COVER

DECENTRALIZING THE TAX SYSTEM

THE PROVINCES ‘MUST DO THEIR PART'

GREG W. TAYLOR March 5 1990
COVER

DECENTRALIZING THE TAX SYSTEM

THE PROVINCES ‘MUST DO THEIR PART'

GREG W. TAYLOR March 5 1990

DECENTRALIZING THE TAX SYSTEM

COVER

THE PROVINCES ‘MUST DO THEIR PART'

It began as a promising day for Antonio Dagnone. The president of Saskatoon’s University Hospital spent the morning of Tuesday, Feb. 20, with a dozen senior staff members considering development plans for the coming decade. For several years, the financially strapped Saskatchewan government, its treasury beleaguered by high interest rates and a succession of droughts, had urged the hospital's administrators to find more costefficient ways of operating.

But recent meetings with provincial health officials,

Dagnone said, had left him optimistic that the situation was about to change for the better. Then, late that afternoon, federal Finance Minister Michael Wilson dropped his budget bombshell. Ottawa, he announced, was freezing or placing strict limits on increases in its transfer payments, which help the provinces pay for their programs, particularly in the areas of health care and postsecondary education. “Our whole plan just g fell out the window,” Dag£ none said. “Why did he have f to hit our province when we 2 are down?”

Indeed, Wilson’s announcement raised fears -

across the country that hospitals and universities—already suffering from staff shortages, overcrowding and a shortage of capital funds—might be in for an even more difficult time. But worried administrators will have to wait to gauge the full impact of the minister’s actions. The money transferred annually from Ottawa to the provinces—$35.1 billion last year—goes to each province’s general revenues rather than straight to the particular institutions. As a result, it is now up to the provincial governments to decide how to react to their loss in anticipated revenues. The options: raise money elsewhere, through provincial taxes or user fees; reduce spending on health, welfare, higher education or other

services; or borrow to maintain current levels.

The decisions in each province will become clear when their finance ministers table their own budgets for the coming fiscal year in the months ahead. Last week, none of those ministers was ready to give a firm indication of

his intentions. But all were unanimous in condemning Ottawa’s action. Said a grimfaced Clayton Manness, Manitoba’s finance minister: “My worst fears have come to fruition.”

Burden: Indeed, Wilson’s move was not entirely unexpected. Economists had been forecasting for weeks that Ottawa was eager to pass more of its financial burden onto the provinces. But, in tackling transfer payments, Wilson argued that the provinces would have little difficulty in absorbing the loss of revenue. He told reporters that the reductions will amount to only one-half of one per cent of provincial spending in the coming year, and only 1.25 per cent next year. As well, Wilson’s

budget documents showed that 35 cents out of every revenue dollar the federal government spends goes to servicing its debt—compared with an average of 12 cents spent by the provinces in the same way. Wilson also noted that the federal government’s program spending has grown by an annual average of less than four per cent during the past five years— compared with 6.4 per cent for the provinces during the same period. Declared Wilson in his budget speech: “Provincial governments must do their part, just as they too will reap the rewards of lower inflation, lower interest rates and sustained economic growth.”

In obliging the provinces to do their part, Wilson had the three main forms of transfer payments to work with. He made no changes to unconditional equalization payments, which effectively transfer tax money collected in what are often called the “have” provinces— Ontario, Alberta and British Columbia—to the other provinces. Accounting for $8.2 bil-

lion in the 1990-1991 federal budget, those payments are meant to ensure that there is a basic level of social services across the country, even in the less prosperous provinces.

But, for the first time, Wilson set limits on payments under the Canada Assistance Plan (CAP). Since its beginning in 1966, that plan— the nation’s welfare program—has committed Ottawa to match provincial spending, dollar-for-dollar, on such social assistance as day care for children and nursing care for the elderly. The program remains unchanged for CAP contributions to the poorer provinces. But the growth of the federal government’s contributions to the wealthier provinces of Alberta, Ontario and British Columbia will now be

THE DEFICIT DÍLEMMA

Three of the 10 provincial governments show a surplus in their current budgets. The others borrowed between two and 21.3 per cent of the money that they spent in this fiscal year. The deficits, in $billions, are shown in red at left.

Prince Edward Island, Ontario and British Columbia budgets show surpluses of $200,000, $11 million and $250 million respectively.

limited to five per cent annually for the next two years, even if provincial spending increases by a wider margin. Finance department officials calculated that the ceiling would save Ottawa $155 million in projected spending in that period.

Freeze: But Wilson said that Ottawa’s greatest savings from earlier spending projections would come from a decision to freeze the third and largest portion of the major federal transfer payments—the Established Programs Financing (EPF). Those payments provide the federal government’s main contributions to programs such as higher education and health care, which, constitutionally, are under provincial jurisdiction. In 1989,

Ottawa’s EPF payments totalled $20 billion and they have been growing at a rate of more than six per cent in recent years. By holding to $20 billion over the next two years, Wilson said that the federal government would cut $869 million from projected spending in 1990-1991 alone—a substantial portion of the $2.8-billion reduction that he claimed to have made in his budget for the fiscal year beginning on April 1.

It was immediately clear that Ontario, which now will receive $378 million less in new transfers in the coming year than planned in the

1989 budget, will be the largest revenue loser. But many observers noted that the province’s healthy economy and an $ 11-million budget surplus for the 1989-

1990 fiscal year still left it in a relatively strong position. At

the same time, “have-not” provinces such as

i--------, Saskatchewan and Nova Scotia proportionally

j j 41.6 will not suffer the same level of cutbacks—but

k'WÊÊf / Hi / they are facing downturns in their economies flV m as a result of such regional factors as continuing western droughts and the collapse of the Atlantic fishery. “This is going to be a tough sell,” grumbled one Atlantic Tory MP in the wake of Wilson’s budget speech. “We have already got our trouble with the fisheries.”

Provincial ministers accused Wilson of dealing with his own problems by passing them on to the provinces. Quebec’s normally reserved finance minister, Gérard D. Levesque, labelled Wilson’s statement “cowardly, dishonest and unfair” and added that the transfer-payment reductions “amount to shovelling snow into your neighbor’s yard.” B.C. Finance Minister Mel Couvelier charged that Ottawa “didn’t have the political courage” to cut its own spending more severely. In Saskatchewan, Finance Minister Lome Hepworth was visibly upset as he said: “This shook the very foundation of our budget. We have to go back to ground zero.” In Prince Edward Island, Finance Minister Gilbert Clements last year projected a modest $200,000 budgetary surplus for 1989-1990. But now, he complained, “It’s as if your employer said, ‘You ended up the year not owing any money, so now we’re going to cut your salary.’ ”

Horrendous: The possibility of cutbacks clearly alarmed university and hospital administrators across the country. Several educators predicted higher tuition fees and slimmer research budgets. Kenneth Ozmon, president of St. Mary’s University in Halifax, said that Prime Minister Brian Mulroney has often said that education is crucial to the country’s development. But because of the new budget, he added, “You have to wonder if they really buy the idea that education is a priority.” Hospital planners said that the already overburdened health-care system would have trouble dealing with any capping of spending. Said Joan Hale, a nurse at Richmond General Hospital in British Columbia: “We are already having beds closed. Our openheart surgery lists are horrendous. The situation is pretty desperate.”

By week’s end, Wilson and the provincial ministers were making plans to meet to discuss the issue of transfer payments. But it appeared unlikely that the meeting would resolve provincial concerns. And that left Saskatoon’s Dagnone and other concerned Canadians waiting to hear the most telling response to Michael Wilson’s latest policies—in the new budgets of the provinces.

GREG W. TAYLOR with correspondents’ reports