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"The Financial State of
our Governments: The Balanced Federation"
Notes for an address
by the Honourable Stéphane Dion,
President of the Privy Council and
Minister of Intergovernmental Affairs
Keynote address to the
Saint-Laurent Chambers of Commerce
Saint-Laurent, Quebec
April 10, 2001
Check against delivery
It
has now been five years that I have had the honour of representing the
riding of Saint-Laurent-Cartierville in the House of Commons. While drawing
a lot of inspiration from the great lady who preceded me, Shirley Maheu, I
have tried to impart my own style, to be innovative. And one of the
innovations I am most attached to is this financial assessment of the
federation you invite me to make each spring.
This
year, I think the topic that is especially noteworthy is the fiscal balance
between the federal and provincial governments. The provincial governments -
and not just that of Quebec - question whether a balance really exists at
this time.
While
they may not all indulge in the kind of hyperbole that leads our Quebec
government to talk of "fiscal strangulation" of the provinces, no
less, many of them have appropriated the slogan: the money is in Ottawa, the
needs are in the provinces.
That
slogan does not correspond to reality. To be sure, the federal government,
under the leadership of the Right Honourable Jean Chrétien, has done a
spectacular job of putting its financial house in order since 1993. But the
provinces have also considerably improved the state of their finances.
Contrary to what some people may believe, the federal government will not be
awash in surpluses in the coming years. Just like the provinces, in the
coming years it will need to carefully manage the margin of safety that has
been acquired through so many sacrifices made by Canadians.
That
being said, whether we think there is a fiscal balance or not, we must agree
that this is a very important issue. As Canada's Intergovernmental Affairs
Minister, I believe it is important that we have a strong federation, not
just a strong federal government.
After
examining the financial state of the federal and provincial governments, I
will turn to the specific case of health care costs. We will see that,
rather than fiscal imbalance, we need to talk about the collective
responsibility of our governments.
1. The financial state of the federal government
Nothing does more to create the impression of a fiscal imbalance than the
surpluses the federal government has managed to accumulate. Let us take a
look at this.
It is
true that the federal government is planning to devote at least $10 billion
this year to paying down the debt. But that is actually in the budget of the
year that has just ended, so it does not reflect the substantial $100
billion tax cut over five years announced by Finance Minister Paul Martin in
his economic statement of October 18, 2000, or the $26.6 billion in new
spending over five years announced in that economic statement.
Those
announcements mark a turning point in federal budgetary prospects: our
spending - including our transfers to the provinces - will grow more quickly
in the coming years than it did during the 1990s, while our revenue will
grow more slowly.
Incidentally, in light of the economic slowdown being felt in the United
States, financial analysts are calling for the greatest possible prudence
from the federal government. According to TD Economics, for instance, "for
the most part they [the surpluses] have already been used."
("Using the Federal Budget Surplus: Is there any left?",
March 1, 2001).
I
acknowledge that, thanks to shrewd management, the federal government is
beginning this decade on a much more solid footing than it did in the early
80s or early 90s. But prudence is still the watchword. We should not forget
that the federal government has a heavier debt load than the provinces. Debt
servicing absorbs 26 cents of every dollar of federal revenue compared to a
provincial average of 12 cents (around 15 cents for Quebec). If the federal
government were to start running deficits again, the consequences in terms
of loss of confidence in the economy and higher interest rates would affect
everyone, including the provincial governments.
Even
more than at the provincial level, federal revenue and spending are exposed
to the effects of a possible economic slowdown, for one thing because of
Ottawa's relatively large share of very cyclical revenues - such as
corporate income tax and social insurance contributions - as well as its
responsibility for the employment insurance program. Federal revenue and
spending have both fluctuated more than that of the provinces during recent
economic cycles. So in the present situation, it should not be expected that
the federal government will continue to run substantial surpluses like those
of the past two years.
That
being said, the federal government has made financial assistance to the
provinces a priority. Ever since it balanced the budget, in the 1997-1998
fiscal year, new federal spending (for the period 1997-1998 to 2002-2003)
has totalled $66.7 billion. Of that amount, $25.1 billion, or 37.6%,
will have been transferred directly to the provincial governments.
Incidentally, those figures do not include automatic equalization increases
since these did not constitute federal "initiatives" per se.
Nevertheless, those increases have been worth $3.0 billion to the receiving
provinces since 1997-1998. In addition, the Government of Canada has
committed to increasing its transfers to the provinces for health and social
programs by a further $15.1 billion for the period 2003-2004 to 2005-2006.
2. The financial situation of the provincial
governments
Now
let's look at the circumstances of the provinces, understanding that they
differ considerably from one province to another, with wealthy Alberta
clearly distinguishing itself from the others.
Eight
out of ten provinces anticipate a balanced or surplus budget for the current
fiscal year. The situation in the two provinces still running a deficit
(Newfoundland and Nova Scotia) is improving considerably. All provinces
foresee a reduction in their net debt to Gross Domestic Product (GDP) ratio.
Most of the provinces that have already brought down their 2001 budget have
made tax cuts this year.
On
average, provincial revenue is growing at the same rate as federal revenue.
Roughly speaking, our government revenues have increased at a slightly
slower rate than our economy. For instance, between 1991-1992 and 1999-2000
provincial revenue fell from 20.6% of GDP to 19.8%, while federal revenue
fell from 19.0% of GDP to 18.0%. Five provinces (including Quebec) enjoyed
stronger revenue growth than the federal government did during that period.
(Only Newfoundland - owing to the decrease in its population - experienced
significantly weaker revenue growth than did the federal government.)
There
is no indication of slower provincial revenue growth in the future compared
with federal revenue. We need to bear in mind that, under our Constitution,
the two levels of government have access to approximately the same revenue
sources (whereas in other federations the states/Länder/cantons have more
limited access to revenue sources). Moreover, the tax bases that are
currently seeing higher growth rates (natural resource royalties and gaming
revenues) belong to the provinces, not to Ottawa.
In
short, we cannot talk about an imbalance in a context in which the provinces
have a lighter debt load than the federal government and are running
surpluses, cutting their taxes and increasing their spending.
As an
illustration, let's look at the recent Marois budget. It contains $500
million in debt reduction, $3.5 billion of new tax cuts over three years,
several billion dollars in new spending, and the creation of a special $950
million reserve. Ms. Marois herself has estimated she will have a $5 billion
margin of flexibility for the year just ending and next year. The federal
government is very pleased to have contributed to this good news, including
by increasing its transfers to the Government of Quebec by $1.8 billion.
That
clashes with the theory of "fiscal strangulation" advanced by
Premier Landry in the inaugural speech of March 22. For a government that
says it is "strangled," it is breathing pretty well.
Ms.
Marois has declared that Quebecers pay $33.1 billion in taxes to Ottawa
(which is accurate for 1998, the latest available statistic) and that "it
is with this money that the central government is accumulating impressive
surpluses which it is using to invade Quebec's areas of jurisdiction."
[translation] In point of fact, the Minister neglects to mention that
Quebecers received $38.9 billion in federal spending in 1998 - a surplus of
$5.8 billion.
3. The health care challenge
The
provinces place a great deal of emphasis on the fact that the growth in
health care costs exerts tremendous fiscal pressure on them. It is true that
they devoted an average of 30.3% of their program spending to health in
1995, and that this figure climbed to 34.1% in 2000. Increasing short- and
longer-term fiscal pressure can also be anticipated, owing mainly to soaring
medical technology costs but also to the aging of the population.
The
provinces lament the fact that the federal government had to reduce its
transfers during the period of cuts. In fact, during that period, in which
it eliminated a $42 billion annual deficit, the Chrétien government
concentrated its efforts on cutting its own direct spending more deeply than
its transfers to the provinces. When we take into account, as we should, not
only cash transfers but tax point transfers as well, total major transfers
to the provinces were reduced by 4.5%, while direct federal spending
decreased by 5.2% between 1993-1994 and 1997-1998.
Since
balancing the budget, the Government of Canada has made health a priority.
Of the $25.1 billion in additional transfers to them, the provinces have
used the lion's share for health spending. The federal government has also
devoted $5.1 billion to health research, disease prevention, the
anti-tobacco strategy, Aboriginal health care, the Canadian Blood Supply
System, and other priorities in the health field.
The
increase in federal transfers contributes to the flexibility now at the
provinces' disposal. To some extent, the rapid growth in their health
spending since 1999 has been a matter of playing catch-up. A little known
fact is that during the 1990s, provincial revenue grew more quickly than
provincial health spending. In point of fact, for the provinces as a whole,
the share of revenue devoted to health is smaller than it was ten years ago,
dropping on average from 36.6% in 1992 to 32.7% in 2000.
Similarly, provincial health spending, which represented on average 6.8% of
GDP in 1991, decreased to 6.0% of GDP in 2000.
We
need to use the flexibility that is now available to us as effectively as
possible. Everyone agrees with Mr. Landry that: "The problems with
health are not just questions of money. [...] This will be solved
with cultural changes in the system, with other, more modern management
methods, with the use of contemporary management techniques for large
systems. We have to work on that as well." ("TVA en
direct," 12:30 p.m., March 2, 2000) [translation]
We
will need every bit of the wealth of information produced by the Clair
commission in Quebec, the Fyke commission in Saskatchewan, and the Romanow
commission and all of the reflection taking place elsewhere in Canada and
throughout the world in order to make the right decisions to give us ever
more effective and humane health policies.
Conclusion
This
debate on fiscal balance is not exclusively Canada's. In other federations
as well, the equivalents of our provincial governments believe that their
federal government should help them more. Indeed, even here at home, our
municipalities are doing exactly the same thing. They too think that their
provincial government should transfer more funding to them.
What
is specific to Quebec is that some people depict these normal tensions
between governments as a reason to separate from Canada. Incidentally, these
are the same people who were calling for separation when the federal
government was racking up huge deficits.
When
the "feds" are in deficit, it is proof that they are incompetent;
when they are running surpluses, it is proof that they are
"strangling" Quebec. When it rains, it is the feds' fault. When it
is sunny, it is in spite of the feds. Those who are making these kinds of
comments would do better to admit that they want to separate from Canada
regardless, whatever its financial situation. I hope that the Séguin
commission, which the Government of Quebec recently created to examine
solely the issue of fiscal balance, will not fall into that rut and will
address itself only to proposing improvements to the Canadian federation on
the basis of a competent and objective examination.
In
fact, it is a sign of good health that our governments have differences of
opinion over surpluses. To a far greater extent than at the beginning of the
two previous decades, our governments, like our private sector, are well
positioned to take on the challenges of any slowdown in the international
economy.
I
believe I have shown that there is no fiscal imbalance, nor any will to use
federal surpluses to "invade" provincial jurisdictions. Rather,
there is a need for both levels of government to manage public finances
strictly.
Prime
Minister Jean Chrétien's approach is a balanced one: balance among tax
cuts, strategic reinvestment and debt reduction; balance between a strong
federal government, strong provinces and, above all, a strong relationship
of mutual support among them.
I
know the provinces would like us to help them more. And we will continue to
do so, to the extent possible, recognizing that we do not just support each
other through cash transfers alone. When a government, federal or
provincial, decreases its debt burden, for example, it helps all the other
governments, because it reduces the collective debt and helps to bring down
interest rates.
We
also need to continually improve the ways we work together. In the current
economic situation, we need to do so more than ever, while respecting each
other's jurisdictions. All our energies must be focussed on this. Canadians
have made many sacrifices in order to put the era of deficits behind us.
They aspire to greater prosperity and social justice. I know that I can
count on you, the business community of Saint-Laurent, to help us reach that
goal.
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