NUPGE calls for reform of Canada's equalization system

Underfunding has severely eroded vital national program

Ottawa - The National Union of Public and General Employees is urging Prime Minister Paul Martin and provincial premiers to endorse three key reforms when they meet this week to discuss the future of equalization payments in Canada.

Equalization payments are designed to ensure that "reasonably comparable levels of public services" exist across the country.

James Clancy, president of the 337,000-member union, says in a letter to the prime minister that the equalization system has been undermined in recent years and needs to be restored.

Clancy suggests the following reforms:

October 21, 2004

Right Honourable Paul Martin, P.C., M.P.
Prime Minister of Canada
Privy Council Office, Langevin Block
80 Wellington Street
Ottawa, ON, K1A 0A2

Dear Prime Minister,

The National Union of Public and General Employees represents workers from across Canada. Our members work in a variety of sectors doing a wide range of jobs. A majority of them work in the public sector, for provincial governments or community agencies, providing services for Canadians in communities across this country. They struggle to provide the best service they can to the members of the public – often under quite difficult circumstances.

As such, our members are intimately aware of the importance of the services they provide and the effect that underfunding of the public sector can have. In a very real way they experience the effects of the federal-provincial revenue sharing agreements each and every day. I am writing to you today based on their experiences.

The National Union strongly supports the intent of s. 36.2 of the Constitution Act of 1982:

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.

We see the equalization program as an important tool to promote equality of treatment for Canadian citizens in all regions of the country.

Unfortunately, reductions in funding and changes to the program have severely undermined its effectiveness. There exists considerable variation between provinces in the level of services offered and the level of revenues they have access to. This is a clear violation of the intent of s. 36.2 of the Constitution Act.

In addition, reduced federal funding to the equalization program has resulted in growing difficulties for many of the ‘have-not’ provinces, who must choose between cutting services or accruing more debt – obviously an untenable situation to be placed in.

We are encouraged by Finance Minister Ralph Goodale’s recent promises of a significant increase in the amount of money dedicated to equalization. While there remains some confusion of how much of the indicated $33 billion increase over ten years is new money it does represent a positive step forward.

Still, the National Union believes that if the federal government is to ensure that Canada’s equalization program is sustainable, it needs to implement a number of reforms to return the program to its intended purpose. We offer the following suggestions as possible reforms to the programs calculation, delivery and governance.

1 Calculation - Return to the Ten Province Standard

The existing five-province standard to calculate equalization payments has no justification in terms of the principles underlining the program. It was implemented simply to remove Alberta’s large oil and gas revenues from the formula, and thus reduce the fiscal pressure on the federal government.

Alberta and its oil and gas revenues should be brought into the formula through a return to the ten-province standard. Although it would be best if this were done immediately, the return to the ten-province standard could be phased in over the five-year life of the new equalization agreement that is about to be negotiated and made retroactive to April 1, 2004.

The impact of returning to a ten-province standard would be significant and profoundly important to the provinces that receive equalization payments. A redistribution of this magnitude would not only restore the letter and spirit of the original idea of equalization as initially understood and later applied in this country, but would also give recipient provinces additional resources with which to improve and sustain their social infrastructures.

2 Delivery - No Caps Imposed on Equalization

During the period 1982 to 2002, equalization payouts were often subject to a ceiling or cap. The federal government has frequently imposed and then removed a cap on equalization transfers. For example, the ceiling was removed for the 1999-2000 fiscal year entitlements. It was then re-imposed in 2000-01 only to be eliminated again for 2002-03. This repeated changing of the rules is both confusing and damaging to the budget planning exercises of many provinces.

This has had a significant impact. At the end of the 1980s, for example, the ceiling saved the federal government, and therefore cost the recipient provinces, almost $3 billion in three years. For Manitoba and Saskatchewan, the ceiling reduced equalization payments by $628 million for the period 1988-89 to 1991-92. Furthermore, Manitoba lost $100 million, due to the cap, in 2000-01.

Fifteen years ago Robin Boadway, one of Canada’s leading authorities on the equalization program, observed that “there is no economic reason for (a ceiling); its imposition is essentially arbitrary”. The provincial and territorial ministers of finance, at their December 2000 meeting in Winnipeg, called for the removal of the ceiling from the equalization program. The four Atlantic provinces have lobbied individually and collectively for the removal of the ceiling. In March 2002 the Standing Senate Committee on National Finance called for the permanent elimination of the ceiling.

Given the uncertainty and inequities created by a ceiling, the National Union strongly believes that there should be no future impositions of a cap or ceiling on federal equalization payments.

3 Governance – Establish a Federal-Provincial Fiscal Secretariat

The reality of political life in Canada is that it is unlikely there will ever be a final solution to the allocation of financial resources within a federal system. Changing economic and political conditions will mean that periodic adjustments and reallocations to the equalization program will inevitably be necessary in the future.

The challenge for Canada’s elected leaders, both federally and provincially, is to respond to new situations in a manner that is open, democratic and collaborative. Unfortunately, the existing policy mechanisms for making adjustments to Canada’s equalization program are not adequate to the task. To date changes to the program have been made in an almost unilateral manner by the federal government and primarily with the goal of controlling costs (e.g. the cap on equalization payments; the move to a five-province standard). Usually these changes have been made without adequate research into the extent to which the program is meeting the ever changing needs to which it is intended to respond.

In our opinion, what is needed is a stand-alone body, structured and governed and financed so as to represent the Equalization interests not just of the federal government, but also of the provincial governments and of Canadians more generally. The mandate of this body would be to conduct ongoing analyses of and long-term research into the equalization program, and to make recommendations to the federal and provincial governments about modifications to the program as they are needed.

There are examples of similar bodies in Australia (Australian Commonwealth Grants Commission) and South Africa (Financial and Fiscal Grants Commission). The research and analysis done by such a body would improve our ability to redistribute wealth across the country in a way that is consistent with both the intentions of the Rowell-Sirois Commission and s. 36.2 of the Constitution Act 1982. It would also improve the quality of public debate in Canada about equalization.

The National Union strongly believes the time is now for the federal government to make fundamental reforms to the federal transfer system. We ask that you seriously consider the proposals set out above.

Thank you for your time and consideration.

Sincerely yours,

(original signed by)

James Clancy
National President

cc: Honourable Ralph Goodale, P.C., M.P., Finance Minister
National Executive Board (NUPGE)
Kenneth Georgetti, President, Canadian Labour Congress - (NUPGE)