The Challenge of Canadian Federalism in the 1980s

MR.MACNAUGHTON:

Ladies and gentlemen of The Empire Club of Canada: When our invitation was first extended to the Honourable Jean Chretien and accepted by him it was in the belief, held by many, that this luncheon might be a part of a campaign by him for the leadership of the Liberal Party of Canada. However, since his visit was scheduled events in Ottawa have intervened (or if one believes columnist Richard Gwyn, Jim Coutts and Allan MacEachen have intervened) to change the kind of contest in which our guest of honour is presently engaged. Nonetheless, for members of the Empire Club, and for audiences in all parts of Canada, Mr. Chretien would be a welcome guest no matter what the context of his visit. After seventeen years in the House of Commons and through his ministerial responsibilities in four different portfolios he has become a well known and widely respected parliamentarian and it is our pleasure to have him with us today.

This meeting, with a representative of the Liberal Party, is the first in the Empire Club's 1980 election trilogy. We will be hearing also from the New Democratic Party on January 31 when its leader Ed Broadbent will be our speaker and from the Progressive Conservatives on February 14 when we will be hosting Prime Minister Clark. It promises to be a lively series that will provide our members with an opportunity to hear spokesmen for all three parties.

Apparently current public opinion polls indicate that Torontonians regard the election as a Hobson's choice--should they elect Mr. Broadbent's New Democrats and experiment with large S Socialism, should they re-elect the Progressive Conservatives and Mr. Clark whose baggage includes an energy policy that Premier Davis has described as an assault on Ontario, or should Torontonians who recently recalled Punch Imlach now do the same with Pierre Trudeau.

Whoever wins the election on February 18, one thing is very clear. That is that unless there is a startling upset in the Quebec Riding of St. Maurice, Jean Chretien will be a major figure in the next parliament of Canada, either as a senior minister or as a prominent opposition spokesman and, at some point in the future, almost certainly as a contender for the leadership of his party.

Today he is here to speak to us on the topic "The Challenge of Federalism in the 1980s." Constitutional reform that will hold Canada together is a topic on which we might expect Mr. Chretien to have an important message not only because, and not even particularly because, he is opposition critic for federal-provincial relations, but more so because it is one for which he has had a passion through all the years he has been in the House of Commons.

In the seemingly endless, sometimes acrimonious and always complex search for constitutional reforms that will satisfy the competing goals of different regions in Canada, one is reminded of the pessimistic words of the French essayist Montaigne who observed:

Le monde est inepte a se guerir. Il est si impatient de ce qui le presse, qu'on ne vise que s'en defaire, sans regarder a quel prix. Le bien ne succede pas necessairement au mal. Un autre mal lui peut succeder, et pire.

For Canadians the pessimism of Montaigne is relieved by the realization that, into the constitutional debate in this country between the thesis of the status quo and the antithesis of separation, men and women of good will in all parties are searching for the synthesis of a renewed and reformed Canadian federalism. One such person is the Honourable Jean Chretien whom it is our privilege to host today. I invite you to welcome him to our podium now.

MR. CHRETIEN:

Ladies and gentlemen: It's a great pleasure for me to speak before a serious audience on a very serious topic. I say this because I think the present campaign should dwell on issues instead of degenerating into a comparison of personalities. Those of you who came to this luncheon to hear me speak about federalism may be surprised when I start talking about oil pricing and the Tory budget. If you'll just be patient, I promise you the connection will soon become clear.

You know, I don't allow myself to think about Tory economic policy too often because I'm afraid of getting ulcers. It was very difficult for me, when I was Minister of Finance and particularly during the last election, to hear John Crosbie and Joe Clark talk about their plans for the Canadian economy. They made spectacular promises, including lower interest rates and a higher Canadian dollar. They promised a two billion dollar personal tax cut, a three billion dollar mortgage tax deduction and something called a stimulative deficit.

We Liberals couldn't promise anything like that. Within my own party, there were some people who wanted us to match the Tories' platform but I said "No, the country can't afford it." I knew we were losing votes because we couldn't offer mortgage deductibility, but I took the responsible course because the deficit was already uncomfortably high. I knew as well that the mortgage tax cut would not stimulate house construction because the rate of family formation is falling steadily: the demand for new housing just isn't there any more. I also refused to single out current home-owners for preferential tax relief if it meant the other taxpayers of Canada would have to foot the bill.

So we held firm and we lost. Losing isn't fun, but I still have the satisfaction of knowing that I made no compromises with my conscience.

For the Conservatives, on the other hand, the compromises were just beginning. Throughout the summer--a summer when Canada was ruled by Orders-inCouncil and Governor General's Warrants--the Conservatives abandoned their promises one by one. The final disappointment for us Liberals came on December 11 when, defiantly renouncing the entire thrust of their campaign platform, the Conservatives tabled a budget which seemed deliberately planned to stifle growth, increase unemployment and severely aggravate inflation.

Some critics and columnists praised John Crosbie's budget for being "tough," and the Minister made a great song and dance about the need to be realistic. That was not the reason it was defeated. Every responsible member of the House would have supported the Conservatives' economic initiatives if they had offered a tough, realistic approach to Canada's pressing economic difficulties. But they did not; the Conservatives gave us a budget that was tough only on people, not on problems.

For 1980, my successor as Minister of Finance was planning double-digit inflation, reaching a possible 13 per cent year-over-year increase by December 1980, together with an increase in unemployment to 8.3 per cent and almost zero economic growth. At a time when the Canadian economy is threatened by recession, the Conservatives' policy seems calculated to assure that downturn.

Well, you may say, at least they took a longer view of the economy's needs. They resisted the urge to tinker with the economy, to do some expensive fine-tuning at the cost of a higher deficit.

In reality, the belt-tightening Tory budget does nothing to slow the expansion of government spending and the growth of the public debt. Expenditures would grow ten per cent a year between now and 1984--faster, in fact, than they did in the last two years of the Liberal government. By 1984, spending will have increased by fifty per cent or twenty-four billion dollars. The cost of debt servicing will double, reaching fourteen billion dollars a year in 1983-84.

The actual budgetary deficit will still be nine billion dollars in that year. When John Crosbie speaks of reducing the "deficit" to four or five billion dollars in 1983-84, he's really referring to the amount the government has to go out and borrow. The government will be borrowing less largely because of a four billion dollar surplus of receipts over disbursements on the government's pension and social security account. In other words, the government would write an I.O.U. to its employee pension fund and apply the money toward its current spending commitments.

Of course I was disappointed by the Conservatives' failure to bring the deficit under control despite massively increased revenue. The greater disappointment, however, was the energy-pricing policy announced in the budget.

Before I go any further, let me say that my party fully accepts that the days of cheap and plentiful energy are now over. As our current reserves are depleted, it will be increasingly expensive to locate and bring on stream the necessary new supplies--because those new supplies must be brought from distant places like the Beaufort Sea and because their extraction will require costly new recovery techniques. My party also recognizes that subsidizing energy imports in areas not yet served by domestic production could cripple the federal treasury if the Canadian price does not rise in line with world prices.

We accept that prices must rise, but I would suggest that three conditions should govern our pricing formula. First, the amount of the increase should correspond to the needs of the industry. We want a made-in-Canada price, one which reflects the cost of ensuring our energy self-sufficiency, not a price arbitrarily set by a cartel of producers in a far-off part of the world. Second, price increases must be phased in so that they do not cause a gratuitous disruption of the economies of consuming provinces. Finally, the federal government must get a share of energy revenues adequate to discharge its own commitments in the energy field and to cushion the impact on the national economy.

In other words, energy pricing should be a function of national needs and the needs of the industry. This is the exact reverse of the Conservatives' policy. The Conservatives turned pricing policy into a tool for achieving other political goals--namely, satisfying Alberta's demands for greater revenues and paying for the ruinous mortgage tax credit.

Between 1980 and 1983, the proposed price increase and excise tax would yield ninety billion dollars in net revenues over and above production costs. Of this, forty billion would go free-and-clear to the producing provinces, not for energy development but for general provincial revenues, including a swelling heritage fund. Another thirty-three billion in net profits would go to the oil and gas industry, an industry whose stockpile of profits is already being directed into the acquisition of unrelated enterprises. Only the final seventeen billion, including the proceeds of an excise tax which hits every productive sector of our economy, would go to the federal government. Ten per cent of that--only ten per cent--would be used to fund a national energy bank. Another modest share would go for energy rebates to consumers, businessmen and utilities. But the largest slice of the pie will go into general revenues to offset the cost of the mortgage tax credit. And there'll be nothing left to counter the slower growth, higher inflation and higher unemployment caused by skyrocketing energy costs.

Is this the sort of economic policy our national government should be delivering--a policy which allocates economic benefits and burdens according to accidents of geography and geology? Is it appropriate, moreover, in a time of sluggish external demand, rising prices and high unemployment to make national needs subservient to the priorities of our wealthiest provinces?

The federal government has an obligation to ensure that there are not two Canadas--one rich and one poor. If we cannot embrace this goal of equality of opportunity, then we must ask what is the purpose of Canada.

Throughout our history, ladies and gentlemen, the central government has used its powers to redistribute among all Canadians the benefits enjoyed by our more fortunate regions and our more fortunate citizens. Only through the redistributive mechanism have we been able to guarantee that the citizens of our neediest provinces have access to jobs, decent living standards and a basic level of social services.

To accomplish that task, the federal government needs access to adequate revenues. Already, the federal government's ability to stimulate the economy and protect our neediest citizens has been substantially eroded by the delegation of tax room to the provinces and the establishment of onerous fixed commitments for transfers to governments and individuals.

In 1950, sixty-four per cent of government revenues in Canada accrued to the federal government and thirty-six per cent to junior governments. In 1978, the federal share had fallen to forty-six per cent and the provincial and municipal share had increased to fifty-four per cent.

In 1950, the federal government's share of total government expenditures was fifty-two per cent. In 1978, junior governments' share of total government outlays reached sixty per cent and the federal proportion was reduced to only forty per cent. And of its remaining spending room the federal government has irrevocably committed fifty per cent to fixed transfers. Yet out of the scant resources which remain, the government has been expected to maintain demand, bolster personal incomes and buoy up an economy hard-hit by rising energy prices.

My government followed a deliberate policy of reducing taxes--to leave both business and individuals a greater share of their own incomes to spend and invest. We saw that as the best way to foster economic growth and create jobs and, by any international comparison, Canada has been remarkably successful in defending itself against the shock of a turbulent world economy.

Of course, this line of action took a heavy toll on the federal treasury. Deprived of adequate manoeuvring room, we could discharge our responsibilities only through deficits and debt. What made our fiscal predicament so cruelly ironic was that, while the federal government was running large deficits, overall provincial surpluses were growing, largely due to increased resource revenue. Mr. Crosbie himself has stated that in 1982, total provincial surpluses will exactly balance the current federal deficit.

In the past, critics have seen the federal deficit as evidence of internal economic mismanagement. It is now apparent that the deficit is both a cyclical and a structural problem--a problem we cannot afford to ignore. The federal government can no longer hope to subsidize the poorer provincial economies through deficit financing while resource-rich provinces pile up huge surpluses. Already the Economic Council of Canada has expressed grave concern over this issue.

In part, the federal government has been the author of its own misfortunes. We have been too generous in decentralizing fiscal power to all ten provinces. But given the existing decentralization of fiscal weight, the claims of producing provinces to increased resource revenues will greatly aggravate the federal financial dilemma. You must remember that the federal burden of unemployment insurance payments, equalization payments and other transfers is often increased precisely by the extraction resource revenues from the consuming provinces. By our equalization formula, for example, every $1 increase in the price of a barrel of Alberta oil costs the federal government another eighty million dollars in transfers to energy-poor provinces.

In their recent budget, the Conservative government might have rectified the federal-provincial fiscal imbalance by pressing for more moderate energy-price increases. Or they could have insisted on a share of new resource revenues commensurate with federal responsibilities toward the national economy. Instead, they gave Mr. Lougheed what he wanted and then treated the federal revenue squeeze as a purely internal problem, to be countered by additional federal tax levies. In the process, the economies of the consuming provinces were hung out to dry.

If the Crosbie budget passes, the implications for federalism will be tremendous. With the federal government reduced to impotence by existing commitments and inadequate revenues, the disparities between rich and poor regions will grow larger. With the progressive Balkanization of our economy, the strains on an already divided nation can only increase.

Ladies and gentlemen, this is not the future I want for my country. We have a tradition of sharing in this land--a tradition which dictates that all regions and all individuals should share in Canada's successes and hardships alike.

In the past, western Canada has benefited enormously from the federal commitment to that tradition. For years, Ontario willingly paid higher prices for western oil when the fledgling oil industry was struggling to establish itself in the face of lower international prices and U.S. import embargos. Of course, the industry could not have survived at all if it had not been generously subsidized by special allowances and writeoffs in the federal tax system. And it was federal sponsorship of the Trans-Canada pipeline, also subsidized by Ontario taxpayers, which helped develop essential markets for Alberta's natural gas.

Sharing is a proud tradition of ours, but it is one which Joe Clark and his government wish to abandon. At the outset of this campaign, Clark deplored the erosion of the federal fiscal capacity, yet he pledges to re-introduce a budget which greatly aggravates that very problem. He is furthermore committed to cutting off your access to northern and offshore resources.

Let me close with a quote from a man who holds a different view of federalism from Joe Clark:

There is a view being advanced that Canada is a community of communities or a nation of provinces, and that our country is made stronger, not by building the whole but by strengthening the separate parts. In some measure, that may in fact be true so long as province-building does not replace nation-building as the most ambitious goal of Canadians. There the Government of Canada must stand not merely as an arbiter of community differences, but the guardian of the nation as a whole.

The author of that is a man who has every reason to wish for the re-election of my party: the Conservative Premier of Ontario, Mr. Bill Davis.

Ladies and gentlemen, Bill Davis has summed up the challenge of federalism in the new decade: will it be a decade of province-building or a decade of nation-building? Will we remain Canadians or will national loyalties and a national spirit be replaced by parochial pride? Will we use a strong federal government as a mechanism for sharing on a national scale or will we let the poorer partners in Confederation shrivel into insignificance?

Of course, Alberta must receive a fair return for its diminishing natural resources. Similarly, citizens of coastal provinces and the far north should have the first call on revenues from the sale of their energy. We cannot expect the federation to function well if we ignore the claims of the constituent elements. But let us not forget that there are compelling national interests which must be maintained if our federation is to flourish and if the federal government is to participate in reaching that goal.

The thanks of the club were expressed to Mr. Chretien by Vladan Milic, a Director of The Empire Club of Canada.