Why Pay Twice? The Cost of Double Government

BGEN. ANDRUNYK:

Distinguished guests, members and friends of The Empire Club of Canada: Our guest speaker today is no stranger to an Empire Club audience.

Mr. Darcy McKeough first appeared at our luncheon table on March 20, 1969 when, as a young thirty-sixyear-old Minister of Municipal Affairs in the Robarts cabinet, he spoke on municipal reform. It was during his ministry that municipalities were modernized to keep up with changing times and much of the success of that modernization was directly attributed to Mr. McKeough.

His second address was on November 22, 1973 when, as Minister of Energy, he spoke of the importance of energy sharing in Canada.

His third visit to our club was on April 13, 1978 when, as Treasurer of Ontario and the Minister of Economics and Intergovernmental Affairs, he spoke on the prescriptions for a post-control Canada. The condition of the patient today suggests that his prescription was not followed.

During his political career which spanned fifteen years between 1963 and 1978, Mr. McKeough gained a reputation for his courage in making the correct, if politically difficult, decisions. He was renowned for his energy and efficiency and for his frankness in dealing with his colleagues and the public. It is not surprising, therefore, that on his resignation from the government these very qualities would lead him into business and his appointment as the President and Chief Executive Officer of Union Gas Limited in October 1979, a year after leaving politics.

Mr. McKeough's abounding energy is evident from his active association with his church, and (following in the footsteps of his ancestors) with the Chatham City Council, with Ridley College which he attended, and with the Stratford Shakespearean Festival, the Trilateral Commission, and the Chatham Jaycees.

It is indeed a distinct pleasure for me to once again welcome Mr. Darcy McKeough to this historic club to speak to us under the title, "Why Pay Twice? The Cost of Double Government."

MR. MCKEOUGH:

Mr. Chairman: This is the fourth time I have had the honour of speaking to the Empire Club. It provides me with further proof that as time marches on and circumstances change, there are certain recurring themes in life and society.

When I came here first in 1969, 1 talked about "The Agenda for Local Government Reform"--an earlier version, at the provincial municipal level, of a kind of constitutional change. In 1973, my topic was "Energy and Government." I could talk about that today, though from the opposite end of the spectrum. Then in 1978 1 came to you with "Prescriptions for PostControl Canada." I have an ominous feeling that I could justifiably have offered you today a "Prescription for Pre-Control Canada"--but I'm not going to do it. Maybe we won't get controls and I could therefore be wrong, and it's a well known fact that Empire Club speakers are not permitted to be wrong. One thing has changed from my earlier appearances. In all of them I spoke in an official capacity as the minister of a government department with direct responsibility for the matters I was dealing with. Today I am speaking to you simply as a citizen, a taxpayer and as, I emphasize, a very retired politician. I'm going to talk about the way the affairs of Canadians are handled or mishandled within an antiquated government structure, and about how that structure might be altered by the re-allocation of responsibilities.

It is my conviction that there are ways to reduce total government expenditures. I want to talk about one of them. I'll take the next twenty minutes or so to elaborate on my basic message. The message itself is simple and brief. It is this: with a few exceptions, every responsibility currently held at the federal and provincial levels would be handled better, more efficiently, more effectively, more economically and with greater accountability if it were handled by one or the other level, rather than by being shared, or even worse, competed over, by the two levels.

We now have eleven departments of labour, eleven departments of agriculture, eleven of industry, eleven of corrections, and the list goes on. In almost every case, we need either one department, with its head office in Ottawa, or ten, one in each of the provinces. We do not need eleven. We must get away from the confusion, the cross purposes, the waste and the sheer ineffectiveness that comes from having eleven.

The topic is particularly pertinent now because we are in a new constitutional era. This is a time when we can try, in a serious and confident way, to deal with the issue of the division of power. It is sometimes called the process of "disentanglement," to use a rather awkward sounding word much favoured by Mr. Ian Macdonald, your past president and my former deputy minister. Your speaker two weeks ago was my former colleague, the Honourable Thomas Wells, who is also my successor as Minister of Intergovernmental Affairs. He talked about the aftermath of patriation and he very wisely noted that while patriation is a major milestone in our history, it is not the end of anything. It is much more a beginning.

When I was younger I had the view, common in some places and particularly in Southern Ontario, that good government is central government. As a provincial legislator and minister, I moved towards regionalism though always, I think, with a national perspective. I would like to feel now that I have progressed beyond centralization, beyond regionalism, to rationalism. I can see more clearly what public matters should be centralized and which regionalized. I believe I can offer some justifications for such moves. I hope I have grown beyond the emotional and sentimental factors that made centralism or regionalism attractive to me in the past.

Rationality on this subject may or may not be a good thing. Reorganizing and re-allocating the responsibilities of government in Canada are not just rational exercises. There are emotional and sentimental factors, not to mention the self-interest, the career implications and the financial repercussions close to the hearts, the pocket books and the power positions of a great array of public servants, elected and appointed.

The Fathers of Confederation, living in a much less complicated era, had a very clear view of the rules and responsibilities of the two senior levels of government. Matters of an essential regional or local concern, including property and civil rights, were allocated to the provinces. Matters of primarily national interest were allocated to the federal government. Revenue raising powers were divided pretty well in parallel with responsibilities. It is hard to imagine, when you look at today's swollen lists of federal and provincial departments and ministries, that the country started out with a handful of ministers at each level. Ottawa had Justice, Defence, Revenue, Finance, Public Works, Fisheries, Post Master General, Agriculture and Indian Affairs. Ontario Ministries were Attorney General, Treasury, Provincial Secretary, Agriculture, Public Works and Crown Lands--and for the first few years the Premier acted as Attorney General.

Naturally, I wouldn't argue that we could or should have maintained that utopian kind of government organization. But did we need to expand to a point where the eleven senior governments have more than two hundred departments plus a multitude of agencies, boards and commissions? According to the Lambert Report in 1979, there were 165 departments and Crown agencies at the federal level alone. I can't identify any planned or rational basis for the proliferation. It seems to have been a rather disorganized two level response to five basic forces.

The first is the normal adjustment to population growth and to the increased size and complexity of the economy and society.

The second is the desirable development of national standards in such areas as health and welfare.

The third is the laudable desire to compensate for regional inequalities.

The fourth is the compulsion of the federal level, particularly since World War II, to spend its burgeoning revenues, even if that meant invading fields previously not recognized as necessary or previously considered provincial responsibilities.

The fifth is politics--the perceived need of politicians to be seen to be active and progressive; to have their good words visible and recognized by a presumably appreciative public. We saw more than a little of that last Thursday in the Prime Minister's complaint that Ottawa doesn't get credit for all the money it spends on joint programs.

Out of this mixture of demands and ambitions has come our hodge-podge system of government, though system may not be the appropriate word to describe it.

The federal government and some of the provinces have from time to time taken a look at their own structures and patterns of growth and tried to restrain and reform. Success has been limited, though I may perhaps be pardoned for immodestly taking some credit for imposing restraint in Ontario when I was Treasurer. I recall warning in my 1975 budget speech that one of the root causes of inflation at that time was "excessive government spending and unnecessary growth in the size and complexity of the public sector." This had shifted an increasing share of Canada's resources out of private productive uses.

In 1976, the Auditor General for Canada had this to say: "I am deeply concerned that Parliament--and the government--has lost, or is close to losing, effective control of the public purse." Since then the appointment of a Comptroller General may have improved the situation somewhat, but the question of excessive duplication and indeed of superfluous programs, departments and agencies is not being addressed seriously and with enough energy at either the federal or provincial level.

In 1947, the first reasonably normal post-war year, public sector spending in Canada was twenty-four per cent of the economy. Today it's over forty per cent, and if you add the spending of government-owned enterprises, it rises closer to fifty per cent. Public sector employment provides one in five jobs in Canada, and that does not include employment in the publiclyowned enterprises.

Spending in the fifties and sixties was concentrated on the building of Canada's economic and social capital. This has since veered over to redistribution of income through increased transfer payments. The social expenditures, health, education and welfare, have accounted for the greater part of the increase in government spending.

Health, education and welfare in fact account for about half of total government spending and represent about one-fifth of the output of the economy. The growth has been most rapid at the provincial and local levels but the federal influence, through its setting of priorities and through the conditions attached to its transfers, have had the effect, for good or for ill, of levering up provincial and local spending. The large federal financial interest has created a parallel tendency by the federal government to occupy the same fields to some degree and to intervene--some would say interfere--in the provinces' administration of these fields.

Quite apart from that trend', we have seen across the country from federal and provincial politicians and bureaucrats alike a war of one-up-manship. Any gap in service, any vacuum of policy is leaped into fearlessly by one or both levels of government, with resources which could be better used by the private sector being dragged in after them. The result, apart from the waste arising from unnecessary programs, is an increase in overlap, duplication and confusion. One example: nowhere is the confusion greater and the waste and failure more deplorable than in the country's manpower policies and programs. Shortages of essential skills in a time of high unemployment are nothing short of a national disgrace. The average citizen is hard pressed to decide who is at fault, not just on the skills question, but in the whole manpower and employment situation.

In today's highly mobile society, manpower--including post secondary education--should in my view be a federal responsibility. Today's chaotic pattern of funding, administration, interference, cross purposes and acrimony is not serving the public well.

In fields like health, the battle against poverty, and the wide range of social programs, the issues should be rationality, effectiveness and economy--not who pays the money, who spends it and who gets the credit. A single body of taxpayers, after all, provides all of the money.

The present system of transfers has evolved over time, and there have been improvements in the manner of funding and in administration. Nevertheless, any arrangement will falter when one level of government delivers the service but another level pays a substantial part of the costs.

Pensions are probably the most pressing of the emerging social issues in this country. If you find the present tax debate heated, wait till the pension reform debate really gets going.

There is widespread recognition that we need uniformity in pension and related legislation--but there is a competition emerging at the two levels to lead in improvement, and this kind of one-up-manship will ultimately be destructive and unnecessarily expensive.

Both levels are heavily into income supplements through tax grants, tax credits and guaranteed income schemes. Many of these programs could be run more efficiently at one level rather than both.

There is duplication and sometimes conflict in agricultural policy, in environmental protection and in other areas. Competition between regions for location of industry is growing. The result often is uneconomic tax concessions, grants and bonuses. Later on, when the effects of unbusinesslike industry location and expansion decisions work their way through to the bottom line, it sometimes turns out that the industrial competitiveness of the companies on the receiving end of this largesse have gone to the wrong place for the wrong reasons. It is proper to provide incentives to make our industries more competitive in the international market place, but the inter-regional auctions that go on wind up hurting everybody.

Taxpayers don't believe that the public sector in Canada should be competing with itself. I am convinced that they strongly favour an open market for jobs, for products and investment across the country. But an obstacle to this is the unhealthy competition and duplication within government. Governments can't go on forever holding on to and building upon what they have and competing for every new opportunity to tax and spend or, worse still, to spend without taxing. There must be give and take. Rules and responsibilities can be realigned if there is a will to do so and a determination to replace our fixation with the past by a vision of the future.

Let me state principles for rationalizing government operations at the federal and provincial levels:

The government that spends the money should be responsible for raising it.

Inter-governmental transfers should be reduced and revenue-raising capacities should be re-aligned. Existing programs and responsibilities should be examined and those which overlap should be disentangled.

Most services to people are best delivered at the provincial or even at the local level.

There should be equality across the country in the levels of health, education, pensions and other personal benefits, and the regulation of business should also be reasonably uniform.

The process of equalization of provincial revenues must be maintained and adjusted to reflect realigned provincial responsibilities and revenueraising capacity. Equalization should be the cornerstone of federalism in Canada.

I know my principles are utopian and may even involve some apparent conflicts. I am aware that traditions, personal interest and strong regional feelings are obstacles to the adjustment of the kind of rationality I advocate. I recognize particularly that some provinces, notably Quebec, will have intense objections to a strong federal role in, for example, post-secondary education or in some social services. Still, we have to try, and if necessary we may have to settle for partial solutions, including the kind of opting out that has worked quite well in the case of the Canada Pension Plan.

Well, now for the moment of truth. Principles are fine, but where would I make changes? At the federal level, clearly, the obvious national functions of defence, immigration, external affairs, the regulation of money and credit and of trade and commerce should stay as they are.

Here are some of the things I think Ottawa should consider getting out of: welfare, other than unemployment insurance; roads; urban transit; agriculture, other than international farm product marketing; food inspection; mineral and energy resources management, other than offshore; housing programs, other than a banking role; programs for the elderly and the disabled, other than pensions; tourism; recreation.

What about health? If the federal government assumes the major role of post-secondary education and manpower training then the provinces, if a fiscal balance is to be achieved, will have to take over one of the major presently shared areas. In my view this area is health.

There will be those who say the health system would suffer. Frankly I doubt very much that the quality of care in a typical hospital in Toronto or Charlottetown benefits from having both a provincial and federal layer of bureaucracy on top of the local board of the hospital. There can be no question accountability suffers and the confused taxpayer is paying more than he should.

If Ottawa were willing to transfer these functions (or some variation of them) to the provinces and if the provinces were enthusiastic about maintaining them, it would be possible to provide service as good or better at less cost, with little expansion of staffs at the provincial level and with a reduction in the numbers of agencies and people at the federal level.

The provinces, on the other hand, should be willing to concentrate on education, welfare, roads, transit, local government and other people-oriented areas. They should consider getting out of the regulation of business and the securities markets, environmental protection (most of the issues here are rapidly becoming national and international in scope), pension regulation, general transportation policies, communications and probably consumer protection.

The artificial split, where provinces regulate businesses that operate only within their boundaries while Ottawa regulates those which operate in more than one province, is archaic and should be done away with. It would make sense for the federal government to oversee the business sector, including capital markets, both to strengthen the national common market and to avoid undue use of the tax system in inter-regional competition. The provinces would have more funds and freedom to meet increased responsibilities in providing services to people. This split would, I feel, result in a more positive environment for business.

Following through on this, it is my view that the provinces should get out of the corporate income tax in return for a bigger share of the personal income tax. Such an adjustment in tax-field occupancy would be a logical reflection of re-aligned functions.

There are areas where jurisdiction should perhaps remain shared. These include fiscal policy, although the federal government has the major levers here; regional development; policing; culture. New mechanisms for co-ordinating activities in areas of mutual responsibility and for establishing acceptable and affordable national standards are needed.

More efficient ways of jointly using public sector manpower and other resources should be examined. For example, regional offices across the country could be shared. One level of government might "contract out" delivery of certain services to another level, or even to the private sector.

In spite of the structural obstacles, the personal interest, the traditional objections, the built-in inertia, the time has come to do something. The public has grown tired of the conflicts, the waste, the confusion, the anachronisms and, above all, of the expense of keeping the present mess in existence or of letting it become even messier.

Let's start with a small task force--call it a royal commission, if necessary, but a group of half a dozen people with some vision, with open minds, with a sense of urgency and with no important stake in the status quo. Let's have them analyse what we now have in the public sector. Let them start with the fact that the present unseemly wrangling over established program financing and equalization stems from the absence of clear divisions of responsibilities between the two levels of government. Let's have them examine the existing division of roles and responsibilities and the opportunities for re-alignment and for disentanglement of functions and programs. Finally, let them make concrete proposals for rationalizing the public sector in Canada.

After the Ocean Ranger tragedy we witnessed a distasteful argument between St. John's and Ottawa over who should conduct an inquiry. The matter was finally settled by an agreement to conduct a joint investigation, but the fact that such an argument could take place in the midst of such a sad occasion was, as columnist Richard Gwyn said, "offensive and downright obscene." Gwyn uses the example as evidence that "We've become the most squabbled-over country in the world. Common sense is a lost cause; our governments long ago cast it aside. Maybe, just maybe, shame, as it did in St. John's, will convince them to shut up, not for our sakes but for the sake of their own self-interest."

The Canadian public knows that the Canada of the 1980s is not the Canada of the 1960s, the 1920s or of 1867. They're prepared for change. They will accept and, indeed, they will enthusiastically embrace change, if it is presented clearly and if they see a co-operative, non-competitive, rational approach from the two senior levels of government. The question is, can the government catch up with the people before the present system collapses of its own weight?

Let me conclude by quoting a significant number. For every percentage point of total public sector spending we manage to cut, we can save well over a billion dollars. And, as the late Senator Everett Dirksen of the United States once said, "A billion here, a billion there, pretty soon it adds up to real money."

The thanks of the club were expressed to Mr. McKeough by A. Carlyle Dunbar, a Director of The Empire Club of Canada.