FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, April 26, 2001

• 0910

[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone here this morning.

As you know, we're dealing with Bill C-18, An Act to amend the Federal-Provincial Fiscal Arrangements Act.

We have very special guests from various provinces in this country. We have representatives from the governments of New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island.

As you know, you'll have approximately 10 minutes to make your presentations. Thereafter, we'll engage in a question-and-answer session. Of course, if you require a little bit more time, we'll be quite flexible.

I would like to welcome from the Government of New Brunswick, the Hon. Norman Betts, Minister of Finance; from the Government of Newfoundland and Labrador, the Hon. Joan Marie Aylward, Minister of Finance; from the Government of Nova Scotia, William Hogg, Deputy Minister; and from the Government of Prince Edward Island, the Hon. Patricia Mella, Provincial Treasurer. Welcome.

We'll begin with the Hon. Norman Betts. You may begin.

Hon. Norman Betts (Minister of Finance, Government of New Brunswick): Mr. Chair, we have a preferred order, if you don't mind.

The Chair: I'm very flexible, just like the federal government. Go ahead.

Hon. Joan Marie Aylward (Minister of Finance, Government of Newfoundland and Labrador): I'm going to start. I would like to introduce my Assistant Deputy Minister, Terry Paddon.

We've talked about our presentations, and we do have a sequence. We thought that, if it would be helpful, we would go through our presentations first, and then maybe you could hold your questions until the end. That way you'll hear the whole piece of this, and it will give us more opportunity for questions.

The Chair: That's fine. You may proceed.

Ms. Joan Marie Aylward: Thank you very much.

I'm very pleased to have the opportunity today to present the views of the Government of Newfoundland and Labrador to this committee on Bill C-18, which amends the ceiling provision of the equalization program. As my colleagues from the other Atlantic provinces are providing sufficient figures, I intend to speak more generally about how the government and province I represent view the ceiling issue.

For the Government of Newfoundland and Labrador, there are two overriding issues with regard to an equalization ceiling: first, the issue of whether a ceiling should exist at all, and, second, if a ceiling provision is imposed, ensuring it is a fair and reasonable one.

On the first issue I would like to state for the record that the province is fundamentally opposed to the existence of a ceiling provision and believes it should be struck from the program. This is our long-standing view, and it is consistent with the views of other equalization recipient provinces. Recipient provinces have maintained this view from the time the ceiling was first imposed in 1982 up to and including the last program renewal in 1999.

Since 1999 western finance ministers, Atlantic finance ministers, the finance ministers of the recipient provinces as a group, provincial-territorial finance ministers, as well as our premiers have all called for the immediate and permanent elimination of the ceiling. But these calls have gone unheeded by the federal government.

This forces recipient provinces to fall back on the second issue, trying to ensure that any ceiling imposed by the federal government is both fair and reasonable.

Let me be clear. The ceiling, either as imposed at the 1999 renewal or as amended by Bill C-18, does not have the support of the Government of Newfoundland and Labrador. The ceiling should not be a mechanism used by the federal government to constrain and suppress normal program growth, which is what the ceiling provision has deteriorated into in its most recent incarnation.

Let me briefly turn to how equalization entitlements are determined and how we see the interaction with the ceiling. The standard to which recipient provinces are equalized up to is, in simple terms, an average of the government revenues that could be generated by five provinces. The potential revenue performance of these five provinces represents in the federal view the average revenue-raising capacity of all provinces. After the standard is determined, provinces with below average raising capacity receive equalization payments to bring them up to the level of the standard. But I'm sure this committee is well aware of that.

• 0915

Most notable is that Alberta is excluded from the existing standard, meaning that the lucrative, albeit at times volatile, petroleum revenues, which are the core of that province's fiscal strength, are excluded from determining the standard. The richest province, able to afford the most generous services and sustain the lowest taxes, has only a minimal impact on equalization entitlements for recipient provinces.

The purpose of equalization, as stated in the Constitution, is to ensure that all provinces have sufficient revenues to maintain reasonably comparable levels of public services and reasonably comparable levels of taxation. This can only be achieved if recipient provinces receive on a consistent basis revenues that match the standard. Recipient provinces would argue that the current five-province standard is not sufficient to achieve this result, but this is an argument for another day. Certainly, if recipients are to have reasonably comparable services at reasonably comparable levels of taxation, this can only be accomplished if they have reasonably comparable levels of revenue, which the equalization program is designed to provide.

What the ceiling does, in effect, is first to look at the level of entitlements each year as determined by the standard, which by federal definition is a fair average of the revenue-generating potential of provinces and in keeping with the constitutional commitment. Then it second-guesses this to ascertain by some arbitrary measure whether this level is too much for the federal government to pay.

The ceiling, if it reduces entitlements, results in recipient provinces being underpaid to a level lower than the standard and therefore by definition puts them in a position of not being able to maintain reasonably comparable services at reasonably comparable levels of taxation. The more restrictive the ceiling is in limiting program growth, the more at risk are the service and taxation levels in recipient provinces such as ours.

If the standard is rising and thereby driving higher equalization payouts, this generally reflects strong tax base expansion and own source revenue growth in standard provinces. If tax revenues in standard provinces are growing strongly, at most times this will reflect a buoyant national economy, which in turn will lead to strong federal revenue growth and provide the federal government with the financial resources to sustain growing equalization entitlements. This raises the likely possibility that a restrictive ceiling, such as was imposed in 1999, could lower equalization payouts at a time of buoyant federal revenue growth, diverting money from the equalization program into an already swelling federal surplus. This means money is being denied to poorer provinces, potentially lowering service levels and keeping taxes high in these jurisdictions, to give the federal government an even bigger surplus. As a recipient province, we cannot accept that this is an appropriate exercise in either nation building or cooperative fiscal federalism.

Our objective, as I stated earlier, if we cannot convince the federal government to do away with the ceiling, is to try to ensure that any ceiling that is imposed is fair and reasonable. I and my Atlantic colleagues are here today to make our case that the ceiling, even after Bill C-18, is not fair and reasonable, and further, in my view, it is a rather unsettling precedent for the future of the equalization program. This raises the question of how we would define fair and reasonable when the federal government insists on maintaining a ceiling.

Our backdrop to this discussion is that the objective of equalization, first and foremost, is to assist have-not provinces to maintain acceptable Canadian standards of public services. This should be a strong override to all but the most significant federal affordability concerns with the equalization payouts. If the federal government has any legitimate concern about the open-ended nature of equalization, it is that a measure of protection from pronounced and unpredictable spikes in payouts would contribute to ensuring that federal fiscal planning is not unacceptably destabilized. This would be consistent with statements the federal government has made about the need for a ceiling mechanism.

The rationale for a ceiling has been stated by the federal government several times. I quote from a letter from a former federal finance minister to one of my predecessors:

The purpose of the ceiling was to protect the federal government against unduly rapid growth in program entitlements.

• 0920

That sentiment is echoed in other federally produced documents on equalization, for example:

The ceiling is important in protecting the federal government from significant and unanticipated increases in program costs.

If we go back to 1982 when the ceiling was first imposed, it followed a volatile period when the oil price shocks of the 1970s created an environment where unduly rapid growth and unanticipated increases in program costs were genuine risks. Much of this risk was mitigated in 1982, however, when the federal government changed the program from a ten-province standard to the current five-province standard, in the process removing Alberta and its petroleum revenues from the standard. Much of the severe volatility, unpredictability, and risk in equalization payouts can be linked to natural resource revenues, which, by their market-driven nature, are subject to rapid and substantial changes.

With the bulk of the natural resource revenue risk out of the program, what then is left to create payout risk for the federal government, as payout is simply a function of the revenue-generating potential of provinces in the standard and in recipient provinces? The only thing left to create unduly rapid growth would be unduly rapid growth in the economy—good economic times—or a dramatic run-up in tax effort by provinces, particularly the larger standard provinces, as equalization calculations are per capita-based.

Let me look at each of these two individually.

Frankly, I have little sympathy for the federal government if rapid growth in equalization entitlements is driven by rapid economic growth in our country. I quote again from a federal document:

federal revenues, out of which Equalization is financed, tend to grow at a rate closely similar to that of GNP...

In other words, entitlements may be growing rapidly in times of strong economic performance, but federal revenues are growing at a similar pace, meaning the federal exposure to a fiscal shock is largely mitigated. The need for the federal government in this kind of environment to protect itself from “significant and unanticipated increases in program costs” would be open to some question and has the appearance of not really being the issue.

In theory, a second way program payout could run up rapidly would be through rapid and significant tax increases, particularly in the larger standard provinces. Federal revenue growth would not increase in step, but program payouts could rise because of a higher standard. It is unlikely, however, in today's tax-cutting climate that this would represent a significant risk to the federal government. In fact, the opposite is true. Tax cuts by standard provinces, particularly in personal income tax, an important equalization tax base, are lowering program payouts to recipient provinces.

The high deficits that all governments faced in the 1980s and 1990s led to a run-up in tax rates across the country. But now we are in an era of increased tax competition nationally and internationally, and instead of a race to the top of the scales, we have a race to the bottom, with key provinces trumping each other with even lower tax regimes. In some respects, this is having a perverse impact on poorer provinces.

While all provinces have enjoyed solid economic growth, this has given some provinces more fiscal flexibility than others, and they have used a good portion of this flexibility to cut taxes. This has created an environment of heightened tax competition within our country, but because Canada has a narrow equalization system based only on government revenues and ignores service needs on the expenditure side of the budget equation, equalization payouts to have-not provinces are negatively impacted by tax competition.

Particularly the poorer of the recipient provinces are forced, on the one hand, to lower taxes to remain competitive in trying to attract business investment, while on the other hand are less able to meet the threat of tax competition because lower equalization payouts driven by lower taxes in better-off provinces siphon away some of the financial resources. The result is that poorer provinces are less able to compete for business investment, and over time, this will distort economic decision-making, potentially exacerbating the divide between rich and poor in this country and leading to a weakening of the economic union.

This is not an environment where I can accept that the need for a restrictive ceiling is a fiscal imperative for the federal government. In fact, the opposite is true. From my perspective, the key issue for equalization should be an examination of the adequacy of the program to meet its constitutional objective. Looking forward to the foreseeable future, there appears to be greater risk now than for some time that poorer provinces will not be able to have comparative public services at comparable levels of taxation, with the negative impacts this could have on the federation.

• 0925

The truly unfortunate part is that this could be avoided by a properly functioning equalization program, one that provides adequate fiscal resources to recipient provinces in keeping with the constitutional commitment while remaining affordable for the federal government. The issue of federal affordability deserves some comment in relation to the ceiling issue.

In my view, federal affordability is a relative concept that has changed over time. Certainly we all remember the days not long past of high government deficits and ballooning debt loads, both at the federal and provincial levels. This was the environment that saw the ceiling first introduced in the 1990s and 1980s. Bringing deficits and debt under control dictated some very tough fiscal measures by all governments concerned. We all understood affordability in that environment meant how much money we could borrow and how high we could raise our taxes just to pay the bills. Fiscal restraint and budget control were the order of the day, and we could better accept in that environment the need for fiscal cost control.

But times have changed, and more so in the fiscal sense for the federal government than for the provinces. In the late 1990s the federal government began to rack up progressively higher and quite large surpluses by anyone's measure, and yes, the federal government was left to deal with a quite significant accumulated debt, but so too were the provinces. More importantly for the provinces who deliver most of the key social programs in the country, we were left sitting on a pile of exploding expenditure pressures driven by years of enforced restraint in health, education, and other public services. The improving economy over the past few years has allowed provinces to deal with some of these pressures, but many remain, and not only in health, where expenditure pressures show no signs of diminishing in the foreseeable future, especially in light of our changing and aging demographics.

Provinces would argue that the federal government has not kept up its share of funding the social programs that are so important to us, and we are culturally seeing the impact as Canadians. I would argue that the struggle to deal with the challenge of providing reasonably comparable public services is generally greater in equalization recipient provinces. So faced with a very full federal treasury and very real sizeable provincial expenditure pressures for basic public services, we take a different view of federal program affordability concerns than are being reflected in the federal approach to an equalization ceiling.

In the view of the Government of Newfoundland and Labrador, a ceiling, if there has to be one, could be fair and reasonable if it only offers the federal government a safe degree of protection from large, unpredictable, sharp spikes in equalization entitlements that are not offset by concurrent large sharp spikes in federal revenues. This sort of criterion is not met by the ceiling imposed in 1999 and will not be met as a result of Bill C-18.

The ceiling that will be in place even if Bill C-18 is enacted could likely constrain normal program growth—I think this is one of our biggest concerns—and growth that would be more or less matched by offsetting federal revenue growth. Under modest economic growth scenarios throughout the period to the next equalization renewal in 2004, it's quite conceivable that program entitlements could consistently ride up against the ceiling. This situation is neither fair nor reasonable for recipient provinces, who, for the most part, are struggling to maintain responsible fiscal positions.

In my view, the situation is quite straightforward. The ceiling for 2000-01 and beyond is based on a starting point that is well below actual entitlements for 1999-2000. Starting from a point well below the most recent entitlements and growing that base by GDP to establish a ceiling is not protecting the federal government from, to use federal words, “unduly rapid growth in program entitlements” or “significant and unanticipated increases in program costs”. Taking the approach the federal government has adopted and is perpetrating with Bill C-18, the ceiling now appears to have the capability of frustrating normal program growth that is well within the fiscal capacity of the federal government to fund. In this respect, the most recent incarnation of the ceiling is somewhat at odds with its 20-year history. My worst fear is that this could be a disconcerting precedent that could have dire implications for the future adequacy of the program if this is a signal of a more pervasive federal attitude towards equalization.

• 0930

At a minimum, the ceiling should be re-based to a more realistic starting point. In application it will fall within the parameters of its stated objectives. The Government of Newfoundland and Labrador is of the view that at a minimum, the new starting point should be the actual total entitlement for 1999-2000, and I would note that even this minimum, in our view, is more restrictive than the ceiling should be to be consistent with the federal statements on ceiling objectives.

In closing, I would like to make brief reference to the most important components of the equalization to Newfoundland and Labrador. Much has been said in recent years of the importance of an increased federal contribution through CHST, the other major federal transfer program, to fund the burgeoning cost of health care across the country, and the need for this has been very real. But the CHST will provide our province with an entitlement of about $300 million this year. Match this against our health care system, which this year we are contributing $1.4 billion to operate, and our education system, which will cost $0.75 billion, and the importance to us of a fully functioning, robust equalization system becomes very obvious.

It is the equalization system, with an entitlement this year of $1.1 billion, that allows us to put the meat on the bones for our public services in our province, and it will have to remain that way for some time for us. The province is fortunate to have significant resource development opportunities spurring economic growth, but even if all the projects come to fruition, equalization under the current program would continue to be an important component of our budget.

Looking beyond our province, I believe, as a Canadian, that an appropriate equalization system, which delivers adequate transfers to the recipient provinces, allowing them to reduce both economic and social disparities with the rest of the country over time, is a key element of nation building that should not be held back. The Canadian Constitution commits the Parliament of Canada to making equalization payments such that the provinces will be able to have reasonably comparable levels of public services at reasonably comparable levels of taxation. The Constitution places a duty on the federal government to ensure for the people of Canada that this commitment is honoured and fulfilled. I assert to the members of the committee today that the equalization ceiling in its present form, even as amended by Bill C-18, works to frustrate the federal mandate to deliver on this commitment. Further, the only clear and reasonable recourse is for the ceiling to be changed, if it cannot be eliminated, to surely protect the federal government from significant unanticipated, unduly rapid growth in program entitlements, but not from normal growth programs, even if this entails strong growth that arises as a function of the equalization program working for Canadians, as it is designed to do.

Thank you very much for this opportunity.

The Chair: Thank you, Minister.

We'll now hear from the Honourable Patricia Mella.

Hon. Patricia J. Mella (Provincial Treasurer, Government of Prince Edward Island): Thank you, Mr. Chair.

Members of the Standing Committee on Finance concerning Bill C-18, my colleague Greg Selinger from Manitoba, ladies and gentlemen, I'm pleased to be here to discuss Bill C-18, given the importance of the Federal-Provincial Fiscal Arrangements and Federal Post-Secondary Education and Health Contributions Act to Canada, and more particularly implications of the amendment for the less affluent provinces. I'm also very pleased to be able to join with my colleagues from Nova Scotia, Newfoundland, and New Brunswick. We have discussed the implications of Bill C-18 in depth, as have our premiers, and we share grave concerns about the maintenance of the severe ceiling on equalization that this amendment provides for. Our premiers have communicated their concerns in a letter to the Prime Minister of April 17, 2001.

I will preface my remarks by noting that every government of Prince Edward Island has opposed the practice of imposing a ceiling on equalization since its inception in 1982-83. We continue to maintain that the equalization ceiling is contradictory to the principle of the program in the Constitution. Committee members should realize that the temporary relief Bill C-18 provides from the ceiling for 1999-2000 is clear evidence that the ceiling, as presently defined, does have major implications. Otherwise, why would it have been lifted? Somebody must have been convinced that it had an effect.

• 0935

As part of the agreement between first ministers on September 11, Bill C-18 lifts the ceiling on equalization payments for 1999-2000. It then reimposes the ceiling on entitlements for the following years, using the $10 billion amount, adjusted for GDP for future years. It is now evident that the $10 billion amount will force equalization entitlements to lower levels as a ratio of GDP than they have ever experienced before. Whereas we do welcome the removal of the effects of the ceiling for 1999-2000, the imposition of the ceiling for 2000 and beyond is likely to have draconian effects on the program over the years.

I will refer to chart 1—and I remind people who have a copy of my remarks that this chart is at the back of the presentation. Chart 1 identifies the level of the original ceiling if it were in effect in 1999-2000 and 2000-2001, and then it shows the new ceiling as it effects entitlements for 2000-2001 and the minimum amount necessary to meet the Prime Minister's commitment to the premiers in September of 2000. In 1999-2000 the ceiling level is the numerical focus of this discussion, as all federal ceiling proposals allow for growth in the program at the rate of gross domestic product for that year onward. In all cases the ceiling growth for 2000-2001 is 8.4%, which is the official GDP growth according to Statistics Canada in 2000.

Prior to the legislative amendments to the equalization program the ceiling would have reached $11.13 billion in 1999, and this in turn would have grown with the growth of GDP to a ceiling of $12.06 billion. The new ceiling under Bill C-18 will force entitlements in 2000-2001 to be no more than $10.84 billion.

In August of 2000 all premiers expressed the view that the equalization ceiling was inappropriate and should be eliminated, in concert with improvements to the CHST transfer. On September 11 Prime Minister Chrétien met with provincial and territorial premiers in Ottawa to resolve the continuing discord regarding health care and equalization. At that meeting the Prime Minister issued a press release with the following commitment:

The Minister of Finance will examine this issue further after consultation with the provincial Ministers of Finance... the Prime Minister agreed that necessary steps would be taken to ensure that no ceiling will apply to the 1999-2000 fiscal year. Thereafter, the established Equalization formula will apply, which allows the program to grow up to the rate of growth in GDP.

It's those last twelve words that are important. It is a very clear commitment to ensure that the ceiling would be lifted for 1999, which is being done in the bill. It was also agreed that the federal Minister of Finance would hold discussions on this issue. Bill C-18 carries out the first commitment. We're pleased to see that happen.

The second part of the pledge is seriously compromised by leaving the ceiling at $10 billion. The latest federal estimate of equalization for 1999-2000 is already $10.792 billion. That's the federal estimate of what equalization will be for 1999-2000, and we're going to go down to a ceiling of $10 billion.

As shown in chart 1, the program must be allowed to rise in 2000-2001 to at least $11.7 billion, which would allow for growth of GDP at 8.4%. Evidently this is impossible if the ceiling is fixed at $10.84 billion, as occurs presently under Bill C-18. This allows for no growth—not growth for GDP, but no growth—in the program for 1999-2000, 2000-2001, which, in my view, is contrary to the Prime Minister's commitment.

• 0940

It can be seen that lowering the ceiling from $12.6 billion to $8.4 billion reduces it by more than a billion per year from previous levels. Such a major reduction of the ceiling is unprecedented in the history of the program. The new ceiling will represent 1.04% of GDP, which is less than the entitlements or the ceiling have ever been in the history of the program.

Chart 2 shows equalization entitlements and the ceiling as a percentage of GDP since 1982-83. Prior to the 1999 legislation changes the federal Department of Finance seriously underestimated the level of equalization payments, and consequently thought that a ceiling level of $10 billion for 1999-2000 would be ample to allow for the routine growth of the program. The department also determined that the $10 billion figure would be high enough to adopt new technical measures that were to be put in place at the time. The annual recalculations of equalization entitlement yielded a far higher stream of payments than the federal Department of Finance had estimated, largely because of the strong economic growth in the country. That growth has also had a major impact on federal revenues. This being so, the new ceiling of $10 billion has become hopelessly inadequate to cover payments for the initial year of the legislative change. The solution is to abandon the ceiling altogether or re-base to a level that allows for growth to the rate of growth of GDP, as the Prime Minister committed.

I offer the finance committee two possible amendments to Bill C-18. The first is that Bill C-18 be amended to state that subsection 4(9) of the Federal-Provincial Fiscal Arrangements Act be repealed—that's the preferred option. The second alternative is that reference to the amount of $10 billion in paragraph 4(9)(b) be reworded to read “the Final Estimate for 1999-2000”.

The former amendment would remove the ceiling from the program. The latter amendment will provide that the program be allowed to expand, at a maximum, to the growth of GDP, which is what the Prime Minister said it was going to do. That, obviously, is not our preferred course, but as a minimum, we would like to see that happen.

Acceptance of the proposed amendments to Bill C-18 will go far in renewing the respect my province has for the federal government's commitment to the principles involved in equalization. I am deeply concerned, as my colleague has mentioned, at the implications for the quality of public services and the ability to have competitive taxation levels in my province, should a ceiling remain in place for future years. Prince Edward Islanders have a right to a similar level of health care, education, and economic infrastructure as that enjoyed by residents in other provinces. Entrepreneurs in P.E.I. must be able to pursue opportunities in international and national markets from a level playing field.

It may come as a surprise to know that P.E.I. led the nation last year in provincial employment growth, reflecting export-led success in leading-edge industries, such as aerospace, metal fabrication, and biochemical innovations. We are working hard with our private sector to ensure that sustainable economic growth continues. However, economic growth can only occur when businesses in P.E.I. are able to enjoy reasonably comparable services at reasonably comparable levels of taxation. Private sector success will mean that in time our dependence on equalization will shrink. Our dependence on equalization is shrinking. We must offer a competitive tax regime to our people.

• 0945

I cannot stress enough the role that equalization plays in narrowing fiscal disparities in provinces. The special role and status of the equalization program is clear in Canada's Constitution. If there were no equalization program, this year the P.E.I. government would be able to deliver only $3,915 in services to each Islander from its own source revenues, if taxes were at a national rate. The federal government, through equalization, raises that amount to $5,766 for each resident. This is still less than what is available to more affluent provinces.

The fiscal gap between provinces will be worsened when the ceiling applies. The levelling that occurs to the current equalization program is substantial. In fiscal year 2000-2001 equalization transfers of $269 million to Prince Edward Island represent 28% of the government's total transfers. Equalization payments are approximately equal to our combined spending on education and transportation in any given year. Based on conservative estimates, my department has calculated that the provisions of Bill C-18 will reduce equalization entitlements to Prince Edward Island by $9 million in respect of the coming year.

The very real increase in fiscal disparities that will occur have clear negative consequences for competitiveness and for equity in a federation. In a joint paper at the annual premiers conference, all premiers agreed that equalization serves to improve the country's economic performance by ensuring that businesses across the country can compete in domestic and international markets without having to relocate to the lowest tax bill.

On a related theme, I would like to point out the work of one of Canada's leading economists, Professor Robin Boadway of Queen's University, who for years has documented the case of economic inefficiencies that result from people relocating simply to take advantage of lower taxes. In respect of equity, the Canadian Constitution provides that all Canadians should receive comparable treatment from their governments in health and education, regardless of where they live. Canadians are becoming increasingly mobile, and this is not an academic consideration. They know in concrete terms how long it takes to get a family physician on P.E.I., they know the conditions of the roads and the public buildings, and they know how much tax they pay. They know what the average Canadian is entitled to, and they know what they are not receiving.

In closing, I should note that the federal finance minister is aware of my concerns. The Department of Finance appears preoccupied with controlling the costs of equalization, notwithstanding the need to uphold the fundamental principles of the program. It is incongruous that the federal government would choose to so severely restrict the program, when federal revenues are so strong. We estimate that the ceiling may affect the program in the order of $380 million a year. That is achievable without breaking the bank federally.

I am most disturbed by the apparent lack of federal concern for the consequences of this restriction. My premier had expected that meaningful discussions would be held on the appropriate ceiling level, in order to allow entitlements to grow at the rate of GDP, as the Prime Minister committed. I urge you, as committee members, to endorse the proposed amendments to Bill C-18.

Thank you.

The Chair: Thank you, Ms. Mella.

We'll go now to Mr. Hogg.

Mr. William Hogg (Deputy Minister of Finance, Government of Nova Scotia): Thank you, Mr. Chair.

The Minister of Finance for Nova Scotia, the Honourable Neil LeBlanc, sends his regrets for not being able to be here in person. He's recuperating from a surgical procedure; otherwise he would have been present today.

I thank you, members of the standing committee, for the opportunity to appear before you today.

Parliament and the Government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

Many of you will recognize this quotation as subsection 36(2) of our Constitution. It is my considered opinion that this commitment, enshrined in our Constitution, is threatened by the ceiling on equalization payments.

• 0950

Allow me a moment to shatter the popular myth about equalization. Equalization payments are not, as we so often read in the media, payments from the wealthier provinces to the less wealthy. Rather, they come from tax revenues paid by all Canadians, including Canadians living in Atlantic Canada. Equalization accounts for about 27% of the revenues of our government and will be used to pay for the public services referred to in subsection 36(2). These revenues are critical to our ability to provide quality health, education, and other important public services. The ceiling on equalization is an arbitrary restraint imposed upon the program's ability to respond to the disparities between provinces.

I can fully appreciate the need to control costs. In Nova Scotia, we are on track with our four-year plan to finally balance our budget on a fully consolidated basis by next year. Keeping this plan on track has required difficult decisions regarding spending. Having said that, the fiscal conditions that existed in 1982 for the federal government do not exist today. As the conditions that necessitated the ceiling no longer exist, neither should the ceiling continue to remain in place.

The ceiling serves to contradict the constitutional commitment of the federation and effectively contributes to a widening of the disparities between the rich and the less wealthy provinces. While wealthier provinces grow and prosper within the federation, thereby enhancing their ability to expand public programs and services, the ceiling on the equalization program limits the less wealthy provinces' ability to keep pace. As you can appreciate, this very quickly leads to a two-tiered system of essential public services across Canada. This is the very condition equalization was designed to prevent. We will allow the public programs and services of the richer provinces to grow and develop as their economies prosper, but the less wealthy provinces will only be permitted to grow up to a predetermined portion of these levels. Somehow, I doubt this is what the architects of our Constitution had in mind when they drafted subsection 36(2).

How can a province like Nova Scotia keep up? We cannot look to our tax system to solve all of these cost pressures. It is critical that we maintain a competitive tax environment to attract and maintain private sector investment in our province.

As I mentioned earlier, the existing ceiling on equalization was introduced at a time when the federal government was battling rising deficits and debt levels. Despite similar battles on the provincial front, the ceiling was imposed to limit the federal government payout under the program. This unilateral action cost receiving provinces millions of dollars in lost revenues at a time when their own deficits, debt levels, and program cost pressures were rising. In Nova Scotia's situation, the triggering of the ceiling in 1988-89 resulted in over $235 million being taken out of the provincial system over the following three years. In 1993-94, a further $3.4 million was scaled back as a result of the ceiling.

With the 1999-2000 renewal of the Federal-Provincial Fiscal Arrangements Act, the federal government not only chose to retain the ceiling provision within the program despite the serious concerns of the less wealthy provinces, it also arbitrarily lowered the base for purposes of calculating the annual ceiling level going forward. This re-basing immediately eliminated the room that had existed under the former ceiling and resulted in a much lower equalization payout to recipient provinces.

The ceiling level is now at its lowest level relative to GDP than has ever existed before. Prior to the 1999-2000 renewal, the ceiling on equalization was approximately 1.16% of national GDP levels. This, at the very least, allowed room for total entitlements to grow up to the rate of growth in the economy—the growth intended from the outset by the ceiling. With the arbitrary setting of the ceiling in 1999-2000 at $10 billion, this growth room was removed and the intent of the ceiling was destroyed.

How has this been allowed to happen? Since the inception of the ceiling on equalization in 1982-83, the ceiling has been re-based by the federal government in each successive renewal of the Federal-Provincial Fiscal Arrangements Act. The new base amount used to calculate the level of the ceiling for each of the successive five-year renewal periods has traditionally been set using the final level of entitlements in the base year. This was not the case in 1999-2000.

• 0955

Despite concerns from provinces, the federal government arbitrarily chose $10 billion at the outset of the new arrangements as the base amount of the ceiling and set it in legislation. It refused to listen, however, to provincial concerns that the ceiling was being set too low and could in fact be triggered in the very first year of the renewal. In fact, it was adamant that, consistent with past experience, this would never happen. Well, it did happen.

The latest estimates of equalization for 1999-2000 show total entitlements at $10.79 billion—almost $800 million above the legislated ceiling for that year. The strong growth in the national gross domestic product during that year has been a major contributor to such entitlement growth. The outcry of the less wealthy provinces from these updated estimates was finally, positively responded to last fall with the Prime Minister's commitment to provincial premiers to lift the ceiling for 1999-2000.

This federal decision to recognize the significance of the cap and the hardship it would impose on struggling provinces, coupled with their own vastly improved financial circumstances, is extremely important for Nova Scotia. It is expected to save my province alone an estimated $62 million in federal reductions for that year. The significance of this additional funding in terms of helping to meet our essential public program costs cannot be overstated. What is of very real concern going forward, however, is the fact that the federal removal of the ceiling is for one year only. The $10-billion legislated ceiling for the 1999-2000 year will be reapplied for the purposes of determining the level of the ceiling in subsequent years.

Once final figures are tabulated, we already know the level of equalization entitlements in subsequent years will not be allowed to grow by the growth in GDP, just because of the artificially low starting point of the ceiling to begin with. For the program to grow by the full rate of growth in GDP, as intended, the ceiling for 2000-01 should be allowed to grow from the final entitlement level provided in the previous year. This would mean a ceiling level reaching at least $11.7 billion, based upon the most recent estimates of 1999-2000 entitlements and GDP growth. Using $10 billion as a starting point, however, ensures that the ceiling climbs no higher than $10.84 billion—minimal growth over 1999-2000, and a scaleback in revenues of almost $1 billion from where it would otherwise be. This is contrary to the Prime Minister's own commitment made following the first ministers conference in September 2000.

The fundamental question we must all ask ourselves today is whether the hardships imposed by the equalization ceiling will go away after 1999-2000. Do the underlying pressures that continue to threaten the ability of the less wealthy provinces to provide comparable levels of basic services, and which led to the Prime Minister removing the ceiling for that single year, disappear? I can assure you this is not the case in Nova Scotia.

As with most provinces, Nova Scotia is struggling to manage the rate of growth in health care costs, meet our educational needs, and properly fund all social programs. The difference between us, however, is our ability to respond to these pressures. Nova Scotia's ability to generate additional own-source revenues to maintain comparable service levels, while lowering its provincial tax burdens to remain competitive, is genuinely threatened. How can a province such as Nova Scotia hope to compete with larger economies that are posting staggering surpluses and are offering generous tax incentives to encourage investment by both individuals and business?

I strongly urge the finance committee to recognize the important role of equalization in addressing these critical issues and to amend Bill C-18 to repeal subsection 4(9) of the Federal-Provincial Fiscal Arrangements Act, or, at the very least, to amend the wording to replace the prescribed amount of $10 billion with the reworded “the final estimate for 1999-2000”.

In closing, I would like to thank the committee members for listening to our remarks here today. I hope we impressed upon you the fundamental importance of a strong system of equalization transfers within the federation. The vision we hold of Canada is of a strong, unified country, where comparable program levels and competitive taxation levels exist regardless of where you reside.

Federal fiscal circumstances have improved substantially in recent years. All provinces, including the least wealthy, have contributed dearly to that turnaround. It is time that we recognize the very real risk to our national programs and services that has been imposed by this arbitrary federal restraint measure and fulfil the constitutional commitment that makes this country so unique and the envy of nations around the world.

Thank you, Mr. Chair.

The Chair: Thank you very much, Mr. Hogg.

We'll now hear from the Hon. Norman Betts.

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Mr. Norman Betts: I'm pleased to have circulated a small gift from Premier Bernard Lord, which is a laminated card detailing section 36 of the Constitution. We do that for a couple of reasons: first, to point out that there are two subsections in section 36, that is, 36(1), dealing with regional disparity, and 36(2), dealing with equalization. It's subsection 36(2) that we're here to talk about today.

Bill C-18 relates specifically to the ceiling on the equalization program, and the ceiling has been a long-standing concern to New Brunswick since its inception in 1982-83.

[Translation]

Atlantic Premiers and Finance Ministers are concerned about the potential impacts of the ceiling on equalization and have called upon the federal government for its permanent removal.

[English]

Atlantic premiers and finance ministers are gravely concerned about the potential impacts of the ceiling on the equalization program and consistently have called upon the federal government for its permanent removal.

Concerns about the ceiling and its potential impact are not limited to equalization recipient provinces. At the August 2000 annual premiers conference, premiers joined together to issue a call for the removal of the ceiling on equalization payments, in concert with other fiscal reform.

In effect, Bill C-18 would amend the act such that the ceiling on the equalization program would be removed for 1999-2000. While I view this as a positive step, I am disappointed that the ceiling on equalization has not been removed permanently. In fact, the proposed change in Bill C-18 would not even allow for equalization entitlements to grow up to the level of growth in the economy for 2000-2001 and future years, as has historically been the case.

The purpose of the equalization program is to raise to a standard level the per capita revenue-raising capacity of recipient provinces such that all provinces have the ability to provide reasonably comparable levels of public services and taxation to their citizens. It is through this program that the playing field is levelled somewhat amongst the provinces.

The importance of the equalization program is underscored by its inclusion in amendments to the Constitution in 1982. You've already heard this today, but I think it's worth reiterating. Subsection 36(2) clearly states:

Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

New Brunswick contends that the ceiling on equalization payments violates the spirit and intent of this constitutional commitment by limiting the capacity of the program to achieve its fundamental objectives.

When the ceiling applies, equalization recipient provinces receive entitlements that are less than what is determined by the formula. Formula-determined entitlements are scaled back to the ceiling level on a per capita basis. As a result, recipient provinces are no longer equalized to the level of the designated program standard, resulting in a widening of fiscal disparities that the formula itself is designed to reduce.

Prior to 1999-2000 the ceiling applied in four fiscal years: 1988-89, 1989-90, 1990-91, and 1993-94. It removed in excess of $3 billion in formula-determined entitlements from equalization recipient provinces. For New Brunswick this has resulted in a reduction to formula-determined entitlements of $190 million.

Leading up to the 1999 program renewal, the ceiling level was determined in a relatively consistent manner. First, a base year was established in which the ceiling on equalization would not apply. In the base year recipient provinces were guaranteed their formula-determined entitlement. Then the ceiling for future years was established based on the cumulative rate of growth in the economy from the base year applied to the base-year entitlement level. The base-year entitlement closely mirrored formula-determined entitlements.

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The 1999 equalization program renewal represented a departure from past practice. The ceiling was again re-based to 1999-2000. However, unlike past practices, an arbitrary ceiling level of $10 million was established for 1999-2000, with future years' entitlements permitted to grow up to the rate of growth in cumulative GDP from the fixed base-year level. As a result, the ceiling would apply in the base year as well as future years. Under current legislation for 2000-2001, the ceiling level is estimated at $10.8 billion, based on the current GDP growth projection of 8.4%.

This change was implemented in large part due to affordability concerns of the federal government. It was also intended to address concerns expressed previously by the Auditor General of Canada as to the uncertainty associated with a base-year entitlement that changed as new data became available.

It should be pointed out that this change resulted in a substantial ratcheting down of the ceiling level for 1999-2000 and future years. In fact, it resulted in an unprecedented reduction to the ceiling level.

If past practice had been followed, the ceiling would not apply in 1999-2000. Formula-determined entitlements for 1999-2000, which are currently estimated to be slightly below $10.8 billion, would serve as the base for establishing the ceiling level for future years. Given the GDP growth projection of 8.4%, the ceiling level for 2000-2001 would be in the order of $11.7 billion, as opposed to $10.8 billion under current legislation.

Bill C-18 proposes to remove the fixed ceiling level of $10.8 billion for 1999-2000. As a result, entitlements for the year in question would be based on the latest estimate of formula-determined entitlements, which, as noted previously, are $10.8 billion. The removal of the ceiling for 1999-2000 would be consistent with past practices whereby the ceiling would not apply in the base year.

However, under Bill C-18 the ceiling level for 2000-2001 and future years would continue to be calculated based on the $10 billion fixed level for 1999-2000 and not the latest formula-determined entitlement. As a result, the 2000-2001 ceiling level under this bill would be $10.8 billion. Given that entitlements for 1999-2000 are currently estimated at just below $10.8 billion, this would allow for minimal program growth, far below the rate of growth of GDP. In contrast, again, past practice would have allowed for program growth of up to the growth rate of GDP from the 1999-2000 base-year entitlement.

It is conceivable that under the proposed Bill C-18, entitlements for 2000-2001 could be restricted to a level below that of the 1999-2000 formula-determined entitlements. This would result in a ceiling allowing for negative growth, as opposed to growth, on a year-over-year basis. This situation cannot be permitted to happen.

Given current circumstances there's a very strong likelihood of the ceiling applying for 2000-2001 and possibly future years. At the same time that less affluent provinces are facing the possibility of reductions to formula-determined entitlements, the federal fiscal outlook is very positive now and for the foreseeable future.

To put the impact of the ceiling on equalization in perspective, the ceiling for 1999-2000 is currently reducing New Brunswick's formula-determined entitlement by $50 million, pending the adoption of Bill C-18. In today's terms $50 million provides New Brunswickers with approximately 11 days of health care. It provides for in the order of 1,000 nurses. It translates into a further 25 kilometres of a new four-lane highway, which we're working to complete. From a revenue perspective, it translates into more than 5% of provincial personal income tax revenues.

Bill C-18 is all the more troublesome given the statements by the Prime Minister at the September 2000 first ministers meeting. In a communiqué emanating from that meeting, it was noted that

...the Prime Minister agreed to take the necessary steps to ensure that no ceiling will apply to the 1999-2000 fiscal year. Thereafter, the established Equalization formula will apply, which allows the program to grow up to the rate of growth of GDP.

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As I noted previously, Bill C-18 is a positive step in that it does remove the ceiling for 1999-2000. However, it does not uphold the commitment of the Prime Minister. It is also inconsistent with past practice by not allowing entitlements to grow up to the level of growth in the economy.

The proposed removal of the ceiling for 1999-2000, under Bill C-18, sends some important messages. One, it recognizes the importance of the equalization program to the less affluent provinces and its role in ensuring that the constitutional commitment can be better met. Two, it recognizes that the arbitrary ceiling level of $10 billion was set too low. This level was established at a time when program entitlements were underestimated considerably, which had a direct bearing on the establishment of the ceiling level. And three, it indicates that the program for 1999-2000 is affordable to the federal government without the need for an equalization ceiling. By extension, this would suggest that allowing the program to grow with GDP from the 1999-2000 formula-determined level is affordable to the federal government. Gross domestic product is a commonly used indicator of economic growth and prosperity. Since the inception of the ceiling, both GDP growth and growth in gross national product have been used as the federal affordability measure.

New Brunswick strongly believes that, on principle, the ceiling on equalization should be eliminated, and we will continue to pursue the permanent removal of the ceiling. In the context of Bill C-18, New Brunswick would support an amendment that would remove the ceiling for the duration of the current equalization renewal period as an interim measure.

Barring its removal, modifications should be made to Bill C-18, such that program entitlements for 2000-2001 and future years can grow up to the rate of growth of cumulative GDP from the formula-determined 1999-2000 level.

[Translation]

Thank you for the opportunity to express my viewpoint today to the committee.

[English]

I thank you for the opportunity to be here today. I trust that my concerns and the concerns of my colleagues will be given due consideration, and we look forward to your questions.

Thank you.

The Chair: Thank you, Minister.

We'll now go to the question-and-answer session. It's going to be a five-minute round, and we're going to start with Mr. Cullen first.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you very much, Mr. Chairman, and thank you, Ministers, for your presentations.

You know, we do understand the importance of equalization programs for the provinces. I think you'd also recognize that equalization is one of two major programs—the CHST being another one—that is increasing by $35 billion—that's new money—over the next few years. Last year, there was a $700-million Atlantic investment partnerships program. Equalization therefore needs to be looked at in that context.

In terms of your chart, you're showing equalization shrinking in relation to GDP. Of course, all federal government expenditures are shrinking in relation to GDP. In fact, the shrinkage in equalization would be quite a bit less than the shrinkage of federal program direct expenditures in total. In fact, equalization has grown by about 32% since 1993-94. It was the only program that was not affected by program review. It's at $10.8 billion in 2001, the highest level ever.

I'd just like to comment briefly on the September 2000 first ministers meeting. I think there was an impression created that the Minister of Finance did not follow up on his commitments to meet with the provincial ministers. He did meet with provincial finance ministers, and there was no commitment to re-base the ceiling for 2000-2001 and subsequent years, to the entitlements in 1999-2000. Bill C-18, in the government's view, meets the Prime Minister's commitments.

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Just briefly, on affordability, provinces create the impression that they have all the spending and the federal government has all the revenues. For the committee's benefit and that of Canadians, I'd just like to put some items before us.

Provincial revenues, including transfers, have exceeded federal revenues for almost 25 years. Secondly, the provincial debt burden is half that of the federal government's. Thirdly, federal debt charges consume a quarter of all federal revenues, compared to about 12% at the provincial and territorial levels.

One of the finance ministers cited the Auditor General's report. It's quite true that the Auditor General criticized the previous equalization ceiling. He stated that it did not provide the government with any certain fiscal protection against runaway growth in the program. Now, if we just—and I say “just” because some of the options presented go beyond this—re-base the ceiling to 1999-2000 entitlements, that could potentially add $4 billion to the cost of equalization. In the view of our government, that's not affordable.

Given that context of equalization being part of two major transfer programs, the growth in the CHST, the federal fiscal capacity versus the provincial fiscal capacity, the issue of affordability that was raised in our Parliament by the Auditor General, and the impact alone of re-basing, I'm just wondering if the provincial finance ministers here would care to comment.

Ms. Patricia Mella: I might comment on a couple of things you mentioned. First, in relation to CHST funding, we're all very aware of the money that has been put into the CHST. We're all very grateful for the money that has been put into the CHST. It took a long time, but we did get a boost to that program. I think basically all Canadians pretty well said this is a priority and this is where we think the money should go, so it did happen.

I think it might be worthwhile to point out here, though, that the big boost people were so pleased with in terms of CHST funding was not a big boost to my province. It was not a big boost to the four provinces you're looking at here. Of all the money added to the CHST, 97% went to three provinces: Ontario, British Columbia, and Alberta. That is part of the issue that we have to constantly deal with.

People keep saying we're getting health money, we're getting CHST money, what are we complaining about? My province got $7 million to $8 million in additional money. The deficit in health was $11 million, so the new money didn't even cover the deficit for that particular year.

The CHST is a per capita funding formula. It was agreed to around the table between finance ministers and premiers. When it was agreed to, I was at the table, and the commitment was that we would go to per capita funding for the CHST, and that you would stand with us when we need equalization re-addressed.

So here we are with the CHST on a per capita basis. The majority of the money is going to go to the provinces that have the largest populations. And we didn't object to that. We know they have more people; therefore, they have more illness, etc. But the commitment at that time was that we would look at equalization as well.

Health care funding doesn't do it. This is our health care funding right here. Equalization is the health care funding for P.E.I. In CHST money, we get approximately $75 million. The health budget is $340 million. If we get $75 million from the CHST, where do we get the rest? From our own-source revenues and from equalization. So if you cap equalization and we don't get the money because it's per capita funding for the CHST, we're moving down in terms of money for health. The level of services cannot remain the same.

On the second point you mentioned about the finance minister agreeing to meet with us to discuss this, he did meet with us regionally—he met with me personally, actually, which I appreciated—but the decision had already been made on this issue before the meetings. I'm not sure that's the consultation process in order.

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It's important for everybody to know the transfer payment called equalization is declining as a percentage of federal revenues. It is a lower and lower percentage of federal revenues. The equalization program is going down.

Yes, people will say we got lots of new money. I hear that all the time in my own legislature. But that's like saying your salary is higher this year than it was ten years ago. Yes, we got new money, but the economy has been growing. The equalization formula is based on the fact that if the Canadian economy is strong, there will be revenues and the wealth will be redistributed to provide essential services for all Canadians. That's the essence of it. But putting a cap on a program that is supposed to equalize us? I don't know how you can argue that can equalize. When there's a cap, you're only equal up to a certain point.

The Chair: Mr. Epp.

Mr. Ken Epp (Elk Island, CA): Thank you, Mr. Chairman.

Thank you all for being here. For a kid who grew up in Saskatchewan and somehow became a member of Parliament, it's a special thing to sit here and to hear the advice of the leading leaders in the finance area of the provinces. I feel very privileged today to have you here.

I have a number of questions I'd like to ask, and my first one is really a very quick one. One of you said all of the premiers agreed upon the removal of the ceiling. The word “all” was there, and I just put a little question mark beside it. Was it really unanimous? If it was, I think that really does strengthen it immensely.

Mr. Norman Betts: In concert with the CHST, it was unanimous at the premiers' level. It was unanimous at the finance ministers' level, obviously, as part of the package, in concert with CHST. It was definitely a unanimous agreement, yes.

Mr. Ken Epp: Thank you. I just wanted to give you a chance to really emphasize that, because I think it's important that the message gets through.

We know there is unanimity amongst you to get rid of the ceiling permanently. That's the message I got—just to make sure I heard you right, lest there be any doubt. Of course, you and all the people in your provinces are also federal taxpayers. You feel you are representing your people, your taxpayers, as well as your provinces, in terms of recipients, in looking to remove that ceiling.

I heard from you a rather compelling argument that the ceiling actually does not protect the federal government from huge spikes in any case. In that, I found a little bit of an ambiguity. You're saying the protection isn't even there to prevent the federal government from having large increases, and you base it on the fact that when the gross domestic product goes up, government revenues go up, so there is no danger to the federal government. It was an interesting concept, and I appreciate that you brought it forward.

I don't know if any of you want to comment on that, but with respect to equalization payments, what I'd like to know is... they've been one of my favourite topics since I've been on the finance committee, because of their huge implications across the country. They need to be done right, but there are huge problems with them. None of you addressed that issue. Of course, that's not the purpose of the bill that we're on today, but as you pointed out, projecting potential revenues based on five standard provinces—Alberta being excluded—seems to be an archaic system and one that should really be totally reworked.

I have a double question, and I'd like you all to answer briefly, if you could. Would you like to actually have a major effort on the part of the federal government to rework the formula for equalization? Subsequent to that or included in that, would you rather have it based on an actual cost instead of an estimate of projected revenue, and should it be based on a per capita basis instead of the formula now?

When I look at the numbers, I notice that, per capita, there is quite a disparity in the amounts that provinces receive. In other words, for the receiving provinces, there's quite a disparity per capita. I would think those of you on the lower end of it should be offended by it, and those who are on the higher end of the per capita increase would probably, in the feeling of Canadian generosity, want to have it equalized, or at least closer per capita.

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So that's a very broad-ranging question, and I'll now give you an opportunity to respond.

Ms. Joan Marie Aylward: I have a couple of comments.

You mentioned the spikes and the protection for the federal government. I think that protection for the federal government was made when it moved from a ten-province standard to a five-province standard, removing provinces like Alberta. So that protection of the fluctuation was made possible when it moved to a five-province standard.

On equalization, I'd like to make a couple of comments, because I know we're here to make a point. I think it's important that, from the perspective of a province like mine, equalization is a critical program. We need equalization, and we will need equalization for a long time to come.

Just to give you an idea, for us to generate enough revenue, we would need to have a Hibernia come on stream every two years for twelve years. Basically, that's what we would need to ever get off the equalization program. That would mean one oil production flowing in one year and phasing out the next year, and then another one phasing in. So the future for the equalization program, for us, as I've pointed out, is a long one. We know that even in our best-case scenario, we will need it for quite a period of time.

But as to whether it would be totally reopened, I'm somewhat concerned. I'm concerned because I hear some of my own colleagues from the west sometimes talk about what's happening with respect to contributing more to to the equalization program. I think, as my colleague Pat mentioned, we were very sympathetic when we talked about the CHST on a per capita basis because more people obviously would require more care and their demands are growing, but quite frankly, it's all relative.

The first speaker talked about the debt and that the federal government has a much greater debt. Our debt load is three times what we spend every year, in terms of our debt load being $10 billion and our spending about $3.6 billion to $3.7 billion. So on average, that might be true, but specifically, I think it's quite a different picture.

So would we like to see the equalization completely revamped? It worries me somewhat what the outcome would be. Culturally, I think it would worry me to think what may happen.

It's an important program. It's one we're all appreciative of, particularly a recipient province, but it's one that we believe, in the particular issue here, goes against the whole intent and the whole cultural piece of what the Constitution says the equalization program is meant to do with respect to the ceiling.

I think the disparity you spoke to is another important issue, but the disparity speaks more to the fiscal capacity of various provinces. Geographically, we'd all love to be sitting where Alberta is sitting, on such wealth. We spoke at breakfast today about the increased spending in Alberta and what that will do for many of us in the other provinces when we're all trying to find ways to meet our growing demands, in health particularly because we have more of an aging population. We have the out-migration issue more so in Atlantic Canada. We are dealing with all those issues in spades, so to speak.

So for the purpose and intent today, as I said, I listened with some concern when some of the previous speakers talked about the “welfare trap” association with equalization, and that concept worries me a lot. If officials and other provinces think equalization is a form of welfare trap, a form of program that would be a disincentive for program growth or for a province to grow its own economy, that would be a worrisome precedent to have in a look at an equalization program. I would be quite concerned about that.

Again, I want to finish by saying that the ceiling will have a very restricted impact on our province. While CHST increases have been minimal, we've certainly spent every penny of it, and we need more. While it is new money, if you want to look back far enough it's still less money than what we had originally intended to receive.

Equalization is an excellent program, but we need to continue to change it so that it truly meets the needs and provides reasonable and comparable services across the county.

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The Chair: Thank you, Minister.

Mr. Ken Epp: Okay. I would like to follow up, though.

It seems to me quite evident that on the cost of delivering services—and I would even go beyond health care and education, but I think those are two that are very specifically directly proportional to the population—to provide health care for 2,000 people costs twice as much as to provide it for 1,000... well, on a larger scale.

Ms. Joan Marie Aylward: That's not accurate.

Mr. Ken Epp: You would disagree with that.

Ms. Joan Marie Aylward: Eighty percent of your health care costs are spent in the last 20% of your life.

Mr. Ken Epp: But that's equal across the country.

Ms. Joan Marie Aylward: It is, but if you have a higher percentage of older people per capita, then your costs would be higher. Numbers really are not the issue.

Mr. Ken Epp: Okay, but that would be the same across the country.

Mr. Norman Betts: But let me make another point on this—

Mr. Ken Epp: I don't think we should be negotiating those details. When I look at the present formula and those 32 categories or whatever they have of potential revenue that could be raised, I remember that a couple of years ago, Manitoba took a hit of around $50 million on equalization because their people didn't buy enough lottery tickets. I think stuff like that is an improper basis for equalization. It should be based on the cost of providing the service.

In the larger community called Canada, I have no problem with saying that we need to put money into the pot to provide equal services in health care and education, economic infrastructure, and other areas, in order to make our community, Canada, a strong country in which people are treated equitably. That's fine, but it seems that our present formula is one that should be improved. I recognize your concerns if this means it's going to be rejigged and reduced, but if it's made more fair, and in cases where people are not getting enough it's actually increased, would you not be in favour of that?

The Chair: We should let Norman Betts respond.

Mr. Norman Betts: As a comment generally, first, on your reference to per capita, I'll give you an example.

We have about 760,000 people in New Brunswick, which is roughly the same population as the city of Calgary, and we're spread over a fairly huge geographic area. If we were to sit down with a clean piece of paper and design a health care system for the city of Calgary, we could probably put together a fairly neat and tidy little package. You can't do that in New Brunswick. Our ability to deliver services, given our population and our geographic spread, is certainly... So funding on a per capita basis is difficult for us.

It's a great place. We love it. I wouldn't want to live anywhere else. But it's an inefficient place to deliver services because of that. That's true whether we're talking about roads or anything else. We have more roads per capita in New Brunswick than any province in Canada. We have more bridges in real numbers than any province in Canada. That's not a criticism; that's a fact.

So we have to be careful with per capita funding, and we accepted that on CHST, but the equalization program is designed to be driven by how we perform in relation to everybody else. Certainly, at another time we'd love to have the discussion on revenue coverage and the standard and those issues, but that's not what we're here for today.

But on those 30 or so revenue items, New Brunswick is a net contributor to the equalization program on some of those revenue items, be it potash, forestry, or base metals. We're contributors to the program. So it's designed as a program to level the playing field.

Premier Lord in New Brunswick says all the time—and Mr. Godin can certainly relate to this—that New Brunswick will be strong when the regions of New Brunswick are strong. Canada will be strong when the regions of Canada are strong, and the equalization program is a fundamental, constitutionally entrenched program to do that.

Could it work better? Yes. The immediate issue is, given what's there now, its ability to work with whatever imperfections it may have is limited because of the existence of the cap, and that's what we're here for.

The Chair: Thank you very much, Minister.

Madame Picard.

[Translation]

Ms. Pauline Picard (Drummond, BQ): Mr. Chairman, I would like to apologize to today's witnesses for my late arrival. Since I missed most of the presentations, I will defer to Mr. Godin. I would, however, like them to know that I understand their concerns. I also know that since the Canada Health and Social Transfer was cut in 1994, the needs of the provinces have continued to grow and that you have had to carefully manage your funds. I have great admiration for the job you are doing.

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With your permission, Mr. Chairman, I will turn the floor over to Mr. Godin.

The Chair: Mr. Godin.

Mr. Yvon Godin (Acadie—Bathurst, NDP): Thank you to my colleague from the Bloc and thank you as well, Mr. Chairman.

I'd like to welcome our witnesses who represent the Finance Departments of the Atlantic provinces. I appreciate your coming here today to Ottawa to voice your demands which I feel are long overdue. Since I only have five minutes, I will try to share with you briefly my slant on things and then get your response.

All provinces were at the table in 1982 when the Constitution was patriated. A vote was held in every province and the Constitution cannot be amended without the consent of all the provinces.

This brings me to the following question: Have you ever considered taking the federal government to court over its failure to uphold the Constitution? Have the Atlantic provinces, and maybe even Manitoba, if it's part of the equalization program, ever thought about taking the government to court over this issue? Perhaps that wouldn't be necessary if an election were held every year since the federal government increased funding for 1999-2000 when it called the election. It was a good pre-election announcement, but things went no further than that.

I would like to take this opportunity to comment briefly on the economic problems of the Atlantic provinces. They are not alone in experiencing economic woes. All provinces are feeling the effects of cuts. Let's look at the connection. According to Statistics Canada, cuts to employment insurance total $278 million a year for New Brunswick alone. Acadie-Bathurst has lost $69 million in EI benefits, money that is no longer flowing into the province. I know that Prince Edward Island and Newfoundland could also produce their own figures. Record sums of money have been lost because money is no longer flowing into these provinces.

Here is how the EI program works. As the economy improves, the number of weeks of benefit entitlement drops. If the unemployment rate in Acadie-Bathurst is 18 per cent, recipients are entitled to 32 weeks of employment insurance. When the rate drops below 13 per cent, recipients are entitled to approximately 24 weeks of benefits. Each time the economy improves, recipients are penalized. In my view, this system is out of whack

I'm hearing the same thing here today about equalization payments. If the economy improves, a penalty of sorts is imposed. This is unfair, in my view. The system does not encourage people to work hard and improve themselves because each time they do, they are penalized. The opposite should happen. If the economy improves and transfers increase because people have worked hard to achieve these gains, then we should see better results.

I'd also like to say that other provinces in Canada need to recognize that New Brunswick, Nova Scotia, Newfoundland and Prince Edward Island provide children with an education and once they have completed their education, these young people head off to work in Alberta or in Toronto. The other provinces reap the benefits of an education that we paid for.

I believe it was either the PEI minister or Mr. Betts from New Brunswick who said that it was far more expensive for us to have hospitals across the province, given the population of 670,000. We mustn't forget either that the average age of citizens is higher. All of our young people are attending university out of province and they are not returning to Atlantic Canada. They look for jobs elsewhere because the economy is healthier and because their chances of finding employment are greater. The average age of the population is higher and health care costs are higher as well.

I realize that I've thrown a lot of statistics at you. I would appreciate some answers to these questions, even if the provinces are willing to take on the federal government. If we want a united country, we must work together and be willing to share. It's sort of like a family: if a parent is unwilling to share with one child who has a problem, then it can destroy a family. If we want unity to prevail in this country, we must be willing to share. Would you care to respond to my comments?

Thank you.

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[English]

The Chair: There's no question there. That was a comment, right?

Mr. Yvon Godin: No, it was a question. I said, are they ever taught to go in court?

The Chair: Oh, yes, that's right.

Mr. Yvon Godin: That's a question.

The Chair: That was the beginning of your speech, that's right.

Mr. Yvon Godin: That's a question. And the second question I had was, is it not true that here in our province we bring people to school, teach them, and they go away?

I think, Mr. Chairman, to be polite, I have many questions that I raise with lots of comments, but at the end, if you listen to my comments, there's always a question. Thank you.

Ms. Patricia Mella: In reference to whether we want to take the federal government to court, I think we'd like to convince the federal government that there is a way to fix it. The courts would not be my first choice of an avenue to make change. I really don't think that has to happen, and there are enough good, strong, logical reasons for the federal government to reassess Bill C-18, so that it does address some of the concerns we brought up.

I'm also really not in favour of having a review of the whole program—it's a good program. I was in Ireland two or three years ago, when there was some discussion among EU members on any number of programs they're trying to devise. The Canadian equalization program is the envy of the world, if it is allowed to work. It has been, and it has helped with the disparities. Because P.E.I. gets equalization, that doesn't mean we're not getting stronger. We're not sitting back saying, send us the federal cheque and we'll do nothing else. We have all kinds of evidence that our economy is growing stronger. We are spending more of our own-source revenues to provide our own services—that's our objective. So it's not a disincentive; it is an equalizer, a chance for Canadians to have comparable levels.

We're not close in taxation. Ontario has 40% personal income tax, something like that, P.E.I. is 57.5%—Alberta, I don't know if they have personal income tax. But you have to say that line with a smile, “comparable levels of taxation”. Being the finance minister, I feel I'm doing my best to move things down, but the chances of moving down to the level of some of the provinces... We don't begrudge any of these provinces the ability to do this. Their economies are growing, they're contributing to the country. This is good for everybody. But we think equalization is good for them, too. We don't think we want a country that has two classes of citizens. We want a country that at least has a chance to have comparable services, and the equalization program can do that. It has helped significantly over the years. It's been misinterpreted by many people, but those of us who are on the inside and see this working know that it's working and working well.

I could talk about EI, but I don't want to. I'm not here to talk about EI. We have all kinds of problems with people who are unemployed, only work 14 weeks a year, and all of that. We're here to talk about this particular bill, which is going to go onto the floor of the House, and members in there are going to either vote it in or amend it. We want you people to recommend that it be amended, that the $10 billion limit...

You can get up and thank the Prime Minister and the finance minister for lifting the ceiling. The more praise they get for it, the more I like it—and I'm not Liberal. I think it's a great idea to say thanks when you know you have something good. But we don't want to come back every year begging for somebody to change it. The $10 billion is going to cut into our entitlements, as we sit here. We know that. It's not something that might hit. We know it's going to cut entitlements. This is our health, this is our education, and this is our roads, and if that money is cut there's only one logical outcome: the provinces that have enough money and are not recipients will grow, and those who don't will decline, and the gap will widen. It's really simple. It's not complicated.

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As to whether the federal government can afford to do this—they don't have to worry. This chart shows equalization declining as a percentage of federal revenues. When the economy goes down in this country, this formula is devised to go down. It goes down if the economy goes down. But when the economy goes up, somebody has decided it shouldn't go up. What kind of a system is that?

It's supposed to work the way it was designed, and the ceiling is really the key to where this program is going to fall apart. Then we're going to have discussions on all kinds of reasons why we should bring in an Atlantic program and a western program. We'll be talking about these “bouquet programs”, or whatever you call them.

This is the best equalizer, and it has worked well up until now. But if the ceiling is going to be left on there until 2004—we're not just talking about this year—my province would lose $9 million this year. I'm wondering what we're going to lose in 2004. We could lose many millions.

You think you know what your economy is going to be like in 2004—but I'll tell you right away, I'm not too sure about mine. We have potato wart and a few other things on our table. So we don't know what our economy is going to be like.

But we do know that when I put equalization into the budget, it's going to be lower, not higher. That is a contradiction to the way this formula was designed.

I don't want to talk about legal arguments, because I don't think that's the way those of us who have been in politics for a long time have tried to resolve these things. We're not asking for something unreasonable. We're not asking for money the federal government doesn't have.

If that $12-billion surplus, or whatever, goes down, this formula will go down; it will be reduced, and we will get less. That's not a problem. We'll know why we got less, because the economy went down. But for somebody in Ottawa to say, “You can be equal up to this line; but I'm sorry, that's the end of it, you're not going to be equal after that”—that is the problem. From my perspective, that is the only issue that should be addressed as we sit here.

Mr. Norman Betts: Just a brief comment, if I may, in response to Mr. Godin—and I think my colleague Minister Mella has expressed it very eloquently. I think she's captured it.

But as to whether we would consider going to court on this, the short answer is no. I understand previous governments in New Brunswick have explored that avenue, but we would prefer to do it in forums like this, where we can negotiate. We'd rather do it by negotiation.

To summarize what Pat said, I recognize, Mr. Godin, that you represent the Acadian Peninsula; and Elsie, I'm sure you're familiar with the phrase from fishing communities, “All boats rise on a rising tide”. Well, that's what the equalization formula is designed to do. When the tide of Canada's prosperity goes up, the program is designed to ensure that everybody goes up. Likewise, when the tide goes down, the equalization formula works that way as well.

To follow through on that analogy, what the cap does is if you have a rising tide and some boats are going up and some boats are not going up... if your boat is not going up on a rising tide, you know what's happening: you're sinking. That's the philosophy. It's entrenched in the Constitution; that's how this country was designed. The cap hinders the system from working the way it's supposed to.

That's the fundamental principle. We can work out the mechanics, but that's the principle you people should all consider before you vote on this bill.

The Chair: Thank you, Ministers. Thank you, Mr. Godin.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.

Thanks to each of you for your presentations today. As an Atlantic Canadian member of this committee, I'm proud that this kind of forum has enabled us to hear directly from our finance representatives in Atlantic Canada.

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I'm awfully pleased to hear such a focus on the tax side, because I have a huge concern about ghettoization of economic opportunity. It's based on the ability of some provinces to have aggressive, even predatory, tax policies, while other provinces, in less fiscally strong positions, are forced to maintain levels of taxation that, particularly in the new economy, deny them opportunities for growth. If you look across Canada, you see that.

Really, a cornerstone of equalization is the notion of equal opportunity and equal access to the levers of economic growth. All Atlantic Canadians want is to sit at the same table as the rest of Canadians and to enjoy some levels of economic growth. So I was glad to hear that focus on tax.

The example of Ireland was largely a tax-driven strategy, as well as an investment in post-secondary education. But Ireland used those transfers from the EU to reduce taxes significantly and to create an environment in which there was a 92% growth in GDP per capita over 10 years. I think those sorts of examples can help to strengthen the case.

One question I would like to ask is whether or not Atlantic Canadian governments would consider some level of conditionality on equalization—particularly relative to debt and tax issues. It may make the case a little more saleable to the federal government if there was a commitment to reducing debt and taxes.

Fundamentally, though, I'd like some feedback on whether or not our economic development strategy should be revamped in lock step with equalization. These economic development programs seem to be dropped on Atlantic Canada without much consultation, and they may or may not be effective. Perhaps in the long term, we should have some integration between the economic development strategies and equalization.

Those are my first questions, and I have a couple more.

Ms. Joan Marie Aylward: If you're comparing economies, I think it's important to note, for example, that Newfoundland is at 69% of GNP. That will give you an idea of where we are and how far we have to go.

In terms of debt, we put about 15¢ of every dollar towards our debt. So we're very conscious of it, and we know that as long as we have it, we'll never fully grow.

The tax burden is very important to us all. You're right, I think, that the higher our taxes remain, the less likely people will be to come and set up businesses. We all know that businesses don't knock on your door any more. You have to be very aggressive to attract business and compete with other markets. Many of us here are competing with each other, as well as the U.S., to try to get business into Atlantic Canada. So the tax base issue is a very important one.

In terms of fiscal capacity and disparities, I think we're all very committed to trying to do something. We've had some good discussions among ourselves on how we can work together as a region to improve our lot—all the things many of you have commented on, such as attracting business, improving infrastructure, or addressing health care needs.

So we are talking about that from an Atlantic perspective, in conjunction with other programs. That's something we finance ministers are working on with our premiers. We've also had some preliminary discussion with the federal minister as well.

Mr. Norman Betts: Mr. Brison, I appreciate your question. I'm now even more pleased that I circulated the little card detailing section 36 of the Constitution. There are clearly two sections in section 36. Subsection 36(1) deals with the commitment to reduce regional disparities and 36(2) relates specifically to equalization.

In 36(2), the tax issue means we not only have to deliver comparable levels of services, but at comparable levels of taxation.

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The way I think of these two sections is that subsection 36(2), on equalization, is there to allow the provinces to keep up. Subsection 36(1) is there to entrench the provinces' efforts to catch up in the Constitution. You can't keep up if the program designed to allow you to isn't working the way it should. That's why we're here—to express to you the severity of the fact that the cap does not allow the equalization program to work the way it should.

Sure, we can be creative with the issues; we'll certainly do that. But they have to be parallel tracks. We have to work to catch up, and at the same time we need the equalization program doing what it's intended to do, to allow us to keep up.

The Chair: We'll just give one brief question to Ms. Guarnieri. Then we'll have to wrap up, because the transport committee is coming in.

Ms. Albina Guarnieri (Mississauga East, Lib.): Thank you.

Welcome. I certainly hope you continue to view Ottawa as the city of brotherly fiscal arrangements. Don't take Mr. Godin up on his suggestion.

One of the earlier presenters lamented the ballooning debt and deficit and the need for fiscal restraint. Ontario is certainly setting the stage for a new round of cost-cutting. We've suddenly been reintroduced to the notion of restraint.

What message have you been sending to the marketplace, and to your consumers and taxpayers, about what they can expect in the upcoming budgets during this period of slow growth?

Ms. Patricia Mella: In the case of Prince Edward Island, we've been very conscious of the fact that we have relatively high taxation. We had to do something about it, so we've had four tax reductions in the last four budgets. With the exception of the present year—because of the potato wart crisis, which we weren't expecting—we've had balanced budgets.

We have reduced the provincial debt. We have a debt restructuring program under way at the present time, and we project growth in the province for the coming year to be somewhere between 1.5% and 2.5%. That's our best estimate—assuming, of course, that the potato issue is resolved, because that's really a major factor.

We have those commitments to try to live within our means and reduce the tax burden, so we can attract industry. It seems to be working. We've been upgraded by the bond raters, and as a result we've had some increased investment in the province, which, again, means that more and more we'll have our own source revenues to replace equalization dollars.

That's certainly the objective. We're not looking to hold on to a program that ignores growth. We know that once our revenues grow, then the equalization dollars decline. That's the way the program was designed, and that's the way we feel it should work—and up until this point it has.

The only wild card here is the cap; putting that on distorts the whole program. We're going to have a serious problem until 2004, when the program is reviewed again for the five years.

Ms. Albina Guarnieri: Are you anticipating a slowness of revenue growth? Quite simply, my point is that if governments—with their finance departments and their fleets of economists and advisers—are rethinking their budgets, average consumers would obviously follow suit and rethink their household expenditures. It's consumer confidence that concerns me.

Ms. Patricia Mella: I would say we still anticipate some growth at this point. I don't think there are any signs that this is an issue. We've already delivered the budgets, and we've got the numbers we project are going to result in increased revenues of between 1.5% and 2.5% for the coming year.

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Things are looking reasonably good, but we have to make sure we can count on the revenues foreseen in the budget actually coming in. One of the line items in the budget is the one we're talking about here. It's the one that's going to be a problem because we already know, as I sit here, there's going to be $9 million less in it than there should have been because of the cap.

Ms. Albina Guarnieri: Would any of the other provinces like to...

Mr. Norman Betts: If I may, I'll make a quick comment. I've brought down two budgets in the province of New Brunswick since we formed the government. In our first budget, we reduced spending by $100 million. That's the only province in Canada to do that, to make a $100 million reduction in spending, not a reduction in the growth of spending. I don't want to suggest it was easy, but what we have—and your question is a good one...

I'd refer you to a paper we as finance ministers unanimously agreed to, one that discusses the fiscal imbalance in the federation. Our challenge—and the challenge for all of us as we go forward—is that our revenue lines aren't growing as fast as our expenditure lines. You don't have to be an economist to know that if that revenue line slope does not climb as high as the expenditure line slope, you're back into red ink once they cross. Health care is a provincial responsibility, and that's a real challenge.

If you look at what this paper details for you—and I'd encourage you to review it again—you'll see that the opposite is true at the federal level. There the revenue lines are growing at a much steeper rate than the expenditure lines because the expenditures that are constitutionally mandated to be delivered by the federal government aren't experiencing the same rate of growth we are at the provincial level, notably in health care.

The issue we're dealing with here, the levelling program, the equalization program, and the existence of a cap just distort that fiscal imbalance all the more. I'd address your question in that context.

Ms. Albina Guarnieri: Thank you for your insights. We'll be scanning the news for your economic statement.

The Chair: Ms. Aylward, do you have a final comment?

Ms. Joan Marie Aylward: Yes, thank you very much.

I'd just like to respond to your comment as well. You started off talking about Ontario and what was happening in Ontario. In fact, the Ontario economy has been burgeoning over the last 10 years, and right now I know they're looking at things very differently.

In Newfoundland for the last 11 years we've been under constraints. In fact, it's become a dirty word because we've been under constraints so long, and there was an expectation we should be growing. It's very difficult to go back and reinforce that issue, almost reintroducing it, when you've been talking about it for 11 years and have had to do a lot of things to maintain fiscal prudence. However, we've also seen modest growth in our revenues, and our predictions are very positive.

I'll conclude by saying that today I want to take this opportunity to thank the committee for hearing these views. I hope you can appreciate the significance of the imposition of the cap on our overall revenues and what it means for our service delivery.

Thank you very much.

The Chair: Thank you very much.

On behalf of the committee, I would like to express to you our sincerest gratitude for your input. You've given us material and a presentation that are comprehensive and that we'll be reviewing as we of course review the bill. Thanks again.

I also want to thank the chairman of the transport committee for being so kind as to give us some extra time.

The meeting is adjourned.