Madam Speaker, I am pleased to open debate at second reading of Bill C-65, which proposes to amend the Federal-Provincial Fiscal Arrangements act.
This legislation involves the renewal of two federal programs—the provincial personal income tax revenue guarantee program and the equalization program—each for an additional five years.
Under the revenue guarantee program the federal government protects those provinces participating in tax collection agreements from large revenue reductions resulting from changes in federal tax policy. The major portion of this bill, however, deals with equalization, a program that in many ways defines the generous spirit of Canada.
Hon. members will be aware that the commitment to equalization payments is enshrined in section 36(2) of the Constitution. These payments exist so as to enable provincial governments of varying levels of affluence to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.
Equalization has a long tradition. It was established as a program in 1957 and has been continuously renewed and improved ever since. This government's commitment to equalization was clearly evident from the fact that this program was exempt from the restraint measures of the past five years when Canadians were facing a $42 billion deficit.
The most recent official estimates made last October indicated that receiving provinces would get almost $9 billion in 1998-99 from the federal government under equalization. These estimates will be updated later this month.
If we use the existing October estimates, it is clear that these transfers are very significant indeed. They can make up between 15% and 40% of total provincial revenues and the payments are unconditional. It means that receiving provinces can use them as they wish and experience has shown that they play a significant role in improving the quality of a wide array of public services.
Currently seven provinces benefit directly from equalization payments: Newfoundland, Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Manitoba and Saskatchewan.
There are also indirect benefits for all Canadians. We all benefit from knowing that we live in a country where the objective is to provide health care, education and basic public services at essentially the same level in all provinces.
In renewing the equalization program this bill proposes a package of improvements, improvements that aim to ensure that the program continues to accurately measure the revenue raising ability of each province.
The proposed modifications will be gradually phased in over the next five years so that the impacts on the provinces will be smoothed. In addition, this will give federal and provincial governments time to plan for changes in the amounts of the transfers.
The proposed modifications are expected, according to current estimates, to result in transfer increases of almost $50 million in 1999-2000, rising to about $200 million by the year 2003-04.
What makes this happen? There are three components to the equalization renewal package proposed in this bill. First, the equalization legislation will be renewed for five years. That provides a secure planning framework for the receiving provinces.
Second, the equalization ceiling and floor provisions will be improved. The ceiling provision provides protection to the federal government against unexpected increases in equalization payments. In other words, this prevents changing economic circumstances from unaffordably driving equalization payments through the roof.
The new ceiling will be set at $10 billion in 1999-2000 and will grow by the percentage change in gross domestic product. This change will ensure that the program remains affordable and sustainable over the five year renewal period.
The floor provision is the other side of the coin. It provides protection to the provincial governments against unexpected large and sudden decreases in equalization payments. The new floor will be applied equally across all receiving provinces. It will reduce the fluctuations in floor protection that can result from application of the equalization formula during a period of economic change. This will mean more predictable protection for provincial governments.
The third change is that improvements will be made in the measurement of the provinces' ability to raise revenues on their own. The equalization formula measures provincial revenue raising capacity by looking at over 30 different provincial taxes and comparing the results to a standard. It is on the basis of this exercise that the size of equalization transfers is calculated for each province.
However, the taxation environment is not static. It changes. The changes proposed in this bill are needed to ensure that the equalization program reflects existing provincial tax opportunities and practices.
These changes in measurement, which will be implemented through regulation, relate to five tax bases that require significant improvements and other tax bases that require technical changes because of revised or new data.
For example, changes are proposed for the measurement of the provinces' ability to raise sales taxes. The new base will now reflect the taxing practices of those provinces that have moved to the value added tax as well as those that have maintained the existing retail sales tax systems.
Similarly, because of increased activity related to games of chance, the treatment of revenues that flow from them needs to be updated.
The proposed changes will take into consideration the ability of provinces to raise revenues from casinos and video lottery terminals.
However, let us get the facts straight. We have not changed the revenues which equalization takes into account at all. Before the proposed changes we looked at all the revenues from all types of gambling and after the changes we continue to do so. What we have changed is our measure of which provinces have a high ability to raise these types of revenues and which provinces have a low capacity. Our measure of disparities has changed, not our measure of revenues.
For disparities, we used to look just at lottery ticket sales per capita. Now we look at lottery ticket sales per capita and the capacity that different provinces have to raise revenues from casinos and VLTs as measured by differences in their incomes.
The new way of measuring disparities is fairer to all provinces, but, let me emphasize once again, in no way encourages gambling.
In addition to this, a number of resources, such as forest products and natural gas, will be measured according to value rather than by volume as is currently the case.
At this point I would like to repeat what I said earlier about these modifications happening gradually. The proposed tax base changes will come into effect in stages over a five year period. This renewal follows more than two years of consultation with the provinces. Considerable tactical work was undertaken by both federal and provincial officials and was then reviewed by ministers of finance at both the federal and provincial levels.
I believe that hon. members will recognize that it has been important to fully analyse the equalization program in order to assess accurately what change is needed. I submit to this House that this has been done.
It is important to build on this groundwork and finish the renewal. Our deadline is March 31, 1999, when the current five year equalization legislation expires. It is important to have new legislation in place before that happens.
I want to make it clear that the passage of this bill will provide important continuing benefits to Canadians by assisting provincial governments in providing services on which Canadians can rely. It will provide for the next five years a stable funding horizon for equalization. It will provide substantial support for the less affluent provinces, underscoring the priority the government has placed on equalization, and ensuring that equalization receiving provinces have resources to provide the services their people need and want.
The legislation intends to maintain the fairness with which the equalization program is delivered. It is important legislation and I believe hon. members will support the speedy passage of it.