The Fiscal Imbalance and the Future of Canada
by Margret Kopala

Published in the Ottawa Citizen, January 14, 2006

Deep in Ukrainian Canada’s Regina heartland, Ralph Goodale will be schmoozing a little less earnestly than usual at this weekend’s Malanka (Feast of St. Melania New Year’s Eve) celebrations. The department run by Saskatchewan’s lone Liberal member is under RCMP investigation for possible income trust improprieties and, after the leaders’ debates in which Paul Martin gave a flat-footed performance, Goodale will be watching his own theory that the fiscal imbalance is only a “theory” disappear into the Julian calendar’s crisp night air.

Adding to the finance minister’s woes, a paper written by Saskatchewan alumnus now Queen’s University economist Thomas Courchene, titled “Confiscatory Equalization: the Intriguing Case of Saskatchewan’s Vanishing Energy Revenues” has made the fiscal imbalance as big an election issue in that province as it is in Quebec.

Inspired by the Newfoundland and Labrador deal that removed resource revenues from any calculation of equalization payments, Saskatchewan Premier Lorne Calvert pushed for his own deal. Only when Courchene revealed how the current formula makes the province worse off than if it hadn’t received equalization in the first place did Saskatchewan get some action. Chastened, the Martin government refunded some $800 million but the offending formula remains.

The term ‘fiscal imbalance’ entered the national vocabulary via the Séguin Report. Commissioned by Quebec Premier Jean Charest’s newly formed Liberal government in 2001, it used Conference Board of Canada figures to show how the federal government is awash in surpluses while most provinces are awash in debt. Over the next few decades, the report argued, with expanding federal government surpluses and expanding demands, particularly on provincial healthcare systems, this situation will worsen.

If Quebec’s Séguin Report provided the kindling, Paul Martin’s deal with Newfoundland and Labrador and Nova Scotia provided starter fluid for the growing controversy that today surrounds federal provincial fiscal relations. Ontario and Alberta duly calculated their fiscal ‘gaps’ while smaller provinces like Saskatchewan called for a comprehensive review of the existing equalization formula that guarantees Canadians comparable levels of government services at comparable taxation levels.

The Séguin Report went further. In addition to major changes to equalization, it called for more financial resources for the provinces, elimination of the health and social transfer and the “relinquishing of new tax room”, that is, the transfer of tax points from federal to provincial governments.

Pledging to address the fiscal imbalance, Conservatives were hailed as the new voice of federalism in Quebec this week. Mr. Courchene’s 2004 paper “The Changing Nature of Quebec-Canada Relations: from the 1980 Referendum to the Summit of the Canadas” explains why.

Quebec’s demands for more powers are being replaced with demands for more revenues, he writes, “in order to … exercise its existing constitutional powers.” (His italics) This dramatic shift, he says, is the result of globalization where sovereignty is about how societies live, work and play. In Canada, these are provincial powers. “The good news,” he concludes, “is that Quebec appears nearer than ever to assuming the mantle of a 21st century nation within the framework of the Canadian state.” Conversely, it could “revert back to seeking its future as its own nation state.”

While the fiscal imbalance won’t determine the outcome of this federal election, it could determine the future of Canada. To be sure, soaring resource revenues place Canada in the enviable position of managing its wealth in ways that provide incentive to dignified governance, meaningful work, sustainable development and a respected place in the international community. But if Canada’s destiny is to become the world’s first post national state, how we get there matters. Transferring tax points may make sense for populated provinces but do they make sense for those, like Saskatchewan, with a smaller tax base? How large a tax base is appropriate or necessary for what jurisdictional responsibility? What about cities? And that’s before the “theory” school of the fiscal imbalance has its say. It argues that each jurisdiction should just raise or lower its taxes as needed and account to its voters.

In the coming year, there’ll be no shortage of advice on how to address the fiscal imbalance. In addition to parliamentary committees, the Council of the Federation has appointed an Advisory Panel on the Fiscal Imbalance while Ralph Goodale has appointed an Expert Panel on Equalization. Ontario Premier Dalton McGuinty, the Toronto Star and Harvard Professor now Liberal Party candidate Michael Ignatieff, are calling for a Royal Commission.

MARGRET KOPALA’s column on western perspectives appears every other week.

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