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The great fiscal imbalance debate . . . of 1906

Prime Minister Stephen Harper is not the first Canadian prime minister to hear complaints about the "fiscal imbalance." Wilfrid Laurier faced this in the first federal-provincial meeting 100 years ago this week -- and he resolved it.

In Laurier's day, politicians debated the issue of fiscal imbalance in terms of the federal "subsidies to the provinces." Debate came to a boil in October of 1906 because the federal government was raking in revenue, while the provinces were assuming more social, public infrastructure and education costs.

Canada was prosperous. It was accepting immigrants to populate its vast expanses as never before, and the costs of expansion were soaring nationwide. Ontario's premier argued that his government was spending four times more on education, the administration of justice, hospitals and agriculture as it had at the time of Confederation, and now had a deficit that was hovering around $1-million. Sound familiar?

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To complicate matters, subsidies were a constitutional affair. In 1867, the Fathers of Confederation had decided that the subsidy rate would be 60 cents per capita, as measured by the 1861 census. That rate would remain unchanged, with Ottawa paying provinces using a scale two generations old. The premiers wanted a new deal. Laurier, in office since 1896 and wildly popular, turned a deaf ear.

By 1906, however, Laurier could not ignore the chorus of a new generation of premiers. James Whitney in Ontario and Jean-Lomer Gouin in Quebec had both taken office in 1905. Barely installed, Gouin started to campaign on the issue, travelling to Ontario, Manitoba and the Maritimes to make his points and to press Laurier to act.

Two new premiers appeared when Alberta and Saskatchewan entered Confederation on Sept. 1, 1905. Then there was Richard McBride, the fiery premier of British Columbia whose denunciations of Ottawa escalated exponentially with each passing day. Together, they claimed that Ottawa's stinginess was hampering the development of the country.

Faced with a united front, Laurier did something no other prime minister had done before: He invited the premiers to Ottawa for a three-day conference to discuss the "subsidy." The meeting on Parliament Hill, called "the greatest gathering of statesmen ever seen," began on Oct. 8. Gouin, as spokesman for the premiers, made the case that the provinces should have autonomy and more resources from Ottawa. Manitoba's Rodmon Roblin talked about the cost of settling immigrants in the West in order to "make these foreigners good Canadians."

Nova Scotia's George Murray emphasized that education costs were assuming too big a share of the provincial budget. Alberta's Alexander Rutherford wanted money to help fund the "excellent salaries" paid to his teachers. Prince Edward Island's Arthur Peters declared that the issue was one of financial life or death for his province. Cash-rich Ottawa was the only solution: "The only source to which we can look for it is the federal treasury, or we must impose direct taxation, an experience which would be both oppressive and unpopular."

Then it was B.C.'s turn. McBride presented his long list of demands. He insisted that B.C. was entitled to an extra allowance because it proportionally contributed a larger sum toward federal revenue than any other province and received less in return. His province, he said, had had to impose direct taxes, something no other provincial government had had to do.

Laurier said he could meet the provinces on their demand for more money, but argued that the subsidy program should be abandoned, saying it was contrary to his "pragmatic" theory of Confederation where intergovernmental entanglements should be rare. The premiers, however, insisted on the cash. Laurier responded by asking for concessions. He insisted that any financial deal had to be "final and unalterable," and proposed ideas to disentangle federal and provincial jurisdictions in fisheries and transportation. Again, the premiers shrugged.

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Finally, Laurier agreed to a new scale for subsidies and increased the money that Ottawa would transfer to the provinces by almost 35 per cent, to $9,255,992 (about $170-million in today's dollars). B.C. would also get a bonus of $100,000 a year until 1917. This represented almost 12 per cent of the federal government's revenue that year.

(It is worth noting that, in 2004-05, the government of Canada collected almost $199-billion in revenue and transferred $42-billion of it to the provinces, or about 21 per cent. This transfer included $15.2-billion for health care -- something unimaginable a century ago. If that sum is removed, Ottawa's subsidy today remains remarkably close to the Laurier formula, transferring 13.5 per cent of federal revenues to the provinces.)

The "fiscal imbalance" issue of 1906 revealed remarkable political leadership. The premiers played their cards as a team. The prime minister also showed courageous leadership. He could have continued to ignore the provinces and side with newspaper editorialists who argued that the national government was weakening itself in order to aid provinces. Instead, he engaged the premiers. It was practical; it was good for Canada; it was good politics. The formula of 1906 proved politically successful -- Laurier was re-elected in 1908.

Practicality had won the day, but Laurier tried one last trick. The federal government sent a letter to the British Parliament asking it to amend the British North America Act and insisted that the words "final and unalterable" be included in the amendment so the provinces could never again unite against Ottawa.

Britain thought better of it, and dutifully amended Canada's constitution in 1907 without using those words. Practicality, like generosity, had its limits.

Patrice Dutil is associate professor of politics and public administration at Ryerson University.

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