"THE FOURTH MARTIN BUDGET AND
RENEWAL OF THE FEDERATION"

NOTES FOR AN ADDRESS TO THE CHAMBRE
DE COMMERCE DU GRAND JOLIETTE

JOLIETTE, QUEBEC

MARCH 3, 1997

Introduction

As the informed businesspeople that you are, and as members of a chamber of commerce that closely monitors major national issues, I am sure you are interested in the budgets of our governments.

The fourth Martin budget has been well received, especially in Quebec, as confirmed by a poll conducted by Léger & Léger for the Journal de Montréal and the Globe and Mail, which was published on the weekend. The budget has been unfairly criticized, however, by the Deputy Premier of Quebec. Mr. Bernard Landry claims that it is a "centralizing" budget which reflects a "predatory" federalism, and that the Government is continuing to "offload" its deficit onto the provinces.

I claim, on the contrary, that it is a budget that shows the great strength of federations. It is a budget that shows us how closely fiscal balance, economic growth and the unity of our country are intertwined. This will be the topic of my address, which I will develop as three points. First of all, I'll talk about the progress we have made in budgetary terms. Then I'll respond to the arguments of Mr. Landry and the secessionist leaders. In conclusion, I'll demonstrate how the initiatives in this budget are in keeping with the Canadian federative spirit.

Progress achieved

Do you remember how, in 1992, the separatist leaders, Mr. Parizeau and Mr. Bouchard, campaigned during the Charlottetown referendum saying that Canada was almost bankrupt? They talked about the "Argentinean syndrome", of "inevitable decline", of "overlap" that was supposedly costing us a fortune, of "one government too many". Have you noticed that they've done away with the alarmist rhetoric about Canada's inevitable decline?

I think they would be in a very poor position to continue with that rhetoric; they'd be contradicted not only by the Government of Canada, but also by economists both here and elsewhere, foreign governments, and the OECD, which says that Canada is among those countries best positioned to enter the 21st century in good economic health.

"Experts no longer hesitate to talk about the ‘Canadian miracle'", it said recently in the French newspaper Libération: inflation under control, growth forecast at between 3% and 4%, a stable dollar, interest rates at a 35-year low, public finances in order, strong job creation, a record trade surplus.

London's prestigious Financial Times said much the same thing, talking about Canada's spectacular financial recovery following the last four budgets.

La Presse reported recently that the Japanese, who are experiencing an unprecedented financial crisis, are impressed with how we are putting our public finances in order and are vaunting the merits of the "Canadian model". The paper quoted the chair of the Canada-Japan Joint Economic Committee, Mr. Koichiro Ejiri, who stated in an interview: "I have been very impressed by how Canadian governments have acted to cut their spending." (Claude Picher, "Le «modèle» canadien", La Presse, February 24, 1997)

Let's look at the economic indicators that have won us those kudos. The federal deficit in proportion to GDP will have been halved in three years, and the budget forecasts that we will achieve our deficit reduction target of 2% of GDP in 1997-98, and 1% of GDP in 1998-1999. Interest rates are at their lowest level in almost 35 years. The rate of inflation is very low. In 1998, for the first time in 28 years, no new borrowing from financial markets will be required to pay for programs or interest on the debt; we have bolstered the confidence of the financial markets and re-established our international competitiveness; we now have a trade surplus; and our prospects for economic growth and job creation are among the most promising of G7 countries.

Of course, we still have work to do, because our federal debt-to-GDP ratio, which now stands at 75%, is much too high. We have, however, broken the vicious deficit trap and implemented measures that will ensure that, for the first time in 20 years, that ratio will start to go down in 1997-1998, and will continue going down the year after that. We can look to the future with optimism.

Those achievements are encouraging for the economy and for Canada's financial credibility, and for the provinces as well, because what Mr. Landry doesn't say is that the provinces have directly benefitted from the improved financial situation of the federal government. Progress achieved at the federal level has driven interest rates down. According to federal Finance Department estimates, lower interest rates have saved Quebec some $645 million in debt servicing charges in the past two years. Lower interest rates have also favoured economic growth, which has had a positive impact on government revenues.

Inversely, the financial recovery at the federal level is only a part of the improvement of the country's financial situation. Only three years ago, all of the provinces had sizeable deficits. In 1996-97, the combined deficit of the provinces and territories should be around $9.0 billion, down more than 60% from the record levels of 1992-93. In 1992, the combined deficit of the federal government and the provinces, according to the national accounts, represented 7.4% of GDP, almost double the average of 3.8% for G7 countries. That put Canada in second-last place among the G7 countries, just ahead of Italy, in terms of deficit size. Forecasts for 1997 peg the total government deficit in Canada at among the lowest of the G7 countries, at 1.3% of GDP.

The provinces have adopted different strategies to get their respective finances in order. Saskatchewan's approach is not the same as Ontario's, for example, thanks to the flexibility of Canadian federalism. The end result is that many provinces are forecasting balanced budgets or even budget surpluses for the 1996-97 fiscal year, as is the case with Alberta. Even poorer provinces such as New Brunswick have succeeded in putting their public finances in order. Ontario and Quebec, each in its own way and in accordance with its own culture, are getting closer to their objective of a zero deficit in two or three years' time.

We have achieved such progress because we have all worked together, and because Minister Paul Martin's four budgets have shown rigour, discipline and fairness. The government of Jean Chrétien began by drastically cutting its own spending. Between 1993-94 and 1998-99, we will have cut program spending by 14%. We have cut transfers to the provinces, but to a lesser extent, with cash and tax point transfers to the provinces dropping by only 9.9%, or less than 2% of total provincial revenues.

Response to critics

Could the federal government have responsibly put its finances back in order without touching transfers to the provinces, which account for 21% of program spending? In all sincerity, I think not.

Some people say we could have made more cuts to defence spending. And yet, Canada is already one of the countries that devotes the least amount of money to defence. Between 1994-95 and 1998-99, the Defence Department budget will have been slashed by 21% (from $10.7 billion to $8.5 billion).

What impact would further cuts have on Canadas ability to fulfil its international obligations, especially its peacekeeping role worldwide?

Could we have cut more in international assistance, which will have been cut by 34% between 1994-95 and 1998-99 (from $2.9 billion to $1.9 billion)? Could we have cut more to transport, when the Transport Department's budget will have been slashed by more than 50% in the same period (from $2.9 billion to $1.4 billion)? Could we have cut more in business subsidies, which have been cut by 60% (from $3.7 billion to $1.5 billion)? Could we have cut more in our own operating expenditures, when 50,000 federal public service positions will have been eliminated in two years' time and federal public servants' salaries have been frozen for five years?

To help the provinces absorb those cuts, the Chrétien government has given them greater flexibility and guaranteed them a predictable funding margin. That's why it has regrouped the Canada Assistance Plan and Established Programs Financing into a single envelope, the Canada Health and Social Transfer (CHST). Quebec's Minister of State for Employment and Solidarity, Ms. Louise Harel, said herself on November 10 when she released the green paper on income security reform, that the CHST gave the Government of Quebec more leeway. The CHST will stabilize at $25.1 billion and then grow at the rate of economic growth, with a $11 billion cash transfer floor.

The provinces that receive equalization payments, such as Quebec, have been less affected than the others, because the equalization program, unlike the CHST, has not been cut and payments are always calculated using the same formula. Changes in equalization levels are essentially due to reductions in provincial taxes, an improved financial outlook in some provinces, or population movements between provinces.

The Bloc and the PQ never stop saying that "Quebec doesn't get its share". In the meantime, between 1993-94 and 1998-99, the federal government will have cut its own spending by 14.0%, compared with a 10.9% cut to transfers to the Government of Quebec. Moreover, our province, which accounts for one quarter of the Canadian population, receives 31% of federal spending on transfers, of which 46% is equalization payments. Quebec continues to receive the highest federal transfers in Canada. Not bad for "predatory" federalism!

If you confront the PQ and the Bloc Québécois with those figures, you'll find they cannot refute them. Instead, they'll reply that the federal government may well send Quebec "social assistance", but it keeps "the money that creates money", its investments, for Ontario, or in any case not for Quebec. There again, they are mistaken. Take equalization, for example: it is an unconditional transfer, meaning that the provinces can invest it how they like, be it for social programs, education, infrastructure, or research and development.

Specifically regarding federal research and development spending, the PQ and the Bloc québécois constantly say that Quebec does not receive its "fair share" of such spending, but yet again, they're distorting reality. In 1994-95, the most recent Statistics Canada data available, 23.8% of all federal R&D spending was made in Quebec, a proportion that is close to our demographic weight and greater than our proportion of the Canadian economy, which is 22.4%. Those data include laboratories in the National Capital Region, such as the National Research Council, which has a non-profit, auxiliary vocation of assisting research throughout the country. In terms only of spending distributed on a regional basis, Quebec's share is even more substantial: Quebec businesses receive 40.2% of federal R&D grants and 42.8% of federal R&D contracts, while Quebec universities receive 27.6% of funding to Canadian universities.

Mr. Landry and his friends say that Quebec does not receive its fair share of federal R&D spending. So you may ask, "Whom should I believe: Bernard Landry or Stéphane Dion ?" Don't believe either of us, if you don't want to, but, instead, consult the Statistics Canada publication Science Statistics Service Bulletin, Volume 20, no.8, pages 1 to 5.

Here again, the secessionist leaders use the same strategy. Rather than giving the true picture by presenting an overview that demonstrates that we do quite nicely, they give a truncated interpretation of a limited number of expenditure items, on the basis of which they make generalizations about Quebec's lot as a victim in the federation, with the sole objective of perpetuating resentment against Ottawa. In fact, our federation treats all its members fairly, including Quebec. An overview shows that Quebec is helped as a province whose wealth is currently below the national average. In 1994, the most recent year for which data is available, federal spending in Quebec stood at 24.5%, whereas Quebecers contributed 21.4% of the Government of Canada's revenues. (Provincial Economic Accounts: 1961-95, Statistics Canada (1996)). This is assistance that we Quebecers should accept by telling other Canadians, "one good turn deserves another!"

Mr. Landry, who sometimes talks more like a PQ deputy premier than a finance minister, should stop blaming the federal government for the Quebec government's financial difficulties. La Presse editor Alain Dubuc has responded to him by pointing out that all the provincial governments have had to deal with cuts in federal transfers, but that hasn't prevented most of the provinces from overcoming their public finance crisis.

But let me tell you something: we Quebecers are capable of improving our economy, to the point where we will one day be making equalization payments to the less wealthy provinces. Saskatchewan has almost reached that point, and we can as well! And we will give just as generously as other Canadians. After all, in the 1930s, our grandparents helped Alberta, which was affected even more than we were by the Great Depression. Today, Alberta is helping us, but in 30 years, who knows? Why would we deprive ourselves of its help now? Find me a single moral argument that could justify such economic foolhardiness!

The fourth Martin budget

Canada is a federation that works well on the whole, but which must always be improved to serve citizens better. It not only works well, but is also one of the most decentralized federations in the world, along with Switzerland, no matter what Messrs Bouchard and Landry may say. The federal government's own spending represents only 11% of GDP and 37% of program spending, 27% not counting the debt. To improve our federation since the Speech from the Throne in February 1996, we have clarified roles in many areas, such as mining and forestry development, social housing, active employment measures, and the use of federal spending power. What we are aiming for above all is a federal government strong in its areas of jurisdiction, provinces strong in theirs, and a solid partnership among all. Such renewal will produce a society stronger and more confident about its future.

Minister Martin's latest Budget Speech continues on that path. To demonstrate this, I'd like to talk about five of the most important measures, which are being implemented in consultation with the provinces, and which we can achieve because we are a federation where everyone works together. These are: pension plan reform, the National Child Benefit System, health care initiatives, the Canada Infrastructure Works program, and the Canada Foundation for Innovation.

1. Reforming the Canada Pension Plan

Pension plan reform, which is my first example, was designed by Minister Paul Martin in cooperation with the provinces and broadly discussed through public consultation.

In all industrialized countries, the viability of pension plans has been made uncertain by economic and demographic changes. In Canada, as in many other countries, the number of retirees is increasing in relation to the work force, and people are living longer, which places tremendous pressure on pension plans, threatening their very survival. In Quebec, for example, between 1981 and 1991, the percentage of people over 65 rose from 8.7% to 11.0%. In 25 years, it should exceed 25% (Report on the Demographic Situation in Canada 1995, Cat 91-209E, Statistics Canada).

Canada is one of the first countries to deal with the pension plan problem. President Clinton recently identified that problem as one of the American federation's greatest challenges.

The federal government and the provinces have a joint responsibility for the Canada Pension Plan; we have a specific weighted vote formula under which both the federal government and the provinces are involved in any change to the plan. We have identified the problems together and agreed with the provinces on implementation of a reform that strengthens the Canada Pension Plan and ensures its viability, not only in terms of economic efficiency, but also and above all in the name of equity between generations. Canadians themselves were concerned and have pressed us to settle the problems with the Pension Plan.

The reform of the plan provides for changes to how benefits are calculated and administered, as well as more complete capitalization so as to constitute a much larger reserve fund, and a new investment policy to obtain higher return on investment. This reform will place us in the forefront of industrialized countries in this area. Our federation, which some people describe as "stalled" or "ineffective", has succeeded in doing what many other federal or unitary countries are having difficulty putting in place.

The Canadian federation is not only efficient, but sufficiently flexible to enable Quebec to have its own pension plan within the Canadian one. The Government of Quebec has approved of the changes to the federal plan. Exactly what changes will be made to the Quebec plan remain to be seen, but they should be in keeping with the reform of the Canada Pension Plan.

2. The National Child Benefit System

The National Child Benefit System is my second example. This is a program that was developed jointly with the provinces and designed to strengthen their actions in this field.

Why implement such a program when low-income families already receive a tax benefit from both levels of government? It was realized that there was a problem of unfairness: parents who left the welfare rolls to re-enter the labour market were penalized by a reduction in the services and the assistance they received. The way out of that "welfare trap" is to implement a more equitable system by reforming child benefits. All provinces are in the process of dealing with this problem, and we want to support their efforts.

What makes this program original is that it is not a shared-cost program. We will use a new formula through the tax system, which will create a federal floor on which each province can set up its own programs. The innovative approaches taken by each will inspire healthy emulation in designing and implementing programs. That's what I call effective federalism. This initiative is completely in keeping with the Constitution, and was in fact requested of us by the provinces before being skilfully launched by my colleague Pierre Pettigrew. His provincial counterparts have recognized the need for urgent action, stating that federal-provincial-territorial cooperation is the best way to find effective and innovative solutions to the problems of child poverty.

We have been very successful in alleviating poverty among seniors in Canada; throughout our adult lives we enjoy social protection that our neighbours to the South envy. But we have a way to go to catch up with other countries with respect to child poverty and poor families; that is a weakness of our federation that we are in the process of remedying together.

Ken Battle, a social policy specialist with the Caledon Institute of Social Policy, has described the new child benefit as "the biggest social innovation since medicare in the 1960s."

3. Health care initiatives

My third example is the new budget initiatives on health care: the Health Transition Fund, the Community Action Program for Children, and the Canada Prenatal Nutrition Program, through which we will help the provinces fund pilot projects in the health care field.

We hear often that health is an area of exclusive provincial jurisdiction under the Constitution, which is true in terms of health care provided through public health networks. But health as a whole necessarily covers responsibilities that concern the federal government. Take drug regulation and prevention of epidemics, for example: the Constitution does not prohibit a federal role, and the public good demands one. I don't see how drug companies could be required to have the results of their clinical trials approved by 10 governments! That would be ridiculous.

There is a too prevalent myth that Health Canada employs 8,000 public servants whose only task is to monitor the provinces and perform the same duties as their provincial counterparts. In fact, Health Canada has 6,400 employees, whose responsibilities are quite distinct from those of their provincial counterparts. Of that number, how many do you think are responsible for ensuring that the provinces respect the principles that are conditional for federal transfers in the health field? Believe it or not, there are only 23; those people play a key role in ensuring compliance with those five principles. Let me list those principles. You'll see that everyone can approve of them: universality, accessibility, comprehensive coverage for essential medical care, portability of the system among our provinces, and public administration. Those principles have an important place in the delivery of comparable, equitable services to all Canadians, throughout the country.

To improve our health system, cooperation between the two orders of government is needed if we want to use the resources allocated to Canadians' health more effectively. The Martin budget allocates $300 million over the next three years to three new initiatives in that field, which will be implemented through federal-provincial cooperation.

Half of that $300 million will go to the Health Transition Fund, to help provinces and territories that launch health care pilot projects, such as the drug insurance plan recently implemented by Quebec.

The importance of this initiative at the national level is that it will create a network of information and promote the exchange of experiences among provinces on the pilot projects. That is one of the great strengths of Canada and its federal system. It is important for Quebec to know what's going on in Saskatchewan, and vice versa. Each province can thus draw on the experiences of the others and share the fruits of its own experiences with them. The Health Transition Fund is being implemented through consultation and individual cooperation agreements between the federal government and the provinces.

The second health initiative is in the same direction: the creation of a Canada Health Information System that will give health care professionals throughout the country access to the best possible medical information, including the latest developments in the field.

The third initiative does not create a new program, but instead strengthens the current Community Action Program for Children, which also includes the Canada Prenatal Nutrition Program.

To hear Mr. Landry describe this program, you get the impression that federal public servants are out on the streets handing out quarts of milk! Let me explain what it's really about.

The funding helps community groups to design and deliver services to address the developmental needs of young children who are at risk and pregnant woman. Priorities for both programs are set jointly by the federal government and the provincial and territorial governments, but the funding comes solely from the federal government. Memoranda of understanding assure concerted actions tailored to the needs of each province. This is a good example of federal-provincial cooperation. Quebec was the first province to ratify a memorandum of understanding, in 1993. The announcement of new funding responds directly to a request by the provinces. Although the sums involved are not enormous, this is truly the type of federal intervention that assists the provinces to help out so many Canadians.

4. Canada Infrastructure Works

My fourth example, which shows the flexibility and creativity of Canadian federalism, is the Canada Infrastructure Works program, which was launched three years ago by Prime Minister Jean Chrétien and implemented in cooperation with the provinces, municipalities and the private sector.

Each province defined its own needs on the basis of the initiatives presented by its municipalities, and is in charge of its operations in connection with the infrastructure program. Ottawa did not impose a "straitjacket" or a one-size-fits-all formula on the provinces. We have forged a partnership, which has enabled the provinces, even in a period of budget restrictions, to renew rural and urban community infrastructures throughout Canada, to create thousands of short- and long-term jobs, and to boost regional and national economic growth.

This is another form of synergy that we can create by working together. It has worked well, generating a total $6.5 billion in investments, 12,500 projects and some 100,000 jobs at the local level, not to mention indirect jobs generated in related sectors of the economy.

In light of that success, Prime Minister Jean Chrétien, at the request of the provinces, has announced that Canada Infrastructure Works has been extended. The federal government will contribute $425 million. This federal-provincial synergy will make it possible to generate some $2 billion in investments in 1997, and thus to implement some 2,500 job-generating projects, whose nature will vary depending on the priorities of each province. Nova Scotia signed an agreement to extend the program on Friday.

5. The Canada Foundation for Innovation

I'll conclude with a fifth example, the establishment of the Canada Foundation for Innovation, on which all parties are invited to work together: the provinces, universities, research hospitals, and the private sector.

The importance to the knowledge economy of investing in research and development can never be overemphasized. For all kinds of reasons, Canada is lagging behind other countries in this respect, perhaps because we have more of a natural resource economy than a militarized economy. But that's no reason not to act; we must act, to remain competitive, to keep our researchers in Canada. Research must be helped, a synergy must be created.

That's why we have announced the creation of the Canada Foundation for Innovation. Once again, this is not a federal-provincial shared-cost program. The federal government is investing in research infrastructure through a Foundation to be operated independently of government through a board of directors drawn from the different communities involved. Canada has a number of strategic research and development focal points, such as high-tech and pharmaceuticals in Quebec and Ontario, biotechnology in Saskatchewan, sustainable forestry development in Alberta and British Columbia, and the offshore fishery in Newfoundland. The Foundation will support research infrastructure in accordance with the needs of each region and will expand our research and technology capacity at the national level.

This initiative will generate numerous partnerships between academic institutions, hospitals, the business community, voluntary organizations, and individuals in every province. This synergy will help Canadians to remain on the leading edge of research and development. It will help Canadian institutions and businesses to stay competitive and create jobs. It will help us train the graduates of the 21st century. It will encourage our researchers to pursue their careers here in Canada.

Conclusion

We in Canada are fortunate to be a federation, to be able to combine the strengths and solidarity of the Canadian whole with the flexibility and spirit of regional autonomy. Thanks to the combined efforts of the provincial and federal governments, we can look to the future with confidence.

We have asked many sacrifices of Canadians, and they have responded admirably. Other countries can't get over how we've managed to pull it off, and without the social conflicts which can be seen elsewhere. We owe that achievement to everything we have accomplished together. If we maintain the discipline we have imposed on ourselves, we will realize our objectives, and we will usher in a new era of prosperity. We will then have to wisely manage the opportunities that present themselves to us, with the greatest possible respect for the federative spirit. That is what the initiatives of the fourth Martin budget show, and it is on that path that we will continue.

It is wrong to believe that our national unity hinges on dry discussions on the Constitution, and that the issues of economic growth, jobs, and quality of life are not a part of that unity. All of these matters are interrelated. I believe I have shown that, through a good understanding of how our federation works, we will succeed in conquering unemployment and alleviating poverty, especially among children. All of this is part of national unity: all Quebecers and other Canadians must regain the desire to stay together to take on the challenges the next century will bring. And it is in unity, rather than disunion, that we will overcome those challenges.

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