Fairness in Confederation

Heather C. Devine, Associate in Litigation, Gowling Lafleur Henderson LLP, and Director, The Empire Club of Canada; Jenny Zhou, Grade 12 Student, Earl Haig Secondary School; Rev. Dr. John S. Niles, Rector, St. Andrews United Church, Markham, and First Vice-President, The Empire Club of Canada; The Hon. Dr. Marie Bountrogianni, Minister of Intergovernmental Affairs and Minister for Democratic Renewal, Province of Ontario; David L. Lindsay, President, Association of Colleges of Applied Arts and Technology of Ontario, and Director, The Empire Club of Canada; Jo-Ann McArthur, President and CEO, Pigeon Canada Inc., and Director, The Empire Club of Canada; Jim Milway, Executive Director, Institute for Competitiveness and Prosperity; and Tenio Evangelista, Vice-President, Borealis Infrastructure.

Introduction by William Whittaker

This is the second time in the past year and a half that Mr. Crispino as President of the Ontario Chamber of Commerce has graced our podium. While it is rare for our club to have a repeat speaker so quickly, we believe the Ontario Chamber's message regarding the $23-billion fiscal imbalance presently faced by the province of Ontario and questioning the efficacy of the federal government's transfer payment program is timely, particularly given the present federal election campaign.

The financial relationship between the federal, provincial and territorial governments of Canada is a serious topic but I want to begin by sharing a joke with you to lighten matters.

Students at the American School of Paris, which draws its student body from many countries, were asked to write an essay about the elephant.

The British student's essay was about "The Elephant and the Monarchy."

The American student wrote about "The Elephant and the Stars and Stripes."

The French student wrote about "The Love Life of the Elephant" and guess what the Canadian student wrote about: "The Elephant--a federal or provincial matter?"

Equalization is one of four federal programs that transfer money to the provinces and territories; two of the others pay for health and social services, and one is just for the territories. The equalization money comes from Ottawa's general revenues and is unconditional, which means provinces can spend it as they please.

In 1982, equalization was added to Canada's Constitution. Section 36(2) of our Constitution Act states: "Parliament and the Government of Canada are committed to the principle 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."

While the principle of equalization is now part of our Constitution, its terms are subject to negotiation, which has occurred continuously since its inception in 1958. It is important to note that throughout its 48-year history, Ontario has never been a recipient of equalization payments. Simple equity demands that Ontario's concerns respecting the present fiscal imbalance and the impact of the present equalization formula be addressed. Mr. Crispino will today outline the Ontario Chamber's views in this regard.

The Ontario Chamber of Commerce speaks for more than 57,000 businesses across Ontario, businesses that are affiliated through 160 local Chambers of Commerce and Boards of Trade and has been Ontario's business advocate since its founding in 1911. Its advocacy and policy initiatives focus on six key areas important to the economic well-being of Ontario--health, education, energy, finance and taxation, transportation and infrastructure and border issues.

Mr. Crispino has been President of the Ontario Chamber of Commerce since 2002. Between 1990 and 1993, Len Crispino served as the province's chief trade representative to Italy, promoting Ontario's trade and investment interests. For this work, he was awarded the Order of Merit from the Italian government for fostering business ties between Canada and Italy.

From 1993 to 2001, Mr. Crispino served as Assistant Deputy Minister of the Ontario Ministry of Economic Development and Trade and also as President and Chief Executive Officer of Ontario Exports. In May 2005, Mr. Crispino was appointed to the Leadership Council of the Ontario Ministry of Children and Youth Services.

Ladies and gentlemen, please welcome to our podium today, Len Crispino, President and Chief Executive Officer of the Ontario Chamber of Commerce.

Len Crispino

Good afternoon.

Mr. President, head table guests and friends, I am truly pleased to be here today--my second opportunity to address this distinguished club.

I'm here today to talk to you about a recent report published by the Ontario Chamber of Commerce called Fairness in Confederation.

The report outlines the dangers of this $23-billion fiscal gap between what Ontarians pay to the federal government and what they receive back in services. The report concludes with six recommendations to address the imbalance and restore fairness.

I believe that once this election is all wrapped up it will be remembered as a battle of perceptions. Mr. Layton is fighting to be seen as relevant. Mr. Martin is fighting to be seen as honest. Mr. Harper is fighting to be seen as worthy.

The Ontario Chamber has also battled public perceptions through reason and research. As a strictly non-partisan group we've waded into this campaign to fight the inequities--the imbalance--we see in fiscal federalism. And we know that--like in this campaign--there is the risk that unchecked perceptions will shape reality.

So, on the fiscal imbalance issue, we decided to break down those pre-conceived notions, to break through the rhetoric to provide clarity and to show quantified research about the fiscal imbalance between the provinces.

To do that, the Ontario Chamber undertook a two-part study of the issue. The first report was provocative and was intended as a call to action. The second provided a road map--six recommendations.

We began by using that $23-billion figure as a starting point. Our job was to examine that gap:

How it came to be;

Why it came to be; and

The overall results, good and bad of having the strongest provinces subsidize the weakest.

The story of the gap starts with the birth of the equalization program in 1957 but over the years has involved many other activities of the federal government.

The fundamental goal of equalization and by implication other subsidies to regions was to ensure that all provinces could provide "reasonably comparable levels of public services, at reasonably comparable levels of taxation."

Now, there have been various ways of calculating those "levels of taxation" in the last 50 years. Unfortunately, there is no system to measure comparability of provincial programs across Canada so that progress, or the lack of it, could be measured against the government's goals.

So we now have this program that is supposed to allow a child in Chilliwack, B.C., to receive a comparable education to a child in Deer Harbour, Newfoundland, while their parents pay roughly similar amounts of tax.

As a brief aside, Ontario is the only province to never have received equalization payments. It qualified once in the late '70s, early 1980s, but the federal government changed the rules, keeping Ontario artificially in the "have" category.

The unstated, macro goal of the program is to give the "have-not" governments a chance to attract economic growth while keeping taxes competitive.

It sounds so good. It is a truly Canadian solution--based on fairness, equality, the very best of intentions. Unfortunately, it doesn't work.

For 48 years the federal government has administered the largest and most enduring governmental transfer of wealth in the world and yet six provinces have never been in the "have" category.

Quebec, Newfoundland and Labrador, Nova Scotia, New Brunswick, Prince Edward Island and Manitoba have never been able to use this massive transfer of wealth to spur economic growth, create lasting jobs, or create any kind of competitive advantage.

Worse yet, the problems with the equalization system are only one part of the issue.

Successive federal governments have gone well beyond equalization in trying to channel resources to certain jurisdictions. They've done this by going beyond--well beyond--their constitutional responsibilities. I've taken to call it equalization by stealth.

Various federal governments have developed a favourite hobby--shaping provincial programs by funding them. And that is something that should concern every Canadian.

Employment Insurance is a perfect example. Ontario subsidizes other regions to the tune of several billion through this one program. And to be clear, this transfer has very little to do with protecting people from unemployment. It is a mechanism of stealth equalization. And the impacts are serious for Ontarians.

New Brunswick now has 5.3 hospital beds per capita compared to Ontario's 2.7.

Ontario has only 65 nurses per 10,000 citizens, compared with Newfoundland's 102 per 10,000.

Quebec has 212 doctors per 10,000, while Ontario has doctor shortages, with only 180 MDs per 10,000 people.

We in Ontario have the lowest grant level per student in our colleges and universities.

We are fraying at the edges because across the public sector we are funding key programs at about three-quarters the levels of other provinces.

Remarkably, over the course of the past 48 years, the federal government has never come up with a way to measure that key phrase, "reasonably comparable levels of service."

Without a measurement tool, the government has no idea if its transfer programs are helping those provinces, nor does it understand if the wealth transfers have hurt the contributors. Our report would argue that it has and other commentators agree.

Now, there are those that say Ontario has had years of tax reductions and that those reductions are responsible for lower levels of public service.

That may be true, in part. But there is another factor to consider.

Ontario's tax levels must be competitive with jurisdictions beyond our borders. And this issue has become more pressing since the creation of equalization.

When equalization and other regional subsidies started, our trade patterns in Canada were east-to-west. There was greater justification for the transfer system then, because recipient regions bought a very substantial share of our output.

That pattern changed long ago.

Now we are part of a North American market--and we compete with China and India. We have to consider emerging players like Brazil and Russia. Our key economic drivers come from manufacturing, which is particularly vulnerable to competitive pressures.

Ours is a global environment; our tax rates and policies must reflect that Ontario has less fiscal flexibility. As it stands, our marginal tax rates are already higher than adjacent American jurisdictions.

The Institute for Competitiveness and Prosperity estimates that Ontario ranks 13 out of 16 in terms of competitiveness with its peer group of provinces and states with populations over six million.

Ontario's competitiveness is constantly at risk. In general terms, the tax cuts of the '90s were needed just to keep us in the game.

So, what it comes down to is this gap, this $23 billion and growing deficit combined with a more competitive international market and new trade patterns, has hurt Ontario's ability to compete and to fund the priorities of its taxpayers. And the gap is continuing to grow. In fact according to the current formula the amount Ontario pays each and every year outpaces our economic growth rates.

In 1992, Roch Carrier, noted Canadian author of the "Hockey Sweater" story, made a keen observation about this country of ours. He said, "Canada is a country that is too big for small minds. Canada is a country that is probably too varied for simple minds."

There are no easy solutions.

Evidence shows that current practices and ideas shaping inter-governmental finances are hurting everyone in every region.

During the research phase of our report, a number of interviews were done with past political figures seeking their thoughts on the current situation.

One person summed up the fiscal mess we've got ourselves into quite well. He said, "You cannot strengthen the weak by weakening the strong." And that is exactly what the federal government is doing.

We need to strengthen the weak by building up the strong by allowing us to compete and generate wealth and create jobs and economic growth. Because economic strength is contagious.

So Alberta's economic strength is Canada's economic strength. Ontario's wealth contributes to Canada's wealth. But, by attempting to equalize everything, the federal government is destroying the foundations for Canada's prosperity.

We needed a plan. We needed a course of action. We created a roadmap, if you will, with six realistic, workable solutions for governments that would start us on the road to restoring fairness.

The first recommendation calls for a shift in the way federal-provincial agreements are negotiated. As a starting point, Ontario should not sign any new agreements with the federal government unless they involve equal funding per capita for all provinces; further new systems must be in place to compare programs across provincial boundaries. Equalization should also be frozen at current levels until these measurement systems are established.

Recommendation two outlines the specifics of the needed measurement systems. The lack of any way to measure the success or failure of programs is a critical issue. I have no idea how, after 40 years, we have a system with the stated goal of providing equal services for equal taxation but no tool in place to compare services.

In Recommendation three, we call for basic tax shifts that can help us out of this mess. We know that in order to re-balance Confederation we need major changes in the tax system. We've put forward several suggestions on how this could be done. One idea would be for the federal government to transfer a percentage of personal income tax to the provinces. This is a plan that's fair to all with weighted benefit to Ontario. There is a great deal of support from independent commentators on re-balancing through tax policy. This recommendation itself reflects the views of many scholars and experts including:

Institute for Competitiveness and Prosperity,
The CD Howe Institute; and
The Atlantic Institute for Market Studies.

Number four is a recommendation geared to give us all a better understanding of the dynamics of the fiscal transfers and how any new changes affect the system, and the country.

The stunning lack of government research on these topics is truly discouraging.

Now I should acknowledge the important work being done by the Independent Review panel. This is a starting point and I'm hopeful that something productive will come from their hearings.

But we must go beyond this.

Ontario should partner with other willing jurisdictions to study the impacts particularly the impacts on the jurisdictions making those net contributions. I suspect Alberta might be interested in undertaking some of this research.

And in recent discussions I've heard there is interest at one of this province's top schools to have a department established to study this issue.

The fifth part of our plan is about communicating better information about the fiscal imbalance to the public.

It is really a call on the McGuinty government to do more to raise awareness of this issue. And the Premier should receive the support of Mr. Tory and Mr. Hampton on this issue by way of a new, all-party resolution in the legislature.

The Ontario Chamber would also like to see the Standing Committee on Finance and Economic Affairs take an active role in exploring the imbalance.

We believe that more should be done to educate Ontarians to the systemic unfairness of the federal fiscal transfer system.

Finally, recommendation six. Here we ask the federal Auditor-General to review the system and assess what measurement systems are needed to evaluate the accessibility, quality, consumer response and outcomes associated with these federal programs, because the first step in addressing this problem must be to set goals and measures which will bring a level of accountability to recipients and the federal government.

To that end, we sent a formal request to Canadian Auditor-General Sheila Fraser requesting an immediate audit of government practices relating to the transfers to provinces and the effectiveness of those programs.

Of course, while anyone can refer a matter to the Auditor-General the ultimate decision remains with her. We are, however, hopeful that she'll carefully consider our request.

Yesterday, to aid our request, we've asked that each federal leader--Prime Minister Martin, Stephen Harper, Jack Layton, Gilles Duceppe, and Jim Harris--to sign a pledge affirming their commitment to build on our research to finally after decades without sound measurement systems consider a system that can put quantifiable measures to this system that will help us rebalance Confederation.

It isn't a pledge to rewrite the Constitution or even to launch a multi-year, million-dollar commission to study it. It is about simple recognition. Simple recognition that there might be a problem, and that more work is needed to determine how these transfers are impacting the nation. That is it.

We have been in touch with all the major political parties on this issue and we are encouraged by what we're hearing.

I'll start by saying that Mr. Jim Harris of the Green party has signed the pledge, and while the Greens are not likely to form the next government their support is welcomed.

In the past couple of days we've had extensive discussions with the Conservatives. And while they haven't signed the pledge we're pleased that they are listening and willing to work with us on this issue.

The Liberals, NDP and Bloc have all been silent. They have not called or e-mailed.

So we'll work harder to reach out and keep those parties engaged in the effort.

Before I wrap up, I'd like to read to you a quote from former Premier Bill Davis who, in 1978 said, "Ontario must be more than a place to stand. It must be a place in which to stand tall, to be proud of one's own heritage, to be secure in one's own culture."

Ontario has a long and proud history of contributing to the health and wealth of Canada. Addressing the imbalance won't change that. Our provincial motto is loyal she began, loyal she remains. Certainly we, as an organization, respect that. Ontario must continue its traditional role of supporting the broader efforts of the other provinces.

However, we cannot continue to fund federal spending at the current rate, which exceeds our own provincial growth rates.

We agree that Ontario must continue to contribute; it is simply a question of scale. We cannot continue to fund programs that only feed local consumption without improving the situation. Nor should we continue to see our own public services suffer while we fund higher levels of services in other areas.

As business people, as taxpayers, as good Canadians, we need to work together, to build a more prosperous Canada, a Canada where we have 10 "have" provinces--instead of two.

I want to encourage each of you to read our report, to work with the Ontario Chamber and local chambers of commerce and boards of trade to help make a stronger, more competitive and dynamic nation.

Thank you for your time--and your interest.

The appreciation of the meeting was expressed by Jo-Ann McArthur, President and CEO, Pigeon Canada Inc., and Director, The Empire Club of Canada.