Debates of March 9th, 1999

Federal-Provincial Fiscal Arrangements Act

[The Acting Speaker (Ms. Thibeault)]

I am afraid I must interrupt the hon. member at this point because his time has expired.

[Lee Morrison, Reform, Cypress Hills—Grasslands, SK]

Mr. Speaker, I hesitate to get into a wrestling match with one of my colleagues, particularly the member for Elk Island. I have a problem with his proposal as it affects equalization specific to the province of Quebec.

It is my humble belief, if we are to have good relations with Quebec and get back to some degree of amity with that province, that the best way to do it is to revert to the terms of Confederation, to the initial British North American Act, which clearly defined the rights and responsibilities of the provinces and the federal government and apparently with which all parties were quite happy 130 years ago.

When we get into targeted payments for health and education we are in effect overriding the original intent of the BNA act. Would it not be more in keeping with the spirit of Confederation if equalization payments were non-targeted and were ultimately based, as they are now, on income levels in the concerned provinces based on productivity? We can jigger the formulas and put in as many variables as we like, but ultimately they are a measure of productivity and per capita income.

Why not have totally non-targeted contributions from the federal government to the alleged have not provincial governments, rather than specifying this is for health, this is for education and this is for whatever?

[Ken Epp, Reform, Elk Island, AB]

Madam Speaker, my hon. colleague from Saskatchewan happens to be, by the way, the MP for my parents and from the area where I grew up. We actually have no differences. Because of the limitation of time I only had 20 minutes and I could not really get into the details of that. I was saying that. The one quote I read actually specified that provincial governments could even use it to reduce their provincial tax levels if they wanted to, total unfettered use by the provinces. Yes, I am totally in agreement with that.

It is interesting also that a number of witnesses appeared before the committee on Bill C-65. One of them was Dr. Boothe from the department of economics at the University of Alberta who held that view very strongly.

I do not know whether I am permitted to do any free advertising here, but there is a book available. I know I cannot display it because that would be considered a prop, even worse than the flag, possibly. There is a book written by one Dr. Dan Usher. He is a member of the economics department at Queen's University.

He gave us a very good presentation in our committee. Dr. Usher's book is entitled The Uneasy Case For Equalization Payments . He addresses both the question of the principle of equalization and the question of the formula. Many speakers said that we should base it on per capita income, average per capita income across the country, and that for those provinces which are sufficiently low on a per capita income provide some sort of rebate to the provinces to equalize it. In other words, it would top them up a bit so that they are not substantially disadvantaged because they live in a very poor province.

Those issues require a long term debate. That is why I would like to see the government do something. In the report I mentioned, the government said that we should discuss it, have a longer term, come up with a white paper and have some technical input. We just barely got started in committee and it was done because it was rammed through so fast.

I could see after we started that the debate should probably last a couple of years. We could hear from different academics, those people who think about these things, and think the thing through. Let us analyse it. Let us look at the different options. Let us choose the best one.

I anticipate that the next round of negotiations will come about in another five years. It has to be done every five years. Perhaps by then we would be ready to bring in a new equalization formula which is open, which is transparent and which provides for accountability.

At the beginning of my speech I said the taxpayers in my province, because they are not eligible for equalization grants, have a very large interest in making sure that their money is properly spent and well accounted for. It cannot be done with this legislation because the formula is convoluted.

In the finance committee I asked a witness how many people in Canada knew how the formula worked. He looked to his left and his right, because he had two or three officials with him, and said “We are all at the table here but I am not sure they all know exactly how it works”.

That is not right. We cannot have accountability to taxpayers when we have that kind of formula. They try to figure out, for example, with the new legislation what is the fiscal capacity of a province on lottery revenues and on gambling revenues. It has many variables. It has to do with how much money is available. It has to do with the psychology of the fact that very often people who have less money available are more likely to spend money on lottery tickets for that little glimmer of hope. It has to do with some people who have a deep philosophical conviction with respect to gambling and will not participate in it, so we get into the psychology of it.

Does this group that determines the equalization payment really think it can get into the heads of the people in Manitoba and determine why it is they are not buying enough lottery tickets? If they did they would have this much income and therefore would be cut out.

Does my hon. colleague know that the province of Manitoba will lose in equalization entitlements under the act about $50 million? There are other areas where equalization entitlements go up a bit, so the grand difference to Manitoba would be about $37 million. However it will lose $50 million. It would be getting $87 million if it were not for the fact that it is penalized because the people of Manitoba are generally too smart to buy lottery tickets. That is unconscionable.

That is the type of thing we have to get our heads around and solve in the great problem of equalization. I recommend this book by Dr. Usher to every member of the House and certainly to every Canadian who is interested in this subject.

[Val Meredith, Reform, South Surrey—White Rock—Langley, BC]

Madam Speaker, I listened with interest to a number of previous speakers from a variety of parties putting forth their ideas. I am a little confused, I must say, about their positions.

My colleague from Kamloops who represents the New Democratic Party said that his party would support the bill, that it thinks it is worth supporting. Yet I heard him give a whole list of issues with which he had a problem. I am a little confused as to why the New Democratic Party would be supporting it.

I never got the impression one way or another whether members of the Conservative Party are supporting it although they did put forward a motion that the bill should go to committee. They do not want to debate it at third reading or have a vote at third reading. They want to put it before the committee for further study. As I continue I may reflect on other things I heard from various speakers.

I will address the question of what is equalization, what it means. There is not a Canadian who does not believe in the concept of equalization, that those provinces with a greater ability to provide a certain level of services should help those provinces without the ability or capacity to deliver the same level of services. The concept of equalization is supported by most Canadians.

The difficulty we get into is in applying this concept in legislation. Many speakers before me have talked about the complexity of it. They have said that the formula was so “complex, complicated, convoluted”, to quote my colleague from Kamloops, that people do not understand what it is or how we try to level the playing field between provinces.

My colleague from Elk Island sat on the finance committee when the bureaucrats came before it to talk about equalization payments. The bureaucrats admitted that they were probably the only ones who understood what the formula was all about.

As has been mentioned by others, it is very distressing that there is a handful of people, if that, who understand how the government is spending Canadian tax dollars. Canadians would be concerned that there may only be a handful of people who understand how the government is spending tax dollars.

We are not talking about a few tax dollars. We are talking about $50 billion over the next five years. We are talking about $10 billion of our tax dollars a year. We have maybe five people who understand how it is being distributed. We have a problem. Not only in this legislation but in all legislation we should be striving for clarity and simplicity so Canadians can understand what it is that their government is doing to them.

Another problem with this program is that there is no consultation. The government is not interested in talking to Canadians about how it will spend the $50 billion. It is not interested in bringing the ordinary Canadian or the business community or the legislators like ourselves into a meaningful debate.

That is another indication of the arrogance of the government. It continues to feel that it knows better than anybody else to the exclusion of a conversation with anybody else how to govern the country, how to take $50 billion and distribute it from the have provinces to the have not provinces.

We have heard other colleagues ask if it is fair in a country that is as well off as Canada where we have such a high standard of living according to the United Nations, that we have three provinces carrying the fiscal burden. Three provinces are providing to seven provinces. Is that fair? Should we not be looking at whether or not that adequately represents reality?

For Canadians who may be watching and trying to understand equalization and what it means, they should not feel bad if they do not understand it because there is nobody else in this country, bar a few civil servants who have concocted the formula and have manipulated the formula for whatever reason, who do understand it.

I hope to clarify some of the issues that we feel need to be addressed, to properly deal with trying to create a level playing field between provinces that have the capacity to raise revenue and provinces that do not have the same capacity. Is it necessary to try to accomplish that? I suggest it is. It is a very Canadian thing to do, to try to help those who are less fortunate or may not have the same ability. It is readily supported by Canadians all across the country but they are asking, and rightly so, is it properly managed? Is the program accountable for its end result and delivery of the services? Is it fair? Is this a program that has the concept of fairness?

I will point out a number of things on which I will challenge that the concept of this bill deals with that. To make equalization and the formula work, there has to be the same kind of tax system in all the provinces so that they are all being compared on an equal basis.

Not all the provinces have the same type of tax system. In essence we are dealing with a tax system in one province and a completely different tax system in another province. In other words, we are dealing with a hypothetical tax system that does not work or does not exist. We are trying to blend them.

The cost of production to create the taxes or source of revenue is not the same in all provinces. There is no way that the cost of taking the trees off a mountainside in a remote area of British Columbia is the same as taking a tree from a flatter area closer to civilization, yet that is not taken into account.

We heard again from my colleague from Kamloops that there is a recognition that new oil sources are more expensive to retrieve than old oil sources. That is very interesting because Alberta, one of the have provinces, depends largely on oil revenue and would have considered the Alberta tar sands as a new source of oil. Certainly it is far more expensive to extract it than the old traditional source of oil, yet there was no compensation for that in the formula.

There was no recognition in the formula to deal with the new type of oil technology that was required for the tar sands. But all of a sudden because of the Hibernia oil field, this new recognition has been brought into the system. The revenue from the Hibernia oil field will only be 70% considered rather than the 100% in another province. This does not add to the fairness of how we deal with revenue sources.

Thirty-three tax areas are brought into consideration in this formula. Another one is property assessment, property taxes. Those can change overnight. All we have to do is ask the individuals who own property on the Musqueam how quickly property values disappear. All it takes is a change in circumstances for that property value, upon which property taxes are considered and are part of the formula, to disappear completely. There is no recognition of those differences.

There is no recognition that property values are different from one end of the country to the other. I would suggest that in my area, a person who bought a single family home could probably buy for the same amount of money a 15 or 20 block apartment elsewhere and have revenue property to help sustain them. That kind of consideration is not taken into account in this equalization payment.

There is a high cost of living in some of the major centres in this country. A large portion of the income of individuals is used just to provide housing. The differences from one part of the country to another are not taken into consideration in the equalization formula.

There is the politicizing of the formula. We have heard from other members about what happened in Newfoundland. It had a deficit and two days before the writ was dropped for a provincial election, the deficit suddenly disappeared because there was more money in equalization to put into the pot. Therefore, Newfoundland did not have a deficit but lo and behold it had a surplus.

There is no commitment on paper for that money. It was simply the ability of a government to say the discrepancy is there because nobody understands the formula, nobody understands where this money is being spent or how it is being spent. For political reasons they can reach into the pot and say they miscalculated and give out some money for political purposes.

That is not good enough. The transparency and clarity are not there. It allows for the transfer of money to be manipulated for political purposes. The lack of transparency and accountability allows for manipulation not only for political purposes but for other purposes as well.

When a situation is not clear and not accountable, it can allow a formula to be changed, to be interpreted without anybody knowing how to challenge it, again because of the complexity of the equalization payment and the lack of transparency. It is very dangerous for a government to allow itself to get into a position where it cannot account for or justify where our tax dollars are being spent.

I would like to talk about the end result and what equalization in the long run does to our country. My colleague from Kings—Hants brought up the issue of equalization payments providing disincentives for provinces to develop their economies in such a way that they no longer need support from the federal government. I would assume that as the member represents Atlantic Canada, he is aware of what has happened in Atlantic Canada.

I want to share some numbers with my colleague. They are percentages of revenues transferred by the federal government to the provincial governments. These are percentages of the budgets that federal transfers equate.

In Newfoundland the provincial budget relies on 43.7% from federal transfers, almost half of its budget. It is 36.8% that Prince Edward Island depends on federal money to go into its budget. In Nova Scotia it is 40.3%. In New Brunswick it is 38.2%. In Quebec it is 15.3%. In Manitoba it is 29.3%. That shows the heavy reliance by those considered have not provinces on the federal government to provide them with their financial resources.

I want to repeat that my colleague from Kings—Hants said that part of the problem is that we have created disincentives for those provinces to be able to stimulate their economies and to create an economic environment so that they do not depend on these federal transfers. In other words, what he implied and what I support is that the concept has created a dependency of the have not provinces upon the federal government. It has created a situation where these provinces feel that it is not worth their effort and not worth their consideration to remove themselves from a position of receiving transfer payments from the other provinces.

I can speak from my own experience that this is not a healthy position to put any province in. When a province loses its desire to better itself, to better its economy because it might cost money, that is not a healthy environment. The last thing this government should be trying to do is to continue the circumstances in 1999 going into the next millennium where three provinces are supporting seven other provinces. It just does not seem right in a country as bountiful as Canada.

The next question we have to ask ourselves is does the formula allow for fairness in the provinces. I would suggest that it does not. I do not think the province of British Columbia feels that it is getting a fair shake. I cannot speak for Alberta or Ontario, but I can speak for British Columbia.

What we do know is that although its economy has been number 10 in growth in Canada over the last three years, British Columbia is still considered a have province. We are still expected to take money out of our economy that is not growing and put it into the economy of other provinces that have a higher growth rate. We are still expected to put money into provinces that are providing services to their citizens that British Columbia does not have the capacity to provide to its own.

We see that in the dental care program in the province of Quebec. The province of Quebec is able to provide free dental care, all dental care to children under 10 years old. Children in British Columbia do not get free dental care. But the taxpayers in British Columbia are funding Quebec, or putting money into the province of Quebec, so that it can offer free dental care to its children.

Somehow I do not think that was the intention of the equalization payments. I think the intention of the equalization transfer was so that all provinces could have at least a basic service, that all provinces could provide to their citizens the same thing that another province could provide, not something more, not something better. But that is what is happening.

Look at education and the university tuition fees. Tuition fees are lowest in the province of Quebec.

Why should the students and the taxpayers in British Columbia be sending money to the province of Quebec so it can provide cheaper post-secondary education for its children when it is not available to the children in British Columbia?

When we talk about fairness I suggest the taxpayers in my constituency and in my province would feel that is not being shown in the transfer payments based on equalization.

Having said all this, what we have to ask ourselves is what would be more acceptable to all Canadians. I want to address a number of issues here. One is that the province of Quebec is constantly arguing as to whether the federal government should be interfering in its—

[The Acting Speaker (Mr. McClelland)]

The hon. member for South Surrey—White Rock—Langley I know is in full flight and I have been disturbing her with my motions to get up but that is because the member is out of time. I will give her 30 seconds to sum up.

[Val Meredith, Reform, South Surrey—White Rock—Langley, BC]

Mr. Speaker, I guess I was in full flight. I suggest to the members from Quebec that they look at equalization as equality and fairness. They should also look at whether they really want the federal government interfering in provincial jurisdictions and controlling through federal spending their ability to manage their own province.

[Marlene Catterall, Liberal, Ottawa West—Nepean, ON]

Mr. Speaker, I noticed that the member South Surrey—White Rock—Langley listed very carefully the proportion of the provincial budget that comes from federal transfer payments in every province that receives equalization payments except Saskatchewan. I do not know if she had a reason for leaving Saskatchewan out. Perhaps it is the fact that Reform has some members elected there.

Perhaps she could tell us just what proportion of Saskatchewan's budget comes from federal transfer payments, including the equalization payments now being debated in the House. Perhaps she could also tell us how Saskatchewan will benefit from the legislation before the House today.

[Val Meredith, Reform, South Surrey—White Rock—Langley, BC]

Mr. Speaker, the figures I have for Saskatchewan in the 1997-98 budget are that 12.8% of the provincial budget came from federal transfers.

I suggest Saskatchewan is one of the provinces learning that it is better to have self-autonomy, a good healthy economy and to join the have provinces in an economy that stimulates job creation and sees the benefits of not being reliant on a federal government to provide it with money but rather on its own ingenuity, its own progress and its own economy.

[Ghislain Lebel, Bloc, Chambly, QC]

Mr. Speaker, I listened with interest to the remarks of my Reform Party colleague.

I cannot help but wonder why, during the 1995 referendum in Quebec, these people who find us so expensive stepped in to prevent us from leaving. If we are the drain on finances that the Reform Party members would have us believe, it would only have made sense to let us go, indeed to help us on our way.

However, when the member speaks about the social union and equalization costs, I would simply point out that, while it is true that British Columbia is one of the provinces now on the paying end, this was not always the case. Nor will it always be the case in future.

When the people who fled Hong Kong for British Columbia because of the impending takeover by mainland China return to their homeland, as some of them have already done, and when the U.S. boycotts against British Columbia lumber have achieved the desired effects, perhaps then British Columbia will find itself on the receiving end.

Canadian society and the equalization systems as we now know them can change at any time. What holds true today will not necessarily hold true tomorrow.

If we are costing them so much, if Quebec is not productive and it is not worth keeping us happy within the federation, I would like the member to tell me why she and her colleagues came to Montreal with their flags and paid so dearly to tell us they loved us during the 1995 referendum. I would like her to simply explain that.

[Val Meredith, Reform, South Surrey—White Rock—Langley, BC]

Mr. Speaker, I did listen attentively and with interest.

I to the hon. member that we want Quebec to stay within Canada for reasons that are emotional. I did not realize we could buy the support of a province or that we should be buying a province to stay in our country. It is a question of opportunity. It is a question of the ability of a provincial government, through the jurisdictions given to it in the BNA act or the Constitution Act of 1867, to enhance and stimulate an economy, to control its natural resources and to look after its people through health, social services and education. It is not to pass that responsibility on to the federal government. I thought we agreed with hon. colleagues from the Bloc on that issue.

I find it interesting the member would bring in the issue of immigrants from Hong Kong and from Taiwan who have come to Canada. What he has not said is that although people moved to British Columbia and settled there they left their money in the province of Quebec. Quebec benefited from the economic well-being of these people. They invested their money in Quebec and they got $90 million for resettlement of these investor immigrants. They did not stay there. They came to British Columbia. British Columbia ended up using our resources while Quebec got the benefit of their investments. I am glad to clarify that for members of the House.

[Tony Valeri, Liberal, Parliamentary Secretary to Minister of Finance]

Mr. Speaker, the hon. member indicated in her remarks that it was very complex topic and that the formula in the bill before us had some elements of complexity. I though I would take this opportunity to clarify a couple of things.

She made reference to Newfoundland and its ability to balance its budget. She felt that was politicization of the actual program. I want to clarify that equalization payments are made according to a formula. Every October the lookback takes place to see what has occurred not only in that province's economy but in the other standardized provinces. When we see what has happened in Ontario and compare what has happened in Ontario and how that increased the standards to what is happening in Newfoundland, we see an adjustment of the program. It is not only Newfoundland, it is other provinces.

If any provincial government decides to call an election sometime after October, I hope the member does not attribute that to politicization of the actual program.

She talked about British Columbia and the turmoil there. We know the Asian crisis is contributing to that. If British Columbia no longer has the ability to raise the kind of revenues it is raising today, it too would be eligible for equalization. Therefore this is a program that is based on formula and one that I think most Canadians support.

[Val Meredith, Reform, South Surrey—White Rock—Langley, BC]

Mr. Speaker, I find it interesting that the hon. Parliamentary Secretary to the Minister of Finance brings up the formula when there is admission by the auditor general that it is too convoluted, that the formula is manipulated, that it can be changed and interpreted in different ways. The formula is not that clear. That is the whole problem with this equalization transfer program. It is not clear. It can be manipulated.

I respect that he differs with my opinion on the transfers, that the conclusion that they had under given money or under transferred money to Newfoundland was not political. I appreciate that he does not agree with me. I would not expect him to agree with me, representing the federal Liberal Party and supporting the provincial Liberal Party.

Part of the problem, very clearly, is that we have low income families in British Columbia, Ontario and Alberta that are sending money to subsidize the Irving family in the Atlantic Canada provinces.

It is not fair for low income taxpayers and families in the three have provinces to support very wealthy families and individuals in the rest of Canada.

[Diane Ablonczy, Reform, Calgary Nose Hill, AB]

Mr. Speaker, we are on the third and final reading of an act that affects the equalization arrangement we have.

Essentially equalization takes money from the federal tax base collected from the wealthier provinces and pays it to the less wealthy provinces to ensure that provincial governments have sufficient revenue to provide comparable public services at comparable rates of taxation.

This is one of the arrangements in our federation that brings equity and equality to citizens across the country. This is a very good goal and a goal that makes our country work well.

Unfortunately over the years the whole equalization arrangement has become very convoluted, very inefficient and full of complexities that have not been addressed. This arrangement is actually unfair, inequitable and in great need of reform. This bill should be doing that. It does not.

The bill renews the current five year equalization agreement which expires at the end of this month. Specifically, the bill makes some amendments to the formula that determines equalization payments but the amendments amount to nothing more than mere tinkering.

I point out to Canadians watching this debate that this topic, although it seems dry and academic, is actually of tremendous importance to Canadians.

It deals not only with the very heart of our federal system but with the billions of the tax dollars that we work hard for, we give to government and pay into programs like equalization.

The practice of equalization started at the beginning of Confederation in 1867. At that time it involved a few hundred thousand dollars per province. Today equalization transfers alone approach $9 billion a year. This is in addition to other transfers from the federal government to the provinces like the Canada health and social transfer which supports health care and education, the EI funds, regional grants and other smaller programs.

If we were looking at total transfers with an equalization component, the total payments would be much higher than $9 billion, perhaps three times as much or upwards of $25 billion to $30 billion.

We are dealing with enormous amounts of our money. Because of that, this debate should be of great interest to all Canadians. Although this is a complicated program, and I am a novice on the subject, a few scholars have written about it, the most recent being Dr. Paul Boothe, a professor of economics at the University of Alberta.

Six months ago Dr. Boothe wrote a 60 page analysis of the equalization system. Just a week ago he testified before the finance committee on the subject of equalization.

For Canadians who want to understand this rather complex area, I suggest they look at Dr. Boothe's work on this subject, «Finding a Balance: Renewing Canadian Fiscal Federalism», released October 30, 1998.

Professor Boothe provides four reasons for transfers between the federal government and the provinces. There is the federal rationale that says each level of government must have the revenues it requires to carry out its constitutional responsibilities.

The central government has taxing powers to collect more taxes than it needs to spend while provinces collect less than they need to spend. That makes these kind of transfers between the federal and provincial governments necessary under our constitutional system.

There is an implication in the Constitution that these transfers will be unconditional. That of course has changed over the years. There is also the citizenship rationale that says that citizens have a right to certain publicly funded social and economic services.

Due to imbalance in the powers of taxation between the provinces and the federal government that I just mentioned transfers become necessary. The citizenship rationale about citizens having a right to publicly funded services suggests that transfers would have some specific objectives. There is a suggestion that transfers should be unconditional. There is a suggestion that transfers should have specific objectives and those need to be balanced out.

There is also the economic efficiency rationale that transfers can be used to alleviate efficiency problems related to the mobility of workers, which means that they can be used to encourage workers to move where the jobs are. Transfers could be used to alleviate bad practices in one province that harm another province, for example grants to induce a province to clean up air pollution and not export it to other provinces. Those kinds of grants would be conditional.

Then there is the equity rationale, closely related to the citizenship rationale, that says the federal government should give the same services and transfers and levy the same taxes on similarly situated individuals regardless of where they live and the provinces should do likewise.

Because provinces do not have identical taxes, services or transfers, this implies an enormous increase in the role of the federal government and very large equalization costs.

I mention this to try to gain some understanding of the philosophical underpinnings of this whole equalization program. Understanding what we are trying to achieve is important before we can examine a program and ask if it is delivering what we had hoped it would deliver.

The history of the equalization program is also interesting and although it may seem like a dry academic exercise it is helpful for Canadians trying to understand this whole issue of equalization to go through it quickly.

Prior to Confederation most provincial revenues came from customs and excise taxes. With the loss of customs duties, because the federal government became exclusively responsible for levying customs duties, the provinces faced a fiscal crunch in meeting their constitutional responsibility to provide key services to their citizens. Therefore the Fathers of Confederation established a system of transfers providing each province with a statutory grant of 80 cents per person to a maximum of 400,000 persons. Nova Scotia and New Brunswick were also paid a special grant, acknowledging that they trailed Ontario and Quebec in economic development.

Between Confederation and the Great Depression transfers from Ottawa fell as a proportion of provincial revenues. During the depression governments raised taxes to combat deficits. The tax system became very fragmented and complicated and some described it as a tax jungle. What happened in the 1930s may sound familiar to us in the 1990s.

As Professor Boothe points out, at one point the city of Edmonton levied an income tax. Transfers from the federal government to the provinces soared, rising from 10% of federal revenue to 45%. Because the situation was spiralling out of control, a commission was set up, always a time honoured way to study a problem, called the Rowell-Sirois commission.

It made a number of recommendations in 1939 concerning unemployment relief, the collection of taxes and provincial debt. An important recommendation of the Rowell-Sirois commission in 1939 was that the federal government institute a system of “national adjustment grants” for poorer provinces and that general transfers be made to ensure that the provinces had enough revenue to fulfill their constitutional responsibilities without undue taxation.

During the second world war the federal government rented the income tax field from the provinces in return for fixed transfer payments with the understanding that it would be returned after the war. After the war the federal government wished to continue with the rental of personal income taxes. Ontario and Quebec resisted. Ontario did join the tax rental agreement in 1952. Quebec remained outside and set up its own personal income tax system in 1954. That led to the development of the present equalization system.

Formal equalization payments began in 1957 with a fiscal arrangements package that had both an equalization and a stabilization component. The equalization component was calculated based on the average revenue from three tax bases in the two richest provinces. This is important because the base for calculation keeps shifting from here on in.

In 1962 the equalization formula was altered, based now on a national average rather than two provinces, and natural resource revenue was included in the tax base. Some of it was, not all. Thus Alberta became a contributing province.

These agreements last for five years. We are discussing a five year renewal today. Five years after that in 1967 the equalization formula calculation was expanded to include the revenue from 16 bases. By this time the federal government had transferred 28 personal income tax and 10 corporate income tax points to the provinces and was offering more in lieu of federal contributions to other programs. We get transfers for other programs mixed in with equalization.

The number of eligible tax bases continued to expand. In 1974 the government abandoned full equalization of energy revenues.

In 1977 the government instituted established programs financing to convert cost shared grants for health care and post-secondary education into block or unconditional grant transfers of only half their former size. At the same time, an equivalent amount of personal income tax and corporate tax points was transferred to the provinces. The cash transfer, which was an equal amount per capita across Canada, was to grow with the economy

Rising energy prices in the 1970s created problems for equalization and Ontario qualified as a receiving province for the first time. We saw the introduction of the national energy program through which the federal government confiscated Alberta's tax revenues to maintain low fuel prices in central Canada. Now we get resource taxation being mixed into equalization.

In 1982 the equalization formula was again altered by moving to a five province standard, excluding Alberta and the four Atlantic provinces, the richest and the four poorest.

Also in 1982 the federal government linked the established programs financing cash component with the tax points. This meant that the federal cash transfer would grow less rapidly than the economy, as had been earlier promised. In addition, the per capita transfer for the three contributing provinces was reduced.

Most important, in 1982 the federal government and all provinces except Quebec agreed to enshrine the principle of equalization in the Constitution, section 36(2).

In 1990 the federal government, as part of its deficit reduction battle, capped the growth of Canada assistance plan payments for B.C., Alberta and Ontario, the only three that were not receiving equalization payments. In 1995 the Liberals introduced the Canada health and social transfer which was really a slash and burn effort on health care and education. It reduced the total transfer for those programs from $18.5 billion to $11.5 billion and locked in the differential treatment of B.C., Ontario and Alberta.

We know of the great hardship this reduction of the Canada health and social transfer put on provincial health, education and social services. The point I make with this history is this. The evolving complexity and patchwork of this program and the fact that it was impacted by a multitude of diverse political purposes to achieve different results from time to time has made this program exceedingly complex.

In addition to equalization there are intergovernmental transfers which add in a component of equalization. In other words, we have equalization and then we have equalization of other transfers. We have equalization on top of equalization which has resulted in some very unfair distortions in the transfers from the federal government to the various provinces.

This bill is about the fiscal arrangements act, equalization payments, but I submit this debate should include a discussion on other major intergovernmental transfers besides equalization, in particular the Canada health and social transfer and regional differences in employment insurance because they also have an equalization component.

As was said earlier, equalization was designed to ameliorate imbalances between revenue and spending responsibilities across the provinces. Today the provinces have access to per capita revenues equal to the potential average of five provinces, B.C., Saskatchewan, Manitoba, Ontario and Quebec. This five province standard includes 33 different tax bases.

I hope members are struggling with this as much as I am because what happens is that in a democracy when billions of our dollars are being spent we need to understand how they are being spent and why they are being spent. I think the history on what I am going through now shows how this program lacks transparency, lacks accountability and therefore lacks the kind of scrutiny we as the public in a democracy need to give it.

The calculation of the values for each tax system is very complicated. Imagine the complication when 33 different systems in each of the 10 provinces are involved. The system also has rules governing floors and ceilings, growth rates and so forth. It has been said that only a few academics and bureaucrats in Canada fully understand the system. I submit it has yet to be proven that anyone understands it. Yet we have only a few hours of debate in the House to even try to talk about it, never mind address it in a meaningful, focused way.

Federal equalization payments will total about $9 billion this year. Federal equalization transfers in 1996-97 ranged from a high of about $1,800 per person for Newfoundland to a low of about $220 per person in Saskatchewan. As I pointed out earlier, B.C., Alberta and Ontario receive no equalization payments.

In addition to that variance, the CHST per capita amounts vary across the provinces. Alberta received the least in 1996-97 of $416 per capita while Newfoundland and Quebec received the most in over $600 per capita. The same regional differences are present in the EI program.

Currently then there are some real problems with these transfers. They result in individual inequity where a program was supposed to give equity to individual Canadians. They result for a number of reasons in inefficiency, and my colleagues have pointed out some of those inefficiencies. There is declining political viability where three provinces are consistently paying to seven supposedly poor provinces in a wealthy country like Canada and then we have to deal now with the impact of international competition.

I urge the House, instead of just rubber stamping a renewal with a few tinkering changes to the equalization agreement, to do a substantial and sustained examination of the system, some fundamental reform, and move to something that is much fairer for Canadians and much more workable.

[Paul Forseth, Reform, New Westminster—Coquitlam—Burnaby, BC]

Mr. Speaker, I appreciate the comments of my colleague, but I am wondering how we get to a new era where we reduce the kind of unfairness that has been pointed out and perhaps might be able to outline the positions in the new Canada Act which call for two basic reforms. The first is the equal treatment of all citizens with per capita grants to provinces for cost shared programs; in other words, amounts directly related to people in the province. The other is a single equalization grant based on macro indicator per capita provincial GDP.

If we go down the wrong road this transfer can become a reward to a province that essentially delivers poor government to its people. Like any benefit program, if it is not in balance it becomes a trap of continuing pursuit of unwise economic behaviour.

Could the member comment on how we could move to a more broadly based estimation of the ability of the provinces to generate revenue and stay out of the trap that a dependency program could create?

[Diane Ablonczy, Reform, Calgary Nose Hill, AB]

Mr. Speaker, the member is pointing out one of the problems with the program to which I alluded toward the end of my speech, that is the inefficiency of the program.

The member who just spoke is from British Columbia. British Columbia has a situation where the transfer payment is based on gross income. Taxpayers in British Columbia are forced to contribute more to the program even though their province is in recession. If we had a net scheme rather than the current gross scheme, we could address this kind of problem.

Another thing that has been pointed out by experts is that there are incentives in the program for provinces to manipulate their own tax structures to maximize the amount of equalization they receive. I think the member was also referring to that.

If that is so, it clearly adds inefficiencies into the system where provinces could have a brighter economic picture. The current structure of the equalization program actually rewards less efficiency in the management of provincial economies. Experts say this is the case and that it should be addressed in the legislation. It is not addressed at all. The member is quite right in suggesting that area needs to be talked about and needs to be cleared up.

[Angela Vautour, NDP, Beauséjour—Petitcodiac, NB]

Mr. Speaker, I find it interesting that a party can get up in the House and say that the provinces are creating a dependency on equalization payments. It is unbelievable that the official opposition, which says that it is a national party, can actually say that it does not agree with those things.

[An hon. member]

We did not say that.

[Angela Vautour, NDP, Beauséjour—Petitcodiac, NB]

That is exactly what it is saying. That party does not care for the people in the country who have less than others.

Every province is a province of the country and the wealth should be divided among the whole country, not only among a couple of provinces. There are provinces and territories in the country. I cannot imagine that party has the gall to get up in the House and say the things it says. I hope Canadians are hearing what members of that party are saying. I hope they hear them.

I wish the Liberal government could hear them as well and stop implementing their policies, because that is the other part that scares me. I live in New Brunswick, in Atlantic Canada. It is a province within the Atlantic provinces of Canada.

Reformers talk about dependency on EI and dependency on equalization payments. They pretend to care about minority groups. They pretend because they do not. They do not care about the provinces that need help.

I just checked with every person in Atlantic Canada and we are willing to give up our equalization payments if they want to send the jobs they have in their provinces. That is a tradeoff we will take. That is no problem.

People in Atlantic Canada want to work. We live in a country where we are supposed to share. We have the Reform Party criticizing the Bloc. Everybody should be looking at themselves to see what kind of platform they are actually trying to promote.

[Diane Ablonczy, Reform, Calgary Nose Hill, AB]

Mr. Speaker, I applaud the member's passion. The goals we have in the House for the well-being of Canadians across the country are the same. However, it is logical and proper to examine the programs that are supposed to get to the results the member wants to see and to examine whether those programs are in fact delivering the well-being they were intended to deliver.

I have quoted experts that have examined the program who note that it is riddled with inefficiencies, inequities and unnecessary complexity. In some cases it is actually harming the citizens it is supposed to help.

The member will be glad to know the policy of my party is to increase equalization payments to her province. We would argue, largely because of the mismanagement, inequities, inefficiencies and perverse consequences in many of the well intentioned programs visited upon her province, that it is one of the four provinces at this point in time which is in inappropriate economic situation in a rich country like Canada.

It is utter nonsense to somehow suggest that we cannot logically and clearly examine a program and point out its inefficiencies and inequities because somehow this is a slur or criticism of the people who receive the program. The programs are administered by the federal government. We have a responsibility to make sure they are well administered. There is no responsibility on the part of the people who are receiving the program for the inefficiencies and inappropriate measures of the program.

We should have an honest and open debate about them without being accused of somehow taking unfair positions against certain Canadians. The whole point of this debate is to achieve and move toward fairness. I hope we can do that in a thoughtful and considered manner.

[Werner Schmidt, Reform, Kelowna, BC]

Mr. Speaker, I compliment my colleague from Calgary—Nose Hill for the concise history she gave of the equalization payment system in Canada.

I would like her to refer briefly again to the shift that took place. In the very beginning it was to make sure there was a balance in the distribution of wealth across Canada. It was so direct, so transparent and so simple that anyone could understand. Now it has become convoluted, difficult, complex and somewhat obscure.

Could the hon. member speculate on why it went from simplicity to complexity, from openness and transparency to obscurity and obfuscation in many cases?

[Diane Ablonczy, Reform, Calgary Nose Hill, AB]

Mr. Speaker, the simple answer is one word, politics. The program has been twisted and turned and jammed and jimmied to serve political masters and political ends that it was never meant to serve. It should be a simple macro calculation of provinces like some of the Atlantic provinces which have a smaller tax base but whose citizens deserve fair and equal services and of the amount that needs to be transferred from the wealthier provinces to achieve that. Instead we have had all kinds of political manipulation of the system. I would suggest that is the reason the system is not clear.

I point Canadians interested in the whole area of the inefficiencies of the system to Professor Boothe's studies, pages 24 to 29. I do not have time to go over them, but I believe he makes a very concise and lucid evaluation of where some of the inequities exist.

[Werner Schmidt, Reform, Kelowna, BC]

Mr. Speaker, first I thank the powers that be for the occasion to debate this very significant part of Canadian financial affairs. Within this debate we can come to the realization that many things are happening in Canada which are highly desirable. There are other things happening in Canada that are not desirable.

I want to make it abundantly clear that at the heart of this question is the heart of Canada. What do we as Canadians believe about one another? It is very significant for us to recognize that many people prefer to live in Canada than in other countries. In many instances they were born in other countries and chose to immigrate to Canada because they liked it here and because they felt they could live better lives and create a better situation for themselves. It feels good to have been born in a country where that characteristic is admired and envied in many other parts of the world.

Before I go any further in my particular remarks on the bill, I want to refer directly to the earlier remark of the member of the NDP who suggested that the Reform Party does not care about Canadians and that this is just a postering position.

I would like to read into the record the three points that clarify and are absolutely essential to the understanding of the heart of Canada. Canadians care about one another. I believe these words will probably quash at least partially the hon. member's statement. I hope she is listening because it is significant. I also assure her that I believe what I will read right now. I am there.

For the member's benefit, if for no one else's, Reform will begin negotiations with the provinces to amend the formula for equalization to make it more sustainable and ensure that equalization payments are refocused toward Canada's poorest provinces. Is that not exactly what the hon. member was alluding to? I loved her passion. I think we all need to become far more passionate about Canada than is often demonstrated.

The second point I would like the hon. member to remember is that Reform recognizes the need and the constitutional requirement for equalization and would ensure that transitional funding and flexibility would be available for any province which found its equalization entitlement reduced. If that does not speak directly to the concerns that have been expressed, I would like to know what does.

The third point is that under Reform equalization for the poorest provinces in Canada would not be reduced and could be increased subject to negotiations with all Canadian provinces. We would have this interaction among all Canadians.

That suggests to me that not only do we have a heart but we recognize that all other Canadians have a heart. What we need to recognize is that as we help each other we can help to build an even stronger nation and an even more desirable country than we have at the present time.

I would now like to refer to what exactly is the equalization that we are talking about. It is an unconditional grant. An unconditional transfer is perhaps a better way to say it. It is a transfer to the less well off provinces from the better off provinces. That is what it is. That is what we support.

The principle of equalization is embodied in the Constitution. This is not something which this particular government dreamed of at this time. Neither is it something that we suddenly discovered. It was there at the very beginning when this country came into being. It is in the Constitution. Interestingly, the provision is not in the formula. The provision is that this must happen. The Constitution did not say that a particular formula should be observed. Periodically the formula is amended to take into account changes in economic circumstances. That is the current position of the equalization payment provisions in legislation and in the Constitution.

What we also need to recognize is that as we go through history we notice that it has changed dramatically from a very simple taxation system, of which parts of it were transferred, to a highly complex system. There are 33 different measures to determine whether equalization payments should be made. It is needlessly complicated. It does not need to be that way.

What does that suggest? What does it make possible? Whenever we complicate something three things are possible. One, it is not easily understood. That means that there is a group of people who can become experts and everybody else has to believe their interpretation of how it works.

Second, that creates all kinds of other opportunities. It creates the opportunity to manipulate the formula and the inputs in such a way that would appear to arrive at the same conclusion as anyone else using the same formula would arrive at. However, we all know that when we examine this it does not turn out that way.

Let me give members one interesting example that happened in the first quarter of this year. Lo and behold when the premier of Prince Edward Island looked at the equalization payments he discovered that he was going to have a deficit budget. Then he noticed that it was okay to call an election. He called the election. What happened? The transfer payments were recalculated. All of a sudden he had a balanced budget. It was a $30 billion difference.

How did that happen? Did it happen because the formula changed? Did it happen because taxes changed? Did it happen because we had a new province? Did it happen because we had a new government in Ottawa? It was none of those things. Had suddenly the population base in Prince Edward Island changed? Had suddenly the GDP changed? No. Something went into this thing that changed the whole picture. Who knows exactly what happened. We could make all kinds of surmises, we could have all kinds of speculation, but nobody could prove the point.

What is the third thing that could happen? In that manipulation and development the whole system could become politically motivated and politically driven. It seems to me that the example I just used illustrates that is exactly what can happen.

The present equalization formula also encourages poor economic decision making by provincial governments and impedes free and efficient labour mobility. That point has been made before, but I want to put this in the context of another issue which has to do with the trade barriers that exist among provinces.

We seem to have developed in this country a preferential interpretation of the Constitution. When it suits us to interpret the Constitution one way, we do that. In other words, the federal government chooses sometimes to intervene in provincial affairs. How does it do that? It intervenes in the educational system. It intervenes in the health care system. What does that do?

The federal government has taken the Constitution, which says that those issues are completely within provincial jurisdiction, and it has intervened. Then it turned the other way. The Constitution also says that there shall be free movement of goods and services across Canada from one province to another. It shall be free. What have we got? We have 700 plus barriers to the moving of goods and services from one province to another, which costs Canadians billions of dollars every year.

On the one hand we interpret the Constitution as saying that the federal government can interfere in provincial affairs and on the other hand we interpret the constitution as saying that it cannot. What kind of sense does that make?

The reason that happens is because the formula has become so complex that it becomes the dictator of what happens. The result is that politics becomes the issue, the bells and whistles become the issue, rather than the heart of the matter which is to help people and to be fair, equitable, transparent and democratic about the whole thing.

That is the heart of this issue. That is why we have some real difficulty with this.

Does this mean that we do not want equalization payments? Does it mean that we should not have them? It means that we have to have equalization payments, which is what I said at the outset. We need them, but they should be transparent, they should be simple and they should be fair.

I want to move to another point which was made by Dan Usher, an economist and professor of economics at Queen's University.

I notice the hon. member opposite is laughing. Why is he laughing? Is he laughing because Dan Usher does not know what he is doing? He knows exactly what he is doing.

He concluded that the equalization program was inefficient, counterproductive and should be radically reformed or scrapped altogether. That is not our position. We do not believe it should be scrapped. But should it be radically reformed? Absolutely.

Usher argues that the ultimate benefit of equalization to the poor may be negligible, even non-existent, and is certainly less than if the federal sources were provided to the poor directly.

That is an interesting development. Give it to the poor people directly. That is ultimately who it is supposed to help. It is not supposed to help governments, it is supposed to help people. It is not the province of New Brunswick that is to be helped, it is the people who live in New Brunswick who are to be helped. That is where we are going. That is what we want to do.

A recent study by the Atlantic Institute for Market Studies found that the massive regional subsidies that have become part of Canada's fiscal and political makeup have done more economic harm than good. The conclusion is that Atlantic Canadians should look to their own economic resourcefulness and not to government or transfers from the rest of Canada. Wow. What a conclusion.

I also refer the hon. member to a conclusion of a former premier of New Brunswick, Mr. McKenna.

[An hon. member]

I don't like him.

[Werner Schmidt, Reform, Kelowna, BC]

The hon. member says she does not like him. That is her privilege.

I will refer to what he said to a conference of Canadians from across Canada: “Do not, first of all, give us grants and subsidies; rather, reduce our taxes. We will use the resources that are left in our pockets, that are left in our province, that are left in our corporations to greater advantage than if you filter them through the government”.

That was a premier who was saying “Let individual Canadians keep the money, the individual New Brunswicker”, rather than sending the money to Ottawa and then having it returned to the provinces to be filtered down.

In that process a lot of people lose money. They do not make money. I would suggest that even the hon. member who thinks Mr. McKenna does not know what he is talking about would spend her money more effectively than if she gave it to the premier of New Brunswick, the Prime Minister of Canada or any other politician or bureaucrat. She is wise in the expenditure of money. That is why she is here today. She knows how to spend money properly. She wants to represent her people so that they will be able to apply their resources in the best way possible. I commend her for that.

Allowing people to apply their own initiative, their own resourcefulness, would create a better world than the kind of world a government would create. The government's role should be to create an environment so that individuals can apply their skills, abilities and energies in a way that will be most productive.

The relationship between the federal government and the provinces has often been compromised by conflict, by the federal government intruding into provincial jurisdiction and by confrontation.

The national energy program created a direct confrontation with at least one province in Canada, but I will take an example that applies to every province, health care.

We know there was a time when the Liberal government, the current group that is in charge of Canada today, said it would never ever pay less than 50% of health care costs in Canada. It promised that would never change, and it underlined never. However, it did.

Not only did the amount change, but even as the proportion of the funding that came from the federal government changed it insisted that the provinces would get less money. And guess what? The provinces could not decide how they would make up the difference because they were told what to do by the federal government.

In other words, if a province wanted to introduce a special fee for a service it was not allowed to do that. If the province wanted the money it would have to spend it the way it was told to spend it.

That is not only unfair, it is downright dirty. Why would anybody want to do that? It took away the money and then told the provinces “Now you have less money to do this job. Do it our way”. Talk about conflict. Talk about confrontation. That is exactly what happened.

I want to return to the issue of interprovincial trade barriers. The Constitution says that we should have the free movement of goods and services across provincial boundaries. We want that. We want that very much.

The federal government has the responsibility to enforce the Constitution of Canada. What have we had? Nothing.

We agree that this is what we want and what does the federal government do? Nothing. How do we put those things together?

The government chooses to interpret the Constitution the way it wants to, the way it seems will be most advantageous to further its political agenda.

Do I blame the government for that? The Liberal Party has done that forever. The time has come for us not to do it from the top down, but to do it from the bottom up.

Canadians would take a different approach. Canadians want those barriers removed.

I was talking to a fellow in Ontario last week. He said that he finds it more difficult to trade his commodities across provinces than to ship them south into the United States.

What kind of sense does that make? On the one hand we have this great equalization program and then we make it difficult for the provinces to develop their economies by trading within their own country. However, they can trade freely across other borders. There is no logic. A decision has been made, but there has been no action.

I want to refer to a certain provision in this bill which I find absolutely insulting. I do not know if I should say insulting. It really caused me to envision all kinds of terrible things about what this government is really trying to do.

There are 33 tax elements. Guess what? I want to read this into the record. I know the parliamentary secretary is laughing. I think he knows exactly what I will read into the record.

There will be in these new 33 taxes eight different measures for oil and gas revenues. There will be eight different measures. How many different ways will gas and oil be measured? This is the list. There will be conventional new oil revenues. That is “conventional” and “new oil”. Then there will be conventional old oil revenues. These are somehow different. There is new oil and there is old oil, but in both cases it is conventional oil. I guess the difference is drawn between new and old. Where will the line be drawn between what is new and what is old, that which was covered last week or that which was covered a year ago? What is new? What is old? That is one complication.

Then there are heavy oil revenues. I guess that heavy oil weighs more per barrel than the other oil. I know better than that, but is it not interesting that they separate heavy oil from conventional oil? It talks about mined oil revenues. Those are the four oils.

Then it goes into the natural gas: domestically sold natural gas revenues, exported natural gas revenues, sales of crown leases and reservations on oil and natural gas lands. There are three gas measures and four oil measures. Here comes the catch all: oil and gas revenues, other than those described in paragraphs (q) to (w).

There are eight different ways of saying the same thing. The government wants to tax all oil and gas revenues, whether they are from conventional oil, heavy oil, old oil, new oil, gas, whether its sold domestically or whether it is exported. The government simply wants to tax all the revenues from oil and gas. Why in the world can it not say that? No, the government has to write it eight different ways. That is what is going on here. It is needlessly complicated.

[Tony Valeri, Liberal, Parliamentary Secretary to Minister of Finance]

Mr. Speaker, I know the hon. member indicated that I was smiling earlier. I was smiling because I could see in the passion the hon. member had in part of his speech his yearning to be back on the industry committee when we were talking about internal trade barriers among provinces. I had the opportunity to work with him on that.

In terms of his remarks on the equalization bill, he talks about the increased adjustments to Newfoundland and what happened. He knows that Ontario forms part of the five province standard and the increase in what is going on in Ontario really contributed to the adjustment to Newfoundland and other provinces.

The member talked about how the Reform Party would refocus the equalization system to Canada's poorest provinces. I have to ask the hon. member, which are Canada's poorest provinces? There are seven provinces today which are receiving equalization payments, the have not provinces. Which ones would he take off the list? Would it be Quebec, Manitoba, Saskatchewan?

The member said he would refocus the program on the poorest Canadian provinces. Some of them must not then be entitled to equalization payments according to how the hon. member described his Reform Party platform.

Then the member went on to say that Reform would also ensure that the poorest provinces would not have their equalization payments reduced under the Reform plan. In essence, all the adjustments that were made collectively have equalization payments going up to each and every have province.

Which would the hon. member take off the list? Which of the have not provinces would not receive equalization payments under the Reform Party platform?