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.