Federal Conservatives Out of Touch with Provinces

Are you wondering what the federal government is up to?

Has the actions taken by Ottawa (especially the conservative government) got you thinking they are on your side and on the right track?

Then you need to dig past the headlines.

To say I'm not a big fan of the Globe and Mail is the understatement of the year, but every now and then one of their columnists actually maks a point worth noticing. Although the writer clearly missed the point in reference to Newfoundland and Labrador's premier and his attacks on Ottawa, (he was already well above 70% in the polls prior to the election) what follows, from the Globe's Report on Business, is interesting

It raises points that should be considered when it comes to federal/provincial discussions. The question being, who really needs who the most. The conservatives might also want to reconsider their statement that relations between the two levels of government "have never been better in Canada".

From the Globe and Mail:

Finance Minister Jim Flaherty is a master of the headline-grabbing declaration. In the last year, he has told Canadians that Canada's total net debt will be eliminated by 2021; that fiscal balance has been restored; that a planned common securities regulator will enhance regulatory efficiency; and a that corporate income tax rate of 25 per cent by 2012 will be a powerful brand for Canada globally.

The one thing that unites all of these federal claims, aside from the fact that they make short, sweet media hits, is that they won't happen without provincial support. So one would assume that Mr. Flaherty, a former Ontario finance minister, has gone the extra mile to ensure he has buy-in from all his provincial colleagues before presenting his latest plan.

Apparently not.

Spokesmen for a number of provincial finance ministers said this week they hadn't heard a peep from Ottawa before Mr. Flaherty announced his goal of a 25 per cent combined corporate income tax rate. (Ontario's responded with some meaningless twaddle about not wanting to speculate about whether consultations had indeed occurred, but that may have been due to confusion in the new minister's office).

It points to a rather high-handed approach to the very people Mr. Flaherty needs co-operation from if he is to realize the lofty national goals he has set. Running roughshod over the enfeebled opposition parties in Ottawa is all very well. They are, after all, the opposition and would do the same if they had a chance. But the provinces should not be regarded as such if Canada is to work.

Yet if you look at the state of federal-provincial fiscal relations these days, there are lots of signs of acrimony.

Earlier this month, the government of Saskatchewan filed a lawsuit against the federal government over the equalization plan Mr. Flaherty said would restore fiscal balance. Premier Danny Williams of Newfoundland has mused about joining in on the equalization suit, but for now is contenting himself with bad-mouthing the prime minister and threatening to campaign against federal Conservative candidates in the next national election.

Monique Jerome-Forget, the Quebec finance minister, blasted Mr. Flaherty for his tactics, which she called aggressive, in pushing a common securities regulator. She suggested he should spend more time on consultations. And just about every provincial finance minister claims that they are sending more money to Ottawa than they are getting back and want the situation addressed. Some of these provincial utterances can be dismissed as political bombast.

A certain amount of federal-provincial jostling is inevitable when it comes to financial matters, especially if a province is headed for an election, as was the case with Newfoundland and is the case with Saskatchewan. Still, Mr. Flaherty must know that if he wants provincial support for his ideas, it's advisable to at least give his counterparts a heads-up beforehand, rather than forcing them to scramble after the fact.

On the matter of corporate income tax, he acknowledged that the provincial part was not his jurisdiction. But then he announced a goal of 25 per cent that he can't deliver on his own.

A cynical observer might conclude that it's the headline that matters and not the actual achievement. The lowest corporate tax rate in the G7 countries (which is what a 15 per cent federal tax and 10 per cent provincial tax would be as long as everyone else stood still) has a definite ring to it. With luck, media reports will feature that figure rather than digging deeper to see if it is realistic.

Look what has happened with the Alberta royalty changes announced last week: news reports repeated the Alberta government's claims (and oil industry gripes) even though royalty experts noted that it was mathematically impossible for the government to meet its announced targets. A less cynical interpretation is that Mr. Flaherty expects to persuade the provinces to go along on grounds that a low corporate tax rate will attract new business and allow existing businesses to flourish.

Setting aside the lack of groundwork done to prepare for this happy eventuality, there is another problem: the provinces may have other plans for their taxpayers' money. Carole Taylor, the B.C. minister of finance, alluded to this in her immediate response to the federal plan, saying she would have to see how it fit with the province's overall economic plan.

Among the challenges that all provinces face are increasing demands from municipalities for more money, the mounting cost of social programs, and aging infrastructure that urgently needs to be repaired or replaced. Any one of these may appear more urgent to a provincial finance minister than going along with Mr. Flaherty's plan to lower corporate income taxes.

In the past, the federal government could use the promise of more money from Ottawa as a sweetener when asking for provincial support on a particular plan. But the Conservative government says it plans to reduce spending in areas of provincial jurisdiction, a move that will also lessen its clout with the provinces.

The upshot of all this is that unless you are a business operating in Alberta, where the provincial corporate tax rate is already 10 per cent, don't plan on paying a combined rate of 25 per cent any time soon.