Madam Speaker, I am pleased to speak to Bill C-24, which is a very important bill. I mainly want to go over the fundamental principles of the equalization program. Then we will be better equipped to review the proposals as well as the agreement on equalization reached last fall between the provincial premiers and the federal government.
Allow me also, for review and evaluation purposes, to take a look at the $2.6 billion agreement that was just signed between the federal government and the Atlantic provinces—Newfoundland and Labrador, in particular. This will also help us to understand the position the Bloc Québécois has taken on Bill C-24.
First, what is equalization? Far too often people speak of equalization and far too often they do not really grasp this formula, which dates back to 1947. The report of the Royal Commission on Dominion-Provincial Relations, commonly referred to as the Rowell-Sirois Commission, painted the picture of a type of federal program geared essentially toward one thing. It would be set up so that from coast to coast in Canada, the provinces and territories would have comparable levels of fiscal capacity in order to provide comparable services to their constituents.
It is a wealth redistribution program reflecting the fact that, at the time—and I hope it is still there today—there was a concern for inter-regional equity in Canada in terms of the services provided to the public.
This program was implemented approximately forty years ago, and it is the only federal program that is constitutionalized, which means that equalization is mentioned in the Constitution, and it is the only transfer program that is actually enshrined in the Constitution Act of 1982.
To determine the amount of the equalization payment for a given province, or to determine, in the first place, whether or not a province is entitled to equalization, the fiscal capacity of each province is established . What is fiscal capacity? It is the capacity of each province to raise revenue from their taxpayers, individual or corporate, either through property taxes, direct or indirect taxes, or personal income tax, naturally. There are 33 government revenue sources included in the equalization formula.
Once the fiscal capacity of each province has been established, an average is calculated using five of the provinces. This average is then used to set equalization standards to decide which provinces will qualify for equalization because their fiscal capacity is lower than the average of the five provinces used for calculation purposes, and which will not receive any, because their fiscal capacity is higher than this five-province average.
Once the provinces that qualify are known, the amount of the equalization payment each one will receive is calculated on a per capita basis. This involves figuring how much a given province needs per capita to reach the average capacity of the five provinces used for calculation purposes, that is, how much it should get in equalization from the federal government to make up the difference .
The fundamental principle underlying equalization is inter-regional equity. That is the first broad principle.
The second principle underlying equalization is fairness to the taxpayers, ensuring that, regardless of where they live, be it Newfoundland, British Columbia or Quebec, they receive essentially the same level of service.
The third principle is the strict and rigorous measurement of each province's fiscal capacity.
For that, regular calculations must be done. Each year, the estimates are recalculated and factual data sought for each of the 33 revenue sources, for each provincial government. As a result, each year, it is essential that this fiscal capacity be assessed. If it is not, our outlook might be off. For example, provinces may have gotten wealthier over the previous year or increased their fiscal capacity, so they probably exceed the established average fiscal capacity based on the five-province standard. If so, they would not be entitled to equalization payments, even if they had been entitled to them that year or during the past two years.
It is perfectly logical and normal, when a province's revenues and fiscal capacity increase, for its equalization payments to decrease. Everyone knows this. When a province gets richer, its equalization payments necessarily decrease. This principle is completely acceptable and accepted across Canada, particularly in Quebec.
It is unacceptable, however, when, first, the annual fiscal capacity of each province is not considered and agreements are negotiated such as the one reached last October, whereby the last payments the provinces received, in 2002 and 2003, would be indexed to inflation, meaning these payments would be increased by an additional factor, each year, without however requiring any recalculations. The last year is used to extrapolate the amounts for the next five years, until specialists can examine this matter and find a better way to allocate or index equalization payments.
This is problematic. The very principle of periodic, meaning annual, calculations has just been trampled. We have just been told that the dynamic fiscal capacity will no longer be calculated on an annual basis for each province. Instead, an amount provided in 2002-03 will be indexed to inflation over the next five years, to determine the equalization payment.
How can the first principle of equalization—determining the actual wealth of provinces in any given year to see if they are entitled to equalization or not based on the five-province average—be respected? We no longer have this annual picture. Already, one of the fundamental principles of equalization has been violated.
I am not sure whether the Minister of Finance is aware of this or not. The Prime Minister should know since he was finance minister for eight years and he had to juggle with the equalization formula. Now we are in a situation where the calculation of the 33 funding sources is ignored year after year and for two years now the government has simply been increasing a predetermined amount. That is the first problem.
Another problem is that the equalization formula is dated. For the past 15 years we have been talking about improving it and correcting the implausibilities in calculating the 33 funding sources. Instead of change, instead of implementing any of the suggestions made in all this time—particularly in the past five years—in order to truly achieve greater accuracy in the annual estimates, at the meeting in October the Minister of Finance together with the Prime Minister preferred, as I was saying, to apply an inflation factor to a previously calculated amount. Nonetheless, he has not understood that the amount that was set two years ago was arrived at through an incorrect formula and does not reflect the true fiscal capacity of any given province.
Rather than take their work seriously, the Prime Minister and the Minister of Finance chose to use a faulty formula to calculate the equalization payments for the provinces for the next five years. This is the second rather hazy aspect of this agreement and its terms.
So they began with a faulty formula and ended up with a faulty result, of course, rather than doing a thorough job and reforming the equalization formula once and for all, with three or four major improvements. It seems to me that is what ought to have been done, rather than coming up with a dubious agreement like this.
I will give just two of the suggestions that have been made over the years to improve the equalization system. First, why use five provinces to establish the national average, so that provinces with a fiscal capacity over and above that figure receive no equalization payments, and those who are under that figure per capita do? Why not use the ten provinces and the two territories? Why not have a proper overview with a calculation of the fiscal capacity of each province and a per capita average for the ten? Then the real average of the ten provinces would be used to determine the amounts and the recipients.
This has been discussed for 15 years. I have seen documentation on it ever since 1993. It is enough to make a person's hair stand on end, although in my case that is just a figure of speech, of course. There are piles of documents explaining why the ten provinces need to be included in setting the standard. It does not take that much paperwork to explain that all of the provinces must be included in the calculation. The way an average is calculated—a basic principle I trust the senior bureaucrats have not forgotten—is to take all the data for each participant, in this case each province. Then you divide by the number of provinces. This gives the average. Why use five rather than ten? I invite you to look into this. Apparently there has always been a great deal of effort expended by senior finance officials not to give in to the obvious: an average is calculated by addition and the use of a quotient that includes all participants in the program, i.e. ten provinces and two territories.
There is also property tax. My interests are not strictly parochial, quite the contrary. Give ten economists the mandate to find a way to measure a measurable event and I am sure they will come up with ten different solutions, each more complex than the other. That is what happened with the calculation of property tax. Instead of using actual figures showing each province's capacity to raise tax revenue from property taxes in each major municipality for instance, a complex calculation—several pages of calculations in fact—is necessary to arrive at an approximation which experts call a proxy. Given that it has to be uniform for all the provinces, this approximation results in a terrifying formula. Even for math fans who enjoy trying their hand at complex formulas, this one is unbelievable. It is up there with the worse horror stories ever produced by the human mind.
Comparing this proxy, this approximation, to actual figures often reveals humongous differences. In property tax revenues, there can be a difference of up to 30% or 35% between the reality and the approximations. A statistician looking at these results would say that the error margin is way too high. A 2% or 3% difference is usually acceptable in approximate calculations, as compared to the reality. But when the difference exceeds 30% or 35%, this means that the calculations are wrong. So, this is one problem among many others with this equalization formula. This fundamental problem actually calls into question this formula's capacity to draw an accurate picture of each province's fiscal capacity.
This is the first criticism that can be made. If you start with a defective formula, take the very defective result of this defective formula, say that, over the next five years, this is how it will be in terms of equalization payments and inflate that amount, this simply means that a defective amount obtained through a defective formula has just been indexed.
Since we already have all this documentation and all the arguments for improving the equalization formula, would it not have been easy in October, to come up with a new formula instead of fiddling around with this one? The result is that in the years ahead they will stop working on the problem and simply index the 2002-03 amounts.
This is one of the criticisms we have with respect to this agreement which, in our opinion, tramples the fundamental goal of equalization, which is really to identify which provinces are richer and which poorer, and ensure that by redistributing the wealth, all the people can be provided with services.
There is another problem. It is clear to see that the provinces are unsatisfied with this equalization formula, as they were with last October's agreement. It is clear that there is a basic, even more fundamental issue involving the Canadian provinces, Quebec and the federal government, and that is the fiscal imbalance.
Not so long ago, the federal government said that some people called this issue the fiscal imbalance, while other people talked about fiscal pressures. The government, and particularly the Prime Minister, forgot to say that they must have got the words “some” and “other” mixed up.
All parties in the House, except the Liberal Party, believe there is a fundamental imbalance between the federal government's ability to get tax revenues from the taxpayers and to fulfill its mandates, but that the provinces are unable to collect revenues to provide services directly to the people, such as health, education, income support, and other services which correspond to their jurisdictions as expressly set out in the Constitution.
We find ourselves faced with an agreement in which the problem of fiscal imbalance has not been solved, and it shows. In fact, despite an agreement which the federal government calls very generous, there are still several billion dollars in the federal government's coffers that could be used for purposes other than accumulating political capital, as the Liberals have done, invading provincial jurisdictions, as the federal government has done, especially over the last seven or eight years, since the surpluses first began.
In short, this agreement does not solve the whole issue of the fiscal imbalance. The taxing abilities of each province are not addressed. More inequities are created, because we still have a formula that was far from perfect. Therefore, only imperfect numbers will come out of it.
More important still, we are also faced with a situation where, after the conclusion of this agreement among the first ministers of the provinces, Quebec and Canada, the federal government and certain provinces reached special agreements. I can name a few of them. I will come back to possible criticism of such agreements.
Following last October's equalization agreement, the first special agreement was reached between the Minister of Finance—originally from Saskatchewan—and the Premier of Saskatchewan. This province was offered $590 million. It owed the federal government $590 million in equalization overpayments. The decision was made to reach a special agreement with Saskatchewan. It was not identified as such. That province was told that it would not have to repay this overpayment. It got this money as a gift.
In contrast, Quebec had an equalization overpayment of over $2 billion. The government tells us that we will have to repay this money, but that it will be nice to us and give us 10 years to do so.
It is the same thing for the agreement with Newfoundland. A special agreement was concluded with Newfoundland, for $2.6 billion. An overall improvement to the equalization formula is dismissed and the waters are muddied.
It is impossible to apply a general equalization formula and not consider certain revenues for some provinces and keep revenues for others. That is not how things work. The system cannot work this way.
If offshore oil and gas revenues are not considered and hydroelectric revenues in Quebec are included, an inequitable situation has been created, which adds to the inequity I mentioned with regard to this imperfect equalization formula. We will have the opportunity to talk about this during questions and comments.