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The debate on the so-called fiscal imbalance is finally getting somewhere

I recently reproached our political media for their complacency in endorsing, without any genuine discussion, the idea that the federal budget surpluses of the past five years are proof of the existence of a structural fiscal imbalance, of which the provinces are the victims. That move provoked some howls of outrage from editorialists who prefer to shoot the messenger rather than analyse the message.

But that was not the case with the editorial by the president and editor of the daily Le Soleil, Mr. Alain Dubuc, entitled: "Fiscal imbalance : welcome to the circus" (19/10/02). Though describing my comments as an "untimely outburst," Mr. Dubuc reacted to them by presenting one of the rare in-depth analyses of the issue. So my words were not entirely in vain. It is not the first time I have come to realize that in politics it is sometimes worthwhile to rattle some cages, even though one may pay a personal price for it.

Mr. Dubuc stated that a fiscal imbalance does exist, but he was critical of the spin put on it by Premier Bernard Landry.

The president and editor of the Soleil rightly pointed out that the gratuitous accusation that the federal government is trying to strangle the provinces financially stems from "paranoia." Rather than a "federal plot," I am convinced there is a sincere desire on all sides, the federal government and the provinces, to find the best solutions for citizens. They want their governments to work together to provide them with high-quality public services.

Similarly, Mr. Dubuc distanced himself from the Séguin Commission report, commissioned by the Government of Quebec. This report is supposed to prove the existence of a fiscal imbalance. Mr. Dubuc called it a "serious" report, but said it is not the "gospel truth," and is a "political exercise" with "very shaky" conclusions. That is quite true, as I can easily demonstrate. If you had tried five years ago to make budget projections for this year using the Séguin formula, you would have come up with a $60 billion surplus for the Government of Canada and a $12 billion surplus for the Government of Quebec! It would be irresponsible to base our budgetary policy in the coming years on such an unreliable methodology.

That being said, Mr. Dubuc then sketched out three avenues for reflection which, if pushed further, would, I believe, lead one to conclude that a fiscal imbalance is absent in Canada.

He first emphasized the need to do nothing that might "affect Ottawa’s financial situation." In effect, it must be borne in mind that the federal debt load of $536 billion is twice as high as the provinces’. The Government of Canada’s surplus, which stood at $8.9 billion for the last completed budget year, may seem substantial, but represents only 5% of federal revenues. It would melt away like snow in summer if we eased up on our budgetary prudence. We would not have had such a surplus if Canada had experienced the economic downturn projected by private-sector economists at the time of the last federal budget in December 2001. Whereas they forecast 1.1% GDP growth for Canada in 2002, it will actually be 3.4% according to the International Monetary Fund (IMF). That unexpected performance by the Canadian economy is nothing less than exceptional under the circumstances. Average growth will be only 1.4% for G7 countries in 2002, again according to the IMF.

Pendulum effects on budgets are very considerable and dictate the greatest prudence. Let us look at the situation in other countries. The US federal government projected a US$230 billion surplus when it tabled the 2001-2002 budget; it is now projecting a US$165 billion deficit. In Europe, France, Italy, Germany and Portugal are experiencing serious financial problems.

Second, Mr. Dubuc noted that the alleged fiscal imbalance is not the reason that "Quebec’s tax burden is the highest in Canada." Indeed, the tax burden, both individual and corporate, is 40% higher in Quebec than elsewhere in the country. But it must be added that some other provinces, such as Ontario, have made substantial tax cuts in recent years. While federal transfers to the provinces have been restored to 1995 levels, tax cuts by the provinces have given them a shortfall of over $20 billion. The Government of Canada is not reproaching them for lowering their taxes, no more than it is suggesting they increase them. It is merely saying that the fact the provinces feel they are in a position to cut their taxes is one proof that a fiscal imbalance does not exist.

Third, Mr. Dubuc wrote that the Government of Canada would be hard pressed to make substantial spending cuts without "discontinuing activities appreciated by citizens." Indeed, wiping out high deficits and the spectacular turnaround of our public finances required enormous sacrifices by Canadians. As a percentage of GDP, federal program spending has been cut substantially in recent years, from 17.5% in 1992-93 to 11.6% in 2001-02 - the lowest levels since 1948-49! So it is no surprise that calls for reinvestment are pouring in from all directions: health, research and development, environment, infrastructure, defence...

In the circumstances, the Government of Canada is helping the provincial governments as best as it can. Federal transfers will increase by 6% a year in the coming years, whereas federal revenues are expected to grow by only 2% a year. The Government of Canada has said and continues to say that if it can find the flexibility to do more in the next budget, it will. Rather than a question of fiscal imbalance, it is a question of federal responsibility.

The Government of Canada helps the provinces partly through transfers, but mainly by fostering the good economic health of the country. If Canada has been able to avoid the economic downturn of the past couple of years, it is in large part because the Bank of Canada was able to lower interest rates when the time was right. It was able to do so notably because public finances, both federal and provincial, were in the best shape they had been in for 10 or 20 years. At the end of the day, the federal surplus is great news for all Canadians. Such a financial situation is the envy of citizens in other countries.

In short, federal surpluses are not a sign that the Government of Canada is awash in money. Rather, they are the fruits of an economic turnaround that Canadians have worked too hard to achieve to take it for granted. While maintaining the necessary budgetary discipline, the Government of Canada is helping its provincial partners as much as it can, and it hopes to be able to free up additional funding for health, for Kyoto, for infrastructure, for official languages...

There is no fiscal imbalance in Canada; there is rather a duty to help one another out. Governments’ responsibility, as Alain Dubuc concluded in his editorial, is always "to serve citizens better." Our governments will not do so by basing their actions on false premises, of which the fiscal imbalance hypothesis is one.

Open letter which Minister Stéphane Dion sent to the newspaper Le Soileil on October 22, 2002.