The Government of Canada’s budgetary prudence servesCanadians well

In the October 24 edition of the Tribune, Mr. Michel Morin suggestedthat it would be "arrogant" for the Government of Canada to saythere is no fiscal imbalance in Canada. Mr. Morin may rest assured that theGovernment of Canada’s position is inspired solely by the public interest.

The federal budget surpluses of the past five years are not proof of theexistence of a structural fiscal imbalance, of which the provinces are thevictims. Rather, they are the fruits of an economic turnaround that Canadianshave worked too hard to achieve to take for granted.

The Government of Canada is not awash in money. It must be borne in mind thatthe federal debt load of $536 billion is over twice as high as theprovinces’. The Government of Canada’s surplus, which stood at$8.9 billion for the last completed budget year, may seem substantial, butit would melt away like snow in summer if we eased up on our budgetary prudence.

We would not have had such a surplus if Canada had experienced the economicdownturn projected by private-sector economists at the time of the last federalbudget in December 2001. Whereas they forecast 1.1% GDP growth for Canada in2002, it will actually be 3.4% according to the International Monetary Fund(IMF). That unexpected performance by the Canadian economy is nothing less thanexceptional under the circumstances. Average growth will be only 1.4% for G7countries in 2002, again according to the IMF.

Pendulum effects on budgets are 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.

Canada would be abandoning the budgetary prudence that has served it so wellif the federal and provincial governments were to base their budgetary policiesin the coming years on as unreliable a methodology as that recommended in thereport by the Séguin Commission. If you had tried five years ago to make budgetprojections for this year using the Séguin formula, you would have come up witha $60 billion surplus for the Government of Canada and a $12 billionsurplus for the Government of Quebec! The conclusions of the Séguin report areunrealistic.

Under these 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 canfind the flexibility to do more in the next budget, it will. Rather than aquestion of fiscal imbalance, it is a question of federal responsibility.

While federal transfers to the provinces have been restored to 1995 levels,tax cuts by the provinces have given them a shortfall of over $20 billion.The Government of Canada is not criticizing them for lowering their taxes, nomore than it is suggesting they increase them. It is merely saying that the factthe provinces feel they are in a position to cut their taxes is one proof that afiscal imbalance does not exist.

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, the Government of Canada is helping its provincial partners as muchas it can, and it hopes to be able to free up additional funding for health, forKyoto, for infrastructure, for official languages etc. But it will do so whilemaintaining the budgetary prudence that gives our country the healthiest publicfinances in the G-7, according to a recent report by the International MonetaryFund.

There is no fiscal imbalance in Canada; there is rather a duty to help oneanother out.

Open letter sent by Minister Stéphane Dion to the newspaper LaTribune and published October 30, 2002.