FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, March 2, 1999

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[English]

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

As you know, the orders of the day are in accordance with the order of reference of the House of Commons on Monday, February 15, 1999, that the committee resume its study of Bill C-65, an act to amend the Federal-Provincial Fiscal Arrangements Act.

We have the pleasure to have with us, from the Department of Economics at the University of Alberta, Professor Paul Boothe, and, from the Canadian Tax Foundation, David Perry, Senior Research Associate. Welcome.

You know how this committee operates. You have approximately ten minutes to make your presentation, and thereafter we will engage in a question and answer session.

We will begin with Professor Boothe followed by Mr. Perry. Welcome.

Professor Paul Boothe (Department of Economics, University of Alberta): Thanks, Mr. Chairman, and thank you for inviting me.

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Although I have been generally supportive of the government's fiscal direction over the past five or so years, those of you who know my work, most recently my 1998 benefactors lecture for C.D. Howe, won't be surprised to hear that I'm disappointed with the proposed amendments to the current program. My disappointment stems from the fact that I think these amendments are really just tinkering and we're not getting at what I think are the fundamental problems of the program as it's currently structured.

Obviously, more complete discussion of my views is contained in my C.D. Howe monograph, but today I'd like to focus just on three things: transparency, accountability, and the process that is being used to renew the equalization program.

First of all, transparency. As a person who has just spent two weeks teaching this to my third-year economic students, I have to tell you that this program is pretty complicated, and I'm sure you know that by now. I don't think it needs to be. I would ask each member of the committee to stop and think for a minute and ask yourselves how this $9 billion plus a year is actually allocated, not the principal, but how it's actually allocated. If you can't do it—and I'd be surprised if all of you felt you could—and my third-year students can't do it, then you have to ask yourself, honestly, how can your constituents do it when they have to make an informed decision about this program and what the government's doing?

In my view, there's no reason why we couldn't use a very simple macro formula to achieve exactly the same end, the same redistribution we have now, and at the same time remove some of the incentives that provinces currently have to manipulate their tax structures in order to maximize the amount of equalization they get.

If it's difficult to say how the money is distributed, it's equally difficult to say who pays for it. Because it's a gross program rather than a net program, taxpayers in all the provinces pay in and then some receive. Thus for provinces who are receiving equalization, taxpayers first have to send money to Ottawa and then they get it back. In fact, although this program is going to cost in excess of $9 billion next year—in the coming year—only about $6 billion of that is actually going to be redistributed. The other $3 billion plus will just go to Ottawa and then go back to the province that sent it. Needless to say, it's going to be difficult for people in provinces receiving equalization, but also the other provinces, to know how the money is actually being shared, because it is so complicated.

A second problem that arises because this is a gross program is that it sometimes distributes the burden of paying for equalization in perverse ways. You've all heard about the upward revisions in entitlements that were discussed in the federal budget, and those are, in large measure, because of the booming economy in Ontario. What the budget did not say is that this boom also forces taxpayers in British Columbia to contribute more, even though their province is in a recession. If we had a net scheme rather than the current gross scheme, we could address this kind of problem.

Before I leave the issue of transparency, I want to add that I'm particularly unhappy with the way the proposed equalization changes and the changes in the CHST are being communicated to the public. All this talk of $700 million in equalization and $11.5 billion for health care might be an effective way to increase popularity, but the confusion it causes has some real effects, and I'll just give you an example from my province.

In Alberta right now, nurses are asking for two consecutive 10% raises. When they heard there were $11.5 billion new dollars for health care, they thought, great, this is exactly what we need. But of course, as you well know, the truth is that it's only $2.5 billion more, and Alberta's share is going to be something just over $200 million.

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This adding up of these things over a number of years, I believe, is not really positive for good public policy or for a well-informed electorate. If budgets are going to be annual events—and they are—we should adopt the convention that budget figures are expressed on an annual basis, and then everybody will be clear about what's going on.

Let me turn to the question of accountability. If people can't understand the program, they can't very well make informed judgments about it. So the lack of transparency I just talked about will naturally lead to problems of accountability, and of course when you have problems of accountability, our democracy doesn't work as well as it could.

Another accountability problem with equalization is that there's equalization taking place in a number of areas outside the formal equalization program. As you know, I'm sure, the most important example of that is the extra equalization that's in the CHST.

For example, for every dollar per capita sent to Alberta or Ontario to help fund health care, social assistance , and advanced education, the federal government will send about $1.11 to the Atlantic provinces and Quebec. This is because the CHST contains its own equalization program with its own rules that are different from the rules of the formal equalization program.

If we want the public to understand equalization, or understand the CHST, the purpose of these programs has to be made clear. Hiding equalization in the CHST, instead of putting it in the formal program you're considering now, simply makes politicians a bit less accountable, and again prevents our democracy from working as well as it could.

Finally, I want to say a few words about the process of renewing equalization. The draft legislation you're considering now is the product of a series of private meetings between government officials and between ministers of finance. Really, until this point, the public has had very little chance to learn about the issues or contribute their views.

The principle of equalization is, I think it's fair to say, one of the key elements of our federal system. Along with many Canadians, I certainly support it very strongly. But speaking honestly about it, we all know that the opportunity to make significant changes to deal with the program's serious problems has long since passed at this point.

I would have thought by now our political leaders would have learned from the experiences of the past—Meech Lake, Charlottetown, etc.—that these deals made in private rarely serve us well. Everything is fairly quiet on the equalization front now, but I predict that may change substantially after the general election in Ontario. We may come to regret that we didn't have an open and vigorous debate about the direction we want this program to take. I wonder if down the road we're going to wish we had taken this opportunity to address what I think are the serious problems of the program, rather than ignoring them, the way I think these proposed amendments do.

Thank you very much.

The Chairman: Thank you.

We'll now hear from Mr. Perry.

Mr. David Perry (Senior Research Associate, Canadian Tax Foundation): Thank you, Mr. Chairman. Thank you for the invitation. I think it was an invitation and not a summons.

The foundation doesn't take positions on major issues. Rather, we try to explain and provide background information. Rather than a lengthy presentation, I'll just chat for a couple of minutes and then I'll be glad to respond to your questions.

I'm old enough to remember when equalization began, and we have a lot of visitors who go through the Canadian Tax Foundation from other countries. They always look in amazement at our federal-provincial fiscal relations and the keystone of that, the equalization system. It's unique in federal systems. No one has that balance of provincial autonomy or independence that we have, coupled with a strong federal presence.

We don't have an emasculated federal government like Switzerland; nevertheless, we have much more participation from provincial governments than the Americans have, for example, with state governments.

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The trend in federal-provincial fiscal relations that also amazes a lot of federal experts from other countries is the decentralization, the devolution, the increasing importance of provincial governments and the changes in financing those provincial governments, particularly the change in federal transfers. I'm going back a number of years, as we switched from unconditional grants under tax rental agreements, through massive conditional grant programs—50¢ dollars—through to our present system with equalization, CHST, and the tax collection agreements.

What makes the devolution and decentralization we've seen so far possible, but makes it work well, is the fact that the poorer provinces are bolstered by the equalization system. The additional funds that come through the equalization system to the Atlantic provinces, Quebec, Manitoba, and Saskatchewan enable them to effectively do what the equalization program intended they should and provide a minimum level of services without resorting to an excessive level of taxation. Certainly, as I said, it's unique.

We have a comparable problem with the provinces and the local governments in Canada. If you look across the provinces at how each tries to cope with regional disparities and disparities in the wealth of governments, you see there's nothing like our equalization system at the local level. It usually involves a much stronger provincial presence—much more control over local governments than Ottawa has presumed to exert for a number of years.

The evolution of our federal system, as we move further in the direction we seem to be going, will depend even more on a strong equalization system. The increasing transfer of functions to the local level, the idea of federal transfers not being tied to specific provincial programs, and the deconditionalization of federal transfers generally remove the equalization element from the conditional grant programs, and you need something else in order to adjust for disparities in provincial revenues.

This is what's happening with the CHST at the moment. There is strong pressure to re-examine the structure of the CHST and who owns the tax points. Any changes in it that would lead to equal per capita cheques rather than equal per capita entitlements would increase the relative importance of equalization to the provinces.

I have a little trouble when I look at Bill C-65, as I've had with some of the other changes over the years, in determining the real importance of specific changes in the formulas. To really understand what's going on, you have to grind the numbers very carefully. This is a function of the Department of Finance, and I gather from the previous discussion the committee had with Finance that they provided some figures on the effect of the changes.

As the formula becomes more complex, it becomes much more difficult to appreciate the importance of the changes, who is going to benefit and who is out of favour at that time. That obviously brings up a weakness of the system that bothers Professor Boothe a great deal, and that's the inability to take a quick look and decide what is happening with changes in the formula; what the existing equalization system does. It's not a quick study. It's not an easy thing to appreciate.

I see a couple of weaknesses in the equalization system that haven't been raised much. One came out in the early 1990s when the representative five provinces in the equalization formula suffered during the recession, and in particular Ontario's reversal of growth had an impact on the equalization entitlements for the have-not provinces. Because of the way the payments are calculated and because of the length of time the accounts are held open, the retroactive adjustments can become quite significant and can certainly hit hard at a bad time.

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This problem of timing and finalization also applies to the stabilization provisions, which are unchanged in C-65, where it takes 30 months or more to close off the books on a stabilization claim and on equalization payments. After 30 months, the original problem may well have been resolved, and instead of being desperate for cash, the provinces in question now have sufficient cash. They needed it 30 months ago, just as the unemployed need money now, not when the income tax refund comes through. That problem of timing is still to be addressed, I think.

I'll close off very quickly by stressing the importance of the equalization formula. This set of changes is evolutionary. As Professor Boothe suggested, it's fine-tuning. I don't see that as a bad thing. I think the preservation of the system is important, and the fewer major shocks we provide to the system, the more smoothly it will carry on.

I look forward to your questions.

The Chairman: Thank you.

We'll begin our question-and-answer session with Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman, and welcome to both our witnesses.

My question for Dr. Boothe has to do with his comments about the ability of the recipient provinces perhaps to manipulate the formula in order to receive more. I wonder if you could explain how that would happen. Of course, the follow-up to that would be, what's the alternative? What's the best way to deliver funds to the recipient provinces that's transparent and easy to understand so that we can take a quick look and understand what's going on?

Prof. Paul Boothe: First of all, I want to be clear that I don't think the best way to say this is that recipient provinces can manipulate the formula, because they can't. It's a federal program. The federal government sets the formula and the provinces live with it.

Basically, what recipient provinces can do, and what I think they should do if they're acting in the interests of their provincial voters, is look at the equalization formula and say, how can we organize our tax system in a way that maximizes the amount of equalization we receive? That's fair enough. They're responding rationally and in the interests of the people of their province to the program as it is written.

In terms of dealing with that, I've suggested in my recent work for the C.D. Howe Institute something that is not, as David said, an evolutionary change but a pretty radical change, I admit, and that is going to a macro formula. If you base equalization on something that's important for a province—for example, the per capita personal income, something like that—it moves up and down in the way we want it to, but it's beyond the direct control of provincial governments. That might be one way to go. Certainly, once the formula is set, provincial governments can't manipulate it, but it's in their interest—and I believe they very sensibly act this way—to look at how they can organize their own tax systems to maximize equalization.

The Chairman: Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): I find your presentation to be very interesting, particularly with regard to the complexity of it. It may interest you to know that when we had the departmental officials before this committee, one of the questions asked was, how many people in Canada understand the formula? One of the officials looked to his left and his right, counted the four other people who were with him, and said five.

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Prof. Paul Boothe: Both David and I understand the formula.

Mr. Ken Epp: And some of them shook their head.

I have some questions. When it comes to equalization, is it your understanding—and I'd like both of you to answer—that the purpose is to provide relatively equal government services to its citizens in the various provinces?

Prof. Paul Boothe: The purpose is clearly laid out not just in the legislation for the program but also in the Constitution. Basically, what we want to do with equalization is allow people in different provinces to have comparable levels of service without having widely varying levels of taxation. So that's the basic idea of equalization.

Mr. Ken Epp: Does the present system deliver that?

Prof. Paul Boothe: That's a hard one to answer.

David wants to answer that. What do you think, David?

Mr. David Perry: It may be the best way of doing it, because the alternative to providing revenue for the provision of equal services is either to provide the services at the federal level, thus ensuring equality across the country, or to legislate for uniform standards across the country. Neither of those two sort of centralist positions have been popular in Canada for the last 75 years at least, with the possible exception of the post-war period. You can see that when it comes to hospital insurance, medicare, and social programs, as well as a lot of the small programs, such as national highways, 4-H programs, and whatever sort of conditional grants you want, you start off with the federal government funding on a 50-50 basis usually a program with uniform standards across the country.

That becomes less and less appropriate as the provinces wish to assert their own standards and to take a lead in certain areas, and the federal government begins to withdraw. When it withdraws the direct funding, it also usually withdraws the control over program standards. So as a federal legislator, in many cases the only way you have of enforcing national standards is simply to make money available.

Mr. Ken Epp: That's the only legal way they have of doing it, and even that's questionable legally.

Prof. Paul Boothe: I want to thank David for giving me some time to think. That's what I keep telling my students: think, then talk.

What I would say is that the current program certainly does give provinces the ability to deliver comparable programs at a much more comparable level of taxation. I would not go so far as to say that this is either the only way to give provinces that capacity or, technically speaking, the best way. However, I want to be clear about my support for equalization. I can't imagine a Canada that didn't have this kind of system. It is really one of the foundations of our federal system.

The issue is not whether we should have equalization but rather what's the best way to do it.

Mr. Ken Epp: I have a really specific question for you, Dr. Boothe. You mentioned several times the words “per capita”. When you did that, it occurred to me that when it comes to things such as delivering health care and delivering education, that is very close to being proportional to the population of a province. If there's greater distance, then perhaps you have fewer facilities and you have added transportation costs. So the per capita cost, I think, would correlate very closely. Would you suggest that the Government of Canada should perhaps collect taxes from individual citizens in income taxes and corporate taxes and have as a component of that an equalization that is just delivered equally to the provinces in proportion to their population? Are you suggesting that, or do you have other mitigating circumstances that would adjust these numbers up and down a bit?

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For example, it costs way more to build a mile of road in British Columbia, generally, than it does in Saskatchewan. It probably costs more to provide education in the Northwest Territories than it does in Manitoba, because the bulk of their population is right around Winnipeg. So you have these different costs. Would you factor that in or would you just go straight in proportion to the population?

Prof. Paul Boothe: I think there are two issues here. First of all, delivering equalization payments on a per capita basis defeats the purpose of equalization. Equalization isn't about how many people you have; it's about the fiscal capacity or your ability to raise taxes. The fact that Albertans are net contributors and people in Atlantic Canada are net recipients from equalization really comes from the fact that the Alberta government has access to more tax revenue than governments in Atlantic Canada, for example. So that part I would certainly not agree with.

The other part, though, is this question of do we factor need into equalization. Of course, in some other jurisdictions—Australia, for example—they spend a lot of time trying to work out the needs of the various states, and they also try to work out needs in Germany. But surprisingly, they have exactly different approaches. In Australia you'd say that need is related to the sparsity of the population, which is the point you were making, whereas in Germany, in contrast, need is determined by how congested the population is. So what they do in Germany is that the länder, states, that are very densely populated get extra money because of that. In Australia, sparsely populated states get more money because of that.

The argument that's been made by Tom Courchene, which I think is persuasive to me, is that when it comes down to it most of the cost of providing government services is salaries. So if you were going to use need as the basis for calculating equalization payments, you would have to give more to the places where the salaries are the highest. The salaries in places like B.C. and Ontario are generally higher than they are in a lot of the provinces that receive equalization.

So although sometimes people say that if we use this needs approach it would result in more equalization to the provinces that currently get it, if we really take into account the impact of salaries, the biggest component of government spending, I think it would go the other way. So generally I'm not in favour of trying to get into this game of figuring out needs.

The Chairman: Thank you, Mr. Boothe. Thank you, Mr. Epp.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman. Thank you, witnesses, for your presentations this morning.

You mentioned, Dr. Boothe, the incentives for provinces to maximize equalization by manipulating their tax system. Would I be correct in assuming as well that there are incentives for a province to manipulate its industrial strategy as well and to maximize equalization? In fact, that may represent a perversity of the system. I would appreciate your feedback on that.

Prof. Paul Boothe: I think there are some incentives in that direction. This is the so-called tax-back problem that I'm sure you've heard about. That is, if a province that receives equalization increases or makes an investment to try to increase economic activity and therefore tax revenue in their province, they're going to lose some of that tax revenue because their equalization will go down.

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Right now we have an ad hoc solution to this and it is that we fix an arbitrary figure, 70%, and we say we're going to try to mitigate that tax-back up to the extent of this arbitrarily set amount. This is another kind of unintended consequence of a program that's so complicated, and of course what we end up doing then is we have that problem, we try to have an arbitrary solution to it, and then if we think we're discouraging investment and economic activity in, let's say, Nova Scotia or New Brunswick, the other thing we do is the federal government makes direct payments to try to increase activity in those provinces. So we're making a second federal payment to try to undo or mitigate the effect of the first federal payment.

Mr. Scott Brison: Would you agree that there are also disincentives for provinces, for instance, Nova Scotia and Newfoundland, which currently have opportunities in terms of natural resources wealth and petroleum wealth, to pursue value-added policies to maximize that wealth? Some arguments have been made that there are disincentives for provinces like Newfoundland and Nova Scotia to actually pursue what would be rational resource management and value-added resource management because of equalization. If in fact the goal of equalization is to provide equality of opportunity, as a tenet or as a part of equalization, there should be a recognition that if in fact there's a perverse effect of when provinces make rational responses to irrational policy and do not pursue opportunities that actually can help boot strap them to sufficiency or self-sufficiency.... Do you see those disincentives in the current formula?

Prof. Paul Boothe: These are exactly the kinds of disincentives that the current ad hoc solution is trying to address, but I go back again to my point that a much simpler formula, a macro formula, might help us deal with those kinds of issues, at least to some extent. That's why I wish we could, as we're renewing this program for another five years, have a discussion about these—less evolutionary changes, more radical changes. We should at least have a discussion about them so that we can weigh the pros and cons and try to decide whether this will help to deal with those kinds of problems.

Mr. Scott Brison: I really would like to focus, and either of you could assist me in this, on direct disincentives to provinces to pursue value-added resource policies. That is a case that was made to me recently relative to both Nova Scotia and Newfoundland, and I'd like to ask you if you are familiar with specific elements of equalization that would discourage what would be seen as a rational industrial strategy for those provinces? Could you explain the unintended consequences of equalization in that light?

Mr. David Perry: At the beginning, I would be hesitant to say too much without resorting to spreadsheets and all sorts of modelling, because you worry a little bit that the effects of the development may far outweigh the changes in equalization system that follow. The development of an iron-ore processing facility in Newfoundland and Labrador, just to be hypothetical, may produce so much more economic activity and tax revenue within the province that the specific effects in the area of mining equalization entitlements may not be the overriding factor. Having said that, the other question is how large the activities are that you're contemplating changing in a particular province relative to the national average or the representative five-province average. How much are you going to affect provincial totals, national totals, average rates of tax, and so on, by the changes you make? Again, the changes may not be that great.

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One of the classic examples of a province having an effect on its own equalization system was when Quebec had a strike of the liquor stores that lasted a long time. I told Paul I wouldn't mention this, but.... Quebec was a large enough component within the formula and changed the averages sufficiently to increase the equalization with respect to revenue from liquor sales to come a long way to financing the cost of the strike as far as the Quebec government was concerned. So in that situation where you have a large hunk of the country and you have big parts of the equation for that particular formula, then you can make a difference by what happens in a particular province. But if you're looking at Newfoundland, Prince Edward Island, Nova Scotia, or New Brunswick, which are the four key provinces for equalization in terms of relative importance, then I wonder, without looking at specific examples, whether you can make too much of a generalization about the importance of weighting or fiddling with the equalization formula—and I use fiddling advisedly.

The Chairman: Thank you.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

I have perhaps a point of clarification and then a question for Dr. Boothe.

When you talked about the manipulation that provincial governments might engage in to increase their equalization, a theme that was picked up by members opposite, I wanted to make sure I understood something clearly. My understanding of the legislation is that it measures the revenue-raising capacity of provinces. So the program would look at tobacco sales, gasoline sales, and corporate profits, rather than the tax revenues received by those provinces that may be coming from those streams. So if a province decided to have no corporate tax, for instance, that would impact the equalization they would receive because the formula looks at the corporate profits in that province. When they take the average corporate tax across the country, they apply that formula. Then you have the revenue-raising capacity in that particular tax base for that province. Am I correct in that?

Prof. Paul Boothe: I think so.

Can I make two points to try to make sure we agree on this?

First of all, the equalization formula has two rates applied in it. One is going to be the five-province standard. Changes in tax rates among provinces will only affect the five-province standard if you're one of the five provinces. So Alberta changing its tax rates doesn't affect the five-province standard because Alberta is not in the standard.

But the other thing is that what you want to do is compare essentially the fiscal capacities of all the provinces, whether they're in the standard or not and whether for each individual tax base they're above or below what their tax base times their five-province standard tax rate would give them in tax. So you're right. It's not their individual tax that affects their equalization. It's their base times the average tax of the five provinces.

Mr. Tony Valeri: So for a province that receives equalization today, if they decided to manipulate their tax system by saying they were going to have zero corporate tax in their province because they want to receive more equalization, that's not true. That would not impact them, because if they have corporate profits in their province and you apply the formula, then you are assessing their capacity to raise revenue through corporate taxes.

Prof. Paul Boothe: I don't think that's quite right, because if they're one of the five provinces then it will affect the five-province standard.

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Mr. Tony Valeri: Okay. But it wouldn't affect it significantly, to the point where you would see huge changes in the amount of equalization received. You would have to have all provinces make that change.

Prof. Paul Boothe: A province's ability to affect the five-province standard is certainly related to the size of the province.

Mr. Tony Valeri: Okay. I'm not quite sure whether I'm clear on that point yet, but the other aspect I'd like to address is this.

Mr. Perry, Dr. Boothe speaks of the macro approach to equalization. Can I get your thoughts on that? Is the macro approach going to achieve the objectives laid out by the equalization program, or are we replacing one system with another? We all know around this table that this is a work in progress. I take your point that discussions need to take place, and they are taking place, between the provinces and the federal government. Perhaps this committee should be more involved in those discussions as we go forward.

I'm not sure every Canadian really walks around wondering and wanting to know exactly what the equalization formula is all about. It's not the first top-of-mind issue that comes to them. So I'm not concerned, as Mr. Epp is, whether more than five people in this country understand equalization. I'm interested in the outcome, and I'm interested in the fact that, however equalization looks, in fact it is delivering what it's intended to do, and that's to provide a comparable level of services across the country without having to raise taxes to a point where it wouldn't be feasible to do so.

So, Mr. Perry, perhaps you could speak to the macro approach versus the representative tax approach we're dealing with now.

Mr. David Perry: We had a macro system prior to 1957 where, as part of the federal rental of provincial personal and corporate and succession duty tax fields, the federal government provided payments to the provinces based on per capita GDP growth. This was a national rather than a regional thing.

I can remember, when I started to work for the Ontario government, working on some very obtuse calculations about the construction of gross national product for 1956, I think it was, and discovering an anomaly in the calculations that resulted in a revision to the payments to Ontario of about $5 million at that time. My boss at that time figured that covered his salary for the rest of his career and then some.

So macro measures have some problems built into them. Again, I would point out that when they introduced the harmonized sales tax for the three Atlantic provinces, payments were to be based on essentially measures of provincial gross domestic product. I think this committee provided $40 million for Statistics Canada over a couple of years to improve and tune up the calculation of provincial gross domestic product so that it would be an acceptable measure for making those payments.

That is the sort of problem with those kinds of macro measures, that you have to get the measurements right just as much as you do the revenue. What we have with the provincial revenue system we use now is as encompassing a system as we can get for provincial and local revenue. So you're not looking at economic situations, you're just looking at the financial resources available to the provinces and to their agents. If this is what you want to equalize, if your concern is the resources available to the provinces and their agents, maybe this is the best measure after all. The manipulation is minimal.

The discussion was about manipulation, the effect of a province's actions on the equalization payments. Nobody can have more effect on the equalization payments as they're now constructed than Ontario. If Ontario sneezes in a recession, everybody else catches pneumonia; their equalization payments go down. This is because you have one province that has a high weighting in all of the formulae. Ontario is one of the five.

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Maybe that's a weakness of the system, that it does expose all the other provinces to Ontario's strengths right now. This is not a problem for the rest of the provinces; it's a problem for Ottawa. But when Ontario stumbles, it is a problem for the rest of the provinces.

The Chairman: Thank you.

We have four more questioners: Ms. Redman followed by Mr. Discepola, then Mr. Szabo, then we'll go back for a final question from Mr. Epp.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chair.

I just wondered if either of you had a comment on the phasing in of third tier oil revenues as well as games of chance.

Mr. David Perry: It's tradition in federal-provincial fiscal relations to try to minimize the shocks as much as possible. The history of the various five-year programs has been a phasing in of this and a phasing in of that, so that you minimize the changes to any one province in one particular year. This is consistent with the way the game has been played at this point.

I don't know how significant the impacts of the oil revenues and gaming revenues you refer to will be. Again, you have to go back to Finance's model and figure out exactly who they're going to hit hardest and how hard they're going to hit in order to see whether the phase-in is window dressing or whether it really is addressing the serious problem. It's probably a good principle to err on the cautious side and provide the phase-in.

Prof. Paul Boothe: Thanks again, David. More time to think.

I would say a couple of things. First of all, this is what this most recent round of negotiations has been about, right? Tinkering, especially with definitions of the tax base, and of course property tax is another one of these things that there were lots of discussions about.

I have two concerns about oil revenues. One of them is longstanding and well known and not surprising to hear from somebody who lives in Alberta, and that is, should we be treating it as a salary, ongoing revenue, or should we be treating it as an inheritance, something that as we use it up it's not going to come back? I really wonder if it's the ongoing income that we would receive by exploiting oil or, however fast it happens to come out of the ground, we should equalize it, and then when it's all gone we won't equalize it.

I have a concern that goes with both of these that isn't such a traditional concern, and that is, one of the things we don't consider when we look at these kinds of things is the costs that are entailed. With oil revenues, of course, there's a lot of cost in terms of provincial infrastructure and whatnot to get that oil out of the ground and to market, and of course that's a problem for Alberta, but they don't get equalization. But it's also a problem for Nova Scotia and Newfoundland, and those costs aren't taken into account.

Even more so—and I guess this won't be surprising from somebody from Alberta because we've had such a big debate about VLTs lately—there are enormous social costs that come from this fastest-growing revenue source for our province, and this is a problem British Columbia is about to take on. It's a problem they have in Saskatchewan and Ontario, and we don't take account of that.

This is the kind of thing, when you get down to this very micro level and you start to talk about whether we should do this or that, where you really lose some of the big picture that we should be talking about when we're discussing equalization.

The Chairman: Thank you.

Mr. Discepola.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chairman.

Dr. Boothe, you were very critical in your opening remarks, I thought. You were saying the equalization payments were discussed behind closed doors, much like Meech Lake, and these private deals did not serve democracy well. Yet in some of your answers to some of the questions—I'm relieved to know that you consider the deal, and I think I'm quoting you properly.... You say you cannot conceive of a Canada without such a system. So obviously the system works despite its complexities. I would concur with you that there should be more discussion. Unfortunately, though, I don't see how you can engage Canadians in discussions, because it's really a program that has a uniquely federal jurisdiction, and it's discussed with the provinces who are beneficiaries of it.

• 1205

Sometimes when I sit down, or try to sit down, with my partners and tell them I want to discuss our shareholders arrangement, the discussion always translates into what's the bottom line. The provinces are no exception. Who's going to be the winner? Who's going to be the loser? Who's going to gain money? Who's going to lose money? The bottom line with my partners is that we had better leave the arrangement the way it is because we're all getting equal revenues out of it, even though one may contribute more to the partnership than the others.

But there is a communication problem, and you touched on that. Coming from Quebec, I saw it very vividly over the last few months, if not the past few days. The complexity of the system itself is one problem, but the beneficiaries of the system and how to communicate that to the citizenry...that's where I am coming from.

When I was out in British Columbia in 1996, for example, at a caucus meeting there, we had a discussion about equalization payments, and we inevitably came around to who the beneficiaries are. The danger I see when we engage in those discussions—and it has been happening around this table—is we seem to measure out attachment to Canada by the dollar value we get out of Canada through the equalization payments. That was very evident in Quebec. Bouchard manipulated that to the nth degree. They conveniently take one aspect of the transfers to the provinces and ignore the other aspects.

So on a communication level, do you have any suggestions about how we can better communicate the benefits of the system to the average citizen?

Prof. Paul Boothe: Well, I'm sorry if my opening remarks were a bit too dramatic for an economist. We're not used to going into the political realm, and it's difficult to hit the right level.

I'm glad you agree with me that there are problems in communicating this. I certainly believe strongly in equalization, but I also believe strongly that we could do it better than we're doing it now, and that's basically why I made this trip to Ottawa, to try to give you my thoughts on that.

I think the communication problems are in part a function of the complexity of the program and the way the program is structured. I don't believe Canadians measure their attachment to Canada by how much equalization they get, because Albertans don't get any equalization and they're very attached to Canada. I think what we see here is that it's hard for people in the federal Parliament and the rest of Canada to explain to people in Quebec exactly what the benefits of equalization are when Quebeckers are both contributing and receiving because it's a gross scheme. That's one of the things that I talked about in my C.D. Howe monograph. Maybe we should think about a net scheme, because then it would be very clear exactly what's going on. There's no question in my mind. I think any student of equalization...that Quebec, the Atlantic provinces, Manitoba, and Saskatchewan are beneficiaries of equalization. There's no question about that. It's incontrovertible. But it's hard to explain it when you're both paying in and taking out, and if we had a net scheme that might help us communicate it.

I have to say again that I think if we communicated these changes on an annual basis rather than adding them up over five years, that would go part of the way to clearing up some of the confusion.

The Chairman: Thank you. Any further questions?

Mr. Nick Discepola: One for Mr. Perry. You mentioned that the timing of the payments to the provinces could at times exceed almost 30 months. My understanding of this legislation is that there are provisions in the legislation to periodically review, and payments are made even on a monthly basis based on those estimates.

• 1210

What recommendations would you make to ensure the cashflow to the provinces occurs on a more timely basis?

Mr. David Perry: Well, it's the problem of the final adjustments when all the figures are in, and this is up to 30 months. It's most dramatic with the stabilization, because stabilization payments aren't made usually until all the figures for provincial revenues are in. There is a time limit in the legislation for the stabilization programs. You've got what in some cases can be quite significant amounts of money flowing to a province under the stabilization programs, but flowing much after the time they're needed.

The same thing can happen with the equalization. The final adjustment to the payments with respect to one fiscal year may not take full effect until 30 months after the close of that fiscal year, which is a long time. It's also quite often a surprise when the adjustments are down. You can see it happening and see the problems that provincial treasurers have with this. When there's a reduction in payments, that's brought forward and shown as a decline in federal transfers. And you get full blame for that in a provincial budget.

If the adjustment payments are positive for the province, as Nova Scotia's often are, these are shown as a revenue of a preceding year. They don't affect the current year's surplus or deficit; they're almost a sort of off-budget transaction. It serves to help out the province without giving the federal government any credit, if you want, for the payment.

I'm not being very clear on exactly what the problem is. But the problem is that the past year's adjustments affect the current year's cashflow, either positively or negatively, and that throws things off. The question is, do you leave last year the way it was and go on and worry about this year? Or do you go back to last year and adjust it, regardless of the effects it has on this year? Or do you go back three years and adjust, say that we overpaid?

Sometimes these things get mixed up with other parts of the federal-provincial fiscal relations program. For example, every time the census calculates new provincial populations, it changes the equalization entitlements, it changes the CHST entitlements. Anything that's based on a per capita basis can be changed. You then decide whether you have to go back three years and adjust the payments due each province to reflect the new population figures. In past years we've seen that those adjustments for census can have a significant negative impact on the Atlantic provinces. So the Atlantic provinces have been in the past willing to join support in new federal initiatives that include, amongst other things, forgiveness of the negative adjustments that have been due in the past.

So it's part of the federal-provincial bargaining that takes place every five years. It's one of the chips that Ottawa can hold in some of those bargaining sessions, to say they will forgive negative adjustments with respect to past years. But if they don't, that is going to hit the provinces' bottom line for the current year's cashflow.

There is one thing I'd like just to remind everybody about. When we were talking about equalization and the awareness of equalization, the awareness of federal transfers, it seems to me—and it's been a while since I've looked at this—in 1868 or 1869 Nova Scotians were complaining that their politicians had sold them down the river for 75¢ a head. I think it was something like that. So it has been a Canadian tradition to look at transfers from Ottawa and whether they're appropriate or inappropriate. They're not always seen to be appropriate.

Mr. Nick Discepola: Thank you.

The Chairman: Mr. Szabo followed by Ms. Leung.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

I suspect if we asked Canadians whether they understood the CHST mechanism and tax points, we might get the same result as if we asked them about the equalization formula, and probably similarly if you asked them about Stats Canada's low-income cut-offs and how that's calculated and what it means. It may also cause a little bit of confusion or misunderstanding.

• 1215

So it doesn't concern me personally that maybe ordinary Canadians don't understand what I think we would concede is a complex mechanism. Maybe the more important issue is the propriety of an equalization system and whether the Canadians who participate in that debate.... I think, Mr. Boothe, you raised the issue of CHST transfers to Alberta compared to Atlantic Canada and whether or not there's a rationale for that differential between the per capita transfers. There is, and we know what it is.

Fundamentally, as a lay person, I would ask you if you are aware of any province that has taken a specific initiative or action to frustrate or to manipulate the intent of the equalization system to their benefit and to the detriment of others. That's the first question.

The second question has to do with this whole concern about process, accountability, and transparency. Does the fact that the technical amendments are phased in over five years not give you a better comfort level and deal with the concern about making changes that are being proposed, compared to the adjustments, which are more mechanical adjustments—mathematical and not of a policy nature? Maybe you could comment on those couple of areas.

Prof. Paul Boothe: I guess I would have to start by saying you and I disagree on the CHST. I frankly do not believe the CHST should have its own equalization program with its own rules that are different from the formal program. I'd like to see all equalization in the formal equalization program. And I think if I were going to say to the committee there's one thing I wish we could do at this round of equalization renewal, I would say let's not have CHST have its own equalization program with a different set of rules.

So I guess I would have to lay that out as—

Mr. Paul Szabo: The budget has proposed to change that.

Prof. Paul Boothe: No, that's the thing. People don't understand this. We're going to go to equal per capita entitlements in 2002, right? We all agree on that. Of course, that includes not just cash, but the tax points that Ottawa transferred to the provinces many, many years ago. It's like somebody giving their neighbour a quarter section of land and saying, here, you farm that, and then every Christmas they write them a card and say, I hope you appreciate the crop you took off the land this year because it's my Christmas present to you.

The thing is the provinces collect that money themselves, and because it's equal per capita entitlements, we have a special equalization program going on in the CHST, as well as in the formal program. You see, this is the thing. I think you're right. It's too much to expect that all Canadians will understand the workings of the equalization program, or the CHST. But I find we don't even understand it, and we have this discussion.... It's not just parliamentarians. We have this discussion at the lunch table in the economics department all the time, and we're scratching our heads and trying to figure out how this works.

We're not looking for understanding from 30 million people, but I think we can do a bit better than the 5 million, or however many people the Department of Finance estimates really understand it.

I guess the other thing is that people have picked up on this issue of manipulating tax bases. I am sure individual provinces that receive equalization look at the equalization formula very carefully when they're making their tax decisions, and because those officials are my classmates, and some of them are my students, I know they take those circumstances into account. So I don't have a case to show you. It's not that important.

• 1220

It is important that we get to a system that cleans up all the kinds of incentives we're worried about. I don't agree we just have to live with the complicated system we have now. It would be worthwhile to have a discussion about whether a simpler system would serve us better. In my opinion, as I think you've probably gathered by now, it might.

Mr. David Perry: I thought I'd weaselled out of that one.

Mr. Paul Szabo: You want a piece of me too, eh?

Mr. David Perry: To get back to manipulation and whether it's worth it, the effect of tax changes on the equalization system is one of the factors tax policy people take into account when they're doing budgets, but it's not the driving force.

For one thing, if you're a recipient province, you have to look at the tax rates you're contemplating in relation to the representative five-province average. If you're below the average, it will be worth your while—

Mr. Paul Szabo: And you're a recipient.

Mr. David Perry: Yes, and if your actions don't change the representative five-province average so you're changing the equation you're working with. There are an awful lot of variables. It's like some of the questions about the effect of taxes. Yes, there is an effect, but it's small in relation to other facts. Nobody is about to give up the corporate income tax in a province in order to attract business and gain on equalization. That's not done; it's not political.

Most of the areas where you're taxing as a provincial tax authority are under scrutiny. If tax concessions for natural resources are too generous, they will look like blatant giveaways to corporate Canada, multinationals, or whatever sort of harsh interpretation you want to give on that. So those kinds of tax changes are not on politically, regardless of their effect on....

Mr. Paul Szabo: Thank you. The one phrase you used there is that you're under scrutiny, and that is a very important element in this whole process. The fact that you can get the provinces to sit down and agree on anything is quite an accomplishment, you must admit. No matter what the agreement is, there is a constant process of monitoring and scrutiny that takes place because of the inter-dynamics of our interprovincial trade and other things that happen in Canada.

There has to be a comfort level for Canadians to know that diverse interests are at the table, they have come to an agreement, and they will continue to monitor and determine the dynamics of the situation on a regular basis and have an opportunity to continue to update it. So that scrutiny is very important to the process, especially a complex process.

The Chairman: Ms. Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chairman.

Dr. Boothe, you mentioned briefly the equalization formula based on needs or salary. That was very interesting. I'd like Mr. Perry to comment on whether that is good or not.

Second, when a province's economy goes down, do you feel strongly that there should be a fair adjustment to the equalization payment? How could such an adjustment be made? The second question is for both of you.

Mr. David Perry: The question of using need as a base for equalization goes back beyond my time. It's been regularly examined and regularly rejected in Canada. It is the basis, in a number of other federations, of the adjusting or levelling payments, or what have you.

You run into strange quirks if you're not careful. I was thinking of Paul's comment about salary being a good basis for it—public service salaries. Then I was thinking about medicare and the first payments for medicare, as opposed to hospitalization.

• 1225

The federal government was picking up half of the per capita national average costs of medicare. Newfoundland ran its doctor system out of hospitals—doctors were paid employees of hospitals—and their medicare costs were half the national average. This is an example of implicit equalization as well. Newfoundland got 100% and 95% of its medicare costs covered for a number of years, while Ontario got less than 50% because it was above the national average.

If you were using that as one of the components of your equalization system, Newfoundland wouldn't have received the extra money it needed to improve its medical care facilities within the province. There wouldn't have been that implicit equalization in the health care, and there wouldn't have been explicit equalization as well. They simply would have been in trouble. As I say, everybody looks at the needs basis, and it's too hard to come up with any reasonable system that works.

On the second question about the adjustment payments, you were asking whether I thought adjustment payments should be dropped—

Ms. Sophia Leung: No, how should they be made up?

Mr. David Perry: I have a lot of trouble because as a statistician I like to know what the final figures are. I like to know that in 1996-97 the provinces got a total of x number of dollars in equalization. They did that fiscal year, with respect to equalization. The following fiscal years they got some more and some more.

It is destabilizing when the adjustments are very large. The question arises, if they were able to get along with roughly that level of equalization in the current year, is it fair to come back two or three years later and say we need 10% of that equalization back; we overpaid you? You're changing the rules well after the game was played.

By the same token, if we come back three years later and say we're giving you 10% more because we calculated the figures more precisely, that's money you got by without during the year in question. Obviously, the money will go to current year operations, just as the recovery would have come out of current year operations, in terms of cashflow, the size of the cheque, and so on. So there is a question as to whether or not adjustment payments should be made.

Ms. Sophia Leung: Dr. Boothe.

Prof. Paul Boothe: I'm going to interpret that question a little differently, because it made me think of something a bit different from what David was talking about. One of the problems with the current system is that because it's a gross system, the boom in Ontario right now is raising equalization payments for the recipient provinces, but it's also raising the contribution of taxpayers in Alberta and B.C. In Alberta that's not really a problem because Alberta's booming too. But B.C. is not booming, so it is a bit of a problem.

Sometimes these problems become so big they cause ad hoc adjustments in other federal policies. I'd like you to think back to the period when oil was booming, just before the national energy program. This isn't an Albertan whining about the national energy program; that's a different committee hearing. Alberta was booming and there wasn't a five-province standard. Alberta was in a national standard, so it was driving equalization payments through the roof.

The federal government couldn't get at that energy revenue because it was provincial revenue, so it had to pay those increased equalization payments from income tax, most of which came from Ontario. So poor people in Ontario—I lived in Ontario then—had higher energy prices and had to pay more for equalization. It was so big a problem that it was intolerable. That was one of the contributing factors to the national energy program.

• 1230

So this is the kind of thing that happens if you have a gross scheme instead of a net scheme. If we had a net scheme, when there's a boom in Ontario, the equalization increases could be financed mostly by Ontario taxpayers and the British Columbian taxpayers who are a bit over a barrel right now could be left out of it until they're having their own boom. Again, that's the problem with a gross scheme versus a net scheme.

Ms. Sophia Leung: Thank you.

The Chairman: Do you have a final question, Mr. Epp?

Mr. Ken Epp: Thank you, Mr. Chairman. I've really appreciated having these expert academic witnesses here today. I have some more questions.

I want to talk about one issue Ms. Redman just touched on and that is lotteries. I think from an academic economics point of view, lotteries do not generate revenue. They merely distribute cash, mostly from the poor, and perhaps—I'm wondering how to say this so that it's politically correct. It's a transfer of cash from people who are perhaps less astute as to how to invest their money to those who have more money.

Under Bill C-65, lottery revenues, or the potential to earn revenues, are going to be included. I think one of the reasons Manitoba's equalization entitlement is going down is because there are too many people in Manitoba who are too smart to buy lottery tickets. I don't know if that's how this formula applies because I can't really figure it out. Manitoba doesn't generate much revenue from lotteries, and because they don't, they are now being penalized in the equalization scheme, because they could. Therefore, their entitlement goes down. I would like you to comment, Dr. Boothe, on the relevance of lottery schemes being included in the formula and what that effect is.

Prof. Paul Boothe: The first thing I would say—and David may correct me if I'm thinking about this incorrectly—is that I think Manitobans not buying lottery tickets, while residents in other provinces do, will cause Manitoba's equalization to go up, not go down, if I understand it correctly. They will be deficient in that tax base, so that will increase their equalization.

David can fix this if I've ruined it, but the other thing I would say is—and I'm speaking personally now—that I have problems with lottery revenues, and I was certainly concerned when we had this debate in Alberta. I would say that the issue of lottery revenues is a problem of provincial revenues. That's where the real problem is. The effect on equalization is maybe a consequence of that, but the real question provinces have to ask themselves is whether lotteries are the best way to raise revenues. I have a personal view on that. I think the equalization part of it is small. I think whether or not provinces should do it themselves is the big issue.

Mr. Ken Epp: Do you have anything to add?

Mr. David Perry: No.

Mr. Ken Epp: I want to go the next question then. The present formula, which is not changed by C-65, has five representative provinces set the standard for the whole country, and you've alluded to some of the problems that come with that. Would you recommend that we include all of the provinces?

Prof. Paul Boothe: I believe we should have a national standard, not a five-province standard. But I would not recommend—I have to be careful here—that we do that with the current program because that would make the current program unaffordable. I believe we need to have a combination of changes. I've already talked about a net scheme and getting all the equalization in equalization, but I certainly would prefer a national average standard rather than a five-province standard.

Mr. David Perry: Do you want me to comment on that?

Mr. Ken Epp: If you wish, I'll give you the opportunity.

Mr. David Perry: We've had a national standard and we've had the average of the top two going back to the concept of equalization in 1957. The real problem with the national average has been Alberta—with all due respect to Paul and his oil and gas—because as soon as you include that province on the revenue side, everybody looks bad during an oil boom. It was Alberta that made Ontario a recipient province. When we were feeling bad for Ontario having to pay high gas prices and also pay for high equalization, Ontario almost became a recipient of equalization, which would have offset a little bit the high price of oil and gas, but it would have been absurd.

• 1235

It was Allan MacEachen's budget of 1982 that unilaterally went for the five-province standard by lopping off, as he said, the top 10%—Alberta—and the bottom 10%—the four Atlantic provinces—and taking the average of the middle, which is a nice statistical exercise that gets around your problem as well.

Mr. Ken Epp: Thank you. I would be interested in receiving this monograph you have produced. How do I do that?

Prof. Paul Boothe: I'll give you mine. I'm sure you have these. It's on the web site.

Mr. Ken Epp: Is it?

Prof. Paul Boothe: I'm sure the research people are aware of it and can provide it.

Mr. Ken Epp: I do want a copy of it.

This has nothing to do with our witnesses, Mr. Chairman, but I sure would like to put this on the record. We've known for five years that the deadline for this is March 31, 1999, and here we are jamming this thing through in one month. Undoubtedly, they'll invoke closure in the House. I think it's already been done on this one, hasn't it? You run so many of those that I've forgotten which one it applies to. So there's no time for meaningful debate.

I want it on the record that we should start talking about the year 2004 on April 1 of this year. I think it's time to get into an in-depth discussion on how this equalization system—which in principle we support—should be fixed up, because it's really in bad trouble. I don't know if the witnesses want to comment on that, but I wanted that on the record here today.

The Chairman: Perhaps the parliamentary secretary would like to comment.

Mr. Tony Valeri: Just very quickly, Mr. Epp, I take your point about the need for further consultation. I think you have to remember that as a member of Parliament from Alberta, it's certainly within your realm to contact your provincial government. It is the provincial government that engages in consultation with the federal government. You can do that as of April 1 and ensure that Alberta is well served and that you engage in that debate. No one has prevented you from doing that before, and you can certainly do that as we move forward.

Mr. Ken Epp: I think what we need to do is look seriously at the whole Canada-wide formula. It is convoluted and even—

Mr. Tony Valeri: Probably a great place for you to start, though, might be Alberta.

Mr. Ken Epp: Yes.

Just coming back to this lottery thing, I really think we're being deluded here. When the suggestion is made that Manitoba will gain more revenue, I think not, because in total the provincial government receives whatever revenue they earn plus what they get from equalization. Including this as a possible revenue source overall I think would equal out on average, and the province that then doesn't collect as much would have less revenue from their own provincial government. But I admit that I don't fully understand this part.

There's one more question. Yukon, Northwest Territories, and Nunavut are not included in the equalization entitlements program. Should they be?

Mr. David Perry: Sorry, I got distracted, and I missed the last two sentences.

Mr. Ken Epp: I'm just wondering about the north, Yukon, Northwest Territories, and Nunavut. They're not included in this equalization entitlement program now. Should they be?

Mr. David Perry: They're not directly, but because the formula is so nice and flexible and covers all sorts of things, such as stabilization and so on, it forms the basis for the territorial financial formula, I believe. So they're looking at the same concept, the idea of looking at all provincial and local sources, seeing how well they're utilized, and topping up where necessary. They are part of it, and one would expect that as the territorial governments grow in importance, they would move from the territorial financing arrangement to equalization.

Mr. Ken Epp: I have one last question for Dr. Boothe. I probably should read your monograph before I continue this debate with you. I was a mathematician before I came here. I taught at NAIT, as a matter of fact, in Edmonton. When time permitted, we used to sit in the coffee room and debate the big questions of life and government and so on.

• 1240

I'm just wondering whether in your department at the university you have ever thought of giving a graduate student the task of devising a new equalization scheme, and whether there has been any amount of research done on the way different countries do it. What could we do in Canada to improve it? Is there any more research available to us as a committee and as parliamentarians?

Prof. Paul Boothe: I think it's fair to say that nobody spends more time thinking about equalization, either in governments or as academics, than Canadians do. There is a tremendous volume of research. I have my new equalization scheme here, but lots of my colleagues.... Paul Hobson from Acadia, for example, has an alternate scheme. He and I completely disagree with one another, but he has put a tremendous amount of time and effort into working one out as well.

Yes, there is a tremendous amount of research, some by graduate students, but also by academics across the country. I think what we need to do is have some mechanism where we can connect that with the thinking that you are doing when you're trying to make these decisions. We can say, well, you know the provinces agree with it and if they agree with it then it must be okay. I'm not sure that's the best way to do it. I think maybe having a little more public discussion...and you're here for all of Canada to make that connection. I think it would be a valuable thing.

The Chairman: Thank you.

Mr. Perry and then we'll move to Mr. Brison.

Mr. David Perry: I just want to add that in the late 1970s and early 1980s oil became a serious problem for the equalization formula. As it was coming up for the annual review, Parliament and the Economic Council at that time both decided to do in-depth examinations of the equalization formula. The Honourable Herb Breau had a special task force of the finance committee that held extensive hearings and published a very good report on the equalization formula plus conditional grant formulas, EPF, and so on.

This was at a time of great change and also at a time of specific pressure on the equalization formula from oil revenues. Everyone's attention was focused on that aspect rather than on the broader aspect. But those two exercises are very useful to show what has happened in the past and point directions for the future as well.

The Chairman: Thank you, Mr. Epp.

Mr. Brison.

Mr. Ken Epp: Could I just conclude, Mr. Chairman?

I just want to say that we have to get together somehow. Can we ask this committee to put up a study group, a subcommittee, do something in order to get this thing rolling?

The Chairman: We'll certainly discuss the possibility of it under future business.

Mr. Ken Epp: Okay.

The Chairman: Thank you, Mr. Epp.

Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chairman.

Thank you, Dr. Boothe, for clarifying the issue relative to gambling revenues. I agree, based on the inclusion of those revenues, it will actually mean that if provinces do participate in legalized gambling, they will actually receive less based on this.

Is there a problem with the inclusion of casino revenues in the sense that provinces that utilize casino revenues to augment their revenues would also bear an increased social cost due to those activities, and those costs are largely provincially borne? Does that create a potential problem in the future? I believe most of those social costs would be provincially borne. I'd appreciate your feedback on that.

I know that my home province of Nova Scotia has embarked over the last several years on increasing its emphasis on gambling revenues, and whether or not these provincial social programs are able to meet that in the future...I'd be interested in your feedback.

Prof. Paul Boothe: Again, I think there are increased social costs, but as I say, this isn't a problem to be dealt with via equalization. I think provinces have to look at the costs of collecting those gambling revenues. The equalization effects I think are secondary to that. The real question is a question for provinces: is this a good way to raise revenue? That's the public debate certainly in Alberta, and I think in British Columbia and other provinces as well.

• 1245

Mr. Scott Brison: Arguably, these changes or inclusion of these revenues could actually reduce the incentive for provinces to participate and develop a strategy to raise revenue through casino revenues.

Prof. Paul Boothe: Actually, if I understand the changes, they're going from the base being straight revenues, and I might be wrong about this, to a mix of gambling revenues and income. So really it goes in the opposite direction of what you say.

Mr. Scott Brison: If I understand it correctly, it was lottery ticket revenues and now it's to include gambling or casino revenues.

Prof. Paul Boothe: Right, but also a mixture of income as well.

Mr. Scott Brison: Okay. Thank you.

The Chairman: Are there any further comments?

On behalf of the committee, I'd like to thank you for your contribution to the study of Bill C-65.

I will take up Mr. Epp's concerns at the next steering committee meeting. I'm sure he'll bring it up.

The meeting is adjourned.