Mr. Speaker, as this House knows, the Conservative Party supports the equalization program as an important and necessary means of building our nation. It is responsible for creating, or at least attempting to create, the conditions for relatively equal social services for Canadians regardless of where they live.
We also support the intent of the equalization program to, in conjunction with other federal fiscal structures, help provinces create the conditions that can lead to stronger local and provincial economies.
Over time, the formula calculating the amount of equalization paid to each province has changed. For example, as I told the House earlier this month, when Alberta was a have not province from 1957 to 1965, the oil and gas revenues the province earned were not clawed back by Ottawa under the equalization program. This allowed Alberta to build its oil and gas industry by using the profits to reinvest in the industry.
As we all know, that arrangement does not exist today for provinces like Newfoundland and Labrador, Nova Scotia and Saskatchewan, nor does it exist for the territories. I will talk quite a bit about the treatment of non-renewable natural resource revenues within the equalization formula today, because I think it is an issue that must be examined as we move forward with the renewal of the program.
Over the past several years, Conservatives have argued in favour of moving from the five province standard to a 10 province standard and for the removal of non-renewable natural resource revenues from the formula. We also believe that it is essential to provide for a phase-in period if any such changes are made to the existing formula to ensure that no province is hurt in the transition period.
We are disappointed that the government is not dealing with these issues head-on when there is such a wide consensus among territories and provinces on the changes necessary, but we support the review process that is under way and look forward to hearing from the panel on these very important issues.
The bill makes basic changes to the act, which were necessary to ensure certainty within the equalization program and to allocate the necessary payments over the next year. For that reason, we support it.
The bill sets a minimum funding floor of $10 billion for equalization and $1.9 billion for territorial formula financing for 2004-05. This is something that provinces and territories have called for as a means of protecting provinces against overall and individual declines in payments in 2004-05.
It also ensures that no province or territory receives less than the levels forecasted in the 2004 budget, thereby setting $10.9 billion for equalization and a total level of $2 billion for territorial formula financing in 2005-06.
In the middle of all this, a 3.5% per year escalator has been created for equalization and territorial formula financing, going through until 2009-10.
Finally, the bill offers a breakdown of provincial equalization allocation for 2005-06 and a breakdown of territorial financing allocation for 2005-06.
Very clearly, the bill recognizes, finally, what the provinces, territories and the Conservative Party have called for, that is, greater certainty for payments. However, there are many outstanding issues that need to be addressed and are not reflected in the bill.
The bill does not specify how the equalization in territorial formula financing levels will be allocated among the provinces and territories from 2006-07 forward. The federal government has launched a review by an independent panel of experts, on which the provinces and territories have been provided with two seats. However, we remain concerned that the federal government has retained final decision making authority as to how future levels should be allocated.
Most important, the bill does not remotely address the long-outstanding concerns the Conservative Party and the provinces and territories have had with respect to the inclusion of non-renewable resource revenue in the current equalization formula. Under the current formula, provinces that benefit from non-renewable resource revenues are subject to a clawback that results in lower equalization payments.
The bill also does not deal with non-renewable resource revenue-sharing outside of equalization, which means that the bill does nothing to solve the Prime Minister's ongoing broken promise to Newfoundland and Labrador and Nova Scotia.
Equally as important, the bill does not deal with non-renewable resource revenue sharing outside the territorial financing formula. The territorial financing formula is an important and necessary grant mechanism to address the present needs of the territories. The Conservative Party supports it, but we also believe it is imperative that the federal government take steps to develop a resource revenue sharing agreement with the territories to facilitate their desire for control over their own economy and movement toward economic self-sufficiency.
Non-renewable natural resources and how they are dealt with under the current equalization formula has become a major concern, an economic inhibitor for provinces and territories that wish to have full access to these revenues to develop their resource sectors further and to have control over their economic future. Equalization can and should be restructured to deal with non-renewable natural resources like oil and gas in Newfoundland and Labrador, Nova Scotia, Saskatchewan and the territories.
Newfoundland and Labrador presents a timely and interesting case study for this policy. We and many Canadians watched the equalization meeting in October very closely, and were disappointed at the Prime Minister's refusal to honour the promise he made during the election to both the Premier of Newfoundland and Labrador and the Premier of Nova Scotia. The Prime Minister attempted to use the equalization program as leverage to water down the commitment he made to these premiers during the election. The premier of Newfoundland and Labrador was not going to let that happen, and he rightly walked away from the equalization talks.
As I have told the House before, our party supports Newfoundland and Labrador's position with regard to its offshore resources. We will continue to advocate for the Prime Minister to keep his word to Newfoundland and Labrador. Put simply, the Conservative Party supports the efforts of Newfoundland and Labrador and Nova Scotia to receive 100% of their offshore oil revenues outside of the current equalization formula, with no cap and no restrictions.
I have raised this issue because, again, the manner in which the formula accounts for non-renewable natural resource revenues is one of the main points of contention regarding equalization in Canada. While this party believes that it is ultimately good that the government bring more certainty regarding aggregate amounts to the equalization program, we remain clear that we support the demands of the provinces and territories to see changes in the way that non-renewable resource revenues are accounted for within the formula.
I have also raised this because it highlights the neglect of the government on this issue. This is an issue that has been ongoing and needs to be dealt with immediately. Because the government has not addressed this issue, it has become a crisis in places like Newfoundland and Labrador. Other provinces and territories are watching closely to see what kind of deal the Atlantic provinces may receive.
If Newfoundland and Labrador is successful in achieving a deal, then other provinces and territories will ask to receive a similar deal, and for good reason. They are experiencing similar economic clawback due to their resource sector revenues. Of course, changes to the formula of this nature would mean less money in the federal coffers and more money in provinces. Therefore, provinces would have a better chance of providing social services and creating conditions for economic development on their own without the interference of the federal government.
This is a political non-starter for the government, which has for the past 11 years used the fiscal imbalance and the relative poverty of provinces and territories compared to the federal government to push its own agenda in areas of provincial and territorial jurisdiction. If the government were to amend the formula to remove revenues and royalties from non-renewable natural resources, the provinces in question would have the opportunity to use those revenues to further build their industry and infrastructure. The province would take income from taxes paid by companies and employees, which would be accounted for in the equalization program.
The federal government would still benefit from the personal income taxes that workers pay to provinces and to the government. The federal government would also benefit from corporate income taxes paid to the provinces and the government. Under the sort of change about which I am talking, it is not just the local province that benefits; all of Canada benefits.
When we consider economic development, then we start looking down the road, we can open the door to working with provinces to develop economic potential in those provinces and can realize that everyone benefits from a strong and economically vibrant and diverse Canada. By looking at provinces as places of potential, we have the opportunity to see what we can do through economic development to increase quality of life, social services and economic opportunity for young people in every region of our country and help provinces and territories realize their goal of becoming economically self-sufficient.
When we talk about equalization, equity remains the main perspective, but I would argue it is only part of the picture. Talking about equity, especially within the context of the equalization program, has taken on a form of a static conversation. Conversants assume that provinces will remain relatively the same in relation to one another. Ontario and Alberta are the have provinces, Saskatchewan and B.C. flirt between have and have not status and Manitoba, Quebec, and the Maritimes are the less well off provinces.
Taking this arrangement as a perennial constant, those who talk only from an equalizing perspective need to assume that this ranking of provinces in these groups will remain constant, which on the flip side assumes no changes in economic performance. We know this to be untrue. We know that every province works toward developing its economy and we know that all provinces and territories are making successful gains in economic diversification and the raising of quality of life within provinces.
This being the case, equalization program reforms need to be done with an eye toward economic development as a means of raising the quality of life of all Canadians. After all, the end goal of every province is twofold: first, to be able to provide increased and efficient services so that citizens have a better quality of life; and, second, to do it themselves, that is to become so successful that the province in question will not need a federal equalization payment.
It is within the context of an equalization formula, which is cognizant of economic development, that I raise concerns over the place of non-renewable natural resource revenues in any reformed formula. We are not there yet and it will take a Conservative government to get us there.
We also need to have a better sense of how non-renewable resources are accounted for with regard to Canada's territories as well. Bill C-24 does not address the outstanding concern that the Conservative Party and territories have in the need to develop resource revenue sharing agreements between the territories and the federal government. The territorial formula financing is an important and necessary grant mechanism to address the present needs of the territories.
We support the territorial formula financing, but also believe it is imperative that the federal government take steps to develop a resource revenue sharing agreement with the territories to facilitate the desire for control over their own economy and move to economic independence. Yukon has a devolution agreement with the federal government which would make it more independent and give the territory greater freedom in the management of its own affairs. The Northwest Territories is working toward a devolution agreement, and Nunavut is doing what it can to bring the federal government to the table with regard to a devolution agreement as well.
Part and parcel of devolution is greater control over natural resources found on territorial lands. Agreements such as these are important for practical reasons. If we talk to representatives from northern Canada, they will say that most of the money that goes north is actually spent in the south. For example, consider health care. As of now, if a major surgery is required, the northern government will pay for the patient to fly south, receive treatment, stay overnight, perhaps in a hotel, purchase food and then fly back. While a northern government foots the bill, it is the provincial economy in the south that benefits.
A different side of the same problem exists when it comes to resource extraction. Companies are often based out of a centre in the south. Workers often come from the south. These companies pay taxes in the south, as do the workers who do not claim official residence in the north. Likely, many of the workers are supporting families that live in cities like Edmonton, Ottawa or Quebec City, among others. They fly north, work as long as their rotation is in and likely fly home to be with their families or send cheques home regularly. The money is not spent in the north. The taxes are not paid in the north.
It is thus very important for northerners to have a greater say over their resource sector so the government can retain more money and so more year round northerners are working in the sector, thereby giving the government a stronger tax base. With that tax base, northern governments could attack their key priorities: economic development, stronger northern health care, a better education system and affordable housing. This is where they need to go and to get there they need certain adequate territorial financing, as well as an agreement regarding natural resource revenue sharing.
It is disconcerting for me when the Prime Minister goes overseas and muses about territories becoming provinces, when he is not engaging in the proper steps necessary to help territories with their most pressing concerns. That is to secure a resource sharing agreement to create the conditions they need so they can build a strong economy which will create more jobs in the north for both indigenous northerners and southerners and lead to greater self-reliance for northern governments.
One of the other concerns I have with the bill is around the new equalization floor. The bill introduces a new equalization floor which provides certainty for have not provinces that are attempting to create budgets and would like to know in advance roughly the amount of money they will receive from the equalization program. In terms of creating certainty, this is important. A floor protecting have not provinces from drastic changes in the economy already exist. However, while introducing a new equalization floor that better shields have not provinces from potential downturns in the economy, it provides less protection for have provinces and the federal government.
For example, situations may arise where the minimum equalization payments agreed by the federal government are higher than the payments dictated by the formula. In this instance, have not provinces may actually be equalized to a greater fiscal capacity than the national average. This belies the equality that stems from the equalization formula. Further, the equalization floor created in the agreement is based upon the largest federal payout in the past decade and then is escalated.
Looking at this from purely an economic perspective, we know that Ontario accounts for 50% of the economic activity measured by the equalization formula and a significant portion of federal revenues. As the province with the most exposure to the U.S. economy, Ontario faces economic risks created by increased U.S. deficits, risks created by the amount of U.S. debt held by China and Japan and economic shocks created by global uncertainty. These risk factors could conceivably add up to slow Ontario's economic growth to a point where the equalization formula would dictate that payments should be lower than the floor agreed to by the federal government. At the same time economic trouble in the Ontario economy would have a drastic impact on federal revenues.
In this scenario the federal government would have to make up the difference between the formula payment and the floor payment out of shrinking general revenue. By building in such a generous floor, the federal government effectively detaches have not provinces from potentially adverse economic realities.
Placing a fiscally imprudent floor in equalization payments, coupled with other significant fiscal commitments in health care, raises the risks associated with economic downturns. Certainly, these commitments limit the ability of the federal government to respond to a fiscal slowdown with measures such as tax cuts or targeted investments. Governments cannot rely on blind economic optimism when creating fiscal policy, especially in the face of current global volatility.
I want to return to another aspect of our policy, which is that no provinces should receive less money simply because the formula has changed. This is an important point. Provinces that need equalization need it to provide important social services to its citizens. A simple change in a formula does not change the overall economic picture of a province, but it could change the amount a province receives.
The shock of receiving less money is usually followed by the result of providing less services. Therefore, when the government makes these changes, it ought to be careful that provinces are treated fairly and do not end up with the short end of the stick. This side of the House will be watching very carefully to ensure that this problem does not exist and if it does, we will work to correct it.
However, we know the numbers involved are more certain and we look forward to the ideas that will be put on the table in the course of the review process. It is our hope that the end results of these ideas will ensure an equalization system that both fairly and adequately provides funds to provinces and at the same time does not hinder economic development as the current formula does.
We will have to wait for the panel of experts to present its recommendations before we say conclusively whether we fully support the process which the bill sets into motion. However, we agree there needs to be a step toward a system that is predictable. At least in perception, the bill is a good beginning.
As I noted earlier, we would have liked to have seen greater provincial involvement. Given the importance of the equalization program for the efficient functioning of provincial governments and the certainty of provincial economies, their voice would have been welcomed. I am sure they would have welcomed greater opportunities to express their views.
While the government did bow to pressure from the provinces for greater provincial involvement, in my mind it was not enough. If there is a chance that we could see greater involvement from provincial governments, we believe that would be appropriate and we would support such a move.
One thing missing in the reforms, which were implemented in the 2004 budget, is a reform that would have allowed provinces that which were overpaid a longer period to pay back their overpayment. These provinces, which are struggling to provide social services and infrastructure needs to their citizens, should not be forced to redesign their entire budget because the federal government has made an accounting error.
As for predictability, we also would like to see a moving three year average used to calculate payments. This would help to smooth out situations where provinces are over or underpaid and at the same time it would provide greater predictability to the provinces.
Finally, we are glad to see the government is now committed to a five year renewal schedule. Remaining committed to the five year renewal, again provides provinces with greater predictability and certainty and also gives the federal government the opportunity to utilize medium term economic forecasts when considering changes.
By moving to a 10 year plan or commitment, we see greater risk within the program's payment schedule and we are also concerned that the government's flexibility in administering the program is negatively affective.
In the end, our party will support the bill because it is the beginning of much needed changes to the equalization formula. It is an admission by the Liberal government regarding the problems that have plagued equalization in the past and it is a step in the right direction toward making the equalization program a better program. In this light, we anxiously await the report of the expert panel, and hope to see our recommended changes included.