Provinces hand Jim Flaherty a nice Christmas present

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The Gazette, Tuesday, December 28, 2010

It had everything to do with another season, the budget season, that Jim Flaherty got what he wanted for Christmas: an agreement with provincial finance ministers to create a private registered pooled pension plan.

This was not the preferred option of the provinces going into last week's finance ministers' meeting in Kananaskis, Alta. Most of them wanted to look at options for topping up the Canada Pension Plan, which is already fully funded for the next 75 years.

But Alberta and Quebec supported Flaherty's call for the creation of a PRPP, and that was enough. Two-thirds of the provinces representing two-thirds of the population is the required consensus for CPP reform. Alberta and Quebec together account for more than one-third of the population.

Quebec, of course, has its own Quebec Pension Plan, having famously opted out of the CPP at its creation in the 1960s. But it still has a vote on changes to the CPP, and Quebec Finance Minister Raymond Bachand was voting with Flaherty.

Quebec actually has some serious pension-funding issues going forward, particularly after the Caisse de Depot took a $40-billion loss in the great meltdown of 2008 -a 25-per-cent hit on its portfolio.

But Bachand's support of Flaherty wasn't really about a pooled private plan. It was actually about Quebec wanting $2.2 billion to harmonize the QST with the GST, as Ontario has done.

You could probably make a strong case that the two consumption taxes have already been harmonized for the last 20 years, in that Quebec businesses make one payment rather than two. But that would an accounting discussion, not a political conversation. And in the political realm, Quebec wants its equivalent of what Ontario received to harmonize the sales tax last summer. The number is $2.2 billion.

Of course, it would greatly bolster Bachand's case in Ottawa if his boss, Jean Charest, would stop trashing the Harper government on climate change on the world stage. Charest did it again in Cancun at the annual UN climate-change conference this month, following his critical comments last year in Copenhagen and this January in Riviere du Loup, with Stephen Harper standing right beside him. That was the moment Quebec's ask on HST harmonization fell off the table in the 2010 budget.

Bachand's support of Flaherty on privately pooled pensions significantly improves the prospect for an HST deal in the 2011 federal budget. It also significantly improves the prospect of the budget being passed, since if HST harmonization with Quebec is in it, the Bloc Quebecois will support it. And that would mean no federal election in 2011 -at least, not one called because of the budget. For Harper this narrative is very convenient, in that he would be doing for the federalist Liberal government of Quebec what he did for Ontario, and this would shield him from accusations of buying off the separatists.

Once Bachand came out in support of Flaherty's position on pooled private pensions, the discussion of the CPP became moot at the finance ministers' table. Flaherty had all the votes he needed for his preferred option, and everyone knew it.

As for CPP options, Flaherty proposed and got a Canadian compromise: they agreed to keep studying it and to talk about it again at their next meeting.

How is it that the provincial finance ministers signed on to the PRPP concept for which they had shown a notable lack of enthusiasm going into the meeting?

Well, it is conceptually interesting in the sense that employees of small and medium-sized businesses, as well as self-employed Canadians, will, as Flaherty said in his closing statement, "have access to a private pension for the first time." And pooling these contributions in a single privately managed fund will leverage investments.

More fundamentally, the federal finance minister has unique leverage over his provincial colleagues in this pre-budget consultation season.

And when you read the second page of Flaherty's Kananaskis communique, you can see why his provincial colleagues went home happy.

While the federal budget will have some cost-cutting features, it won't come at the expense of the provinces. Transfer payments to the provinces, said Flaherty, "will reach an all-time high of $56 billion, which is $2.2 billion more than last year."

If you look inside the numbers, which confirm that transfer payments for health will grow at 6 per cent and even equalization payments will grow by $300 million to nearly $15 billion, it's all good news for the provinces.

As for Flaherty, he may not be Santa Claus, as he has said, "or even an elf." He turns out, instead, to be the Artful Dodger.

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