University of Toronto
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President Iacobucci, ladies and gentlemen, good morning. Thank you for inviting me to participate in this conference on fiscal federalism. As Minister of Intergovernmental Affairs, I have to give much attention to fiscal federalism and the principles that underlie it. I am therefore very happy to have this opportunity to share my thoughts with you. But before turning to today's topic, let me set the stage with a few general observations.
Federalism was a wise choice made by the founders of our country. It was at the time and still is the governing structure that is most consistent with the needs and aspirations of Canadians. Canada’s diversity is exceptional - be it linguistic, cultural, geographic, economic, social or through the rich heritage of our Aboriginal peoples. Federalism helps to strike a balance between unity and diversity.
The Canadian federation is unique in many ways, not least in its capacity to continually reinvent itself. Because of its inherent flexibility and capacity to adapt to new situations and circumstances, it can respond to the needs of Canadians in an ever changing world.
In a federal system it is necessary that the constitutional partners work together while respecting each other’s legislative powers. A strong and successful Canada is made up of strong provinces and a strong federal government. And, all governments in our federation have a role to play in successfully meeting the priorities and aspirations of Canadians and improving their quality of life. The key to this success is collaboration. One emerging challenge, among others, is learning how to better manage interdependence among governments and citizens and to know how to use this interdependence to the advantage of all Canadians. The lesson we draw from this interdependence is that no one can act alone. This is profoundly true today.
In order to better plan for the future , we need to understand how federalism and Canada’s fiscal arrangements have worked in the past. This knowledge helps us to recognize and meet current and future needs and priorities.
Let’s first look at fiscal federalism from a broader context.
Recently, I attended the Forum of the Federations meeting in Belgium, and this experience highlighted to me how successful Canada’s fiscal arrangements are in serving Canadians. Other federations around the world look to Canada and the flexibility in our fiscal arrangements to guide their evolving financial relationships.
But more important than that, I observed that all federations have debates about fiscal federalism – it is a natural part of belonging to a federation. When I look at fiscal arrangements in other federations, I see different approaches, although not incompatible with the Canadian model. For example, in the United States there is no equalization program and the states rely on taxation and purpose-specific federal transfers. On the other hand, in Australia, there is a more complex and comprehensive equalization program to reduce regional disparities. Canada’s fiscal arrangements lie somewhere in between, with a mix of taxation and transfers, and a strong Equalization Program.
While Canada’s fiscal federalism is similar in some ways to that of other federations, there are unique elements that reflect our particular circumstances. Canada is a vast country in which regions have widely varying fiscal capacity. Our fiscal arrangements take into account these disparities. Canada’s fiscal arrangements are grounded in the principle of equalization – in other words, equity. It is a key responsibility of the Government of Canada to ensure that Canadians, no matter where they live, have access to comparable levels of services at comparable levels of taxation. The Equalization Program and transfers – the Canada Health Transfer and the Canada Social Transfer – remain the key pillars of our intergovernmental fiscal arrangements.
In Canada, the provinces have the authority to tax and to make their own expenditure decisions. Some tax areas are shared with the Government of Canada. This is not uniquely Canadian, but the degree of interdependence between the two jurisdictions is more significant than in many other federations.
That being said, there are significant variations in the capacities of governments across Canada to meet the needs and expectations of Canadians at reasonably comparable levels of taxation. This is where the Government of Canada plays a key redistributive role, by sharing risks and opportunities with Canadians everywhere.
Also, I want to emphasize that if the national government is to play this redistributive role and pursue national objectives in the interest of all Canadians, it needs to maintain its fiscal health over the long term and ensure that it has the ability to make choices and to respond to future challenges.
It is important to recognize that there always have been, and always will be, debates in Canada about fiscal arrangements. Today’s debates about fiscal arrangements are highly charged, particularly since the federal government has improved its fiscal situation. An improved fiscal situation at the federal level has meant that there are funds available to reinvest in intergovernmental transfers that respond to the priorities of Canadians. Interestingly the increased federal government support to provinces has been used by some jurisdictions as grounds to argue that they are not receiving their fare share. But in the end, in our collective experience, these debates lead to positive change.
For example, later today you will hear from Premier McGuinty. A few weeks ago, the Prime Minister and Premier McGuinty worked together to address issues of importance to Ontarians such as immigration, the labour market development agreement and post secondary education, which culminated in $5.75 Billion investment over the next five years.
In the fall of 2004, the Government of Canada, working with the provinces and territories, made historic investments in a new Framework for Equalization and Territorial Formula Financing that provides an additional $34 billion in transfers over ten years, including an annual escalator of 3.5 % to respond to provincial and territorial concerns about stability and predictability.
As well, in September 2004, the First Ministers agreed to a $41 billion investment in the 10-year Health Care Plan designed to reduce wait times and increase accountability to Canadians. The Plan also includes a 6% escalator to ensure long-term stability for governments in delivering health care.
Recently, a number of federal and provincial forums have been established to discuss fiscal federalism.
At the October 2004 First Ministers’ Meeting, our government established the Expert Panel on Equalization and Territorial Formula Financing which is mandated to examine the principles and allocation of funds to provinces and territories, among other issues. The Panel is in the process of its consultations with provinces, territories, academics and other interested Canadians and will report to the government in December 2005.
Later in the fall of 2004, the House of Commons asked the Standing Committee on Finance to have the Subcommittee on Fiscal Imbalance examine current issues in the Equalization Program. The subcommittee will table its report shortly.
As well, through the Council of the Federation, the provinces and territories have established the Panel on Fiscal Imbalance which is expected to report in the fall of this year.
The fact that there are various forums examining fiscal federalism, I believe, is a good indication that there is no consensus among the experts, the Federal Government and the Provinces and Territories on how to best address the issues. For example when discussing horizontal equity, some jurisdictions want transfers and program spending based on need, others on an equal per capita cash basis and yet again others based on the number of service recipients. The Expert Panel on Equalization and Territorial Formula Financing and other forums will help us find solutions to this and other important issues. Above all, we need to work together to resolve these concerns.
We can all agree that equity is important to Canadians. Sharing the risks and opportunities with our fellows is a shared value across this country. Canadians have indicated to us that it is important that their governments be accountable for their spending decisions. It is also important that fiscal arrangements be sustainable and that we live within our means.
As governments we make decisions about our priorities which frequently require trade-offs and compromises. Decisions about our priorities for fiscal arrangements are no exception. We must also recognize that the federation, the economy and Canadian society are constantly evolving, as are the expectations and aspirations of Canadians. This means to me that governments need to work together even more closely to make the best decisions for Canadians. Interdependence is a fact of our federation.
Fiscal federalism is not merely a series of complex arrangements and formulas that few Canadians can understand. Beyond dollars and cents, Canada’s unique brand of fiscal arrangements speaks to the very essence of what it means to belong to this federation and recognizes that governments can collaboratively work toward common goals in the interest of Canadians.
Equally important in the current context are the principles of fiscal federalism. As the Prime Minister emphasized last week, “Fairness is not found in dividing each federal dollar into 13 slices. Nor is it to be found in adding up a balance sheet at the end of each day to see if it was profitable to be part of Canada.”
I truly believe that our approach to fiscal federalism has served Canadians well, and will continue to do so in the future.
Throughout the evolution of fiscal federalism in Canada, we have had debates about the relevance and efficacy of our fiscal arrangements. These debates have not been easy, but they have consistently resulted in positive changes for Canadians. Let us look at today's discussions about fiscal federalism as an opportunity to make positive changes for Canadians, as we have in the past.
In that spirit, today's gathering is important. Let us do our work well on behalf of Canadians.
Thank you.