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The Government of Canada’s budgetary prudence serves Canadians well

In the October 24 edition of the Tribune, Mr. Michel Morin suggested that it would be "arrogant" for the Government of Canada to say there is no fiscal imbalance in Canada. Mr. Morin may rest assured that the Government of Canada’s position is inspired solely by the public interest.

The federal budget surpluses of the past five years are not proof of the existence of a structural fiscal imbalance, of which the provinces are the victims. Rather, they are the fruits of an economic turnaround that Canadians have worked too hard to achieve to take for granted.

The Government of Canada is not awash in money. It must be borne in mind that the federal debt load of $536 billion is over 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 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 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.

Canada would be abandoning the budgetary prudence that has served it so well if the federal and provincial governments were to base their budgetary policies in the coming years on as unreliable a methodology as that recommended in the report by the Séguin Commission. 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! The conclusions of the Séguin report are unrealistic.

Under these 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.

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 criticizing 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.

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, 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 etc. But it will do so while maintaining the budgetary prudence that gives our country the healthiest public finances in the G-7, according to a recent report by the International Monetary Fund.

There is no fiscal imbalance in Canada; there is rather a duty to help one another out.

Open letter sent by Minister Stéphane Dion to the newspaper La Tribune and published October 30, 2002.