Press Room

"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

Economic Club of Toronto
Toronto, Ontario

October 11, 2006

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As a new minister in Canada’s new government, let me tell you a bit about my Canadian story. My story is like your stories, and the stories of your parents and grandparents.

I’m a small town boy from Fergus, Ontario with the last name of Chong. My father was a Chinese immigrant who came to this country in 1952. My mother was a Dutch immigrant who came to this country in the 1960’s. They met in the 1960’s in Kingston and together they got married, and had four children, of which I am one.

There is no doubt they faced barriers and challenges but they overcame them and built for themselves, their children and their grandchildren, a life of opportunity and hope in this great country.

It is the story of my family, that led to my decision to stand for Parliament and why I am proud to be a minister in the government of Prime Minister Stephen Harper. I wanted to give back to the country that has given me and my family so much.

While I live in Fergus, I love returning to Toronto, one of the greatest cities in the world. I worked in downtown at Barclay’s Bank, the National Hockey League Payers’ Association, and the Greater Toronto Airports Authority.

While my experiences were varied, they gave me insights into the challenges you face – the challenges businesses in Canada are facing – everyday as they compete both here at home and around the world.

Challenges such as:

• Acquiring skills from an increasingly mobile pool of labour 
• Raising funds from an increasingly mobile pool of capital, and 
• Moving goods and services through an increasingly complex web of infrastructure

I try to keep in mind these challenges as I sit around the federal Cabinet table discussing the plans and priorities of the federal government. You will already have heard about our fall priorities: democratic reform, the environment, and tackling crime.

As Prime Minister Harper announced yesterday, when Parliament returns next week, our government is going to introduce Canada’s Clean Air Act.

This Act will set in motion Canada’s first comprehensive and integrated approach to tackle air pollution and greenhouse gases. And in doing so, deliver better air quality and address climate change. Through its focus on enhanced regulation and enforcement, this approach will mark a fundamental departure from the approach of the previous government.

In fact, since taking office, Canada’s new government has undertaken a number of important environmental initiatives. All these measures have this in common: They are focused on outcomes and achievable results in creating a healthier environment for ourselves and future generations over the long term.

Today, however, I’d like to talk to you about our plan to restore fiscal balance in Canada which is inextricably linked to improving economic opportunity in Canada. The link between the two is what my speech is about today.

I'd like to talk to you about our government's plans to restore the fiscal balance and renew federalism in Canada, a debate on what has come in recent years to be called the fiscal imbalance. This is a complex issue, and it's easy to get bogged down in details and numbers. So I'll address it in clear, simple language.

Allow me to take you through the problem, how we are addressing it, and the action we’ve taken – or will soon take – to put Canada’s economic union on a stronger, sounder footing.

To start with, I would like to provide a brief definition of the fiscal imbalance.

There are three imbalances: the first imbalance is the vertical one between Ottawa and its citizens. Quite simply, we believe Canadians and Canadian companies pay too much in tax.

The second imbalance is between Ottawa and the provinces, also a vertical one, where, over the last number of years, the federal government has had more money than it needs to fulfill its responsibilities while provinces struggled to deliver services they were responsible for.

The third imbalance is the horizontal imbalance amongst provinces, where some have special agreements with the federal government that others are not privy to.

There are a number of causes of these imbalances. I’ll just briefly highlight a few.

The first cause is the large, unplanned and unanticipated federal surpluses of recent years. While balancing the federal budget has been a positive development in Canada, federal surpluses over the last eight years have generally been larger than anticipated.

These unplanned federal surpluses led to the second cause of the imbalance which is spending in areas of provincial jurisdiction, with little to no consultation with provinces and territories and often at odds with their priorities and policies.

A third cause of the fiscal imbalance were the cuts in federal transfers to the provinces and territories in the mid-1990s. At the time, these were necessary since the federal government was running massive deficits. But, while overall federal transfers have now been restored to their pre-1995 levels, federal funding in support of other areas, such as post-secondary education and training have not been put on a long-term, predictable track.

A fourth cause - and a major cause of the horizontal imbalance - was the one-off deals signed between the previous government and various provinces and territories. 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.

The final cause of the imbalance within the federation has been the wrangling that has, at times, characterized the way the different orders of government dealt with each other, especially on matters of fiscal federalism.

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. Provinces have told us they want a new relationship that is open, honest and transparent.

Canada’s New Government listened to Canadians. We chose to promptly tackle fiscal imbalance rather than talk about it like our predecessors. Our straightforward approach is based on 5 guiding principles:

• Greater accountability through clarity of roles and responsibilities between the orders of government – this to ensure that the right level of government has the money it needs to deliver the services for which it is constitutionally responsible 
• Responsibility and transparency in budget planning – to avoid surprises 
• Predictable, long-term fiscal arrangements – to allow us all to plan. 
• Greater competitiveness and efficiency of the economic union - to ensure Canada remains a leader in the world. 
• Effective, collaborative management of the federation – to keep our federation strong.

Based on these principles, our government has already taken action to restore fiscal balance in Canada.

Budget 2006 invested in core federal responsibilities, like border security, Aboriginal peoples, emergency and pandemic preparedness, and the RCMP.

Since we’ve assumed power we’ve also focussed on rebuilding our military. We invested new money in the military in Budget 2006, we’re investing over $17 billion in new equipment, and we’ve introduced our defence policy called Canada First. We’ve also cut taxes including the GST. There were more tax cuts for individuals in Budget 2006 than in the previous four federal budgets combined.

While we feel like we’ve accomplished a lot so far to restore fiscal balance (and fiscal sanity) we acknowledge more remains to be done. That’s why we will be delivering proposals in 4 key areas in the coming months.

• First, a new approach to long-term funding support for post-secondary education and training, 
• Second, a new framework for long-term funding support for infrastructure program, 
• Third, a renewed, principle-based Equalization program, and, 
• Fourth, a new approach for allocating unplanned federal surpluses.

Allow me to elaborate on each of these just briefly. As business people, I believe that the fiscal balance debate will touch close to home.

I need not convince those in this audience tonight of the importance of post secondary education. This is one of the cornerstones of our success as a nation. But we are facing real pressures to do more. By providing predictable, long-term funding for post-secondary education we can train our future researchers, scientists and innovators and have a better chance of keeping them here in Canada.

The ladder of success need not end in the United States or Asia. The need for talented, educated people in this country is too great. We are facing a severe shortage of skilled labour as well as increased competition from emerging economies around the globe. With better co-operation between governments we can eliminate the barriers to higher education, university and community college, get a better linkage between the education and training offered and the jobs skills and talents needed, and build upon our centres of excellence that exist across the country.

On Infrastructure: The key to a competitive, productive economy is world-class infrastructure. Without the ability to move people and goods along free flowing roadways, over safe bridges or across efficient border crossings our economy would quickly grind to a halt. In today’s interdependent world of trade and security, modern, smart infrastructure is not a luxury; it is a necessity.

In fact, many of our major urban centres today are experiencing severe gridock, aging infrastructure and lost productivity. In the GTA alone, it is estimated we are losing $2 billion a year due to inefficient infrastructure. The solution will require a significant amount of time and a significant funding commitment. It speaks clearly to a core responsibility of the federal government. That’s why we have no choice but to adopt a long-term funding framework for infrastructure.

We have already made inroads with an unprecedented $16.5 billion for infrastructure over the next four years, including full GST relief for municipalities, the sharing of a portion of the federal excise tax gasoline and federal infrastructure initiatives for highways and border crossings, strategic infrastructure and municipal projects.

Given recent commentary on the topic, it is worth reminding ourselves of what Equalization is and what it is not. Equalization is provided for, by the 1982 Constitutional Act, section 36(2), which clearly articulates the purpose of Equalization:

" Parliament and the government of Canada are committed to the principles of making Equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation. "

Equalization is a constitutional responsibility of the federal government. Equalization ensures that every Canadian, regardless of where they live or how much money they make, have access to high quality, public education and healthcare. This is crucial if Canada as a whole is going to be competitive. This part of our plan will come forward in due time, and the solution will be consistent, fair, and equitable.

Earlier, I noted the tensions created in the federation by the previous government spending its surpluses in areas of provincial jurisdiction. This has to stop. This is why a strong consensus is emerging around the following three principles to guide us in the allocation of unplanned surpluses. Any decisions would have to:

• Bring genuine benefits to a large number of Canadians; 
• Be able to accommodate an uneven and unstable pattern of contributions; and 
• Prepare Canada for fundamental long-term challenges.

Canada’s New Government firmly believes that unanticipated surpluses should be used primarily to reduce the debt and reduce federal taxes. Unanticipated surpluses should not be used to launch new policies in areas where the federal government is not best placed to design or deliver programs.

In abiding by these principles, we will in turn create tax room that provinces and territories can consider filling for their specific needs and purposes. To be sure, it is up to provinces and territories to make that decision. But, as the saying goes, they cannot have their cake and eat it too.

Provinces and territories cannot clamour for clarity in responsibilities and more federal money at the same time as they forego making use of the tax room now available to them. Either they don’t have enough resources and they seek to increase their revenues – which they could do without adding to the overall tax burden of Canadians – or they seek to meet their responsibilities with the resources at hand.

But continually calling on Ottawa to raise the taxes to pay for provincial programs cannot go on without making a mockery of our very first principle – clarity in the roles and responsibilities of each level of government.

That clarity is essential to ensuring that Canadians can hold governments accountable for their actions. However, in addition to the four key areas, we are doing more. We want to work with the provinces to strengthen our economic union. Which, as I mentioned earlier, is one of the principles that is guiding us as we move forward to restore fiscal balance.

It is simply unacceptable that there are fewer international barriers to trade and mobility in the European Union then there are here in Canada. It is simply unacceptable that there are fewer internal barriers to trade and mobility in the European Union than there are here in Canada. A strong and prosperous economic union is essential if we are to remain ahead of the productivity and competitiveness curve.

By addressing these structural impediments we as Canadians can increase our standard of living, strengthen our economy, and make Canada a more attractive place for foreign direct investment.

First steps include:

• Reducing inter-provincial trade barriers; 
• Building consensus toward adopting a common securities regulator; 
• Harmonizing federal and provincial taxes; 
• Establishing a new foreign credentials recognition agency and provincial-territorial agencies responsible for professional accreditation; and 
• Adopting measures to improve work incentives for low-income Canadians.

In this respect, all Canadian governments can now build to the agreement struck between Alberta and British Columbia. The two provinces have adopted an accord and a dispute resolution mechanism that has so impressed all other provinces and territories that they have recently agreed to work towards making it the template for a national model.

It gives me an enormous sense of pride to know that in a matter of mere months, our new government has started to build a stronger Canada. A prosperous, secure, and clean Canada that is united at home and respected abroad. A country where what you've done and where you're going matters more than where you're from or who you know. A Canada that offers everyone a fair shot and helps those who need a hand up. A country with safe streets and secure borders. A Canada that leads, not follows, on the world stage.

This is the Canada that our government is committed to building and together, with you, we will.

Thank you.