William Robson is President and CEO of the C.D. Howe Institute.
The Prime Minister's recent announcement that the federal government is ahead of schedule to eliminate its deficit signals the start of the fall round of pre-budget lobbying. That lobbying will feature, as always, demands from provincial and territorial premiers for more money from Ottawa. This ritual is a grueling test of faith for fans of Canadian federalism, which never looks more venal than when the provinces have their hands out.
The premiers' annual summer meeting gave us a preview. Their four-page communique started with the historical significance of this year's Charlottetown venue – and it was downhill from there. Nation-building? Letting people work or sell across provincial boundaries? As if! The rest was an extended gripe about Ottawa's stinginess, and its terrible consequences for the country.
The federal government did not respond. Which is understandable – but regrettable. Because the premiers' complaints have two serious flaws that need rebutting before we hear them again this fall.
Start with a glance at the "major transfers to other levels of government" line in the federal government's budget. They are not down, or flat-lining – they are way up. After Paul Martin balanced the budget as finance minister in 1997/98, they stood around $20-billion. Then, as prime minister, Mr. Martin doubled them: by 2006, they topped $40-billion. Since then, Stephen Harper's Conservatives have added as much again: they now run upward of $62-billion.
They have outpaced the economy, rising from 2.3 per cent of GDP in 1997/98 to 3.2 per cent now. And far outpaced the rest of the federal budget: in 1997/98, they were around one-eighth of federal spending; now, they are nearing one-quarter.
Which leads to the more fundamental problem with the premiers' annual beg-fest. Provinces and territories tax the same personal incomes, corporate profits, and consumption spending Ottawa does. So why cycle the money through Ottawa? Yes, we have provincial disparities to even out, but with the two largest provinces, Ontario and Quebec, now receiving Equalization, it's hard to see persuading the provinces on the wrong end of that deal to pay even more.
Basically, the premiers like the feds to take the heat for taxing Canadians. And they like to dodge accountability. What good does it do Ontarians concerned about hospitals, Albertans unhappy with roads, or Nova Scotians with questions about universities to hear it's the stingy feds' fault? Health, municipal infrastructure and education are provincial responsibilities. If those governments are not answerable to their citizens for the successes and failures of programs in those areas, nobody is.
In Charlottetown, the premiers touted a report they commissioned from The Conference Board of Canada showing how demographic change will disproportionately stress provincial and territorial finances in the years ahead. True, aging's impact on healthcare particularly will put more upward pressure on provincial/territorial spending – many C.D. Howe Institute studies have shown the same thing. But the implication that further hikes in federal transfers will solve the problem is nonsense. They are way, way up since 1997/98 – and look what has happened.
Like Ottawa, provinces and territories were struggling with deficits in the late 1990s. Like Ottawa, they got back to surplus by the end of the decade. Then federal transfers started escalating – and so did their spending. And when the 2008/09 slump hit their revenues, the provinces and territories plunged back into the red.
Federal transfers are more than $40-billion higher now than they were in 1997/98. Yet provincial and territorial deficits are more than $10-billion worse than they were then. No way would the premiers have let spending run so far ahead of their resources if Ottawa hadn't enabled it. Why would the result of further escalation in federal transfers in the future be any different?
In the years ahead, the pressures of demographic change will indeed squeeze government budgets. We will need more bang for every buck our governments spend. To get that, we need accountability. Provinces and territories will tackle their budget challenges better if they, not Ottawa, raise the taxes they need, and if they, not Ottawa, must tell their citizens why they are succeeding or failing in delivering the services they have committed to deliver.
We will surely hear more pleas for money from the premiers this fall. But the answer from Ottawa should not be more transfers. It should be tax cuts. And the provinces, rather than commissioning reports blaming Ottawa for their problems, should take the resulting fiscal room, and give their citizens some straight talk about how they themselves will do the job they were elected to do.