"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

Peterborough Chamber of Commerce

Holiday Inn, 150 George Street North
Peterborough, Ontario

August 9, 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  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 defence, 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.

     But more remains to be done. In the coming months, the Government will bring forward broad proposals with the intent to implement them in Budget 2007. We will propose a new approach for allocating unplanned federal surpluses.  We will also announce renewed, principle-based Equalization and Territorial Formula Financing programs. As well we will propose a new approach to long-term funding support for post-secondary education and training, and a new framework for long-term funding support for infrastructure programs.

Finally, I would like to address concerns within our own province about the fiscal gap.

     In any federation such as the Canadian federation, 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 reflects 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.