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"Our federation in the era of surpluses"
Notes for an address by
the President of the Privy Council and
Minister of Intergovernmental Affairs
the Honourable Stéphane Dion
to the Trois-Rivières
Chamber of Commerce
Trois-Rivières, Quebec
February 4, 2000
As luck would have it, I have the honour today of
addressing the Trois-Rivières Chamber of Commerce right on the heels of the
Premiers' Conference, which was held in Quebec City. No need to hunt around for
a topic, then. You're expecting me to give the federal government's reaction to
the premiers' meeting, and that's exactly what I intend to do.
Yesterday, the premiers called for the next
federal budget to maintain a fair balance between Canadians' main priorities
including tax cuts and new investments in health and social programs.
In addition to reiterating a call for federal tax
cuts (without specifying numbers), the premiers requested among other things:
- a substantial increase in the Canada Health
and Social Transfer - through which the federal government provides the
provinces with direct assistance in funding for health care, post-secondary
education, and social assistance;
- increased federal assistance to farmers
(again, without specifying numbers).
I am not the Minister of Finance, and today is
not budget day. I cannot, therefore, reveal to you how the Government of Canada
will respond to these proposals. What I can do, though, in my capacity as
Minister of Intergovernmental Affairs, is look at this budgetary discussion
within the context of the evolution of our federation. This I will do by first
glancing back at the recent past, a period marked by spectacular progress in
restoring our country's fiscal health, and then by turning towards the future
and the budgetary challenges that our governments, both federal and provincial,
will need to tackle.
1. How our federation restored its fiscal
health
It is wonderful to be able to stand here today
and discuss what to do with the surplus rather than what to do to reduce the
deficit. Remember the pessimism rampant throughout Canada in the early 1990s.
The difficult debates in the post-Meech period, which dragged on right until the
referendum in 1995, coincided with the recession and accumulated deficits. With
our country's public finances plunging further and further into the red, and the
Wall Street Journal declaring us a candidate for Third-World status, many were
branding Canada an economic failure.
It was the period during which Mr. Lucien
Bouchard, then the leader of the Bloc, led a campaign urging Quebecers to leave
Canada in order to avoid "bankruptcy": "If they [Canadians
outside Quebec] want to go bankrupt, that's their problem. But we're going to
save our skin," he announced on August 14, 1993.
Today, just a few years later, all our
governments, both federal and provincial, can look forward to a growing degree
of fiscal flexibility in the years to come, according to the findings of a Royal
Bank study released in September 1999. The World Competitiveness Yearbook of
1999 ranks Canada third among 47 countries in terms of the degree of improvement
in managing its public finances. We are leading all our main trading partners in
this category. Not bad for a country people ought to have left to avoid
bankruptcy!
Our federation put its finances back on a healthy
footing by drawing on its ability to combine a diverse set of approaches with a
common course of action. The strategy Quebec adopted to restore its fiscal
health differed from that adopted in Saskatchewan or New Brunswick. As for the
federal government, it relied on a team of ministers and MPs representing all
the regions of the country. I would like to single out in particular the
contributions made by three great Quebeckers: Jean Chrétien, Paul Martin and
Marcel Massé.
But it is thanks primarily to the sacrifices made
by all Canadians that our country has been able to restore its fiscal health.
Now that the surpluses have arrived and economic growth is in full swing,
everyone wants to see his or her efforts rewarded. We all want to receive our
share of the surplus, in view of the contribution we feel we have made in
eliminating the deficit.
The result is that governments are up against
incredible pressure emanating from every segment of society, with calls for tax
cuts or program reinvestment.
Of course the premiers also want to benefit. They
feel they have contributed more than their share towards eliminating the federal
deficit. Hence their main demand: reinvesting in the Canada Health and Social
Transfer, which provides funding mainly for health care, but also for our
universities.
The premiers are calling on the federal
government to increase its portion of funding of health care, post secondary
education and social assistance to what they deem to be the 1994-1995 level.
Some of them have gone so far as to claim that the federal government balanced
its books on their provinces' backs, and that while the surpluses may be in
Ottawa, the needs are in the provinces.
This interpretation is inaccurate. In reality,
total Social Transfer funding to the provinces in 2001-2002, $31 billion, will
exceed the $29.4 billion provided in 1994-1995.
Transfers to the provinces for health, higher
education and social assistance have long had two components:
• a cash component provided every year by the
Government of Canada to the provinces;
• a tax point transfer component, which the
provincial governments too often omit from their calculations. What is this
component? Tax points are the result of a federal tax reduction, enabling the
provinces to raise their own taxes. In this way they were able to use the
freed-up funding in order to finance their health care, education and social
assistance spending.
And this is not a federal invention. Tax point
transfers have been made at the express request of the provinces as a federal
contribution to health, higher education and social assistance programs. By
neglecting to take them into account, the provincial governments underestimate
the federal portion of funding in these three fields.
It is especially important for the have-not
provinces – including Quebec – that the Canada Health and Social Transfer
take account of the inequality of the value of these tax points from province to
province in its formula for redistributing cash transfers. Since tax points are
worth less for the have-not provinces than for the wealthier ones, this
inequality is compensated by the distribution of cash transfers. For example, if
tax points were not taken into account and only cash transfers were allocated in
proportion to population, the Government of Quebec would have received $200
million less in last year's budget.
The premiers also overlook the fact that the
other major transfer, equalization payments – which benefit seven of the ten
provinces – have continued to grow even during the struggle to bring down the
deficit. For example, the Quebec government received $4.5 billion in
equalization payments in 1999-2000, compared with $4 billion in 1994-1995. This
is substantial assistance, which the provincial governments, remember, can use
any way they see fit.
I could say many other things to highlight the
federal viewpoint in its entirety. For example:
• This government's first budget focussed its
cuts on direct federal expenditures and increased the transfers to the
provinces, to give them time to adjust to future cuts.
• In order to give the provinces greater
flexibility, the federal government consolidated its main transfers in the areas
of health, social assistance and post secondary education into a single
envelope, allowing each provincial government to decide how it will allocate
funding in these areas.
• The provinces' finances benefited from the
decline in interest rates, a decline that itself benefited from the improvement
in federal finances.
• The provinces sometimes cut their own
transfers more than the federal government did (just talk to the municipalities
that are taking the Quebec government to court). • The federal
government made it a priority to help the provincial governments once its own
financial situation had improved. The provinces directly received 41.6% of new
spending in the last two budgets, including $11.5 billion in new health
transfers announced last year, the largest ever investment by the federal
government.
• Transfers to the provinces are among the only
expenditure items of the federal government that have increased since 1993-1994,
whereas our overall program spending decreased from $120 billion to $111 billion
last year.
What's more, the provincial governments have
themselves made enormous strides toward putting their fiscal house in order. In
1993, they were all running deficits. According to the latest estimates, six
provinces had a balanced budget or a surplus in 1998-1999. All the provinces
have cut taxes, especially Ontario. The Royal Bank study I referred to earlier
predicts that, before 2004-2005, eight of the provinces, including Quebec, will
be recording surpluses comparable to Ottawa's, in terms of percentage of GDP.
I hope that hearing the other side of the story
will convince you that the government of Jean Chrétien has taken into account
the provinces' interests during its efforts to restore Canada's fiscal health.
But I am pretty sure that as members of the Trois-Rivières business community,
it matters little to you which version of the past is more accurate. All that
matters, as far as you're concerned, is that your governments work together so
that they are better prepared to tackle the challenges which lie ahead. And you
are absolutely right.
2. The budgetary challenges which lie
ahead.
I would ask you to put yourselves in the shoes
– soon the new shoes – of Canada's Minister of Finance.
The suggestions made by the premiers, which I
referred to earlier in my address, are entirely valid. But there are other
important considerations that the Minister of Finance must take into account as
well.
First of all, the last thing we want to do –
and I think we're all in agreement on this – is fall back into an era of
deficits. The Finance Minister must therefore be encouraged to continue his
prudent approach to managing our finances. Let's be clear: the government of
Canada is not made of money. We do not take out a $100 billion surplus to spend
as we wish, as Mr. Bouchard seemed to suggest yesterday.
It is true that the Finance Minister's
projections indicate that the federal government could enjoy a $23 billion
surplus by 2004 - 2005 but only if we do not reduce taxes nor reinvest in health
or any other of the priorities of Canadians. However, our budgetary flexibility
is much narrower over the coming two fiscal years included in the upcoming
budget, since the projections indicate only a $5.5 billion surplus next year and
$8.5 billion the year after.
To continue Mr. Martin's careful management, we
must keep reducing our debt load. The federal government is committed to paying
down Canada's accumulated debt, which currently sits at about $577 billion, by
some $3 billion a year. Total provincial debt – $261 billion – is less than
half the debt of the federal government, even though total provincial revenues
exceed federal revenues ($167 billion versus $156 billion last year).
Consequently, the federal government remains more vulnerable than the provinces
to interest rate hikes. And we all know that increases have occurred this week
and that others are possible in the coming months, given the indications coming
from the United States.
Because of this higher debt, servicing charges
take a much bigger bite out of federal revenues than is the case with the
provinces and territories. Today, the Government of Canada must devote 27% of
its revenues to servicing the debt; for the provinces, the average is 13%. The
figure in Quebec is about 17%.
It is especially important to reduce our
debt-servicing burden now, while the immense cohort of baby-boomers has not
reached retirement age yet. The proportion of Canadians 65 and over, now 12% of
the population, is expected to double by the year 2050. Canada will need to have
the financial flexibility to assume the inflated costs of our pension plans and
health care system brought about by the greying of our population. A finance
minister needs to consider the long term when preparing his budget.
But as Keynes was fond of saying, in the long
term we're all dead. A finance minister and a government must also take into
account the pressing needs of the here and now.
• The federal government is permanently
committed to our health system and has indicated many times that it is ready to
make new investments in this sector – more than the $11.5 billion announced
last year – as its financial situation improves.
• Canadian families need a boost as well. In
the Throne Speech, the federal government pledged to increase the Child Tax
Benefit, expanding on the existing first two components worth $850 million, and
to increase parental benefits by $1.2 billion.
• The homeless must be helped now, and that is
why the Government has announced a series of new measures valued at $750
million. And because certain segments of Canada's agriculture industry are
facing hard times, Ottawa recently announced $1.1 billion in increased annual
assistance.
• We must continue to invest in our municipal
and highway infrastructure. In my travels throughout Canada, all the mayors I
have spoken to have told me how eagerly they are awaiting the new infrastructure
program announced in the Throne Speech. Premier Harris, not exactly known as a
lavish spender, has called on Ottawa for $2 billion in new money over a
three-year period.
• To enhance our competitiveness in the
knowledge-based economy, we need to keep up our investment in research, and this
is on top of the $5.4 billion over four years in new spending on higher
education and research announced in the 1998 and 1999 budgets.
• Economic development also depends on regional
development. We need to retain the ability to foster economic growth as needed
in a region like yours, through strategic, targeted investments such as:
- the opening this week of the international
coating centre (I'm told that coating is a paper finishing technology);
- the launch of the St-Maurice Valley ‘technopole'
on January 27;
- the establishment of a Canadian institute for
tourism and e-commerce in Shawinigan;
- numerous other projects for which the federal
government will provide $39 million in funding over the next five years.
• Federal spending on Aboriginal peoples is
growing rapidly because of the special demographic pressures faced by this
population. The costs associated with an eventual settlement of Aboriginal land
claims could very well run into the billions of dollars.
• Then there is the matter of Canada's
ever-expanding international responsibilities, which represent urgent needs:
national defence, diplomatic services, international assistance, coast guard,
customs control and immigration.
• And I haven't even touched on Canada's
fundamental responsibility to contribute to our planet's sustainable
development. We made some expensive commitments in Kyoto. The quality of our
environment hangs in the balance.
• Lastly, there are a host of other areas where
the Government had to put off for several years the spending needed to maintain
the integrity of its programs. A few billion dollars will need to be put aside
for this.
Have I forgotten anything? Oh yes, of course –
tax cuts! The 1998 and 1999 budgets provided for $7.5 billion in tax relief for
Canadians. We need to continue on that path. Prime Minister Jean Chrétien has
promised Canadians he would maintain a proper balance between reinvestments and
tax cuts. An easing of the tax burden will be announced as part of the upcoming
budget: both the Prime Minister and the Minister of Finance have said so on
numerous occasions.
Conclusion
Will our government's next budget fully and
immediately satisfy all these demands which, taken together, add up to billions
and billions of dollars? Of course not – if it did, we'd be knee-deep in
deficits again.
This government will follow the balanced,
responsible approach that the Liberals – and the government of Jean Chrétien
– are known for.
And from my own perspective as Minister of
Intergovernmental Affairs, there is no doubt in my mind that our upcoming budget
will offer some form of additional assistance to our constitutional partners:
the provincial governments. Just look at each of the areas I've talked about:
health care, family assistance, universities, economic development and fiscal
policy. In none of these areas can both orders of government, federal and
provincial, play a useful role if they ignore each other. On the contrary, they
need to work together efficiently, while respecting their own jurisdictions. We
must not lose sight of this goal as we get into the inevitable discussions about
money.
Our government's next budget will improve
Canadians' quality of life while enabling their federation to function better.
By showing Canadians what they can accomplish together, the budget will
strengthen our country's unity.
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