from the ground, you have a depleting resource. The question is, if you simply substitute our own revenues for those that were received from Ottawa, what will we have, at the end of the day, to show for our patrimony, our gift our resources? That is a concern that the people in Atlantic Canada had. That is a concern that we have.
The Chairman: When talking about Atlantic Canada and Nova Scotia in your remarks today, in looking at the economic and fiscal circumstances, you indicated that your debt situation is a little better. What effect does your debt in Saskatchewan have on the formula?
Mr. Van Mulligen: It is not affected. I was making the point that people say that the Atlantic accords are in recognition of the fiscal circumstances of those two provinces and that our fiscal circumstances are better. I certainly agree with respect to Newfoundland and Labrador, that their fiscal circumstances are challenging, but I would encourage people to look at the fiscal circumstances of a province like Nova Scotia 10 years ago and to look at our fiscal circumstances now. We in Saskatchewan have made difficult decisions and choices to reduce our debt. This was done at considerable cost and sacrifice from the people of Saskatchewan. My colleague who is with me will take the opportunity in the legislature to criticize us for taxation levels that he feels are higher than they need to be, but we feel that these taxation levels are justified to ensure that we are in a position to fund our programs and also be in a position to continue to pay down our debt; but again, it is that sacrifice.
Senator Massicotte: Thank you for coming to Ottawa to meet with us. It is a good and important occasion for you to educate us on this bill and other related matters. I can appreciate your argument that you find it frustrating that some provinces receive certain treatment regarding resource depletion and yours does not. I do not want to get into that issue of equity; I want to deal with the bill per se. You are saying that for the future, we should probably exclude resource revenue from the computation of capacity to pay, because you argue that depletion is happening.
To take that argument further, you must acknowledge that it is an asset. How would you calculate it? There is some depletion, but there is a value to the revenue. Everything depreciates over time. How would you do the calculation to account for the depreciation factor, forgetting Nova Scotia and Newfoundland and Labrador for a minute?
Mr. Van Mulligen: We take the position that if the federal government believes that it is appropriate for those jurisdictions to retain 100 per cent of their offshore royalties, we should be treated similarly and retain 100 per cent of our resource royalties.
Whether there is a formula that can calculate what should be afforded to jurisdictions on the basis of a depreciating asset is a good question. I hope that is one question that the expert panel on equalization will deal with and provide some guidance on; that is, if there is not to be 100 per cent recognition of resource royalties, is there some other way of calculating what is a fair amount of resource revenues for provinces to retain without being impacted in the equalization formula?
Senator Massicotte: You do agree that there is some value to that asset. The question is whether you value it at 100 per cent.
C.D. Howe did a study recently on the income test versus the cash flow test. Have you seen that paper? If so, could you comment on their recommendations?
Mr. Van Mulligen: I have not seen the paper.
There are many ways to approach the equalization issue. Our position is that we should measure the disparities between provinces and determine what is required to equalize them.
Senator Massicotte: That is the objective of the act.
We hear a lot from certain provinces about fiscal imbalance, that is, that the federal government has a larger capacity to create revenues than the provinces relative to their responsibilities. Do you agree with that?
Mr. Van Mulligen: The provinces take the position that there is a fundamental fiscal imbalance in Canada. We had a study done on the primary areas of expenditure of provincial governments and the rate at which those expenditures are increasing. As you know, in health care, for example, provincial expenditures have risen at a very high rate compared with the obligation of the federal government.
The study concluded that over time, the imbalance between the provinces and the federal government will grow. I would not challenge that thinking. I think of the budget we are putting together and the rate of increase of expenditures. Without scooping my own budget, I can tell you that we are challenged by the increases in demands that we see in the two primary areas of responsibility, health and education. About two thirds of our budget goes to health and education, and the demands are huge in those areas. The B.C. budget also demonstrated that.
Senator Massicotte: You are referring to the study by the Conference Board of Canada. They did a projection for the next 20 years and concluded that the federal government would have a surplus and the provinces would not. The study is based on projecting surpluses and making assumptions.
My concern with that argument is that they are basing their projections on existing tax bases. In the 1970s, 1980s and early 1990s, the imbalance was that the provinces had too much money and the federal government did not have enough; it had huge deficits. My other concern is that if the federal government decides to match defence spending or foreign aid with that of other nations, there will not be a surplus. If we do all that, then I guess the government surplus disappears. That is sort of flimsy. What comments can you make on that?
Mr. Van Mulligen: Health is a provincial responsibility. About 10 years ago, the federal government would have paid approximately 50 per cent of all health care costs in Canada. Now, notwithstanding the agreement between the first ministers, it pays less than half of that. In post-secondary education, as well, we have seen a significant decrease in support from the federal government. Yet that is also a growing responsibility for the provinces.
In my view, we will continue to see disparity grow in those areas. I do not think those disparities would exist if the federal government were currently providing 50 per cent of health care dollars.
Senator Massicotte: In its current budget, the federal government is proposing a certain reduction of taxes in the forthcoming years. Why would the provinces not collect the money directly from the taxpayers to cover the fiscal disparity? It is obvious that that would not be popular with citizens, but in order to assume your responsibility, why would you not do that?
Mr. Van Mulligen: We think it is the federal government's responsibility to ensure equality of opportunity for all provinces, recognizing that different provinces have different capacities and capabilities. Important in that is an effective equalization program as well as established programs financing for all the provinces.
Adjustments can be provided for through the income tax system, but in the case of my province, given its location next to Alberta and its fiscal capacity, that would create some challenges. The federal government has an important role in supporting the provinces in these social priorities that are shared by all Canadians.
The Chairman: Senator Murray, I want you to know that Mr. Van Mulligen is very familiar with the debate that took place in our chamber on Bill C-24. He is familiar with the questions you asked and some of the responses you received.
Senator Murray: Mr. Chairman, the witness has added considerably to my education this afternoon by handing me a sheet of paper explaining not only what third tier oil is, but also what new oil, old oil, heavy oil, heavy third tier oil, natural gas and sales of Crowns leases are.
I confessed, in speaking at second reading debate, that I did not know what third tier oil was. However, I knew they were taking a beating on it from the federal government, which was the important thing to know and say.
I thank the witness for that information and I thank him for being here today. Mr. Van Mulligen has been here on the subject of equalization before. Forgive us if we repeat some of the conversation we have had in the past.
I was intrigued by your suggestion, Mr. Van Mulligen, about the panel that was announced at the first ministers' meeting. The panel will decide on the allocation of the overall equalization pot in the next couple of years, and at the same time, supposedly make recommendations for a longer-term program on equalization. The panel is to consist of four members, including the chairman, to be appointed by the federal government, and two by the provinces. Here you say that the current disagreement among provinces on nominations to the panel should not delay the announcement of the federally appointed panel members.
You are an experienced politician and experienced in the ways of federal-provincial fiscal relations. I know you are not cynical, but I do want to know whether you have a healthy degree of skepticism about what is likely to emerge from a panel consisting of four federal and two provincial nominees.
Mr. Van Mulligen: We are encouraged by the spirit in which Minister Goodale is undertaking this endeavour.
He honestly seems to believe, if I read him correctly, that the program, as I have indicated, has too much complexity and defies understanding. The Conference Board called it ``opaque.'' Therefore, he wants a review of this program. Significantly, he takes the view that the panel should look at the question of resource revenues and whether they should be treated differently from other kinds of revenues that are calculated in equalization.
The panel gives us hope that there will be some fresh thinking as to the equalization program and how it can better serve the needs of all the provinces and, indeed, of all Canadians. We support the panel.
Senator Murray: Even without the provincial nominees, you would like to see the four federal members get going.
Mr. Van Mulligen: Because you have recipient provinces and non-recipient provinces, and provinces that are affected by resource revenues and others that are not, when they start to discuss equalization among themselves, they sometimes find it difficult to achieve unanimous agreement. This would be one of those areas. I take the view that if the provinces cannot come to an agreement among themselves as to who their nominees should be, the panel should get going.
There is also uncertainty in Canada as to what the future will bring. We are booking for the year beyond this in terms of equalization. We are booking some allowance based on the existing program. The panel may well suggest changes. We do not want that kind of uncertainty to drag into yet another fiscal year.
I hope that this panel would be able to report to Minister Goodale by the end of November, so that its recommendations could be incorporated in not only his budget projections, but also the budget projections for all provinces. I would hate to see that delayed. That would not be good for any of the provinces.
Senator Murray: I want to get at the extent of your dissatisfaction with the present system. I will try to do this in a direct way. Leaving aside whether it should be a five-province standard or a 10-province standard for the moment, leaving aside whether or not non-renewable resources should be one of the revenue sources measured, the essence of the equalization formula is that it is supposed to measure relative fiscal capacity based on a representative tax system.
Are you prepared to abandon that in favour of some hypothetical well, not so hypothetical system? The federal terms of reference for the federal-provincial panel mention the possibility of going to some macro formula GDP, personal incomes, whatever on the one hand, or possibly an even more subjective system in which a commission is appointed to take a look every year or so at needs and allocate the revenues in that way.
The essence of the present system is relative fiscal capacity measured according to a representative tax system. Do you want to stay with that or abandon it?
Mr. Van Mulligen: I am not an expert in these matters. I leave that to the handful of people in Canada who are. I take the position that perhaps we also ought to focus on the outcomes. We have focused significantly on the mechanics of transferring equalization payments. We now have a system that defies understanding, and perhaps we ought to focus on clear, understandable outcomes. Maybe it is a measure such as personal disposable income. If that is the case, then all kinds of different measurements would be taken and different fiscal disparities would show up.
I was intrigued by the comments of Dr. Courchene where he said that Saskatchewan is becoming poorer relative to the other provinces. How can that be? If we are a have province, we have our own resource revenues other provinces like our neighbour to the east, Manitoba, receive equalization why are we becoming poorer relative to other provinces? Perhaps the panel may be able to identify some bottom-line measurement as to what ``fiscal capacity'' should mean.
Senator Murray: We had Professor Courchene here several times. I have read, as we all have, I think, his piece on the Saskatchewan situation. I have no doubt that the present formula has worked very much to your disadvantage. I go so far as to say it has created an injustice for you, obviously in the case of the Crown leases, for which you have been compensated by up to $120 million, and also by the fact of the five-province standard, that you are in and Alberta is out. We discussed this at second reading and I do not think I need to put more on the record about that.
That being said, I agree that we have to look at outcomes. While I do not pretend for a moment that the report this committee put out a few years ago is the last word, we looked at who the winners and losers would be in a number of these hypothetical new formulae. We looked at five macro formulae. If my recollection is correct, the main winner from all of them was the federal treasury, and after that there were winners and losers among the provinces, but more winners than losers.
While more research and imagination might come up with different potential outcomes, we said that some changes ought to be made to the present formula, but we should not scrap it for a macro formula, and still less for a commission of wise men or women to go around the country every year making an assessment of provincial needs.
You seem to be saying that non-renewable resources should be taken out of the formula, and if we had a representative tax system, we should take them out. We looked at that in both the present five-province standard and a possible 10-province standard. We had to look at it retrospectively. What would have been the situation in 1994-95 to 2000-01? It is true that it would certainly solve your problem. The big winner would have been Saskatchewan, and almost all of the other provinces would be major losers. However, if you leave the non-renewable resources in and go to a 10-province standard, you are a substantial winner in any event, as are most other provinces. That is what led us to take the position that we should move to the 10-province standard. The Macdonald royal commission suggested 20- odd years ago that we should move to the 10-province standard but leave non-renewable resources in.
Mr. Van Mulligen: Honourable senator, if the federal government had retained a 10-province standard, you would likely see very little argument from any of the provinces about equalization.
The Chairman: You would be substantially richer.
Mr. Van Mulligen: You will be hearing from Minister Murphy from Prince Edward Island, and I think he will tell you the same thing. I would think that all of the ministers of finance from the majority of the provinces would take the view that if there were a 10-province standard, the provinces would not be debating this program among themselves. We take that point of view as well.
Senator Murray: You say that there should be a comprehensive review of both the existing equalization program and alternative ways of addressing interprovincial fiscal disparities in Canada. I could not agree more. You and I have had this conversation before. We should go back to a Rowell-Sirois and have a royal commission on federal-provincial fiscal relations.
I notice that the Toronto Star , which is something of a guide for the present federal government, and David Peterson, the former premier of Ontario, may also recommend this; and I saw in one of the French papers in the last few days that the Prime Minister is considering a royal commission.
It is not just equalization. There is a certain body of opinion that came down very hard on the health accord asymmetrical federalism, giving away the store and not imposing enough conditions, et cetera. That is pretty rich when you consider that this government cut back by $6 billion or $7 billion in 1995 on the backs of the provinces, so some catch-up is in order. Anyway, you have that complaint. You have Ontario offside, which is a very worrisome state of affairs in this country at any time on issues such as this.
There are precedents for this. In the 1960s, there was a tax structure committee struck under Prime Minister Pearson that consisted of the federal Minister of Finance, two federal ministers and all the provincial ministers of finance. They did exactly what the Department of Finance now says is impossible or unthinkable, which was take a look at the projected revenue growth and spending responsibilities of the federal government and the provincial governments over a manageable period of time. They came to the conclusion that federal revenues would continue to grow faster than federal spending responsibilities and that the reverse was true for the provinces. All the reports are there.
The big issue then was post-secondary education the baby boomers that had to be educated, the need for more facilities and that sort of thing. If you read Tom Kent's memoirs, Gordon Robertson's memoirs or Mitchell Sharp's memoirs, they all talk about this. One of them said they have the money and the provinces have the responsibilities.
A lot has changed since; I am the first to agree there. However, in order to settle things down, at least for a while, and create a more stable equilibrium, we do need a public royal commission or a tax structure committee model, if they want to go there to look into the entire issue of federal-provincial fiscal relations and try to come up with a regime that nobody may like entirely, but everybody feels is acceptable.
The Chairman: Minister, may I ask you, in responding to that question, to keep it fairly short. I know you have another meeting in 20 minutes, and Senator Ringuette has some questions.
Senator Murray: You should demand that the provinces have equal membership on a commission such as that.
Mr. Van Mulligen: When I see the federal government now proposing to assist municipalities in a flow-through arrangement with the provinces, but nevertheless federal dollars flowing to municipalities when we see the federal government becoming involved in the provision of scholarships in the post-secondary area, when we see the federal government also intruding in other ways in post-secondary education, it raises the question of why do the provinces not have the fiscal capacity to deal with these areas that are part of their jurisdiction? Why is the federal government becoming involved? There is some imbalance here. I am not sure how that should be addressed, but I think it needs to be addressed.
Senator Ringuette: I remember seeing you last year when we were discussing your receiving $120 million in underpayments, and now I see that this year, with Bill C-24, Saskatchewan will be receiving the highest ever equalization payment from the federal government. This is another happy occasion for you.
I am looking at your statement, just to clarify this in my mind, where you said:
To illustrate, Saskatchewan's clawback rate for its energy revenues in 1981-82 was 30 per cent, which left our province with 70 per cent of our energy revenue for reinvestment.
Was that the first year? Your resource revenue from energy dates from way before 1981-82.
Mr. Van Mulligen: I do not think they would have been hugely significant prior to that. They were not nearly as significant as they are now. In absolute terms, we now probably produce about 30 per cent of all the oil in Canada. I would suspect that back in the early 1980s, it would have been something much less than that. That would have been the period prior to the introduction of the five-province standard.
Senator Ringuette: You move on to say:
In 2001-02, the clawback rate was 103 per cent.
Is that where the reimbursement from the federal government of $120 million kicked in?
Mr. Van Mulligen: Yes, for that year and for many years preceding that, for some of the revenue bases where it was clear that the federal government had clawed back more than they ought under the program. They were saying we should estimate the revenue received from this source when, in fact, what we actually received did not begin to approach what they had estimated.
Senator Ringuette: That was rebalanced with the $120 million.
Mr. Van Mulligen: They compensated us for that, but the program has not been fixed for the future. Hopefully, that is one of the things that the panel will deal with.
Senator Ringuette: You are saying to us that for over 20-some years, you had this agreement whereby you kept 70 per cent of your energy revenues; is that correct?
Mr. Van Mulligen: With a very small revenue base from that sector in those years relative to the kind of base that we have now. We have seen a great increase in the amount of development in our energy sector since that time.
Senator Ringuette: Is there still a lot of room to grow?
Mr. Van Mulligen: Yes, there are probably some reserves out there that could be tapped. However, I would also point out that we see an increasing amount of heavy oil, which does not command the same price as the light crude oil. About half of our oil is heavy crude. In the early 1980s, we were not seeing that. The nature of what we are receiving has changed.
Senator Ringuette: I look at this and at the Atlantic accord, which contains basically the same principle, but was only reached in 1988 or 1989 quite a number of years after your agreement so that one was based on your 1981- 82 accord.
I seem to be reading this through what you are saying.
Mr. Van Mulligen: I think the seminal issue was the change in about 1982 from a 10-province standard to a five- province standard. That had huge implications for Saskatchewan, and it is apparent from the Atlantic accords in those days that it also had an effect on those two provincial jurisdictions, Newfoundland and Labrador and Nova Scotia. To recognize that those resource revenues should not be clawed back, at that point the federal government of the day entered into an agreement in 1985 or 1986 with those two provinces to allow them to retain some of their energy revenues under the equalization program. We have never had any such deal.
Senator Ringuette: Last year, when we were discussing an equalization bill, either you or one of your provincial counterparts was expressing concern about the 33 elements used to calculate the formula and so forth. I remember saying that if the government had a fixed pie to distribute among the provinces, perhaps the provincial premiers could sit down and agree on what outcome they would like to see. I cannot remember if it was you or a provincial counterpart, but someone said, ``There is no way that we could agree. Please do not do that to us.'' It seems that you are back to the same kind of situation with the panel. The provinces have a hard time agreeing.
Mr. Van Mulligen: I think so. Some provinces are recipients of equalization and others are not, so what is good for one may not be good for another. Some provinces have resource revenues while others do not, so I think there are fundamental disagreements between provinces.
Senator Ringuette: I come from New Brunswick, and we are a non-energy-revenue province, but we were very pleased to see our Atlantic provinces have the chance to get their heads above water in a few years. I thank you for being here.
Senator Stratton: I am from Manitoba, where we have always reaped the benefits of equalization to a greater degree than Saskatchewan, and I have always wondered why that occurred. Now I have read your document and know why. Why are you being so polite? According to this document, you have been getting the short end of the stick for a long time. You are still being polite. Are you getting anywhere in the negotiation? Surely to goodness, with the evidence that you put forward, you have a strong case for some substantial correction.
Mr. Van Mulligen: We are appealing to what we think are fundamental Canadian qualities, fairness and equity. We believe that at the end of the day, those qualities will prevail.
Senator Stratton: So you will not take down flags.
Mr. Van Mulligen: No, not at all. I might say, on a personal note, that my first sight of Canada was Newfoundland and Labrador when I arrived here all those years ago from the Netherlands, so that province has always represented the country to me. I am pleased to see that they have received assistance with their challenges, but I believe too that this country is based on fairness and equity.
Senator Stratton: How long do you think this will take?
Mr. Van Mulligen: However long it takes.
Senator Stratton: If I were you, I would be running short of patience, because this has indeed been going on for a long time. If you say on record, ``However long it takes,'' that is how long it will take, in my view.
Mr. Van Mulligen: We will take whatever opportunities are there to put our case before Canadians. We will do that during the course of the coming year. We think the panel will be helpful in terms of focusing attention on these issues.
Senator Stratton: In my view, Alberta is always front and centre in what they term ``fed bashing.'' I thought it would be Saskatchewan's turn to take over that role.
Mr. Van Mulligen: It would not be in our nature to do that.
Senator Stratton: I would suggest perhaps it should become your nature if you do not get this solved shortly.
The Chairman: Thank you, minister. As usual, it has been a great pleasure to have you appear before this committee. Your comments are always challenging, informative and, indeed, persuasive. We look forward to having you back again some time soon. We will take your comments under advisement as we consider Bill C-24. Thank you very much.
Mr. Van Mulligen: I thank honourable senators for their interest, not only today, but after reading the transcripts of your debates, I know that you have a great interest in this subject and we commend you to your work.
The Chairman: Honourable senators, our second set of witnesses are from the Government of Prince Edward Island. The Honourable Mitch Murphy has served in many portfolios since 1996, including community affairs and Attorney General, Acadian and Francophone affairs, Government House Leader, technology and environment, agriculture and forestry. Following the provincial general election of September 29, 2003, Mr. Murphy was reappointed to the cabinet as the Provincial Treasurer. As honourable senators know, we are studying Bill C-24, and we look forward to Mr. Murphy's remarks. Following that, honourable senators will have some questions they would like to put to you about your presentation. You now have the floor, and welcome.
The Honourable Mitchell Murphy, Provincial Treasurer, Government of Prince Edward Island: Honourable senators, I thank you for the invitation to appear before this committee on a topic that is very important to Prince Edward Island and, indeed, to the country as a whole. I know that you are considering amendments to the Federal-Provincial Fiscal Arrangements Act, Bill C-24, and we would like to add some of our thoughts as you consider that bill, but also some thoughts as we move forward with regards to federal-provincial fiscal arrangements, particularly as they concern equalization.
The Senate of Canada has, on various occasions, conducted analyses of the equalization program, and it has always been a staunch supporter of that program.
Equalization is one of the defining features of the Canadian federation. It recognizes the vast nature of the country and seeks to have all regions share in the richness of the federation by having Canadians enjoy reasonably comparable levels of public services at reasonably comparable levels of taxation.
Equalization has undergone various program changes since its introduction in 1957, including adding a number of tax bases to the calculation, the introduction of a 10-province standard and then a five-province standard and enshrinement in the Canadian Constitution. Now we have the recent declaration by Minister Goodale of the most comprehensive reform of the program in its 47-year history.
I am here today because Prince Edward Island has concerns about where we think equalization may be heading. I appeared before this committee in the spring of 2004 to discuss equalization renewal. We were informed by the federal government at the time that equalization as we knew it would be renewed for an additional five years. Subsequently, as senators are aware, discussions on the program have embarked on a different path. Payments are set for fiscal year 2004-05 and 2005-06, with a suggested 3.5 per cent escalator built in to 2009. Fiscal capacity has been largely set aside, and for the first time, per capita funding has been introduced on the 50 per cent of the above-floor adjustment. A federal panel of experts has been convened to make recommendations for 2006-07 and beyond.
In the interim, a number of special considerations within the equalization system have been given to some provinces, ranging from inclusion of have provinces in 2005-06 arrangements and property tax concessions to offshore accords.
The brief that you have points out how these increase the gap in fiscal capacity for a province like P.E.I. within the context of equalization. I would say that I am not here to criticize what has happened in other provinces, I am here to present information on how it affects fiscal capacity and fiscal disparity in the country. We are especially concerned about the potential move to a macro approach and the removal of non-renewable resource revenues from equalization calculations. The Senate has pointed out very clearly the pitfalls of the macro approach. There is a movement and a push by some provinces for the removal of non-renewable resource revenues. This, in the absence of any mechanism to deal with provinces without non-renewable natural resources, would destroy any meaningful equity as stated in section 36(2) of the Constitution.
To conclude my opening statement, I believe the principles of equalization have gone off track from their original intent and we need to fix them, not only in the context of recipient provinces, but also in the context of Canadian federalism. On a broader level, we need an acknowledgment of the fiscal imbalance that exists in the country between the federal government and the provinces.
Mr. Chairman, senators, I would be happy to discuss points in my brief and take any questions that you may have. I do not intend to go through the brief word by word but I would like, Mr. Chairman, to hit a few of the highlights, if I may.
We go to page 3 the background. Following the first ministers' meeting in September, the federal throne speech announced that equalization was to have fundamental reform. This was followed by a first ministers' meeting last fall where the package of reforms was discussed. Throughout these discussions, federal finance officials emphasized that equalization was a federal program, and while they had the obligation to consult, they were not necessarily looking for approval for the changes. The Senate should in no way believe that these fundamental changes for 2004-05, 2005-06, were endorsed.
We go to page 4; I do not believe that provinces were seeking a fundamental reform of the program.
On page 5, in the context of related offshore agreements that have been reached, I believe that is opening the door to major fiscal disparities among provinces. Bill C-24 represents a huge change to the equalization program. Essentially, the bill discards the formula-driven basis of entitlements, based on the representative tax system that was the heart of the Canadian equalization system. The bill itself provides for a top-up of the 2004-05 second estimate, as agreed to by premiers in September. Premiers were pleased that the erosion in entitlements that had been taking place was halted, but they were disappointed that the full $10.9 billion was not to be provided in 2004-05. The bill specifies the provincial amounts to be received in 2005-06, which are again based on the 2004-05 second estimate of $8.9 billion, topped up to $10.9 billion. It then provides that in the following years, this amount in each province's 2005-06 allocation is to be expanded by 3.5 per cent per year. The actual amounts involved are shown on the next page.
What the chart on page 7 points out is simply the results of the first ministers' accords on equalization last fall and the set payments that each of the recipient provinces will receive.
What is not provided for in the bill is the appointment of an expert panel to make recommendations later in 2005. I believe Minister Van Mulligen indicated the end of November, first of December, is the timeline Minister Goodale would like to see. That panel will make recommendations for subsequent years on provincial allocation, including consideration of the representative tax system, the treatment of natural resources, macro approaches, et cetera. In doing so, the panel is also asked to consider the need for a permanent body of experts to study equalization. I do not believe provinces ever endorsed the idea of opening the program to so major a potential change.
We have a real concern about the possible outcomes of a new equalization arrangement. The program can only respond to changing economic and fiscal circumstances of provinces by changing the act. I believe provincial entitlements will become a politically driven process. The fundamental problem that we see is that the total amount of equalization payout should be determined by the sum of the amounts needed to balance the fiscal capacity of provinces with measured fiscal deficiencies. With a predetermined payout, the compensation provided to provinces cannot match the real needs. Some provinces may actually receive equalization, even though they would not ordinarily qualify under a certain 10-province or five-province standard.
Changes impacting a large province such as Quebec will automatically have large effects on smaller provinces. Given that it is a zero-sum game, the allocation math will not provide equitable compensation for measured needs. We are not supportive of changing from a representative tax system to a macro approach. We believe that the RTS formula was based on the notion of raising all receiving provinces to an equal level when measured on a per capita basis. Champions of macro-formula simplifications would further edge out the old system based on the RTS to favour resource-rich provinces.
The Senate committee work in 2002 understood the distortions that macro approaches create and the large entitlements for resource-based provinces that can arise. Several modifications were made in 2004 that distinctly favoured resource-rich provinces. The new bill compounds this by embedding discriminatory treatment in the payout. We are most concerned that the federal government is prepared to provide special treatment for resource-rich provinces, both within equalization and outside of it.
In January 2005, the Prime Minister conceded to the Premiers of Newfoundland and Nova Scotia that 100 per cent of their equalization losses will be offset in the coming eight years, and there is a chance of an extension for an additional eight years. The chart on the next page shows the massive inequities that are a result of both the decision and the new fiscal arrangements. Again, I am not here to be critical of those deals. We have included the chart simply to show the effect in terms of fiscal capacities across provinces.
The chart shows the likely situation that Newfoundland will enjoy in 2006-07.
For P.E.I. to reach Newfoundland's level of fiscal capacity in 2006-07, our equalization payments would need to be supplemented by approximately $350 million per year. I would also note that the five-province standard excludes Alberta and Newfoundland from the calculation, which artificially lowers the standard, further penalizing equalization-recipient provinces.
On the offshore accords:
The situation is that it would be unfair to taxpayers in other provinces to provide even more generous treatment of offshore revenues in calculating equalization....
Its effect would be to disadvantage those provinces with few natural resources in comparison with those that have many.
That was a statement by the Government of Canada at that time. We continue to support the position that the Government of Canada held at that time.
The offshore accords have implications for Bill C-24 that may not yet be fully understood. Given the political nature of future allocations, one can foresee the federal government being resistant to making appropriate reallocations within the formula. We think the consequence of the new formula is that the willingness of the federal government to consider a move away from RTS would be in keeping with the need to reduce the level of reallocations in the new system. If the formula does not properly reflect true fiscal capacities, then appropriate adjustments to entitlements will simply not occur and the cost of the offshore offsets is reduced.
However, resource revenues do provide major benefits to provinces such as Alberta, as can be seen in the next chart, and I do not believe that they can be ignored. This table maps what Alberta's tax regime would generate relative to each province's tax base. These are numbers from fiscal year 2004-05. The lack of a sales tax and lower tax rates generally would generate only 68 per cent of provincial revenues in P.E.I. Stated another way, if we presently had Alberta's tax regime on Prince Edward Island, we would give up $211 million in revenue, and the situation for the other provinces is outlined there as well. Yet we know Alberta's expenditures on programs are somewhat higher than the national average. Alberta is also in the enviable position of having a surplus. The main reason for this is natural resource revenues coupled with high incomes being earned there.
I do not think it was coincidental that after the meetings last October, some provinces were in a better fiscal position, and therefore in a better position to compete, certainly in terms of a sales tax regime, business incentives, et cetera. My point there is that the equalization program has more far-reaching consequences than simply the lump sum that is transferred to any province. It allows provinces with increased fiscal capacity more options that certainly are not available to all.
The potential costs for P.E.I. of a move away from the RTS are huge. We highlighted one macro situation here for illustrative purposes. Under a macro-style formula based on personal income, our share of the $10.9 billion would be approximately $225 million, compared with $277 million under the present arrangement. We do not think that we need a wholesale scrapping of the present equalization system, but we do admit that change is necessary. We certainly will be supportive of and participate in the change process, but our representation to the federal panel would be to proceed cautiously and ensure we know the full implications of the changes that we are making. Certainly, the bottom line for us, and I believe for everybody, is that equalization should continue to provide the opportunity for all regions of the country to have reasonably comparable levels of public services at reasonably comparable levels of taxation.
We conclude with these four points: The new equalization amounts are set in legislation. The only mechanism to change them is to change the legislative act. A movement away from the representative tax system in favour of macro approaches would have disastrous effects on a recipient province like Prince Edward Island. The Senate committee was right in its analysis and recommendations in 2002.
We are deeply troubled by where the program now seems to be heading and we would urge this committee to use its influence as a chamber of sober second thought to ensure that this vital program adheres to its basic principles.
The Chairman: Thank you very much for a most excellent presentation.
It is clear that you do not want to see any fundamental change or reform, but the reason we are here today is Bill C- 24. I gather from your remarks that notwithstanding the fact that the offshore accords may have implications for Bill C-24, you are not asking that any changes, variations or amendments be made to the bill itself.
Mr. Murphy: Quite simply, I, like Minister Van Mulligen, need the extra revenue that will come to P.E.I. as a result of the first ministers' agreement on equalization in the fall. We would ask the committee to pass that bill. We would hope that those transfers will be made during the current fiscal year.
The Chairman: At the beginning, when you were going through your main brief, you made a telling statement that I would like to ask you about. You said that throughout these discussions with the federal government, the federal finance department emphasized that equalization is a federal program. It is not a provincial program and the provinces do not control it; it is a federal program. The funding comes from the feds primarily. It is a federal program and their obligation was to consult, not to receive approval from the provinces. That pretty well sets forth the position that you are likely to encounter in the negotiations.
When the federal officials were here before this committee, they talked briefly about the panel. It is clear that the panel will have a consultative power and any recommendations they make will be just that; the minister will have the final say on what he accepts and what he rejects.
Therefore, are you putting much faith in this panel? You seem to indicate in your remarks today that the provinces never agreed to this wholesale analysis of equalization.
Mr. Murphy: Certainly that is our perspective. I do not disagree that this is a federal program and the federal government reserves the right to make the final decisions on allocations within the program. However, it is important that people are aware that while provinces can have input and make their suggestions, at the end of the day, it will be the federal government that will decide.
The panel will travel the country and seek input. It has already contacted us to arrange a meeting to hear our input on the equalization program and where it is heading. I would concur with you, Mr. Chairman, that at the end of the day it will be officials in federal finance, the federal finance minister, and the federal government, for that matter, that will decide what equalization will look like in 2006-07 and beyond. Our concern is that things are basically set for 2004- 05 and 2005-06. Although I could, I am not here to take issue with that. Our concern is equalization as we envision it following the 2005-06 fiscal year. I certainly would concur with my colleague from Saskatchewan that it is important for our budgetary procedures and financial planning to know as soon as possible following the recommendations by the federal panel to the federal minister what equalization will look like, because we will all want to incorporate that into our budgets in that fiscal year.
Senator Massicotte: Thank you for taking time to explain your point of view. You summarized it quite well. The act is okay. The $10.9 billion is for next year; you wish it was this year, 2004-05, but your concern is obviously where we are going with this.
The objectives are clear in other words, to provide equalization but you are worried about which technical form we will use. Do you know something we do not know? You seem to be very suspicious and saying it will go the wrong way, yet the panel, given the quantum set, will attempt to find the most equitable path. Your problem is that it may not be your way.
Mr. Murphy: I do believe we have cause for concern about the direction that may be going. The terms of reference for the panel include examining whether non-renewable resource revenues should be included in the equalization calculations for the future.
As you are aware, we have a five-province standard. All provinces in Atlantic Canada and Alberta are exempt from the calculation of that national level of fiscal capacity. Our concern is that if non-renewable natural resource revenues are left out of that calculation, the five-province standard will be lower and the fiscal capacity lowered. Therefore, the gap between the fiscal capacity of provinces such as Prince Edward Island, New Brunswick, Manitoba and Quebec, which do not have large revenues from non-renewable natural resources, and national fiscal capacity is narrowed. As a result, the ability of recipient provinces, which do not have huge incomes from non-renewable resource revenues, to provide equitable levels of service at reasonable levels of taxation is compromised.
Senator Massicotte: Let us accept, for the sake of this discussion, that it is an asset and a form of revenue. If you accept the argument that it is a depleting asset, like many others, how would you treat it? It has historically been treated as 100 per cent included. Is there a more equitable way to treat it?
Mr. Murphy: It is very difficult for a province to argue against a 10-province standard that includes the 33 tax bases that are in the present formula. We set a national standard that is inclusive of the fiscal capacity of all the provinces. We might see fluctuations from time to time, and I, like some of my colleagues, have asked for volatility in the program to be addressed. To be fair to Minister Goodale, volatility certainly has been addressed in 2004-05 because of the fixed payments. As to other ways of addressing volatility in the future, including a 10-province standard with various revenue sources and averaging out adjustments over time is a possible solution that we have advanced.
Senator Massicotte: There is much press coverage of the fiscal imbalance. What are your thoughts on that, and what is the solution?
Mr. Murphy: I agreed with part of the observation you made earlier in addressing the question with my colleague from Saskatchewan. Policy initiatives are taken by all levels of government. As you pointed out, fiscal capacity may increase or decrease as a result. Analyses of fiscal imbalance are done on a base set of numbers that includes a lot of assumptions, as was the work of the Conference Board of Canada. The revenue stream to the federal government and some policy decisions that they have made have allowed for eight consecutive surplus budgets, while at the provincial level, with the notable exception of Alberta, provinces have been on deficit financing.
I do believe there is a fiscal imbalance with regard to responsibilities for providing levels of services. The big cost drivers at the provincial level are health and education. By way of example, our health care costs are rising at about 7 per cent per year.
The Chairman: What percentage are they of your overall budget?
Mr. Murphy: This year, health care will be 46 per cent of the overall budget and education will be about 23 per cent. Those two areas account for more than two thirds of our overall budget.
Senator Massicotte: In your paper you speak about B.C. reducing its sales tax, we know that Ontario reduced its tax rate in the four or five years previous to the last couple of years, and Quebec is talking about a $1 billion reduction in taxes. Is it not inconsistent to say that the federal government has too much money and the provinces do not have enough when, albeit for good political reasons, we are seeing such tax reductions?
Mr. Murphy: My point about property tax issues in B.C. speaks to the equalization program in general. I am not here to argue about agreements that have been reached between the federal government and other provinces. However, B.C. treats property tax revenues in the Lower Mainland differently from how they are treated in the rest of the country. I believe that 50 per cent of revenue from property tax is included in their fiscal capacity. That, of course, affects us because it influences the national standard of fiscal capacity. I can only speak to my own situation. I guess I am a bit envious. I look forward to the day when I am in a position to ease the tax burden on Senator Downe and others.
Senator Murray: The spin from the federal government with regard to Bill C-24 includes the statement that the new framework will make payments more stable and predictable. Certainly that is the case for the federal treasury. The federal government has decided the size of the pot for the next 10 years. It is no more stable and predictable for the provinces, because after the fiscal year that begins in April, not only do you have no idea how much you will get, but also you have no idea what the formula will be or how it will be determined.
They say in their press releases that the equalization-receiving provinces have expressed concerns about the funding of equalization and the planning difficulties they have experienced in recent years caused by year-to-year swings in equalization payments. I suppose there will be year-to-year swings in equalization payments in the present formula as your fiscal capacity improves or deteriorates relative to the rest of the country.
You have suggested that volatility could be ironed out, first, by averaging the repayments that are built into the system. That, I suppose, is an obvious way to proceed. You then say that going to the 10-province standard would reduce volatility.
Why would the 10-province standard be less volatile than the five-province standard?
Mr. Murphy: First, we do agree that averaging payments or equalization adjustments would, to a large extent, address volatility. It has been our experience that we have received adjustments both ways. Some years we have gained because of positive adjustments in equalization; other years we have lost because of negative adjustments.
Over time, those adjustments have a tendency to be very close to being balanced. We think the volatility issue could be addressed that way.
Moving to a 10-province standard involves the economies of all 10 provinces in the country. Part of the challenge now under the five-province standard is that Ontario's economy is, I believe, 40 per cent of the national economy. When they are also one of the five provinces used in the calculation, when their economy fluctuates by small amounts one way or the other, it has a big impact on the national fiscal capacity. We believe that moving to a 10-province standard would smooth out or level out the impact that the Ontario economy happens to have on a five-province standard.
Senator Murray: I do not know how to put this in the form of a question, but I will make a comment on Senator Massicotte's inference that the tax decreases in one or two provinces and the prospect of tax decreases in one or two provinces prove the assertion of the federal government that there is no fiscal imbalance in the country. It proves, on the contrary, two things. First, in addition to a vertical fiscal imbalance, there is a horizontal imbalance across the country. Second, if you look at the main argument used by the federal government in denying the existence or even the possibility of the existence of a fiscal imbalance, they say both levels of government have access to virtually all revenue sources. The invitation is, if you need money, raise your taxes. That points out the difficulty that provinces such as Prince Edward Island or Manitoba or many of the other provinces would have in a competitive tax regime. If they are forced to raise taxes, they become less competitive one against the other. It exacerbates the horizontal imbalance that is there. I do not make any more of that than to simply state that I think it should be taken into consideration.
The Chairman: Minister, would you like to respond?
Mr. Murphy: I do agree that the fiscal imbalance exists on two levels, both the vertical between levels of government, and the horizontal. Part of the reason we included the chart on Alberta's taxing capacity in the brief and what it looked like in the rest of the country was to illustrate that point.
Let me use an example closer to home the offshore accords. My understanding is the payments under the offshore accords are outside of the equalization pot. However, let us compare ourselves with the Province of Nova Scotia. If the Province of Nova Scotia has bettered their fiscal capacity through this means and they have and we are happy for them the practicality is that some time in the not-too-distant future, they will begin negotiations, let us say, with the medical society in Nova Scotia to renew contracts. They may be in a position, because of receiving different treatment, to offer a package to those health care professionals with which I have to compete or New Brunswick has to compete. They may be in a position to have a tax regime that is more competitive for business investment or in attracting companies to come to the province to do business.
The horizontal fiscal imbalance creates problems between provinces in terms of the things that they do.
In terms of the vertical fiscal imbalance between the federal government and the provincial levels of government, we look at where the cost drivers are in providing public services. As I said earlier, the cost drivers for us are in health and education. We can go back through the history of federal-provincial fiscal arrangements something I became very familiar with over the last 18 months and at one time, under established program financing in 1977, we were very close to a cost sharing of those responsibilities between the federal and provincial levels of government. Cost sharing has been eroding since that time. It has been somewhat addressed in the first ministers' meeting with the health accords in the fall, but it is certainly nowhere close to what it was throughout that history.
Senator Ringuette: That begs a comment. You should not worry about the opportunity to hire nurses. Our provincial premier in New Brunswick just fired 350 nurses. They are up for hire and are close to P.E.I.
I wish to direct you to a table in your presentation. It is a comparison of Alberta tax efforts. In the comparison, does the 100 per cent for Alberta include the non-renewable energy revenues?
Mr. Murphy: Yes, it does.
Senator Ringuette: Does it include the non-renewable energy revenues for the other provinces?
Mr. Murphy: Yes.
Senator Ringuette: Is it all on the same basis?
Mr. Murphy: Yes.
Senator Ringuette: You mention on the next page that B.C. announced a reduction in its sales tax from 7.5 per cent to 7 per cent. Was that this past fall?
Mr. Murphy: Yes, it happened in the fall of 2004.
Senator Ringuette: I read in the paper a comment from your provincial premier that perhaps agriculture, which is the number one revenue source for P.E.I., should not be included in the equalization program. Would you comment on that?
Mr. Murphy: The premier was using a hypothetical situation to argue that non-renewable resource revenues should be included in the formula, those 33 bases of calculating our revenue streams for equalization. If the equalization system is to close the fiscal disparities, it would be dangerous to start picking and choosing what revenue sources will be in and what revenue sources will be out.
We do not have any non-renewable resource revenues per se, although we are still penalized to the tune of $4 million a year for peat moss mining in Prince Edward Island; but that is a discussion for another day.
The premier was illustrating the point that that would be akin to us not including the revenues that we gain from our agriculture sector.
Senator Ringuette: I can understand P.E.I.'s position. With a small population, and this system being based on a per capita process, it is probably difficult to provide the same level of services.
Mr. Murphy: One of the concerns that I pointed out in my presentation was that equalization was formula based until 2005-06. For the first time, we have seen per capita funding creep into the equalization formula; 50 per cent of the top-up, if I can use that term, the federal government provided for 2005-06 was on a formula base. That means that P.E.I. would get 2.57 per cent of the national pot.
On a per capita basis, it would be 0.8 per cent. Therefore, we are very concerned. We do not think that the equalization program should be strictly per capita.
If the formula is calculated and the difference in fiscal capacity is identified, then it goes by per capita. We do not argue with that. What we are arguing about is that the payments cannot be made simply on a per capita basis, because smaller jurisdictions like ourselves can never win in those scenarios.
Senator Downe: I wish to thank the minister for his presentation.
Before I get to my question, I want to talk about the fiscal imbalance in P.E.I. You have a budget in which close to 40 per cent of revenue comes from federal transfers. You have a population of fewer than 140,000 people. I am not sure what the provincial debt is.
Mr. Murphy: $1.2 billion.
Senator Downe: Does that include unfunded liabilities for teachers' pensions?
Mr. Murphy: No, the net debt is $1.2 billion. The gross debt is about $1.8 billion.
Senator Downe: It is a lot of money; and you have a population with a high percentage of seniors, who not only pay less tax, but consume a disproportionate amount of health care dollars in the province. You have a right to be worried. If your hair was not grey now, it would be after you were done with this job.
I would like to talk about this expert panel that was established. You indicated in your presentation that the province has received indications they will travel to P.E.I. Has the panel been appointed?
Mr. Murphy: We received correspondence on Friday that they were looking to arrange a meeting on April 12. That correspondence indicated that Mr. Al O'Brien was to head up that committee, and that Mr. O'Brien and his group would be heading to the province on that date.
Senator Downe: Is anyone from Prince Edward Island or Atlantic Canada on that panel, or do we know yet?
Mr. Murphy: I believe Elizabeth Parr-Johnston is on it.
The Chairman: She is the former president of UNB.
Mr. Murphy: She is the person from Atlantic Canada. There are four federal nominees to the panel, one from Atlantic Canada.
Senator Downe: Do the provinces appoint people as well?
Mr. Murphy: The provinces have been asked to submit two names. I do not believe consensus has been reached among the provinces on what those names will be.
Senator Downe: Is that two for all the provinces?
Mr. Murphy: Yes, two for all the provinces.
Senator Downe: The current equalization formula equalizes only revenue-raising capacity. Some countries, as you know, factor in the cost of delivering the services. This references my earlier concern about the high percentage of seniors. Is that a position that you will be taking on equalization?
Mr. Murphy: It is important that the panel look at other federations around the world. I know that Mr. Palmer and others have done some interesting research and reading on federal systems in Australia and Germany.
We have always maintained the position that we are not opposed to having a look at equalization. We do not think that we need to throw the baby out with the bathwater here. The present system is not all wrong. Certainly, from the analysis that has been done by this body and others, we are convinced that a macro approach is wrong, but we are not averse to looking at other possibilities.
CIHI, the Canadian Institute for Health Information, has put out a statistic showing that 90 per cent of the costs that we as individuals will incur in the health care system will occur after the age of 65. In Atlantic Canada in general, and certainly in Prince Edward Island, the proportion of seniors in the total population is greater than the national average. That would indicate that the increased cost in the health care system will be particularly acute in our region.
Senator Downe, I agree wholeheartedly, it is a particular concern of ours.
The Chairman: Mr. Murphy, on behalf of the committee, thank you for coming and answering our questions so directly. It has been useful and helpful.
That concludes our meeting for today.
Honourable senators, I want you to know that in terms of proposed legislation, this committee will continue the hearings on Bill-C24 tomorrow morning at 9:30 a.m., with, perhaps, a clause by clause. You should know that the estimates schedule is as follows: Supplementary Estimates (B) 2004-05 and Main Estimates 2005-06 were tabled in the other place two weeks ago; they should be tabled in the Senate tonight. If these estimates are referred to our committee tomorrow night, we will hear from Treasury Board officials tomorrow morning on the Supplementary Estimates (B) in our regular time slot following our business on Bill C-24, assuming we get to clause by clause.
We will also hear from the President of the Treasury Board and officials on Wednesday, March 9, on the Main Estimates. Briefing notes on Supplementary Estimates (B) have been distributed already to senators, as have notes on the Mains.
Senator Ringuette: On a question of clarification, on Bill C-24, the equalization bill, have all the provinces been invited and only two are coming?
The Chairman: I made that announcement at the beginning. All the provinces were invited and only two indicated they wanted to appear, Saskatchewan and P.E.I., and they have both done so.
Senator Day: And we appreciate it.
The Chairman: Very much.
The committee adjourned. |