Madam Speaker, Bill C-65, which renews the equalization program, is renewing one of the cornerstones of this country.
The equalization program has played a major role in defining the Canadian federation. It ensures that all provinces have the resources they need to provide reasonably comparable services to Canadians no matter where they live.
Equalization is an unconditional federal payment. Provinces can use it as they wish. That is a basic outline of what the equalization bill is about but over the years and this year as in other years many questions have been raised about the system. Let us look at some of these questions.
Some have asked if there is not a simpler approach by which to measure disparities among provinces. Some have suggested for example a measure based on gross domestic product of each province. One has to go back to the concept of the equalization program. All provinces are to be brought up to a standard to enable them to provide comparable services at comparable levels of taxation.
The calculation is based on a legislated formula that models typical provincial tax systems. This formula is called a representative tax system. The complexity of the program arises as a result of the complexity of provincial tax systems that are being modelled. The representative tax system has proved to be a reliable and stable measure of provincial fiscal capacity, a measure that has widespread support as a fair and comprehensive approach.
The representative tax system uses around 30 tax bases to measure a province's relative capacity to raise revenues. It might be possible to construct a simpler equalization formula that works satisfactorily and the federal and provincial governments will continue to evaluate and investigate alternative methods.
One suggestion for a simpler approach has been to use GDP per capita as a measure to measure the provinces' fiscal capacities. But a great deal more research is necessary before considering an equalization based on a new approach.
Another question is whether equalization creates disincentives to growth. The government would respond that when a province's ability to raise revenues increases due to growth in that province equalization payments decline. This was how the program was designed to work in the first place, but the equalization program is not a disincentive to provincial economic development. It would be difficult to imagine that a province would turn its back on opportunities to increase incomes and jobs for its people just because its equalization payments might decline.
The Reform Party has raised the question of whether the proposed changes in Bill C-65 address all the recommendations on the topic made by the auditor general. The auditor general's report discussed the design and operation of the equalization program and made a number of recommendations.
During the course of this renewal the federal government discussed all these recommendations with its provincial counterparts. Many of those recommendations are being addressed through this bill such as those involving the resource tax bases and the ceiling design.
But other recommendations were more complex and it is felt by both federal and provincial governments that it needs more research and discussion, but both levels of government will continue this research and discussion once the program has been renewed.
Some people have asked why not move to a ten province standard. This program is based on five provinces. The purpose of equalization is to ensure provinces have sufficient revenues to provide reasonably comparable levels of services at reasonably comparable levels of taxation.
The current five province standard fully meets the federal government's constitutional commitment to make equalization payments and fully achieves the intended purpose. The five province standard was introduced after the significant volatility in the resource sector in the 1970s. These fluctuations generated large fluctuations in equalization entitlements.
Now the risk of volatility is lower with the five province standard than with the ten province standard which increased the potential for volatility. If implemented again, the ten province standard would add considerably to the cost of the program, an anticipated $1 billion each year.
Some people are confused by the terms floor and ceiling. The floor protects individual provinces against large declines in their equalization payments from one year to the next. Some provinces criticize the current floor because the protection it offers could fluctuate by large amounts with relatively small changes in a province's economic situation. The proposed new floor in Bill C-65 provides a similar level of protection to the current floor but will not be subject to the same variations which have been criticized.
What about the ceiling? The purpose of the ceiling is to protect the federal government from unsustainable large increases in equalization expenditures. The current ceiling limits the total size of the program to an amount equal to the 1992 equalization entitlements increased each year by the growth of GDP between 1992 and the year in question.
Whenever the size of the program exceeds the ceiling the program standard is reduced, lowering each province's entitlement. In 1998-99 the ceiling is about $10.4 billion, about $1.2 billion higher than the entitlement. The proposed new ceiling would be set at $10 billion in the years 1999-2000. Like the current ceiling, it will grow in subsequent years by GDP growth rate. Receiving provinces have argued for the removal of the ceiling. The federal government has indicated that the ceiling is essential to ensure the program remains affordable and sustainable.
Some have asked why the lottery and gaming revenues base is changing. The current measure of a province's ability to raise revenues from this source of revenue is based solely on lottery ticket sales in the province. However, significant changes have occurred over the years in the lottery and gaming area. The federal government is proposing changes to the equalization program that will take into consideration all types of gaming activity and their revenue. The proposed changes will recognize provinces' abilities to raise revenues from new and rapidly growing sources, for example casinos, video lottery terminals, break open tickets and other games of chance.
Some have asked why the equalization formula does not take into account the different expenditure needs. The answer is that the federal government has undertaken a number of studies to examine various measures of expenditure needs. Both levels of government concluded that there were too many issues that needed to be resolved before expenditure need could be incorporated into equalization such as how to decide what expenditures are needed. The federal and provincial governments will continue to study the issues surrounding the measurement of need and the inclusion of such measurement in equalization.
The new bill addresses most of the questions that have been raised. It must be remembered by all members that the agreements reached at these five year renewal periods are agreements that have taken a long time to hammer out between federal and provincial representatives. They have agreed. Before us in the House now is the result of much of that work. Each amendment reflects an agreement that has been concluded between representatives of all levels of government. I hope the House will respect the work our colleagues in the provincial houses have put into this and which our own representatives have agreed to.