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"Intergovernmental relations in an era of federal
surpluses"
Notes for an address
by the Honourable Stéphane Dion
President of the Privy Council and
Minister of Intergovernmental Affairs
At the Toronto Board of Trade
Toronto, Ontario
December 6, 2002
Check against delivery
Things are going well in Canada at this dawn of the decade. Our economy has
managed to avoid the economic downturn that is hitting other industrialized
countries, the unity of the country is strengthened, and our federal government
is no longer accumulating deficits. It has even been running surpluses for five
years now.
And for five years, our Prime Minister, the Right Honourable Jean Chrétien,
who as you know has many years of experience in politics, has reiterated this
warning to his Cabinet and his caucus: governing in a period of surpluses will
prove to be at least as difficult as in the time of deficits.
The existence of a surplus makes everyone salivate. Each wants his share,
sometimes to the point of forgetting all of the discipline that was required to
get out of the deficit rut. As the Prime Minister said in a speech he gave on
August 30, in St. Gallen, Switzerland, on the occasion of the International
Conference on Federalism: "It seems to be the case, in Canada at least,
that managing a surplus can prove to be as challenging as managing a deficit –
perhaps more. The focus and discipline that united all governments as we
restored order to our public finances has, to some extent, and in some quarters,
been replaced by rising expectations. And a tendency to look to the federal
government as a treasure house awash in surpluses that will never end."
It is normal for a situation of budget surpluses to create this type of
tension within a federation. So it is no surprise that our provincial and
territorial governments are pressing the federal government to transfer more
money to them, because its financial situation seems to be better than theirs. I
find this quite understandable, and the Government of Canada is indeed committed
to supporting its partners in the federation as best it can in the
circumstances. It intends particularly to strengthen its partnership with the
provinces and territories in the field of health, one of the main priorities of
Canadians. But it also wants to support them in other areas where they call upon
it: infrastructure, agriculture, urban challenges, the environment, social
policy, assistance for the lumber sector, and so on.
Over and above the inevitable tensions, I would like to amicably suggest
three principles to my provincial and territorial colleagues which, if
respected, could help ensure that intergovernmental relations best serve the
public interest in this era of federal surpluses. I would like to thank the
Toronto Board of Trade for giving me this opportunity to outline these
principles, at a time when our governments are undertaking discussions leading
up to the First Ministers' Meeting in early 2003.
First principle : all governments must call on Canadians to never relax
budgetary discipline
I can well understand that the provincial and territorial governments look
upon the federal surplus with envy while they are struggling to maintain
balanced budgets.
Nevertheless, they should not give Canadians the impression that "the
federal government [is] a treasure house awash in surpluses that will never end,"1
to reiterate Prime Minister Chrétien's phrase. The Government of Canada is not
afloat in money. Keep in mind that the federal debt load of $536 billion is over
twice as high as that of 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 like snow in summer if we relaxed 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 3.5% 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. The most recent predictions show instead a US$165 billion deficit. In
Europe, the governments of France, Italy, Germany and Portugal are experiencing
serious financial problems.
Canada is an open economy, after all. If the economies of the United States,
Europe and Japan were growing at a rate as impressive as ours, rather than
showing signs of weakness, and if the governments of those countries were
running surpluses comparable to ours rather than grappling with substantial
deficits, our Finance Minister, the Honourable John Manley, would certainly be
looking to the next budget year with increased optimism. But in the
circumstances, everyone, including his provincial and territorial colleagues,
should congratulate him on his prudence.
The provincial and territorial finance ministers know full well cash
transfers are not the principal way the federal government can be useful to
them. Above all, the federal government supports them by helping to put in place
the conditions of a healthy economy whose growth fills the coffers of the
provincial and territorial governments better than federal transfers ever could.
Now, the economic track record of not only the Chrétien government, but the
federation as a whole, is impressive. In a very recent report, the International
Monetary Fund described Canada's macroeconomic performance since the 1990s as
"exceptional," adding it "owes much to the sound policy
framework and its skillful implementation."2
If Canada has been able to avoid the economic downturn at the dawn of this
decade, 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 primarily because
public finances, both federal and provincial, were healthier than they had been
10 or 20 years ago.
In short, it is normal for our governments to discuss vigorously the best way
to use federal surpluses. But they must not lose a single opportunity to point
out to Canadians that those surpluses are excellent news in themselves, the
fruits of an economic turnaround that Canadians have worked too hard to achieve
to take for granted.
Second principle : all governments must assume their own
responsibilities
I have no problem with the provincial and territorial governments pointing
out that the Government of Canada has responsibilities toward the federation as
a whole, and not just to itself. One of the federal government's
responsibilities is to support its partners. Cash transfers by the federal
government to the provinces and territories are one form that support can take.
Federal transfers have two advantages within a federation. The first is to
help the provinces and territories better direct their activities toward
achieving national objectives. For example, the Canada Health Act seeks
to ensure that in Canada, access to health care does not depend on the size of a
patient's wallet. Federal transfers help achieve that national objective.
Second, federal transfers enable the provinces that are less wealthy than
average to provide services reasonably comparable to those provided by the other
provinces. This is the rationale for equalization. Even when the transfer is
redistributed to all provinces on a per-capita basis, it retains a wealth
redistribution effect because the less wealthy provinces are supported beyond
their fiscal capacity.
However, there is always the risk that federal transfers will have the
negative effect of making the governments that receive them less responsible.
Rather than managing their budgets prudently, they may yield to a certain
laxness in relying on federal funds.
From that perspective, I feel the theme of the so-called fiscal imbalance,
which the provinces have endorsed in recent years, is very debatable. The slogan
they assign that theme – "the money is in Ottawa, the needs are in the
provinces" – clearly undermines responsibility. It does not do justice to
the provinces by depicting them as powerless governments. They deserve better
than this belittling image they give themselves. As the OECD points out in a
recent study,3 it would be difficult to find
constituent entities of a federation more autonomous and responsible for their
own budgets than our provinces.
Within a federation, there cannot be an imbalance to the detriment of one
order of government when the latter has access to all revenue sources and even
has a monopoly on such major sources as natural resource royalties (and Canada
is rich in natural resources) and lotteries. The Mayor of Toronto, Mel Lastman,
might find himself in a fiscal imbalance situation, in that revenue sources for
the City of Toronto would be too limited in relation to its obligations. This
could not be the case for Premier Ernie Eves, as his government has access to
all revenue sources.
Each government must assume its responsibilities in order for a federation to
work properly. The provincial governments have chosen to lower their taxes in
recent years. They must accept the responsibility for this. While federal
transfers to the provinces have been restored to 1995 levels, tax cuts by the
provinces have given them a shortfall of over $22 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
are lowering their taxes is one proof that a fiscal imbalance does not exist.
As the Prime Minister said in his speech in St. Gallen: "it is
illogical for one level to choose to reduce taxes and then claim that it lacks
the fiscal resources needed for new investments."
Your provincial government has been especially keen on cutting taxes. Again,
I do not reproach this enthusiasm. I simply say that it must accept the
consequences, good or bad. It alone has accounted for 57% of provincial income
tax cuts since 1995, which represents a $13 billion shortfall in relation to
revenue it could have collected had it not reduced taxes. As for federal cash
transfers to the Government of Ontario, they increased by $549 million during
the same period. Has that $13 billion in tax cuts benefited Ontarians, or have
they led to undue reductions in the quality of services provided by the province
in the areas of health, the environment, education and so on? Ontario voters
will answer that question in the next provincial election.
In my province, the provincial government levies an individual income tax and
business taxes that are 40% higher than elsewhere in the country, yet it is
second-last among the provinces in terms of per capita health spending. Are
Quebecers getting their money's worth? It is up to them to answer in the next
provincial election.
The provincial governments have to take responsibility for their own track
records. The fiscal imbalance slogan should not be used as an easy way out. That
slogan is just another way of repeating for any and all situations that
"it's the fed's fault".
In its next budget, the Government of Canada will increase transfers to the
provinces because that is one of its responsibilities. It is normal for the
provinces to remind it of that responsibility, with as much emphasis as they
want. But let us agree that the provinces, as well, must assume their own
responsibilities.
Third principle : all governments must strive to ensure that the tone
of their debates is a credit to Canadians
I will always remember the main argument brandished in the 1995 referendum,
by that formidable orator, Lucien Bouchard, was that Quebec's secession would
put "an end to the squabbling" (« la fin de la chicane »).
Canada seemed, in the view of too many Quebecers, a perpetual squabble.
Today, the secessionist movement is in strong decline in Quebec. But the
feeling that our federation is fraught with squabbling is still very present, in
Quebec as elsewhere in the country.
Yet, tensions and disagreements arise in all federations in the world. A
federation of nirvana does not exist. It is normal for our federal, provincial
and territorial governments to have disagreements. We cannot expect them to
agree on everything right away. The important thing is that this tension
inherent in federalism generates a synergy that is beneficial to all Canadians.
We need to stop continually dramatizing these normal disagreements. For
Premier Bernard Landry to brandish the so-called fiscal imbalance as an argument
to justify secession is already aberrant enough in itself. Even from a
secessionist viewpoint, one should agree that countries do not break up over
budget surpluses! But when Alberta's Environment Minister, Lorne Taylor, who
believes in Canada, suggests that ratification of the Kyoto Protocol could lead
him to separatism,4 it is beyond understanding.
Whatever we think of the wisdom of Kyoto's ratification for Canada, we must
agree that this has nothing to do with our attachment to our country. Canada is
certainly the only country in the world where ratification of an international
agreement such as Kyoto can call national unity into question.
It is not separatism itself that worries me. I know full well that this
ideology is marginal in nine provinces and three territories, and is becoming an
increasingly minority view in Quebec. The polling questions5
that might have given the opposite impression in Alberta were confusing (I know
all about confusing questions on separatism!). I have noticed that Minister
Taylor has since moderated his view and that Premier Ralph Klein and his Cabinet
have reiterated their unconditional support for Canada. No, what worries me is
the harmful effect this type of discourse can have on the quality of public
debate in Canada and on Canadians' image of their country.
Let us look once more at the example of the debate on Kyoto. One should not
equate support for Kyoto with an anti-Alberta sentiment. Even the Leader of the
Opposition in the House of Commons, Stephen Harper, has made that type of unjust
link: "They are trying to sell [the Kyoto Protocol] on the basis
of an anti-Alberta sentiment,"6 he has
said, referring to the Government of Canada. I do not know of any of my
colleagues in the House of Commons, regardless of party, who are anti-Alberta.
On the other hand, I know there are many Albertans, loyal to their province, who
are pro-Kyoto, including 58 scientists from various universities in Alberta, who
have signed an open letter to Premier Klein emphasizing the merits of the
protocol.7
Our governments are now engaged in another difficult discussion:
strengthening their partnership on health following the release of the report by
the Romanow Commission8 and the many provincial
reports on this matter. I hope that those discussions will be free of any
negative discourse and will be marked by mutual respect. Unfortunately, things
have gotten off to a bad start with the provinces' attack ads on television and
in print.
Today, my criticism is not of the content of the message from the provinces,
but rather of the medium they have chosen. I will not reproach the provinces for
claiming that the federal contribution to health funding is only 14%, even
though that arithmetic is inaccurate. Rather, I would say that their TV
offensive is not constructive in terms of the effective functioning of the
federation. It is unacceptable in a federation for one order of government to
attack its constitutional partner through negative ads. Canadian taxpayers are
not at all impressed by this waste of their money. To date, only two Canadian
politicians have regularly used negative advertising as a political weapon: Mike
Harris and Lucien Bouchard. It gained them nothing: not to make an overly
simplistic link between cause and effect, I note both of them are no longer in
politics.
Imagine the vicious circle we would have if the Government of Canada were to
imitate the provinces. If negative publicity is to become the norm in conducting
intergovernmental relations, the image of all governments would be tarnished in
the eyes of Canadians. Nothing good can come from such a practice.
I am pleased that this government I belong to has not, so far, responded to
the provinces with its own negative advertising. I prefer its advertising to
address issues of public interest, such as the anti-smoking campaign or
promoting physical activity.
I can assure you that the media tactics with which the provinces have sought
to publicize their version of the facts will not influence the Government of
Canada. This will in no way alter its desire to achieve an optimal partnership
with the provinces, in order to provide Canadians with the best possible health
care. This is what Canadians are asking from their governments.
Conclusion
Budgetary discipline, budgetary responsibility, mutual respect, these are the
three principles our governments must be mindful of in this era of federal
surpluses.
The Canadian economy is doing exceptionally well. It has been said repeatedly
that we have put our public finances in order. (See table
1) But what must be emphasized in particular is that this improvement in our
budgetary situation has been accompanied by a spectacular turnaround in our
economic performance. Since 1994, this performance has outstripped that of the
ten previous years. In terms of both economic growth and job creation, we were
barely at the G7 average; we are now in first place. (see tables
2, 3 and 4)
Let's not forget that if health is emerging as by far the top priority of
Canadians, it is partly because they are not as concerned about issues such as
the economy, jobs, the deficit and national unity as they were ten years
ago.(see table 5)
That spectacular turnaround of the Canadian economy must not lead us into
complacency. But it must help us to turn a steady eye in finding solutions to
our problems, in the health field and other fields alike. To do so, we will need
a good dose of discipline, a sense of responsibility and mutual respect. It is
up to all our governments to set an example!
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Prime Minister's address to the International Conference on Federalism.
August 30, 2002, St. Gallen, Switzerland.
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International Monetary Fund, 2002 Article IV Consultation with Canada,
Statement of the IMF Mission, November 15, 2002.
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OECD Territorial Reviews: Canada, 2002
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The Calgary Sun, October 28, 2002, p. A4.
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Polls conducted in Alberta by Insight Research and Consulting Corp.,
between October 20 and 25, 2002, and JMCK Communications Inc., between
October 30 and November 9, 2002.
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The Calgary Sun, October 18, 2002, p. A19.
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"An Open letter to Premier Ralph Klein", Edmonton Journal,
October 28, 2002, p. A14.
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Commission on the Future of Health Care in Canada, November 28,
2002.
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