Mr. Speaker, I am pleased to have the opportunity to debate Bill C-3 at second reading. It amends the Federal-Provincial Fiscal Arrangements Act and Federal Post-Secondary Education and Health Contributions Act.
Bill C-3 is centred on the renewal of the equalization program, which is in fact the cornerstone of fiscal federalism in Canada. The objective of equalization, whose principle is enshrined in the Canadian Constitution, is to enable provincial governments to offer to the Canadian people fairly comparable public service levels at fairly comparable tax levels.
Equalization has a long tradition. It was established as a program in 1957. Even here the wartime and post-war tax rental agreements implicitly equalized provincial revenues. Indeed in 1867 higher statutory subsidies were paid to Nova Scotia and New Brunswick than Ontario and Quebec in recognition of their disproportionate loss of customs duties and excise taxes upon entry into Confederation.
Because equalization is paid only to the less wealthy provinces, it is the most progressive of the major federal transfers to the provinces. In 1994-95 it is anticipated that the government will provide about $8.5 billion in equalization to receiving provinces. This means that a provincial government along with its local governments that levies average rates of tax will have per capita revenues of $5,000 from taxes and equalization to fund public services.
However as we all know the context for this year's renewal of equalization is unprecedented. The federal government's fiscal situation is worse today than in 1992 and much worse than in 1987 and 1982, previous times of equalization renewal.
In our deliberations on renewing equalization we have balanced the need to be fiscally responsible with the singular role of equalization in underpinning the unique sense of Canadian sharing.
I think the bill is moving in that direction. It calls for an increase in equalization payments of 5.5 per cent a year for the next five years. It also provides for several changes to the tax base in order to update and improve the measurement of provincial tax capacity, which is essential to maintain the equity of the program. For the provinces these tax base updates will translate into gains of about $165 million next year and some $900 million in the next five years.
In addition, the government has promised the provinces not to amend this formula in the next five years. The provinces will then be able to plan their budgets in a stable climate.
Clearly the renewal package has to be affordable. This is why we have retained a ceiling on equalization, one that will be effective in providing protection to the federal government's ability to finance the program. The ceiling limits the cumulative growth in equalization to no more than the growth of the economy from a base year. This means for example if the economy grows 5 per cent from the base in the first year, equalization can grow no more than 5 per cent. If in the second year the economy grows a further 5 per cent, the cumulative or total two-year growth of equalization is 10 per cent.
The year 1992-93 has been retained as the base. It is a year of relatively modest equalization payout. Unlike previous equalization renewals where the first year of the term was not subject to a ceiling constraint and in fact set the base year, we have put a limit on the payout for the first year. In current fiscal circumstances it is simply not appropriate to have an open-ended first year. Having 1992-93 as the base year uses a year where the data
are close to final, that is to say subject to little revision. This will provide more certainty on payments for both the federal government and the provinces.
Now let me go into some details of the bill.
First, equalization will be renewed for the next five years. Given the commitment to maintain the structure of the formula, this will give more stability to the provinces receiving equalization payments.
Second, the level of the five provinces, namely Quebec, Ontario, Manitoba, Saskatchewan and British Columbia, whose provincial fiscal capacity is being raised will be maintained.
Third, as I said earlier, the ceiling based on the 1992-93 fiscal year will stay in place.
Fourth, the program floors will remain unchanged. The floors provide protection to provinces against large year to year declines in equalization.
Fifth, certain tax base changes to update the measurement of the provinces' fiscal capacity will be introduced. This is essential to maintain the integrity of the program.
Sixth, the legislation will contain a means to alleviate excessive reductions in equalization for provinces with specific and exceptionally large proportions of the tax base for certain natural resources. This will remove a longstanding irritant to the provinces on this so-called tax back issue.
Finally it is important to note the base for the ceiling will be adjusted so that the provinces can benefit from the tax base updates and tax back even if the ceiling applies.
In closing, passage of this bill will have beneficial effects for Canadians and the provincial governments, providing essential services to them. It will provide for the next five years a stable funding regime for equalization. It will provide substantial support for the less wealthy provinces, underscoring the priority the government puts on equalization. It maintains the fairness and equity of the program and it is fiscally responsible. It is fully consistent with the government's deficit target.
I commend the bill for the consideration of the House. I hope with co-operation from all sides we can obtain second reading of the bill promptly this day so that it can be studied in detail in the standing committee.