Finance Committee on Dec. 7th, 2022

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Chair.

Thank you to the witnesses for being here today.

I want to go back to Mr. Soderstrom. You mentioned some very interesting points. You have, obviously, been studying this for a lot longer than I have.

I wonder what effect of equalization should be contributed to regionalization. When you look at places like Alberta, GDP per capita is 185% of that of where I come from on Prince Edward Island, and the personal income in Alberta is about 160% more than it is on Prince Edward Island.

You talked about erroneous provincial claims and cost sharing with the provinces. You mentioned tax points.

Could you expand on that comment relative to tax points and how effective that is on the equalization formula?

[The Chair, Liberal, Peter Fonseca]

Professor Soderstrom, you're on mute.

There you go.

[Lee Soderstrom]

Unfortunately, I can't answer your question because I haven't looked at the implication of cost-sharing for the equalization payments.

[Heath MacDonald, Liberal, Malpeque, PE]

What was that? I didn't hear it.

[The Chair, Liberal, Peter Fonseca]

Can you repeat that, Professor Soderstrom? You may want to turn off your video so we can capture your sound better, because it's a little choppy.

[Lee Soderstrom]

Okay.

Again, I can't answer your question because I have not looked at the implications of cost-sharing arrangements for the fiscal transfer or the sharing payments.

[Heath MacDonald, Liberal, Malpeque, PE]

Mr. Soderstrom, you mentioned “tax points”. Could you expand on what you're talking about relative to tax points in the equalization formula?

[Lee Soderstrom]

Again, I don't understand how that links into the equalization formula. I just haven't looked at that.

[Heath MacDonald, Liberal, Malpeque, PE]

Okay. Thank you.

[Lee Soderstrom]

Do you want background on [Inaudible—Editor] issue generally?

[Heath MacDonald, Liberal, Malpeque, PE]

Yes.

[Lee Soderstrom]

In 1977, for the feds to be able to justify cutting back on their cash payments, the basic idea was to find a different source of financing for the provinces. And the provinces were quite keen on the idea that they would get a transfer of taxing powers from the federal government.

What this involved was a reduction by the federal government of the personal income taxes and a reduction in the corporate income tax. That allowed the provinces then to increase their taxation, generating additional revenue for health care without putting an added burden on the typical taxpayer when they take into account both the federal and the provincial taxes.

[The Chair, Liberal, Peter Fonseca]

You have a minute and a half.

[Heath MacDonald, Liberal, Malpeque, PE]

Okay.

Thank you, Mr. Soderstrom.

Mr. Béland, I'm going to go to you. You mentioned in your preamble that you had written about Australia's Commonwealth Grants Commission as a potential model we could use for equalization payments. Can you tell us little bit about this model and what Canada could learn from it?

[Daniel Béland]

Yes. Thank you very much for your question.

In Australia they have what they call the Commonwealth Grants Commission, which has existed since 1933. Of course, its mission has changed and been updated over the years. You have a body with a chairperson and at least two other members who are looking at fiscal federalism especially in the way, in Australia, they share the GST. They have a tax-sharing system there which is quite interesting, and I think Canada should also consider that, by the way. Basically their GST is shared with the territories and the six states in Australia.

The members of this Commonwealth Grants Commission look at public finance in the provinces and territories and at changing economic circumstances. They issue a report to the Australian Parliament and they make recommendations about equalization payments and fiscal transfers. In the end, of course, they don't make any final decisions. Parliament has to vote to reject or adopt these recommendations.

That system, I think, has an advantage over equalization of reducing or lowering the political temperature, because it's an arm's-length commission. It's politically independent. It's not civil servants working for their political masters within the government who do this. People at arm's length from the government make these recommendations.

With André Lecours and others, I have written about how this model could be useful for Canada. We could look into it, but not copy it and do exactly the same thing. I think a permanent body could be helpful in terms of equalization, but perhaps also we could look at even the CHT and the CST and how they interact.

The way equalization works in Canada right now—and this has been the case since the program was created in 1957—is that it is based only on the calculation of the fiscal capacity of provinces. What they do in Australia and in some other federal countries is that they also look at expenditure needs related to population aging, the indigenous population that they might have in the territories, the number of immigrants, and so forth. They take into account expenditure needs, not just fiscal capacity. The equalization system in Australia in even more complex than Canada's.

Certainly, I think we should consider changing the governance of equalization, because it's such a political hot potato, and having an arm's-length body might be helpful. It will always remain contentious because, again, it's about money, and there is political conflict among different parts of the country over this, but—

[The Chair, Liberal, Peter Fonseca]

Thank you, Professor Béland.

Thank you, MP MacDonald.

We have MP Ste-Marie, please, for six minutes.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Thank you to the witnesses for being here and for their very interesting testimony.

My questions will be for Mr. Giroux or M. Behrend.

Before asking them, I'd like to remind everyone of the purpose of this study on fiscal federalism, which is an initiative of our NDP colleague Mr. Daniel Blaikie. He wanted to move forward on suggestions made by Seth Klein, which we received at our initial meeting in the fall, and whose basic idea was to incorporate green transitional measures into fiscal federalism.

For today's meeting, I would like to return to the underpinnings of the fiscal federalism concept.

Mr. Giroux or M. Behrend, I may be catching you off guard, but can you give us an explanation of what you believe fiscal federalism to be?

[Yves Giroux]

I'm not an expert in constitutionalism, the separation of powers, or federal or alternative structures, but I can explain it in my own words, Fiscal federalism is an organization of states that join together and that share some of their resources in order to redistribute them to provide an equitable sharing of resources within a federation.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Okay. Thank you.

My understanding of it is that under the Constitution, which identified separate areas of jurisdiction, each order of government has its roles to play and ideally, revenue should match expenditures in each of these fields of jurisdiction.

If I've understood it correctly, in fiscal federalism, there can be programs. From the outset of this meeting, we've been talking about three federal transfer programs: the Canada health transfer, the Canada social transfer and the equalization program. This enables other governments, below the federal level, so to speak, to provide their services, and possibly do some resource redistribution within the federation.

I'd like to hear your comments on that.

[Yves Giroux]

That indeed is the nature of the arrangements between the federal, provincial and territorial governments of Canada. Although provincial and territorial governments have virtually the same tax base as the federal government, the value varies from one province or territory to another owing to fiscal capacity disparities.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you. That's very clear.

You've prepared quite a few reports on fiscal sustainability. The most recent is the 2022 report, which was published at the end of July.

Could you remind us of the main thrusts of this report and the conclusions you drew?

[Yves Giroux]

Of course.

I'll exclude the pension plans, because they are sustainable over the long term. That's the conclusion we came to, just as we had expected.

The major conclusions from the fiscal sustainability report were that the overall government sector was sustainable over the long term. By that we mean a period of 75 years, based on the current status of the policies. In other words, if we were to go into autopilot with the current policies for a 75-year period, there would not be a perpetual increase in debt.

However, the situation is better at the federal level than in the provinces as a whole. The federal situation, when we assessed it in July, was sustainable over the long term. For the provinces and territories, taken together, the situation is not. The explanation for this discrepancy is that most federal expenditures are limited by GDP growth. What we're talking about here are the transfers to the provincial governments and to individuals. In contrast, the principal provincial expenditures are rising, mainly because of the aging population. Elderly or very old people require a lot more health care than those under 65 or under 50. That's what explains the disparity.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you very much for your answer.

This is a finding that seems to appear in most of your fiscal sustainability reports. In each of your reports, in fact, your very long-term projections indicate that the federal government will be all right and able to have surpluses, or even reduce its debt, whereas the provinces could, over the long term, be facing accumulated deficits that would increase debt. However, the situation described in the last report, even though it shows a better outlook for the federal government than for the provinces, is not as bad for the provinces as it was in the previous reports.

Do you know why that would be?

[Yves Giroux]

This can be largely explained by a budgetary situation that has improved in the provinces and territories. The situation at the outset is an important factor in determining the trajectory of the next 75 years and the point of arrival. We have also revised some of the economic and demographic data.

That's what explains the relative improvement in the overall state of affairs for the provinces.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

The fact remains, however, that the situation is better for the federal government.

Thank you for this information.

Mr. Chair, I believe I have approximately a minute left, do I not?