PM's balancing act dazzles Quebec

By acknowledging the fiscal imbalance Tories take a giant leap forward

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The Gazette, Friday, May 5, 2006

The most important political document in the budget was the paper on the fiscal imbalance between Ottawa and the provinces.

The 125-page discussion paper, Restoring Fiscal Balance in Canada, is significant for its source, the federal Department of Finance, where it was written in blood.

"Fiscal imbalance, what fiscal imbalance?" That has always been the position of the feds. If the provinces are short of cash, they have the power to raise taxes. End of discussion.

For Ottawa to acknowledge formally the existence of the fiscal imbalance, first in the Throne Speech and then in the budget, signals a major attitudinal shift.

It is significant that the person running this file on behalf of Prime Minister Stephen Harper is the new clerk of the Privy Council, Kevin Lynch, himself a former deputy minister of finance. The department known as Imperial Finance would not have developed this paper without orders from the centre.

Harper would not have appointed Lynch, and Lynch would not have accepted the job, without a discussion of how to move on the fiscal imbalance. In his previous role as deputy at Finance, Lynch manned the barricades of denial. Now, as head of the prime minister's own department, he is the agent of acknowledgment.

Fiscal federalism, the distribution of federal dollars to the provinces, is a core concept in managing the federation. And the management of the federation derives from each prime minister's sense of the country. The vision thing.

Harper represents a classical Conservative perspective in that he has pledged to respect the division of powers in the Constitution Act of 1867. The Liberals have always been comfortable, with the NDP urging them on, using federal spending power to occupy exclusive provincial jurisdictions. But Harper has specifically promised not to do so without the support of a majority of provinces.

Paul Martin's entire domestic program - health care, daycare, cities - was in provincial jurisdiction. Martin's agenda was shaped by public opinion research on voters' priorities, which became his own. He ended up looking weak and irresolute, cutting a series of cheques to the provinces.

Harper promises to respect provincial jurisdiction with one important exception - higher education, which is crucial to Canada's global competitiveness and where Ottawa's role in funding research at public universities is only going to increase.

How serious is the fiscal imbalance? As it happens, only two provinces, Ontario and Prince Edward Island, are currently running deficits, and Ontario could easily have balanced its books. But the provinces face huge challenges going forward, especially with the demands an aging population will make on health care and with university enrolment surging past a million by the next decade.

Then the discussion becomes how to shape financial flows, either through a new equalization formula or an increase of transfer payments from Ottawa to the provinces.

Quebec, as one of eight recipient provinces of equalization, would clearly prefer an enhanced formula. Ontario, as one of two donor provinces, would obviously prefer an increase in transfer payments.

It is easy to see where this discussion is going. Quebec started the debate on the fiscal imbalance, and Premier Jean Charest brought it to the table in creating the Council of the Federation after the 2003 election.

Quebec also holds the key to Harper's ambition to growing from minority to majority status in the next federal election. Harper and Charest are joined at the hip. They both need to deliver the goods before their elections expected next year.

Ontario Premier Dalton McGuinty, on the other hand, is marching to a different beat, an Ontario-fair-share agenda, in which Ottawa is the bad guy and Quebec by no means an ally. He runs a serious risk of being politically isolated.

The acknowledgement of the fiscal imbalance in the budget does nothing to redress it. But Harper is calling for a first ministers' conference in the fall, and he will want a done deal before sitting down at the table. He does not want a repetition of the 2004 health-care conference, remembered as much for its messy proceedings as for its positive outcome.

Meantime, Charest has hailed Ottawa's acknowledgement of the issue as the dawning of a new era in federal-provincial relations.

Just the inclusion of the discussion paper was sufficient to gain the support of Gilles Duceppe and the Bloc Quebecois, enough to secure passage of the budget in the minority House.

That works for Duceppe, given the Conservatives' continued rise in the polls in Quebec.

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