The pre-budget HST tango

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The Gazette, Wednesday, January 19, 2011

Finance Minister Jim Flaherty doesn't think the federal and provincial sales taxes in Quebec can be harmonized in time for his budget.

"We've made a lot of progress with Quebec," Flaherty said the other day, "but there are still a lot of points to be settled."

Well then, welcome to a budget vote that just got a lot more interesting. The Bloc Quebecois has stipulated it will vote against the budget unless there's an HST deal meeting Quebec's request for $2.2 billion, the equivalent of what Ottawa paid Ontario and British Columbia to harmonize their sales taxes with the feds.

But, says Flaherty, it's not about the money. That's not the issue, and no one disputes Quebec's number.

Nor is it about process -Ottawa does not have a problem with Quebec collecting an HST on behalf of both governments, as it has done for 20 years with the GST and QST.

The gaps aren't a matter of clashing personalities either. Flaherty and his provincial counterpart, Raymond Bachand, get along famously. Bachand made a very strategic play at last month's federal-provincial finance ministers' meeting in Alberta, when he supported Flaherty on creating privately funded pension plans rather than topping up the Canada Pension Plan, thus aligning Quebec with Alberta and Ottawa.

The support of those provinces gave Flaherty the votes he needed to win the argument. Together Quebec and Alberta represent more than a third of the population, and two-thirds are required for agreement on pension reform.

For the rest, he sent the provinces home happy by confirming increases to all federal transfer payments in the budget.

Bachand had some issues of his own with the funding of the Quebec Pension Plan, but his eye was also on the potential windfall from an HST deal.

The problem is that Ottawa and Quebec can't agree on what should be exempted from harmonization. Each province is allowed to exempt sales of specific items up to five per cent of its revenues.

In one province, Ontario, meals under $4 might be exempted to benefit low-income earners or pensioners. In B.C., they've exempted gasoline.

But Quebec officials apparently have a much longer list of would-be exemptions. As one senior federal official close to the talks puts it: "Bachand tells Flaherty they're close to a deal, only a couple of points apart, but then when the minister sends in his officials they come back and say we're much farther apart."

Which isn't to say an HST before the budget is out of the question, only that it's unlikely unless Quebec moves quickly to close the gap.

The window on this budget is already closing. The most logical date of the budget is the beginning of the first full week of March. With the House in recess the following week, this date would give Flaherty and Stephen Harper the opportunity to go out on the road and sell it without being shouted down in question period.

Realistically, given publishing and translation timelines, the budget would have to close two weeks ahead of that, in the third week of February, just a month from now.

The next potential window for a deal would open with the provincial budget, usually in April, with the possibility of an Ottawa-Quebec agreement that could be announced with considerable fanfare by the principals, Harper and Jean Charest. Harper could say he was delivering for Quebec, just as he did for Ontario and B.C.

As for Charest, he needs a win of any kind to show that he's defending Quebec's interests in Ottawa. It would be helpful in that regard if he stopped trash-talking the feds on climate change.

Meantime, there's the potential of a budget deal between Flaherty and New Democratic Party leader Jack Layton. They had a very friendly exchange in Toronto last weekend at the wake for the young Toronto police officer who died in the line of duty.

Layton signalled a budget shopping list in a Sudbury speech last week, including a top-up to the Guaranteed Income Supplement and other items that would benefit hard-pressed seniors and the urban poor. He can't have a whole Christmas tree, but he can have a few trinkets.

For his part, Flaherty said on Monday: "I'm happy to put in the budget items that the opposition might want. There are areas, certainly I know the NDP has concerns. The Bloc I expect will have concerns because they have in other years, about continuing to rebuild the forestry industry."

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