Fixing the Fiscal Imbalance

It's always sad when the good reviews start appearing after a show has closed.

This article was originally published in Maclean's Magazine on May 15, 2006

It's always sad when the good reviews start appearing after a show has closed.This article was originally published in Maclean's Magazine on May 15, 2006

Fixing the Fiscal Imbalance

It's always sad when the good reviews start appearing after a show has closed. Here's how great the Liberal governments of Jean CHRÉTIEN and Paul MARTIN were:

The federal government was able to record its first surplus in 1997-98 and has since had 8 consecutive years of surplus. This return to sound finances has generated many benefits to Canada. It has allowed governments to reduce their debt. It has allowed both orders of government to cut taxes. It will help governments prepare for the fiscal consequences of population aging. Major transfers have largely been put back on a long-term funding track.

The funding attached to the 2004 Plan to Strengthen Health Care met and exceeded the benchmarks set out by the Romanow Report. The federal government has increased its support for post-secondary education research. These investments have helped reverse the "brain drain." Increased direct support to students has helped Canada achieve the highest level of post-secondary education attainment among OECD countries.

But don't take my word for it. In fact, it's not even my word. Every sentence of the second and third paragraphs of this column comes directly from "Restoring Fiscal Balance in Canada," a discussion paper that was released along with Conservative Finance Minister Jim Flaherty's federal budget last Tuesday. It was amazing to read all this laudatory stuff in a document that was billed as a stark break from the bad old Liberal ways.

In the federal election, the Conservatives promised to fix the fiscal imbalance, which is the idea that the feds have billions of dollars more than they need, while the provinces are billions of dollars short. The Liberals say the fiscal imbalance doesn't exist. Harper says it does. His stance was a key to the Tories' modest electoral breakthrough in Quebec, where complaints about the fiscal imbalance began. Fixing the imbalance will provide much of the next year's work for Harper's government.

But to fix a problem, you first need to define it. If you define the imbalance the way the provinces do - roughly, as "all the billions we could ever dream of getting from Ottawa" - you'll bankrupt even a flush and province-friendly government like Harper's. So Harper's definition is crucial. And as we've learned to expect from him, it's clever.

Harper's Conservatives define the fiscal imbalance so broadly that just about everything the feds do becomes part of the problem. Which means just about everything they do or plan to do becomes part of the solution. In many ways the little pamphlet Flaherty released last week amounts to the blueprint for at least the next year of Tory government.

This is the real Throne Speech. A little late but worth the wait.

It turns out the fiscal imbalance is four problems. One, federal budget-making is too vague about the size of future surpluses. Two, the feds spend money on provincial responsibilities - hospitals and schools - while ignoring their own duties, like armies and Indian reserves. Three, when Ottawa does increase transfers to the provinces, it does so at the last minute and for the short term, so provinces can't plan. Four, the limited "efficiency and competitiveness of the economic union" hobbles everyone's ability, be they governments, companies or families, to increase prosperity.

Well. When a problem is everywhere, everything you do can be a solution. Harper and Flaherty claim that the new Accountability Act, which is about ethics in Parliament, improves budget-making. They announce that their $1,200 child care payments to parents help fix the imbalance, because they're income support (a federal responsibility) instead of social program delivery (a provincial responsibility). But the Tories aren't just about grabbing credit for what they've already done. They also set out an agenda for the future.

The Tories will increase spending on federal responsibilities like defence, border security, the coast guard, and law enforcement. Not so surprising. But also on immigrant settlement, foreign aid and ("further investments") on Aboriginal Canadians. More surprising. They'll improve workplace training, public infrastructure - and Canada's public pensions, by putting unexpected budget surpluses into the pension fund, so my generation can hope for larger payoffs at lower contribution rates, just like Dad.

But there aren't just offers here. There are hints of demands. It's all about the economic union. "In many respects, barriers to trade and to mobility are being eliminated more rapidly outside our borders than within them," Flaherty's Finance Department gnomes write. Time to fix that. The provinces will have to recognize each others' professional credentials, as well as those of immigrants, so a dentist doesn't have to become a cabbie when he moves to Calgary, whether he's from France or Moncton. Provinces will be asked to allow neighbouring provinces to transmit electricity through their territory to a third market. They'll be asked, for the umpteenth time but with more urgency, to permit a single securities regulator for the whole country. And non-Atlantic provinces will be asked to harmonize their sales taxes with the GST, just as the Atlantic provinces did, to cut administration costs.

This is big. Central-government fans worry that the fiscal imbalance argument is about Ottawa surrendering power to the provinces. This is more of a trade: we'll get out of your hair if you act like you deserve it. And all that nice language about the Liberal record? It's not cute, it's crucial. Harper is opening up big new areas of Canadian consensus. Here are the things we won't argue about anymore, he's saying, so we can set the table for the new debates about tomorrow.

Maclean's May 15, 2006