MACLEAN'S REPORTS

NATIONAL AFFAIRS

One man who might save the federal government from obsolescence

Peter C. Newman July 25 1964
MACLEAN'S REPORTS

NATIONAL AFFAIRS

One man who might save the federal government from obsolescence

Peter C. Newman July 25 1964

NATIONAL AFFAIRS

One man who might save the federal government from obsolescence

Peter C. Newman

THE TOUGHEST ASSIGNMENT in Ottawa these days probably belongs to A. W. Johnson, an unusually original young economist who was recently hired away from the Saskatchewan government to fill the important job of assistant deputy minister of finance for federalprovincial relations. Johnson (who has a PhD in economics from Harvard, where he came under the influence of J. K. Galbraith) worked for eighteen years in Regina’s treasury department. He was appointed deputy provincial treasurer in 1952, at twenty-eight, and although they may not have knowm it, those Canadians who mourned the passing of the CCF government because of the enlightened policies it pioneered were in all likelihood sorrowing over some of Johnson’s many policy suggestions. (A more complete report on the

downfall of the CCF appears on page 10.)

Like the good civil servant he is. Johnson has refused to make any public comment since he arrived in Ottawa. But his published thoughts on Canadian federalism indicate that he may be the one man who can suggest a solution to the delicate but formidable problem that now confounds official Ottawa: how to preserve for the federal government the ability to influence the economic climate of the nation. (That is. broadly, to set those policies of public spending and taxation which can help slow down a boom when it drifts into inflation, or help prop up a slump brought on by inadequate consumer spending power.)

The full implications of the opting-out arrangements agreed to at the federal-provincial conference in Quebec City last April are only now' becoming clear. Quebec has indicated that it intends to opt out of nearly all the shared-cost programs, including hospital insurance and old-age assistance. Quebec's officials want to adopt the new formula by April I, 1965.

So far only Quebec has indicated that it intends to take up the offer. But the principles established now will be applicable to future withdrawals by the other provinces. During the past ten years Manitoba, Saskatchewan, Ontario and Nova Scotia have asserted both the intention and the ability to pursue individual long-term economic policies of their own. Through the fiscal policies expressed in their provincial budgets, these and some of the other provinces have in effect been setting the fiscal policies for their regions. If the opting-out arrangement is ever carried by these provinces and the others to its extreme, Canada will wind up with eleven fiscal policies — each province as well as the federal government following its own ideas. This would make us the only country in the world unable to pursue national economic goals by setting a national fiscal policy.

OTTAWA TAKES A BACK SEAT IN SPENDING

The reason this desperate outlook is credible, if not imminent, is that the opting-out formula, if fully applied, will mean that the provinces will get more of the tax revenues that Ottawa collects than the federal government. It’s not yet clear exactly what share of the relevant tax revenues Quebec will recover from Ottawa, but one informed estimate suggests that eventually the new provincial shares will be fifty-five percent of personal income taxes; twenty-two percent of corporation taxes, and seventy-five percent of succession duties. At present most provinces recover eighteen percent, twenty-two percent and seventy-five percent respectively.

Obviously, a federal minister of finance will be unable to use the tax provisions in his annual budget to set national fiscal policy when he controls only a minor share of tax revenues. This has led to the current search for alternatives — new methods by which the federal government can manoeuvre fiscal policy.

This brings us back to the new man in Ottawa, A. W. Johnson. His writings on Canadian federalism show' him to be an ardent advocate of an entirely new approach which, if followed up. could provide us with a workable substitute for the conventional idea that national fiscal policies can only be set by the federal minister of finance on budget night.

AN ELEVEN-SIDED CANADIAN BUDGET

In a working paper prepared for the royal commission on banking and finance. Johnson makes the unprecedented proposal that budgets might be worked out by a kind of eleven-government collaboration. He says provincial treasurers should meet the federal minister of

finance annually in November or December, just before budgets are formulated, to exchange views on an economic outlook and on the kinds of budgetary action indicated. “Ultimately,” he suggests, “this committee might be used as a vehicle for integrated fiscal planning, subject, of course, to the provision that its deliberations would not be binding on the governments represented.” He points out that all provinces already operate on the same fiscal year (ending March 31) and that it is not too far-fetched to suppose they could bring their budgets down on the same evening as the federal government. (The committee of finance ministers and provincial treasurers mentioned by Johnson already exists. It was established in February, 1959, by former Finance Minister Donald Fleming, and hasn’t met since.)

Probably Johnson’s most startling proposal is that the expenditures side of the budget should be used as a fiscal weapon. He advocates that the federal government and the provinces draft many projects, all of them planned and engineered and ready to start. In effect, this would be a five-year capital-works program that could be speeded up or slowed down very quickly according to the economic climate.

A BIGGER TAX SLICE FOR THE PROVINCES

Such thinking may sound shocking to people with conventional ideas of government’s role in the economy, but it’s hardly more than a tardy recognition of the fact that even before the introduction of Prime Minister Pearson’s opting-out formula, the federal government was no longer the most important spender in the economy. At the end of World War II, Ottawa had three times as much income as provincial and local governments; now provincial and municipal revenues are fifteen percent greater than those of the federal treasury and the provinces and municipalities are responsible for three quarters of all non - military public capital expenditures.

“If the trend continues,” Prof. Jacques Parizeau of the University of Montreal suggested recently, “the time may come when Ottawa will no longer be in a position to carry on as a federal government.” Then, Parizeau suggests, the provinces which once used sharedcost programs to finance projects they couldn’t afford may find it in their hearts to share their funds with Ottawa, so that the federal government may still be able to pay for a program or two of its own.