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September 28, 2006

Address by the Honourable Jim Flaherty, Minister of Finance, to the Queen’s University Institute of Intergovernmental Relations Conference Fiscal Federalism and the Future of Canada

Kingston, Ontario

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I’m going to speak tonight about where we are in terms of restoring fiscal balance. I realize that it is not a topic that is perhaps the most exciting after-dinner topic, but it is important for our country and certainly for our future internationally when we think of the strength of our economic union.

I'd like to thank the Queen’s University Institute of Intergovernmental Relations for the opportunity to be here tonight. Before I get into some of the basic principles, let me say this: we have not made the decisions that we are going to necessarily make with respect to the important issues of Equalization and transfer payments. We have set out a course that we intend to follow, which we did in Budget 2006 on May 2nd this year. We released an important part on moving toward fiscal balance in Canada at that time, which I’m sure many of you have referenced at the time to see. And we laid out a schedule, a plan of what we would do and that is we would release the paper, which was released with the budget; that we would proceed with a federal-provincial-territorial finance ministers conference, which we did at Niagara-on-the-Lake at the end of June; that there would be further consultations and discussions by various federal ministers on infrastructure, post-secondary education, other intergovernmental issues during the summer and fall, which are continuing, have been happening and are continuing; that we would address the issue further in the fall economic update, the fiscal update which I will do in a month or so; and that we would move forward with the fiscal conclusions in Budget 2007, which would be in the new year, which of course would give us our fiscal plan for 2007–2008.

And that plan hasn’t changed. We are on track, the consultations are taking place and the decision-making process will follow. We have more conversations to have with our provincial and territorial colleagues and they are continuing. I say that by way of context for what I’m going to say in terms of the principles that we are embracing in terms of those issues of Equalization and fiscal balance.

Canada’s federation is a world success story. We are a model to others: we have a successful federation with effective governance and respect and recognition of diversity and pragmatic consensus. As a federation, Canada will always have some regional stresses and strains. Our common strength has been in how we address these, overcome them and build a stronger economy.

And if you think of what we’ve, has been, accomplished in this country in the past 10 years, think of our fiscal situation, economic and social policy, foreign defence policy, the deficit. You know, two decades ago few would have believed that Canada could be deficit-free. And, in fact, many in the elites in our society would have been divided on the benefits of a deficit-free approach at all to fiscal policy. Zero balance on the deficit has become the policy preference and larger reality at the federal level and throughout most of our provinces. Similarly with debt: debt levels, which peaked in the early 1990s, have declined steadily as a percentage of our GDP, and that reduction in debt and deficit spending has not increased unemployment, as some proto-Keynesians might have predicted.

But rather we, it has contributed through more moderate tax levels and enhanced investments, incentives in the provinces and nationally to greater workforce participation and higher overall employment.

Now the government of which I am a part has some clear views on the priorities going forward for the economic and social infrastructure of Canada. Simply put, number one, we are liberating the forces of investment. Secondly, moderating the cost of government—heard about some of that this week. And thirdly, enhancing the depth and capacity of capital markets to sustain not only an ever more technologically acute economic base in Canada, but also an ever more outward-looking Canadian economy.

So why does this matter and why do I raise it? Because the nature of constitutional roles and responsibilities and the fiscal arrangements that flow from them are critical not just to delivering services to people, but to our ability as a country to stay competitive and create jobs and opportunities for our citizens. We need to contemplate restoring fiscal balance in the additional context of economic growth and a stronger economic union in Canada.

I’m mindful that our collective effort to restore fiscal balance is not an end in itself but rather a means to an end. A means to a stronger economy, to better services for people and a stronger federation for Canadians.

Why restore fiscal balance? Well as we look at restoring fiscal balance it is important to pause and consider the word "balance." Confederation itself was a reflection of the desire for balance between the Houses of Parliament, between the executive and legislative branches, between regions and religions, between the two orders of government themselves. Confederation would not have happened without seeking balance.

But this is of course 2006 and not 1867 and that balance has changed, and not necessarily for the better. Prime Minister Harper and our new government believes sincerely that the federal government has grown, over-reached in many ways, some of which violate the very spirit of the original Constitution of Canada.

To leave it out of sync means to be untroubled by the stresses imposed on the core agreement and the essential nature of Confederation itself. That is why we’ve put this issue on the national agenda. Simply put, a federal government that overtaxed Canadians in all parts of Canada, then used overarching surpluses to launch boutique federal programs in areas of provincial jurisdiction and went on year-end March spending sprees with no parliamentary authority, practised neither good finance, financial management, nor good governance. And this was the approach of the previous government.

The neglect of core federal responsibilities has blurred accountability, created needless intergovernmental resentments and discouraged progress in the priority areas of Canadians. The budget planning was neither effective nor transparent, with large unplanned surpluses the norm, not the exception. And despite recent significant increases in federal transfers, notably in health care and Equalization and the Territorial Formula Financing, the absence of clear principles behind these replenishments has helped undermine the important consensus and support all Canadians must give for fair and effective fiscal arrangements. To be direct, not only must fiscal arrangements be fair, they must be seen to be fair. Unfortunately, that has become less and less the case in Canada.

So now, in a federation like Canada fiscal arrangements are far more than a line-item transfer in the federal budget. They are in many ways the political expression of how our country governs itself. They are the underpinning of Canadian values themselves: of sharing, yes, but also of fairness and reasonableness.

So to restore fiscal balance we must start with principles. Our government will not be a government of grand assertions and over-reaching visions that are impractical and unsustainable. We leave that to our political opponents. We are instead determined to be a government of practical progress on the crucial economic, geopolitical and social infrastructure priorities that reflect our values and principles as Canadians. And that, of course, includes restoring fiscal balance.

When I presented our government’s budget, our first budget in May, we set out five fundamental principles for restoring fiscal balance. First of all, accountability through clarity of roles and responsibilities. Secondly, fiscal responsibility and budget transparency. Thirdly, predictable long-term fiscal arrangements. Fourth, a competitive and effective economic union. And fifth, effective collaborative management of the federation.

In the short time that we have been in office Canada’s New Government has already taken a number of steps to restore fiscal balance. First, by focusing on federal areas of responsibility. This means investing in Canada’s capacity to meet its obligations internationally as part of our military alliances, our North American obligations and partnership, and our international humanitarian commitments. From our "Canada First" defence plan and our mission in Afghanistan, to increased border and security investments, to protecting Canadian families by tackling crime, our government is clearly asserting itself in its core areas of responsibility. That’s what we were elected to do and that’s what we are doing.

At the same time, we are addressing what might be called the fiscal imbalance existing between the government, the federal government, with taxpayers by delivering over $20 billion, $20 billion in tax reductions in every we tax: income taxes, corporate taxes, big business, small business, consumption tax, GST and even excise taxes.

We introduced a more transparent approach to budget planning; we tabled a new Federal Accountability Act; and just this week we reduced the national debt by $13.2 billion, one of the largest debt relief payments in Canadian history—in fact, the third largest in Canadian history.

We have also reduced program spending for the first time in nine years and put a strategy in place to deliver $2 billion in savings over two years by eliminating inefficient and wasteful programs and tightening spending control. And we will do more in terms of effective ongoing spending management control in the Government of Canada.

This will help boost our strong macroeconomic fundamentals. As a country in the G7, we have a good reputation in terms of our debt situation and our balanced budget. We have good employment figures, good inflation figures, and our economic growth is unparalleled in recent years.

We have stellar fiscal performance with nine years of federal surpluses and the lowest debt-to-GDP ratio in the G7. We also have the best per capita growth record and the highest employment growth in the G7 since 1997. Similarly, the fiscal federalism fundamentals have also improved. Federal transfers are now at historic highs with $42 billion in cash transfers to the provinces and territories as well as almost $19 billion in tax transfers each and every year. The Canada Health Transfer is set to grow at 6 per cent annually, which is built into the base, so it’s more than 6 per cent, of course, per annum going forward over the 10 years of that agreement. This year alone it’s an additional $1.1 billion to the provinces under the CHT.

12 of the 13 provincial and territorial governments have recorded surpluses last year, some bigger than anticipated, and together the aggregate surplus is almost equal to our own federal surplus of $13.2 billion. The only province not running a surplus presently is the province of Prince Edward Island.

Debt levels are coming down, but it remains true that the total provincial-territorial debt is still roughly half of that of the federal government of Canada. We made significant new investments in infrastructure and just this week confirmed an additional $3.3-billion one-time transfer through trust to the provinces and territories for post-secondary education, public transit and affordable housing.

We also have to bear in mind that in Canada sub-national governments, sub-national governments raise the largest share of total government revenues among industrialized federal countries. Moreover, Canada’s the only country where more than half of total government revenues are raised at the sub-national level.

So clearly we’ve moved the yardstick forward but we believe there is more to do. In the budget in May, as part of our plan to restore fiscal balance, we promised to take action in the following four areas: First of all, and we’ve been talking about this at dinner tonight, of course to develop a new approach to long-term funding for post-secondary education and skills training. Secondly, to develop a new framework for long-term funding for infrastructure. Third, to renew and strengthen Equalization and Territorial Formula Financing programs. And fourth, to outline an approach for allocation of unplanned surpluses.

So let me take a moment to expand on these points. First of all, on post-secondary education and training I don’t need to convince anyone here, I’m sure, of the importance of post-secondary education for the future of our country. This is one of the cornerstones of our success as a nation, but we are facing real pressures to do more. So 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 up in the United States or in Asia. The need for talented, educated people in this country is too great, and we are facing a severe shortage of skilled labour as well as increased competition from emerging economies around the globe. With better cooperation 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 job skills and talents needed, and build upon our centres of excellence that exist across Canada.

On infrastructure, increasingly this is a key to a competitive, productive economy and we need to act on this. Without the ability to move people and goods along our highways and at our border crossings in particular, our economy would grind to a halt. The Detroit-Windsor border crossing, for example, is 30 per cent of our economy crossing it and is in dire need of resolution.

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 gridlock, aging infrastructure, lost productivity. In the GTA alone it is estimated we are losing $2 billion a year due to inefficient infrastructure. In Toronto the 401 near the Highway 400 is the busiest section of the busiest highway in the world, according to the World Bank.

The solution will require a significant amount of time and a significant amount of commitment in spending. This speaks clearly here, now, 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, which is in this year’s budget, including full GST relief for municipalities, the sharing of a portion of the federal excise tax gasoline and federal infrastructure initiatives for highways, border crossings, strategic infrastructure and municipal projects.

Perhaps no current fiscal federalism issue has generated as much recent commentary as Equalization. It is worth reminding ourselves at the outset of what Equalization is and what it is not. It’s provided for, as I’m sure almost everyone in this room knows, by the Constitution, 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."

The point here—and I have to make this point often across Canada—is that Equalization is a federal program that provides transfers directly to the provinces and territories. Sometimes the Equalization program has been characterized quite differently as a transfer from one province to another. And as you know this is simply not true, and I’ve had the experience of a provincial finance minister, and we’re all sitting around the table there saying my people aren’t going to sign any more cheques to other people in other provinces and I had to caution him that when we sit around the table together we don’t do that, because Equalization is a federal program paid for with taxes that people pay to the Government of Canada, and isn’t a matter of one province, the taxpayers of one province, subsidizing taxpayers in another province. It’s important as Canadians that we recognize the federal nature of the Equalization constitutional obligation of the Government of Canada.

One thing that we are good at as Canadians is debating issues of jurisdiction, division of powers and of course money. Recently there have been some good contributions to the debate, and I know that Al O’Brien is here tonight, I saw him earlier, the former treasurer of Alberta. He and his expert panel on Equalization produced a terrific report and has resulted in much constructive debate this year in Canada. And, also, I know members are here of the report by the council, the reports by the Council of the Federation, which are also much-appreciated contributions to public debate on this issue in Canada, as well as numerous articles and books by various persons in the academy and I’m sure that some of you have written those books, some of you here tonight.

I want to thank all of you for your contributions to the discussion. I’m not surprised to learn that the O’Brien report has emerged as a major focus of attention. Al O’Brien is here tonight. You can, if you have any difficult questions, please feel free to bring them to him. We discussed the O’Brien committee report with the provincial and territorial ministers of finance at Niagara-on-the-Lake. Mr. O’Brien and two of his colleagues very kindly came and sat with us and went through the important elements of the report, of course, and listened to and tried to respond to questions from the various ministers of finance several months ago, as the premiers also did when they met with Mr. O’Brien.

The O’Brien report presents an approach that strikes a certain balance amongst the very diverse views that exist. It proposes returning Equalization to its formula base and principle-based roots. The report, the proposals include a 10-province standard; 50 per cent inclusion of resources; a cap to ensure that the fiscal capacity of a province that receives Equalization payments does not exceed that of the province that does not receive Equalization payments; more stable and predictable payments; and a more transparent and simplified program, among other recommendations.

To say that provincial opinion on Equalization is divided would be a bit of an understatement. In deciding how to move forward with this important program as part of our plan to restore fiscal plan, we will need to balance the competing demands in a manner that is fair to all Canadians.

For all the very direct and sometimes single-minded suggestions we receive on how to fix Equalization, it is worth bearing in mind that our job as a national government requires us to consider the interests of Canada and Canadians as a whole in all parts of this great country.

Our government firmly believes that unanticipated surpluses, the last area I wanted to mention, should be used primarily to reduce the debt and reduce federal taxes rather than to launch new policies in areas where the federal government is not best placed to design or deliver programs.

This, in turn, creates tax room that provinces and territories can consider filling for their specific needs and purposes. It supports the premise that governments need to be accountable to Canadians for their taxing and spending decisions. That clarity of roles and responsibilities is essential by ensuring that Canadians can hold governments accountable for their actions.

At the same time—and I’m going to speak for a moment here now about the economic union and issues relating to that—at the same time it is imperative that governments cooperate better and remove the barriers to competitiveness and efficiency within Canada’s economic union. It is simply unacceptable that there are fewer international barriers to trade and mobility in the European Union then 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. The first steps include reducing interprovincial trade barriers; building consensus toward adopting a common securities regulator; encouraging harmonization of 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 to help them rationally enter the workforce in Canada.

To assist us on this front we can look to the agreement struck between the province of British Columbia and the province of Alberta with respect to labour mobility, a terrific agreement which was spoken well of. And I’m pleased that a number of other provinces are looking fondly on that agreement as a constructive way, I dare say, at long last of knocking down some of these barriers with an effective enforcement mechanism. Those two provinces have adopted an accord and a dispute resolution mechanism that could be held up and is being held up by many as a national model for Canada.

Now I’ve gone on almost as long as it seems. Let me conclude with a few final thoughts. Our government is deeply committed to facing this difficult issue head-on, as we have been, and delivering for citizens, families and taxpayers of Canada. We are a different government, as we were talking about in the House of Commons today in response to questions. We acknowledge the fiscal imbalance in Canada and now we’re moving forward to address the issue.

Our government is deeply committed to making use of the opportunity that we have today to make our economic union stronger as part of our discussion toward restoring fiscal balance in Canada. Our goal should not simply be to have a country fit for the 21st century but a country equipped to lead in the 21st century. And by tackling the issue of fiscal balance, we are going where the previous government, as I indicated, failed to go.

We are reaching further, we are focused, committed and markedly different. The Canada that emerges from this will be one that is confident and prudent, idealistic and practical, impressive without being self-obsessed. As a trading nation with the longest coastline on three oceans in the world, our perspective must be global and our context deeply international.

But the days of externalizing our internal problems and refusing to face them directly ourselves are gone. We are in a minority parliament so the ideas of other parties matter greatly and are taken into consideration. But our prime minister is working hard to provide Canadians with stable, balanced and effective government. And if I have one message for you tonight, it is that the government serving Canadians today is different than the last government and that we will face squarely the issues that matter to Canadians, including these issues of Equalization and fiscal balance.

Our priorities are more focused and they are less numerous. Our fiscal stance is more precise and disciplined and our belief in a more compelling federal-provincial partnership is more determined. And I hope this is of some assistance to you in understanding the fundamentals that we embrace, as we move forward in our consultation and toward resolution of the important issues of Equalization and fiscal balance. Thank you very much.