Part Three – Modernizing the Federation – March 3, 2017
Equalization and Other Fiscal Transfers
As both a beneficiary of, and in recent years a contributor to, the equalization program, Newfoundland and Labrador has an interest in ensuring more coherence, transparency, accountability and equity in the system of federal-provincial fiscal transfers in Canada.
First, some background: Every year, Ottawa channels billions of dollars to the provinces and territories to reduce inequities among Canadians. This goal is so fundamental to our way of life that it is entrenched in the Constitution. Section 36(1) of the Constitution commits our governments to: “(a) promoting equal opportunities for the well-being of Canadians, (b) furthering economic development to reduce disparity in opportunity, and (c) providing essential levels of public services of reasonable quality to all Canadians.” Federal contributions to provinces primarily take the form of transfer payments specifically designated for health care, post-secondary education, social assistance, and social services. Together these arrangements are called “fiscal federalism.” One specific form of financial redistribution of the nation’s wealth, called equalization, is specifically mentioned in Section 36(2), committing our governments to provide “reasonably comparable levels of public services at reasonably comparable levels of taxation.”
It is important to note that transfers from the federal to the provincial and territorial governments are an integral component of a well-functioning modern federation. In a federation such as ours, the so-called vertical balance between federal and provincial levels is just as important as the horizontal balance that focuses on correcting disparities across provinces. In fact, too much provincial self-sufficiency can lead to greater horizontal imbalances and interprovincial disparities; this then puts pressure on equalization. Indeed, we should be concerned that Canada is now the most decentralized federation in the developed world as measured by federal transfers as a percentage of provincial revenues. Many economists argue that the level of federal transfers is so low that this will seriously impede our ability to pursue national equity and efficiency on behalf of all Canadians. For example, from 1945 to 2006, federal government revenues only twice dropped below 15% of GDP – in 1958/59 and 1963/64. Yet revenues have now dropped below 15% of GDP every year since 2008/9.
It has become increasingly difficult to measure whether the current structure of fiscal federalism allows us to share the financial burden fairly and ensure federal transfers do what they are meant to do to promote national objectives. Governments engage in ad hoc deals that make calculating the real impacts of transfer payments next to impossible. Recent developments on the health care front with bilateral federal-provincial funding deals are just the latest illustration of this. The federal government once again has failed to negotiate a multilateral agreement with all provinces and territories, and establish a specified set of national standards in health care, together with clear indicators and measurements against targets. Without such long-term clarity and transparency, the record shows that the federal government cannot be relied on to guarantee adequate funding to maintain those standards, and too often arbitrarily reduces transfers to provinces in future years, with serious consequences. To ensure greater accountability and more openness and transparency surrounding the purpose and adequacy of federal fiscal transfers, there must be crucial changes to how Parliament handles them, and much more meaningful scrutiny at the very least by the House of Commons.
In 2015-16, the Canada Health Transfer distributed almost $34 billion and the Canada Social Transfer (covering such areas as post-secondary education and childcare) another $13 billion. Both these transfers are now paid on an equal per-capita basis. Equalization payments (which are made only to provinces with comparatively weak fiscal capacity) totaled approximately $17.3 billion, with about half of this amount going to Quebec and the rest distributed across Ontario, Manitoba, Nova Scotia, New Brunswick, and Prince Edward Island. Presumably Newfoundland and Labrador will once again qualify for equalization this fiscal year. There are many other federal programs and initiatives that incorporate equalizing elements, such as Employment Insurance, which is currently structured to benefit the unemployed who live in areas of the country with fewer job opportunities.
Undoubtedly, equalization is a valuable program that some observers argue may help Canada to quell incipient voter revolts in particularly hard-hit geographic areas (as happened in the US Rust Belt states that tipped the vote to Trump). But our equalization program has long been in need of serious reform, both substantive and procedural. The formula is so complex that few experts can even describe it in understandable terms – adding up different tax bases while excluding others to somehow measure comparable fiscal capacity across provinces.
Too often equalization has become a political football: at one point under the Harper administration, we ended up with several different versions in play when Danny Williams here in Newfoundland protested successfully regarding the impact of a change on our province. Alberta, because of its natural resource wealth, used to be the biggest contributor to equalization, and even though this has changed, Alberta politicians still question why enormous sums are being sent to Quebec to allow that province to pay for services that others cannot afford, such as subsidized electricity, $7.55-a-day child care (now for incomes up to $50,545.00, and rising on a sliding scale to $20.70 for higher incomes), and the lowest post-secondary tuition fees in the country.
We urgently need to bring coherence, consistency, and accountability to the perverse jumble of federal contributions to provinces so that it does not divide governments and erode Canadians’ ties to one another.
A permanent non-partisan independent advisory commission, similar to Australia’s Commonwealth Grants Commission, could scrutinize and manage fiscal federalism. This Commission on Fiscal Transfers would examine how every province is doing based on a giant balance sheet of GDP in each jurisdiction, taking into account all revenue sources, measuring the effectiveness of programs, and charting improvements in equity. It would examine such difficult issues as whether and which transfers should be made on a per capita basis or according to “fiscal need”, given the disparities among provinces. The current equalization formula, among other things, would be replaced.
The Commission’s reports to Parliament and recommendations to the minister of finance would make the system of federal contributions to other levels of government more transparent and much less political. Its findings would inform intelligent debate on longer-term national standards and objectives, thereby building stronger ties among Canadians and greater confidence in the fairness of the system.
Council of Canadian Governments
When Newfoundland and Labrador seeks support from the federal government on a bilateral basis, inevitably and predictably the cries go up from other provinces that if Newfoundland is getting ABC for Muskrat Falls then, for example, Quebec is entitled to XYZ for its hydro projects on the St. Lawrence river. In the ensuing bidding war, the federal support that ultimately materializes too often reflects more transitory political priorities rather than important long-term economic and financial realities.
The traditional approach of relying only on ad hoc first ministers’ meetings to achieve an intergovernmental consensus no longer works for the long-term action that is urgently needed. Too often, on any given issue from health care to energy, we end up with either the lowest common denominator of agreement, or no multilateral agreement at all with a potentially inequitable patchwork of standards and quality of services across the country.
We know all too well that many critical challenges we face today – from infrastructure to energy, education/training and health care to climate change – involve every level of government. We cannot neatly allocate this or that responsibility to this or that jurisdiction. We need coordinated governance to ensure that all levels of government work together collectively to help Canadians meet the real challenges we all face on a daily basis.
The time is overdue to bring about structural changes to modernize our federal system and to facilitate all levels of government working together towards common goals for all Canadians. It is also time to make structural changes to assure maximum accountability and maximum efficiency from our collective public expenditures across multiple levels of government.
Australia has a model that Canada could follow to create a more collegial and collaborative federalism without the need for constitutional change. The ten-member Council of Australian Governments consists of the prime minister, the state and territorial leaders, and the head of the Australian Local Government Association. Established in 1992, the Council fosters co-operation on policies and issues of national importance. It is generally well accepted and has enabled Australia to eliminate much of the inter-jurisdictional wrangling with which Canadians are so familiar while successfully establishing more coherent and harmonized policies across the country in areas such as a national disability insurance plan, skills training, business regulations, transport, infrastructure, and health care.
A Council of Canadian Governments, chaired by the prime minister, would include provincial premiers, territorial leaders, representatives of the municipal order of government, and representatives of Indigenous people. It would not be a formal part of the legislative process, nor would it have any governmental powers or constitutional status; instead, it would supplement first ministers’ conferences. The Council’s role would be to initiate, develop, and monitor the implementation of policy reforms that are of national significance and require action by all Canadian governments.
The focus on collaboration would bring more direction and coherence to national governance. The Council would be transparent. Full information about its meetings, agendas, proposed initiatives, agreements, and so forth would be made public. Council meetings could be open to the public, giving them access to experts invited to participate. This high degree of transparency would facilitate constructive citizen mobilization and permit Canadians to demand much greater accountability from our leaders collectively for progress on matters requiring national attention and co-ordinated government action at different levels. (The provincial and federal legislatures would be accountable for any laws or regulations they made that followed up on the Council’s work.)
So much of the public action required to strengthen our social safety net and our economic fundamentals requires all levels of government to collaborate constructively. From the citizen’s perspective, it is frustrating to be met with one level of government ducking from taking action by blaming another level. It is frustrating to find federal action uncoordinated with a related provincial program so that individuals fall through the gap and find certain benefits arbitrarily canceled. It is frustrating to find that your business has to comply with different requirements when you operate across more than one province, and that your employees’ training certificates are not recognized across Canada.
The Council’s purpose would be to strengthen our social safety net and prevent Canadians from falling between the cracks when dealing with complex and uncoordinated federal-provincial-municipal initiatives. The aim would also be to strengthen our internal Canadian economy and eliminate the regulatory labyrinth across Canadian jurisdictions that absurdly makes it easier to conduct business outside our borders. Greater national coherence will provide Canadians with greater economic and social security and increase investment and jobs across the country.
Finally, the Council of Canadian Governments would permit much-needed accountability for the massive federal-provincial fiscal transfers that totalled $68 billion in 2015-16, or 25.8% of all federal program spending. It would be invaluable to have a forum where issues such as the much-misunderstood topic of federal-provincial “fiscal balance” can be examined, and ensure a coherent, collective focus on the sustainability of the federation’s finances.