"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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