A question of fairness

During the Great Depression of the 1930s a number of provinces, including Saskatchewan, faced financial bankruptcy and had to be bailed out by the federal government. Under the BNA Act, provinces were given the responsibility for the key areas of education, health and social services, but they were not given the taxing authority to carry out this mandate.

Furthermore, many of the less industrialized provinces, including Saskatchewan, did not have the economic base to provide services equal to those available in the more prosperous areas of the country.

In 1937 Mackenzie King’s Liberal government created the Royal Commission on Dominion-Provincial Relations, better known as the Rowell-Sirois Commission after its two chairmen. Unlike other Royal Commissions, this one held hearings all across Canada, even in small towns.

A wide variety of people gave evidence at these hearings, not just “stakeholders.” Furthermore, the commissioners actually listened to what the people told them.

Their report  recommended that the federal government adopt a system of “National Adjustment Grants” provided to a provincial government whenever it  “could not supply Canadian average standards of service and balance its budget without taxation (provincial and municipal) appreciably exceeding the national average in relation to income.”

This was necessary in order to guarantee “a national minimum standard of social services” across Canada. John Diefenbaker’s government gave strong support to this policy in 1957, and it was included in the Constitution Act of 1982.

Equality demanded

The people of Canada told the Rowell-Sirois Commission that family, friends and community were very important. People should not be penalized because they live in rural and remote communities or hinterland provinces. Canadians demanded at least equality of opportunity if not social justice.

The goals of the equalization program were to reduce regional disparities, create national standards for basic public services, assist the mobility of people across provincial borders, create a sense of Canadian identity, and even share the wealth across provincial borders. It was also established that basic public services should be considered a citizenship right.

This set Canadian confederation off from that of the United States. These principles have always been opposed by those who insist that we should allow the economic free market to determine what is best for all of us.

Formula no easy task

Implementing these principles has been difficult. However, from the beginning it was agreed that in creating a formula for federal equalization grants the criteria should be the “fiscal capacity” of all provincial governments to raise revenues through taxation.

To be fair, all potential sources of revenues must be included. Under the existing formula, thirty-three sources of revenues are covered, including most resource revenues.

There are some exceptions. Water is excluded because it is almost always given to industry as a free subsidy, as in the development of the Alberta tar sands. This was a policy demanded by big business and granted by our governments.

Rents for water use and hydro power are not adequately assessed, as they usually take the form of a general subsidy to consumers through low rates and special low rates for industrial enterprises. This exclusion from the equalization formula creates a disparity as it greatly benefits Manitoba, Quebec and British Columbia, which have extensive water and hydroelectric resources. This is an obvious fault in the program.

Resource exclusion - undermining the principles

Almost every country in the world regards natural resources as a national resource. This is logical and fair because the geographic placement of natural resources is an outcome of nature and not human endeavor. The failure to take that position in Canada has led to significant political and economic problems.

To exclude non-renewable natural resources from equalization would completely undermine the basic principles of equalization.

All provinces have some capacity for raising revenues from the taxation of natural resources, and do so. In Saskatchewan, all revenues from the extraction of natural resources go into general government revenues. They are treated just like any other revenue.

The application of any equalization formula is a difficult political task. For example, when Lorne Calvert’s NDP government reduces taxes on corporations and people with high incomes, should this loss of government revenue be offset by equalization grants from Ottawa?

A gift to resource companies

During the NDP government of Allan Blakeney resource royalties and taxes were increased. Saskatchewan became a “have province” and for a few years did not receive equalization payments.

In contrast, the last three provincial governments have all steadily reduced the royalties and taxes on the use of natural resources.

This policy has been warmly received by the owners of the corporations who extract our resources, for their income and profits have greatly increased.

Of course, this policy has reduced provincial revenues. But is it fair that this pro-business policy be offset by equalization grants from the federal treasury?

On a number of occasions officials in the NDP government, including Finance Minister Janice MacKinnon, have told me that they had no intention of raising royalties and taxes on natural resources back up to the levels they were during the Blakeney government. They could instead get roughly equivalent revenues from the federal government under the equalization program.

However, the federal government is not that stupid. In 1994 they introduced an amendment to the equalization program called the “Generic Solution.”

This was specifically designed to deal with the Saskatchewan policy, the “distortion” of the program which occurs when a province reduces its tax rates knowing that equalization grants would provide compensation.

Who really pays?

In January 2003 the NDP government feigned surprise when there was a reduction in the equalization grant from Ottawa. Instead of continuing to assess Saskatchewan’s mining tax base on the value of mineral production, it shifted to the use of “net profits.”

Saskatchewan’s mines produced 13 percent of total Canadian mineral sales but 55 percent of mining company profits. This was a result of the steady reduction of provincial royalties and taxes on the mining industry.

There is no money tree in Ottawa. Equalization payments come from the taxes we all pay to the federal government, most notably income taxes and the GST.

The policy of the NDP government has been to cut the royalties and taxes on corporations extracting our resources and instead collect revenues from federal equalization payments.

Now that the boom in resource prices has produced enough additional revenue to make Saskatchewan a “have province” under the equalization formula, the Calvert government is insisting that natural resources be eliminated from the formula so that the province can collect another $800 million from the federal treasury.

This policy of taking from the poor and giving to the rich does not serve us well.
   

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