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"Restoring the Fiscal Balance"
Notes
for an address
by the Honourable Michael D. Chong,
President of the Queen's Privy Council for Canada,
Minister of Intergovernmental Affairs and,
Minister of Sport
Trenton Chamber of Commerce
Old Town Hall
Trenton, Ontario
July 19, 2006
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Good afternoon.
Today I would like to speak to you about our new Government’s plans to restore fiscal balance and renew
federalism in Canada, a debate that has more recently been framed in terms of the “fiscal imbalance” or the “fiscal gap”.
This is a complex debate, full of dizzying numbers and details, so I intend to speak with you in plain language on
this topic.
But before I tell you about our plans, I’d like to begin by providing a snapshot of my interpretation of the
history of Canadian federalism. Federalism is a system of Government where there are at least two sovereign and
constitutionally established orders of Government, each with its own jurisdiction, while a unitary state is where
there is only one sovereign and constitutionally established order of Government.
The Dominion of Canada was created through the British North America (BNA) Act in 1867. Among those debating
Canadian federalism at the time, Sir John A. Macdonald argued for a strong central government, much like the unitary
government of the United Kingdom or of France, while Cartier, Tupper and others insisted on a federal system.
In the end MacDonald lost the argument and agreed to the federal system of government that we have today:
a system with two orders of government, one provincial, and one federal, each having different areas of responsibility.
While the BNA Act was a compromise document, the result was a much stronger federal Government than we have today.
So how have we gone from a strong federal Government in 1867, to the more decentralized federation we have today?
There are several reasons – I will speak to two in particular.
First, in 1867, the bulk of Government responsibilities rested with Ottawa. Since then, however, there has
been explosive growth in the size and scope of social programs in areas like health care and education, primarily in
the period after World War II, and these are the responsibility of the provinces. In addition, migration from rural
to urban areas has created the need for significant investments in provincial and municipal infrastructure such as
highways and public transit. This is the first reason for the increase in provincial responsibilities.
The second reason has to do with the decisions of the Judicial Committee of the Privy Council in the United Kingdom,
which until 1949 was Canada’s highest and ultimate court of appeal, a role now played by the Supreme Court of Canada.
Over the years, until 1949, the JCPC interpreted the constitutional distribution of powers in ways that tended to favor
the provinces over the federal Government.
The Committee established precedents that gave, for example, narrow interpretation to federal powers, such as
the “residual” and “trade and commerce” powers, and wide interpretation to the provincial power over “property and
civil rights” which became, for all intents and purposes, an alternative residual power.
This all being said (and there is always a caveat, even though today we have a strongly decentralized federation)
while not explicitly stated the constitution provided the federal government with an immense but obscure power, called
the “spending power”. Over time, it has become common in practice for both orders of Government to spend in areas over
which it cannot legislate, a power that has been used to implement shared priorities in areas of provincial jurisdiction,
such as healthcare, post-secondary education, training and housing. One of the main tools to effect federal spending in
provincial areas of jurisdiction has been federal transfers to the provinces, transfers that today can make up a
significant portion of revenues in some provinces. Unfortunately, these transfers have often been a source of tension
rather than a source of healthy debate.
In light of this brief historical overview, I'd like to share what I perceive to be the five broad causes of the
fiscal imbalance within the Canadian federation.
First, large, unplanned and unanticipated federal surpluses of recent years have contributed to the imbalance.
While the restoration of Canada's fiscal health has been a positive development, federal surpluses over the last eight
years have generally been larger than anticipated, and the federal government has not been transparent with Parliament,
Canadians and other orders of government.
These unplanned federal surpluses have led to federal spending in areas of provincial jurisdiction, often at odds
with provincial priorities and policies. Since a significant portion of recent federal surpluses was unplanned, they
resulted in large year-end spending that was not always guided by a pre-announced policy framework. This year-end spending
was often in areas of primarily provincial responsibility and announced with little or no consultation with provinces and
territories.
A third cause of the fiscal imbalance was the cuts in federal transfers to the provinces and territories in the
mid-1990s. While overall federal transfers have now been restored to their pre-restraint levels, much of the focus of
these efforts has been to ensure long-term predictable funding to health care, reflecting the priorities of Canadians.
As a result, federal funding in support of other areas, such as post-secondary education and training, has not been put
on a long-term, predictable track.
One-off deals recently signed between the previous government and various provinces and territories have also
contributed to the imbalance. The confidence of Canadians in the overall fairness of federal programs was undermined
through these “one-off” efforts, as federal actions were seen to be moving away from the principle of equity among
provinces and territories.
Finally, also contributing to an imbalance within the federation is the ongoing wrangling that has, at times,
characterized the way the different orders of government deal with each other. Canadians have told us that they want
governments to put aside their jurisdictional arguments and move forward on resolving the issues that affect them most.
The time has come to establish a new relationship with the provinces that is open, honest and respectful.
Canada's new government believes that efforts to restore fiscal balance need to be principle-based.
We have therefore set out five guiding principles:
1) Accountability through clarity of roles and responsibilities between the orders of government;
2) Responsibility and transparency in budget planning;
3) Predictable, long-term fiscal arrangements;
4) Competitiveness and efficiency of the economic union; and
5) Effective, collaborative management of the federation.
Based on these principles, our government has already taken action to restore fiscal balance in Canada.
Budget 2006 invested in core federal responsibilities, like national defense, border security, Aboriginal peoples,
emergency and pandemic preparedness, and the RCMP, and there were more tax cuts for individuals in Budget 2006 than
in the previous four federal budgets combined.
nbsp;But more remains to be done. That is why this fall the Government will bring forward its broad proposals in
four key areas with the intent to implement them in Budget 2007. At that time, we will propose a new approach for
allocating unplanned federal surpluses. Second, we will announce renewed, principle-based Equalization and Territorial
Formula Financing programs. Third, we will propose a new approach to long-term funding support for post-secondary
education and training, and finally, we will propose a new framework for long-term funding support for infrastructure
programs.
Lastly, I would like to address concerns within our own province about the fiscal gap.
In any federation like Canada, regional economic disparities due to a host of factors can result in different
balances between revenues and expenditures in different regions. Because of their relatively higher incomes,
citizens and businesses of more prosperous provinces, such as Ontario, contribute relatively more to federal
revenues than they receive from federal programs. Currently, the so-called "Ontario gap" is a reflection of
the province's greater prosperity relative to most other provinces, with its above-average incomes and below-average
eligibility for income- and needs-tested federal programs.
Nevertheless, the new government is committed to further action over the next year, engaging Canadians,
provincial and territorial governments, academics and experts towards more open, transparent and collaborative
fiscal relations in Canada. The Government of Ontario will participate in the consultation process for the
Equalization program, and its views will be heard.
As you can see, the fiscal imbalance is a complex issue which necessitates the mutual willingness
by all orders of government to work together to find tangible, effective solutions, for the well-being of
all Canadians. We must always bear in mind that the enviable quality of life all Canadians enjoy is closely
linked to the smooth functioning of our federation. This is why the debate on this issue is not just a matter
of numbers, structures or funding mechanisms, but ultimately has a human face.
Although it can be quite technical, this debate goes to the very heart of our federation and its underlying values:
solidarity, generosity, sharing and fairness. The main federal transfer programs – namely, the Canada Health Transfer,
the Canada Social Transfer, Equalization and Territorial Formula Financing – are specifically designed to fund services
of comparable quality provided to all Canadians.
For example, Canada’s Medicare system ensures universal access to high-quality health care for all Canadians,
regardless of where they live or their financial situation, so that there are no financial barriers to good health care.
Education, while an area of provincial and territorial jurisdiction, is one in which the federal government nevertheless
provides substantial financial assistance through provincial and territorial governments, as well as directly through
student loans and scholarships, to ensure that all Canadians have equal access to post-secondary education.
Equalization helps to ensure that Canadians in all parts of the country have access to reasonably comparable levels of
public services at reasonably comparable levels of taxation.
This overall system of federal programs and taxes reflect the values we all hold as Canadians to share and support
each other. We must not lose sight of these values as we move forward.
In conclusion, while the objective of restoring a fiscal balance is an ambitious one, we must also recognize that
federal-provincial-territorial cooperation is the best guarantee of our future progress and prosperity.
This is as true for restoring fiscal balance as it is for any other issue. Let me be perfectly clear, Canada’s
new government is firmly committed to that path.
In short, restoring fiscal balance will involve working closely with our partners in confederation in a spirit
of openness and with the understanding that we all benefit from a more effective economic federation.
Thank you.
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