The debate on the so-called fiscal imbalance is finallygetting somewhere

I recently reproached our political media for their complacency in endorsing,without any genuine discussion, the idea that the federal budget surpluses ofthe past five years are proof of the existence of a structural fiscalimbalance, of which the provinces are the victims. That move provoked some howlsof outrage from editorialists who prefer to shoot the messenger rather thananalyse the message.

But that was not the case with the editorial by the president and editor ofthe daily Le Soleil, Mr. Alain Dubuc, entitled: "Fiscalimbalance : welcome to the circus" (19/10/02). Though describing mycomments as an "untimely outburst," Mr. Dubuc reacted to themby presenting one of the rare in-depth analyses of the issue. So my words werenot entirely in vain. It is not the first time I have come to realize that inpolitics it is sometimes worthwhile to rattle some cages, even though one maypay a personal price for it.

Mr. Dubuc stated that a fiscal imbalance does exist, but he was critical ofthe spin put on it by Premier Bernard Landry.

The president and editor of the Soleil rightly pointed out that thegratuitous accusation that the federal government is trying to strangle theprovinces financially stems from "paranoia." Rather than a"federal plot," I am convinced there is a sincere desire on allsides, the federal government and the provinces, to find the best solutions forcitizens. They want their governments to work together to provide them withhigh-quality public services.

Similarly, Mr. Dubuc distanced himself from the Séguin Commission report,commissioned by the Government of Quebec. This report is supposed to prove theexistence of a fiscal imbalance. Mr. Dubuc called it a "serious"report, but said it is not the "gospel truth," and is a "politicalexercise" with "very shaky" conclusions. That is quitetrue, as I can easily demonstrate. If you had tried five years ago to makebudget projections for this year using the Séguin formula, you would have comeup with a $60 billion surplus for the Government of Canada and a$12 billion surplus for the Government of Quebec! It would be irresponsibleto base our budgetary policy in the coming years on such an unreliablemethodology.

That being said, Mr. Dubuc then sketched out three avenues for reflectionwhich, if pushed further, would, I believe, lead one to conclude that a fiscalimbalance is absent in Canada.

He first emphasized the need to do nothing that might "affect Ottawa’sfinancial situation." In effect, it must be borne in mind that thefederal debt load of $536 billion is twice as high as the provinces’. TheGovernment of Canada’s surplus, which stood at $8.9 billion for the lastcompleted budget year, may seem substantial, but represents only 5% of federalrevenues. It would melt away like snow in summer if we eased up on our budgetaryprudence. We would not have had such a surplus if Canada had experienced theeconomic downturn projected by private-sector economists at the time of the lastfederal budget in December 2001. Whereas they forecast 1.1% GDP growth forCanada in 2002, it will actually be 3.4% according to the International MonetaryFund (IMF). That unexpected performance by the Canadian economy is nothing lessthan exceptional under the circumstances. Average growth will be only 1.4% forG7 countries in 2002, again according to the IMF.

Pendulum effects on budgets are very considerable and dictate the greatestprudence. Let us look at the situation in other countries. The US federalgovernment projected a US$230 billion surplus when it tabled the 2001-2002budget; it is now projecting a US$165 billion deficit. In Europe, France,Italy, Germany and Portugal are experiencing serious financial problems.

Second, Mr. Dubuc noted that the alleged fiscal imbalance is not the reasonthat "Quebec’s tax burden is the highest in Canada." Indeed,the tax burden, both individual and corporate, is 40% higher in Quebec thanelsewhere in the country. But it must be added that some other provinces, suchas Ontario, have made substantial tax cuts in recent years. While federaltransfers to the provinces have been restored to 1995 levels, tax cuts by theprovinces have given them a shortfall of over $20 billion. The Governmentof Canada is not reproaching them for lowering their taxes, no more than it issuggesting they increase them. It is merely saying that the fact the provincesfeel they are in a position to cut their taxes is one proof that a fiscalimbalance does not exist.

Third, Mr. Dubuc wrote that the Government of Canada would be hard pressed tomake substantial spending cuts without "discontinuing activitiesappreciated by citizens." Indeed, wiping out high deficits and thespectacular turnaround of our public finances required enormous sacrifices byCanadians. As a percentage of GDP, federal program spending has been cutsubstantially in recent years, from 17.5% in 1992-93 to 11.6% in 2001-02 - thelowest levels since 1948-49! So it is no surprise that calls for reinvestmentare pouring in from all directions: health, research and development,environment, infrastructure, defence...

In the circumstances, the Government of Canada is helping the provincialgovernments as best as it can. Federal transfers will increase by 6% a year inthe coming years, whereas federal revenues are expected to grow by only 2% ayear. The Government of Canada has said and continues to say that if it can findthe flexibility to do more in the next budget, it will. Rather than a questionof fiscal imbalance, it is a question of federal responsibility.

The Government of Canada helps the provinces partly through transfers, butmainly by fostering the good economic health of the country. If Canada has beenable to avoid the economic downturn of the past couple of years, it is in largepart because the Bank of Canada was able to lower interest rates when the timewas right. It was able to do so notably because public finances, both federaland provincial, were in the best shape they had been in for 10 or 20 years. Atthe end of the day, the federal surplus is great news for all Canadians. Such afinancial situation is the envy of citizens in other countries.

In short, federal surpluses are not a sign that the Government of Canada isawash in money. Rather, they are the fruits of an economic turnaround thatCanadians have worked too hard to achieve to take it for granted. Whilemaintaining the necessary budgetary discipline, the Government of Canada ishelping its provincial partners as much as it can, and it hopes to be able tofree up additional funding for health, for Kyoto, for infrastructure, forofficial languages...

There is no fiscal imbalance in Canada; there is rather a duty to help oneanother out. Governments’ responsibility, as Alain Dubuc concluded in hiseditorial, is always "to serve citizens better." Ourgovernments will not do so by basing their actions on false premises, of whichthe fiscal imbalance hypothesis is one.

Open letter which Minister Stéphane Dion sent to the newspaper Le Soileilon October 22, 2002.