Alternative Federal Budget 2003: The Cure for the Common ......just that. The federal deficit was eliminated between 1993 and 1998, mainly by cut-ting services and transfers to people,

Canadian Centre for Policy Alternatives 1

Alternative Federal Budget 2003: The Cure for the Common Budget

The Federal Government:Balanced Budget, Social Debt

This month’s federal budget will be boththe first John Manley budget and the lastunder Prime Minister Jean Chrétien.

Manley’s predecessor, Paul Martin, fa-mously promised to balance the budget“come hell or high water,” and then didjust that. The federal deficit was eliminatedbetween 1993 and 1998, mainly by cut-ting services and transfers to people, fami-lies, and communities. There were deepcuts to the EI program, and Ottawa re-duced the transfers that the provinces useto pay for health care, education and so-cial assistance. By the time the dust hadsettled, income gaps between Canadianshad grown and poverty had increased.1

Employment levels and incomes havebeen rising for four consecutive years. Yetthis job growth has had much less impacton child and family poverty than manypeople realize. Average after-tax family in-comes have just barely reached their 1980-level.2 The market incomes of the moreaffluent have grown much faster than thoseof middle- and low-income families. Mostrecent statistics show that almost one infive children in Canada still live in pov-erty.3

So has the government simply failed toensure that the benefits of a strong

economy and the “fiscal dividend” thatresulted from a balanced budget are equi-tably distributed? This is true, but it is onlypart of the story. Middle-income fami-lies—even those who have seen their mar-ket incomes and job prospects improve—have also seen the quality of the public serv-ices that support and enhance their stand-ard of living fall.

The Liberal government’s priorities havebeen narrowly financial (eliminating thedeficit, reducing the debt), and electoral(cutting taxes to steal ground from theirconservative opposition), all at the expenseof real and growing social needs. This isthe equivalent of a family deciding to makeaccelerated mortgage payments — possi-bly a responsible move, but not if doing someans they can’t afford to fix the leaky roofor buy winter clothes for the kids.

Picking up the Finance portfolio afterPaul Martin must feel a bit like being givenan expensive sports car with most of thepayments still owing on it. Aside from abalanced budget, Manley inherited some-thing else from his predecessor: a huge so-cial debt that must be repaid. This debt isowed to Canadians, who sacrificed manyvalued social programs and supports to al-low Martin to reach his goal. The demandsfor repayment are growing louder all thetime. Jean Chrétien, meanwhile, appearsto be quite justifiably concerned about hislegacy as Prime Minister.

Introduction

2 Canadian Centre for Policy Alternatives


Add to these considerations the fact thatthe Canadian economy is surprisinglystrong, and one might expect this year’sfederal budget to begin the massive task ofrebuilding the social programs that weredevastated by the cuts of the 1990s. In-deed, last fall’s Speech from the Thronemade a number of broad gestures in thedirection of social reinvestment, and a realoptimist might conclude that the 2003-2004 budget will deliver on those assur-ances by allocating new spending as partof a renewed, activist agenda.

In reality, however, the chances of thefederal government doing any such thingare extremely remote.

To the extent that Canadians supportedthe spending cuts of the 1990s, they didso to allow the budget to come into bal-ance; all evidence shows that Canadians donot support program cuts for the sake ofprogram cuts. Therefore, for the federalgovernment a balanced budget representedboth a major political victory and a hugepotential problem. With the deficit gone,how could it continue to shield itself frompublic demands for more spending?

The government’s “solution” to this di-lemma contained two key elements, bothof which are exposed in more detail in themacroeconomic and fiscal parameters sec-tion of this document. The first was a pack-age of deep tax cuts introduced in 2000;

the second is the government’s continuinguse of budgetary sleight-of-hand to seri-ously misrepresent the fiscal room it hasin which to move.

Each year since 1995, the AlternativeFederal Budget has rejected the federal gov-ernment’s massive cuts to programs, itsobsession with balancing the budget, andits dubious accounting methods.

In fact, many of the ideas contained inprevious AFBs – which have always re-flected the views of a broad spectrum ofCanadian civil society – are now back onthe public policy radar screen. While the

Chrétien government allowed medicare tofall into a crisis caused largely byunderfunding and lack of accountabilityover how provinces spend federal transfers,the AFB has proposed higher levels ofhealth funding and a better, more trans-parent delivery system than the CHSTeach year since our project began. As forthe National Health Council proposed inthe Romanow Commission report—andagreed to early this month at the First Min-isters’ meeting on health care—the estab-lishment of such a body was first suggestedby the AFB in 1997.

The AFB: Walking the Walk

This year the AFB shows what could bedone by a federal government genuinelycommitted to repaying the social debt that

Aside from a balanced budget, Manley inherited something else fromhis predecessor: a huge social debt that must be repaid.



was built up through the 1990s. Our planis based on the basic assumption that thefederal budget and government policy de-cisions in general are tools to help buildthe kind of country we want. In contrast,the government has chosen, year after year,to back away from its social responsibili-ties.

What kind of country do we want? Ourpriorities are reflected throughout thisdocument. The AFB would work to builda strong, sustainable economy, with thegovernment playing a lead role in protect-ing and strengthening public health care,reducing inequality, developing new socialprograms such as child care, and buildingsocial housing.4

The AFB includes a forward-lookingand comprehensive Kyoto ImplementationFund. Created out of the 2003-2004 sur-plus and intended to be drawn down overseven years, this fund puts real resourcesinto Kyoto implementation, allowingCanada to be effective in meeting our tar-gets, while not harming the economy. Infact, the Fund’s investments in green tech-nologies would help make Canada a worldleader in cutting-edge, sustainable indus-tries.

We begin by setting out our programgoals, and then raise the revenues requiredto meet them. (Precisely the opposite of a“tax and spend” budget, this is a needs-driven budget.)

We end the federal government’s fiscaltrickery, including the practice of using theEI surplus to fund anything other thantraining and benefits for unemployedworkers.

At a time when the most recent roundof corporate accounting scandals is stillfresh in our minds, the AFB stands outeven more: in a narrow sense, because it isbased on clear and accurate economic as-sessments; and more broadly, because ourbudget recognizes and begins to re-pay thesocial debt that now hangs over the coun-try.

Notes1 Whatever Happened to Social Development? Sub-

mission to the House of Commons Standing Com-mittee on Finance by the Canadian Council onSocial Development. May 21, 2002

2 Social Watch Canada 2003 Report. CCPA andNorth-South Institute.

3 Putting Promises into Action: Brief to the StandingCommittee on Finance Sept 2002, by LaurelRothman, Campaign 2000

4 The Alternative Federal Budget continues to sub-scribe to the historic view of progressive EnglishCanada that the federal government should playa leading role in economic, social and culturalpolicy, in developing national cultural institutions,enforcing standards for social programs, andbuilding a strong national economy. However,such a strong federal role should not infringe onthe expression of Quebecers’ national identity andsocial rights. The key issue for English Canadiansshould not be the accommodation of Quebec’suniqueness, but the way that uniqueness is ac-commodated.

Until there is a resolution of the Quebec-Canada relationship, the AFB’s approach to fed-eral-provincial fiscal relations recognizes the needfor special arrangements with Quebec that maynot be open to the other provinces. We recognizethat Quebec has primacy in its jurisdiction oversocial policy and the right to opt out of joint fed-eral-provincial programs in this area; and, for therest of Canada, we recognize joint federal-pro-vincial responsibility, with a federal leadership rolein funding social programs, as well as in setting

and enforcing national standards.



AFB HighlightsHealth Care

• Annual increases of $5.5, $6.5, and $7.5billion in health spending over the nextthree budget years. These figures areover and above the funds promised inthe September 2000 Accord, and by thethird year the federal contribution tototal provincial-territorial health spend-ing would reach 23%.

• Achieve greater accountability in healthfinancing by: replacing the CHST withnational Health Investment Fund; at-taching conditions to federal transfersto ensure national standards are met;and requiring provincial governmentsto document and report publicly onhow transfers were used.

• Bring all home care and palliative careservices under the CHA. Establish anational drug agency, and begin to de-velop a national prescription drug plan.

• Pay attention to the broader determi-nants of health, and implement budg-etary measures to reduce poverty andinequality, improve housing, provideearly childhood development program-ming, and protect the environment.These would all contribute to improv-ing the health of Canadians and in thelong term reduce health care costs.

Macroeconomicand Fiscal Approach

• The surplus is much bigger than thefederal government admits. Using veryconservative assumptions, we identifyconsiderable room to move inupcoming budget years.

• Nevertheless, the federal government’sability to respond to the social debtwhich is the legacy of the 1990s is con-strained by the major tax cuts it an-nounced in 2000. In retrospect, thosetax cuts were a huge mistake.

• We would roll back the 2000 personalincome tax rate cuts as necessary overthree years to allow program spendingthat would meet the urgent needs of Ca-nadians.

• We would maintain a balanced budgetin all years, in the absence of a reces-sion.

• The AFB would rebuild programspending as a share of GDP from 11.6%to 13.2% by 2005-06. Debt continuesto fall as a share of GDP, to less than40% by 2005-06.



Employment Insurance

• Balance the EI Fund, spending all of itsrevenue to provide income support tounemployed workers. Improvements toincrease support for family leave, train-ing, and improved benefits.

Children and Families

• Increase the Canada Child Tax Benefitby $1,195 per child in 2004. The sup-plement for young children would in-crease to $425 per month up from$237, and the increase per child forthree or more children will increasefrom $83 to $150. These changes wouldtake effect immediately; the benefitswould continue to rise in future years.

• A major new investment totaling $9billion over three years in early child-hood care and education. Within threeyears federal funding will have reached$5 billion per year; within five years auniversal program could be established.

• Balancing the Employment InsuranceFund will allow for improvements to EIbenefits covering pregnancy and paren-tal leave for all new and adoptive par-ents with compensation rates of 80%;the goal is to allow all households thechoice to provide parental care to in-fants up to age one.

The Environment

• A Kyoto Implementation Fund wouldprovide $1.25 billion per year over thenext seven years to provide training andbenefits for displaced workers, assist in-dividuals in adjusting to Kyoto targets,invest in new green technologies, andmake Canada a world leader in sustain-able industries.

• New money to clean up abandonedmines and contaminated areas and toestablish new national parks and pro-tected areas.

Housing

• $2 billion over three years for new hous-ing, including a flexible grants programto assist provinces and municipalities inworking with community-based hous-ing organizations.

Tax Fairness

• Implement a tax on intergenerationaltransfers of more than $1 million. Re-verse the changes to the capital gains taxmade since 2000.

Post-Secondary Education

• New national system of needs-basedgrants funded at $750 million a yearover the next three years.



Macroeconomic Outlookand Fiscal Parameters

pared to deficits which average over 2 per-cent of GDP in other leading developedcountries.

As reported in the federal government’sEconomic and Fiscal Update (October2002), private-sector forecasters believe realGDP expanded in Canada by 3.4 percentin 2002, and they expect real growth of3.5 percent in 2003 and 3.0 percent insubsequent years. The Alternative FederalBudget adopts identical macroeconomicassumptions (including private-sector con-sensus forecasts of nominal price levels andfederal interest rates) to underpin its ownfiscal projections, as summarized in Table1.

This modestly optimistic macroeco-nomic outlook must be tempered by cau-tion on a number of fronts. A U.S.-led at-tack against Iraq, which could spark abroader conflict, would have immense re-percussions on the global economythrough a number of channels: price shocksin world energy markets, a severe impacton the perceptions and attitudes of con-sumers and companies, and a fiscal drainon governments participating in the con-flict. Even without a war, recent weaknessin consumer confidence in both the U.S.and Canada, combined with continuedturbulence in financial markets, may un-dermine aggregate demand conditions over

The Economy:Cautious Optimism

The federal fiscal situation has benefitedin recent years from the relatively robustperformance of Canada’s economy. Cana-da’s economy has mostly shrugged offworldwide concerns about financial insta-bility and war in the Middle East, and hascontinued to expand at a moderately strongrate. Canada’s GDP growth was the high-est among the G7 economies in both 2001and 2002, and is expected to maintain thatstatus over the next two years. The diver-gence in economic performance betweenCanada and the U.S. has been especiallystriking – most visibly in terms of labourmarket outcomes. Canada’s economy gen-erated 560,000 new jobs during 2002,compared to a net loss of over 100,000 jobsin the U.S. labour market; the proportionof working-age Canadians employed (theemployment rate) now exceeds the U.S.level for the first time in two decades.

This reasonably strong economic per-formance has translated into a better fiscalsituation for Canada’s federal governmentthan most other industrialized countries.OECD forecasts suggest that Canada willbe the only G7 economy to post a fiscalsurplus in the 2002-03 fiscal year, com-



Table 1Macroeconomic Assumptions

Fiscal Years2001-02(actual) 2002-03 2003-04

2004-05& subsequent

Real GDP Growth1 1.4% 3.4% 3.5% 3.0%

GDP Inflation1 -0.2% 1.1% 2.3% 1.9%

Revenue as Share GDP2 15.8% 15.2% 15.2% 15.2%

“Status-Quo” ProgramExpenditures3

$126.7 b $134.3 b $140.7 b $146.6 b5

Avg. Effective Interest Rate onFederal Debt

7.0% 6.6% 6.8% 6.9%

Underlying “Status-Quo”Budget Balance4

$8.9 b $6.7 b $10.2 b $13.8 b5

Shaded areas indicate assumptions that are identical to Finance Canada estimate in October 2002 Fiscal and Economic Update.1. Calendar year forecast.2. Status-quo base federal revenues only, excluding the phased-in tax increases implemented in the AFB.3. Program spending indicated in Finance Canada projections, excluding potential new spending programs.4. Expected balance in absence of tax or spending policy changes.5. 2004-05.

the next couple of years. And a deteriora-tion in the average quality of the new jobsbeing created in Canada (with a rising pro-portion of part-time work, and generallyweak growth in average earnings) meansthat the welcome expansion in total em-ployment over the past year has not beenmatched by a proportional increase in fam-ily incomes – not to mention in govern-ment revenues.

Canada’s economy obviously leavesmuch to be desired from the perspectiveof those concerned with equality, socialsecurity, and environmental sustainability.Indeed, the comprehensive set of measuresproposed in the Alternative Federal Budgetto address these and other problems ismotivated precisely by a desire to ensurethat future economic growth translatesmore reliably into genuine progress in hu-man and environmental conditions. Butfrom the perspective of the federal govern-

ment’s fiscal bottom-line, it is reasonableto adopt the same cautiously optimisticplanning assumptions as have been incor-porated into the government’s own pre-budget documents.

The Federal Surplus:Still Playing Lowball

Despite the relatively resilient performanceof Canada’s macroeconomy, FinanceCanada officials profess (in public, anyway)a continuing state of pessimism regardingthe limited room in federal coffers for newfiscal initiatives. In October, Finance Min-ister John Manley presented the govern-ment’s annual Economic and Fiscal Update,in which he announced the governmentwas planning for a surplus of just $1.0 bil-lion in the current fiscal year, followed bysurpluses of barely $3 billion per year in



the next two fiscal years. Following now-standard departmental practice, Manley’sestimates have been made even more cau-tious through the inclusion of an annual$3 billion “contingency reserve,” and byallowances for extra-cautious economicassumptions.

Ironically, this pessimistic predictionwas made just weeks after the governmentannounced its official results for the 2001-02 fiscal year. That year, the government

booked a surplus of $8.9 billion – far inexcess of official Finance Canada estimates.In 2001-02, Canada’s economy teetered onthe brink of a recession, the job marketstalled, and consumer and investor confi-dence was shaky. This fiscal year, in con-trast, the economy is growing strongly,more new jobs were created than in anyother year in Canadian history, and theoverall economic outlook is considerablymore optimistic – yet the federal govern-ment wants Canadians to believe that itshealthy budget surplus is poised to virtu-ally disappear. It is obvious to anyone witha relative sense of proportion that the num-bers have once again been cooked, consist-ent with Finance Canada’s long-term strat-egy to dampen Canadians’ fiscal expecta-tions.

Indeed, the federal government has nowexceeded its official budget balance targetsfor eight consecutive years, by as much as$15 billion in a year. The goal has been to

understate the true strength of the govern-ment’s financial situation so as to restrainexpectations for new spending or tax cuts.When the final results are found to vastlyexceed official budget targets, the FinanceMinister invariably claims credit for “pru-dent fiscal management.” The longer-termresult of this deliberately misleading ap-proach to fiscal planning, however, is thatofficial Finance Canada projections (pre-sented in economic updates and in the fed-

eral budgets themselves) no longer providean accurate reflection of the true state ofthe government’s financial position. Forexample, the cumulative federal surplusover the past three fiscal years (from 1999-2000 through 2001-02) totaled $39.7 bil-lion, more than five times as much as offi-cial estimates (which suggested a cumula-tive $7.5 billion surplus over the threeyears).1

Adopting exactly the same macroeco-nomic assumptions as were reported in theOctober Economic and Fiscal Update, theAFB expects that the government will bookmuch larger surpluses (in the absence ofmajor changes in spending programs andtax policies) than the Finance Ministeradmits. Our estimates allow for a signifi-cant decline in government revenues, meas-ured as a share of nominal GDP. This ratiohas already declined from a peak of 17.4percent of GDP in 1997-98 (the year thefederal government balanced its books), to

It is obvious to anyone with a relative sense of proportionthat the numbers have once again been cooked.



15.8 percent in 2001-02. Finance Canadaexpects a further decline in that ratio to15.2 percent in the current fiscal year. Thisdecline in federal revenues relative to GDPreflects the structural effects of federal taxcuts (including the large reductions in per-sonal and corporate income tax rates an-nounced in 2000); this year it also reflectsadditional cyclical factors, including theimpact of the stock market downturn oncapital gains income.

We have assumed, conservatively, thatthis decline in the federal revenue share willbe a permanent one, in the absence of off-setting tax increases. In other words, wehave assumed that the observed declinereflects mostly the structural impact of theLiberals’ tax cuts, rather than the cyclicalimpact of the stock market decline, weak-ness in corporate profits, and other tem-porary factors. In reality, however, it is al-most certainly the case that revenues willrecover at least somewhat as a share of GDPwith the rebound in economic growth,once the federal government has digestedthe one-time effect of tax refunds relatedto the stock market meltdown and othertemporary outflows.

Even with this assumed decline in theaggregate tax rate, and allowing for budg-eted increases in program spending (whichis set to rise this fiscal year by over $7 bil-lion), the government will still enjoy a sub-stantial fiscal cushion – which we estimatewill equal $7 billion in the current (2002-03) fiscal year (see Table 1).2 This cushioncan only grow in subsequent years, as rev-enues expand along with the economy, anddebt service charges shrink in relative im-

portance along with the declining debtburden (measured as a share of GDP). Our“status-quo” fiscal outlook (assuming nomajor changes in spending or tax policies)predicts underlying federal surpluses of $10billion in fiscal 2003-04, rising to $14 bil-lion in 2004-05. Over the three years as awhole (fiscal 2002-03 through fiscal 2004-05), our estimates suggest a cumulativesurplus exceeding $30 billion – 4.5 timesmore than the official estimate. Given therelative accuracy of past estimates, however,these projections can certainly be consid-ered more reliable than the deliberatelyunderstated Finance Canada projections.

Tax Cuts: Sober Second Thoughts

While it is true that the federal governmentenjoys a vastly more comfortable fiscal bal-ance than the Finance Minister will pub-licly admit, it is also true that the govern-ment is facing an unprecedented set ofpressing public demands for investment incrucial services and infrastructure – andthat responding to these demands will pressthe government’s current fiscal capacity tothe limit.

First on the list, of course, is the demandfor increased federal support for publichealth care in the wake of the Romanowreport and gathering evidence of an emerg-ing multidimensional crisis in care. Com-missioner Romanow suggested additionalfederal funding for targeted health pro-grams of more than $15 billion over thenext three fiscal years. Many observers ofthe public system, including co-sponsors



of the Alternative Federal Budget, do notbelieve this is enough.

Meanwhile, numerous other social, en-vironmental, and economic priorities alsocall out for prompt and well-resourced fed-eral action. The Kyoto Accord has beensymbolically ratified by the House of Com-mons. But the federal government has yetto set aside significant resources to assistwith Canada’s transition to a more sustain-able economic footing. This must happenif Canada is to credibly commit to meet-ing its Kyoto targets – and to do so in amanner which is economically helpful,rather than harmful. Other big-ticket so-cial priorities in the federal government’sfiscal plan must include child care, a resto-ration of social housing, a contribution tothe repair of Canada’s crumbling physicalinfrastructure (starting with the publicwater system), and resources to address theappalling health and social conditions ofCanada’s Aboriginal peoples.

This symphony of urgent, legitimate,and expensive demands for federal pro-gramming is the legacy of a decade of fed-eral government underinvestment in Ca-nadians’ basic social and economic needs.Canada’s financial debt has been broughtunder control, and incredibly quickly: thefederal debt has plunged by one-third, as ashare of GDP, in just the past five years.Yet, thanks to the painful and one-sidedmanner in which this financial challengewas addressed, the government has openedup a huge and unsustainable social debt:an obligation that we are now compelledas a society to begin to pay off as surely aswe are paying off our financial debts. The

Liberal government is obviously uncom-fortable in the face of so much public fearand anger regarding necessities of modernlife that Canadians once took for granted– like safe drinking water and access toemergency health care. But this bed is oneof their own making. The government hasan obvious moral and political responsi-bility to lead Canadians in a massive effortto rebuild the social and environmentalfoundation of our society that was so dam-aged by their historic but one-sided waron the deficit in the 1990s.

In this context, the federal government’soptions have been painfully limited by thehistoric tax cuts which it implemented fol-lowing the attainment in 1997 of a bal-anced budget. Instead of allocating emerg-ing surpluses to the pressing task of repair-ing the social damage from the unprec-edented spending cuts of earlier years, theLiberals – with an eye on their conserva-tive opposition – instead placed their firstpriority on reducing taxes. Most importantwere the tax cuts engineered in the Febru-ary 2000 budget, accelerated in the pre-election “budget update” of October thatyear. The government delivered deep cutsto personal and corporate income tax rates,along with a range of other measures –some sensible (like the expanded Child TaxBenefit), but most not (like the outrageousgiveaway of over $2 billion through an ex-panded capital gains tax exemption).

The value of these tax cuts to averageCanadians has been overstated: despitesome effort by the Liberals to target low-and middle-income households with taxsavings, the vast majority of the benefits



have been captured by high-income earn-ers. But the tax cuts have had an undeni-ably negative impact on the federal fiscalbalance. The government’s ability to re-spond to public demands for reinvestmentsin essential programs and services has beencompromised by the tens of billions ofdollars that are lost every year due to the2000 tax cuts. Indeed, this was no doubtpart of the strategy of the Liberal govern-ment and its supporters in the business andfinancial community. By making hugemulti-year tax cuts the first priority after abalanced budget, the government wouldratchet down its overall fiscal capacity andtie its hands against future demands fornew spending. A smaller, less flexible fed-eral government was the permanent – anddeliberate – result.

In both the 1997 and 2000 federal elec-tions, the Liberals promised to follow a“balanced approach” to dividing long-termbudgetary surpluses equally between socialprograms, on one hand, and tax cuts anddebt repayment on the other. In practice,however, the vast majority of newly avail-able funds has been dedicated to tax cutsand debt repayment. An Alternative Fed-eral Budget analysis of federal budgets sincethe 1997-98 balanced budget indicates thata full 44 percent of the “fiscal dividend”enjoyed by the federal government sincethat year has gone to debt reduction, withanother 46 percent to tax cuts. Just 10 per-cent of the dividend has been allocated togenuine increases in federal programspending.3

By making tax cuts its first priority, thegovernment hoped to insulate itself in the

long-term against popular demands formore spending – in the same manner as itrelies on fishy accounting and budgetingtechniques to insulate itself against thesedemands in the shorter run. The govern-ment assumes that the tax cuts are so popu-lar with Canadians, and the political tol-erance for higher taxes so non-existent, thatno opposition party or advocacy groupwould dare to suggest taxes now be raised.The historic Liberal tax cuts – by far thelargest in Canadian history, and coming ata time when the government knew it wouldneed to spend tens of billions of dollars onhealth care and other priorities – were anact of calculated fiscal irresponsibility. Thegovernment must now own up to this mis-take, and begin to undo the damage. Al-though underlying federal surpluses, evenwith existing lower tax rates, will be muchlarger than the government admits in pub-lic, it is quite likely that they will not beenough to sufficiently fund the repair ofMedicare and the other urgent demandswhich Canadians are expressing. So thegovernment needs to be prepared to undoits tax cuts, particularly the reductions inpersonal and corporate income tax ratesengineered in 2000, to fund thereinvestments in essential programs andservices which are clearly Canadians’ toppriority.

Our View:Essential Services Come First

The overarching goal of the AlternativeFederal Budget project is to demonstratethat the federal government can indeed



marshal the resources that are needed tomeet the social and environmental goalsof Canadians, if they make the appropri-ate fiscal and political choices. Budgets areabout choices. We think the governmentshould choose, first and foremost, to allo-cate resources to meet the basic needs ofCanadians for health care, education, eco-nomic and social security, and a clean andsustainable environment. Our budgetmakes those priorities our priorities. Overthe next three fiscal years, the AlternativeFederal Budget would free up an averageof $15 billion per year in new funding forpublic health care, meeting Canada’s Kyotocommitments, and addressing the otherurgent social and economic concerns ofCanadians. Where the federal governmentpleads poverty in the face of these demands,despite the unprecedented resources it hasdevoted to tax cuts and debt reduction, weshow that the money is there – if we chooseas a society to put it there. And we do itwhile maintaining a balanced budget in allyears.

Allocating sufficient resources to essen-tial services and programs is the “leadingedge” of our Alternative Federal Budget: itcomes first, both fiscally and morally. Thenext step is to mobilize the resourcesneeded to fund those programs in a respon-sible and sustainable manner. Our budgetis not a “tax-and-spend” budget, as con-servatives like to label any effort to expandthe scope of public services. Rather, ourbudget identifies the needs of Canadiansfor federal programs that will enrich andprotect their lives, and then seeks out the

fiscal resources necessary to deliver thoseprograms.

The task of locating those needed re-sources is made especially difficult this yearby the impact of the Liberal tax cuts onthe government’s fiscal capacity, as well asby the new level of uncertainty which thosetax cuts have introduced into fiscal plan-ning. No one knows for sure if currentlyweak current levels of federal revenues re-flect mostly the permanent legacy of the2000 tax cuts, or are more a temporarycyclical effect of the decline in the stockmarket and other economic weakness. Ourbudget has conservatively assumed that thedecline in federal revenues (as a share ofGDP) is mostly permanent, and hence weare not counting on any rebound in fed-eral revenues (measured as a share of GDP)from expected 2002-03 levels. In reality,however, federal revenues will almost cer-tainly bounce back strongly in comingyears, reflecting the rebound in theeconomy, the recovery in corporate profitsand financial markets, and the longer-termunderlying tendency for government rev-enues (at given tax rates) to grow slightlymore quickly than GDP.4

This uncertainty leads the AlternativeFederal Budget to adopt the following fis-cal strategy. We have mapped out the me-dium-term spending commitments that webelieve are necessary to meet the demandof Canadians for a more secure, balanced,and sustainable society. On the precedingassumption (that the recent decline in fed-eral revenues as a share of GDP is a per-manent one), these new and expanded pro-grams and services cannot be funded from



Table 2Phased-In Reversal of Income Tax Rate Reductions

Initial(Jan.2000)

Current(Jan.2003) 2003-04 2004-05 2005-06

Rate Restoration Schedule (%)

Personal Income TaxLowerMiddleUpper-middleHigh1

172629

29 +5%stx

16232629

16.5242730

17252831

17262931

Corporate Income Tax 28 25 26 27 28

New Revenues Raised ($billions)2

Personal Income TaxLowerMiddleUpper-middleHigh

1.11.20.40.5

1.11.20.40.5

1.20.4

Corporate Income Tax 0.5 0.5 0.5

TotalIncrementalCumulative

3.73.7

3.77.4

2.19.5

1. The former 29 percent tax rate with the 5% high-income surtax was equivalent to a 30.5% statutory tax rate.2. Estimates of new revenue generated by reversing Finance Canada estimates of the foregone revenues lost as a result of the 2000 tax cuts, as published in the February 2000 Budget Plan and the October 2000 Economic Statement and Budget Update.

existing tax levels – even after recognizingthat underlying federal surpluses will bemuch larger than the government admits.We have therefore developed a three-yearschedule to reverse the major reductionsin personal and corporate income taxeswhich the Liberals implemented in 2000.In essence, we restore (over three fiscalyears) all personal and corporate incometax rates to the levels that existed in Janu-ary 2000, before the budget and pre-elec-tion budget update that year implementedan accelerated schedule of tax rate reduc-tions (see Table 2).5 This reversal of the2000 tax rate reductions will result in a$9.5 billion increase in annual federal rev-enues by the third year of the Alternative

Federal Budget (2005-06), compared toexpected federal revenues if tax rates werekept at their existing (January 2003) lev-els.

If it turns out that federal revenues doindeed rebound as a share of GDP, thenthis full reversal of the Liberals’ 2000 taxrate reductions may not be necessary. Infact, if federal revenues rebound only mod-estly as a share of GDP (to 15.9 percent,just slightly more than the 15.8 percentshare that prevailed in 2001-02), then ourprogram of social and environmental re-investment could be fully funded from ex-isting tax rates. The Alternative FederalBudget would monitor the future evolu-tion of the federal government’s revenue



base; if and when it became clear that rev-enues were indeed rebounding relative toGDP (such that the current weakness inrevenues was seen to be largely a cyclicalphenomenon), then the schedule for re-versing the Liberals’ tax cuts would be fro-zen, and already-implemented portions ofthat schedule could be reversed. In anyevent, however, the Alternative FederalBudget would implement the first stage ofthe reversal of the 2000 tax rate reductionsin the first fiscal year (2003-04) of our pro-gram.6 This reversal of the tax rate reduc-tions would affect all income tax brackets;this reflects our conviction that public serv-ices deliver essential value and security tothe lives of all Canadians, and hence allCanadians should pay a fair share (througha progressive income tax system) to sup-port those programs.

Even if all three stages of the reversal ofthe 2000 tax rate reductions are completed,taxes will increase as a share of GDP byjust 0.7 percentage points (leaving themstill some 1.5 percentage points lower thanin 1997-98 when the federal budget wasfirst balanced). Completely reversing thetax rate reductions over the three yearswould increase the federal government’stotal revenue take by 4.6 percent, com-pared to the level of revenues the govern-ment can expect to take in under the exist-ing rate structure.

In addition to this schedule for revers-ing the Liberals’ cuts to personal and cor-porate income tax rates, the AlternativeFederal Budget would also implement a setof measures aimed at improving the fair-ness of Canada’s tax system. These meas-ures, in sum, are revenue-neutral, and are

described fully in the last part of this docu-ment. Their effect will be to close specialloopholes which currently benefit high-income, wealthy, and business taxpayers,while channeling needed financial relief tolow-income households (especially thosewith children). So, while all of the incometax rate reductions announced by the Lib-erals in 2000 are reversed under the AFB’sthree-year schedule (including the low per-sonal income tax rate, which is restored to17 percent from the current 16 percentlevel7), the overall impact of the Alterna-tive Federal Budget’s tax changes will bepositive for low-income families. No tax-payer with income less than Statistics Cana-da’s Low Income Cut-Off (LICO) level willexperience higher federal income taxes asa result of our measures, and many willexperience a lower tax burden. Of course,since low-income households rely the moston public services (including health care,education, public housing, and publictransportation) in their day-to-day lives,they will benefit disproportionately fromthe important expansion in public programspending which is the centrepiece of theAlternative Federal Budget.

The Alternative Federal BudgetFiscal Framework

Table 3 summarizes the main fiscal param-eters of the Alternative Federal Budget overthe coming three fiscal years (from 2003-04 through 2005-06). Aggregate indicators(including revenues, program spending,and the budget balance) are also illustratedas a share of GDP in Figure 1.



Table 32003 Alternative Federal Budget

Macroeconomic and Fiscal Parameters2001-02(Actual)

2002-03(Estimate)

2003-04(AFB Yr.1)

2004-05(AFB Yr.2)

2005-06(AFB Yr.3)

Alternative Federal Budget ($billion)

RevenuesBasePhased-In IncreaseTotal

173.3

173.3

176.6

176.6

187.53.7

191.2

196.77.4

204.1

206.49.5

215.9Program Spending 126.7 134.3 154.8 167.1 178.9

Debt Service Charges 37.7 35.6 36.5 37.0 37.0

Balance 8.9 6.7 0 0 0

Memorandum Items ($billion)

Nominal GDP 1094 1158 1230 1290 1354

Closing Debt Balance 536.4 536.41 536.4 536.4 536.4

Est. Balance, EI Fund 4.3 2.8 0 0 0

GDP Shares (%)

Revenue 15.8 15.2 15.5 15.8 15.9

Program Spending 11.6 11.6 12.6 13.0 13.2

Closing Debt Balance 49.0 46.3 43.6 41.6 39.6

1. Since the 2002-03 surplus is allocated under the AFB to an endowment fund to support Kyoto-related environmental investments in Canada, it does not result in a reduction in the federal debt.

Program Spending:Aggregate nominal program spending inthe Alternative Federal Budget grows at anaverage annual rate of just under 10 per-cent over the three-year planning horizon.The spending increases are somewhat fasterin the first year of the budget. As a share ofGDP, program spending climbs during thethree-year AFB plan from 11.6 percent ofGDP in the current fiscal year to 13.2 per-cent of GDP by fiscal 2005-06. Despitethis relatively ambitious expansion ofspending, however, program spending as ashare of GDP is still significantly lower in

the final year of our budget than it was in1995, and still far below the federal gov-ernment’s long-run post-war spending lev-els (which averaged more than 15 percentof GDP between 1945 and the present).

Debt Service:The federal government’s interest expensesunder our budget are roughly constant, atabout $36 billion per year. Since the AFBmaintains the existing stock of nominalfederal debt, and since average interest rateson that debt remain stable at just under 7percent, there is little change in the total



interest outflow. As a share of total federalspending, however, these interest paymentsdecline in our program from 23 percent in2001-02 to 19.5 percent by 2005-06, sincethe relative importance of the debt (andhence of interest payments on the debt)declines with ongoing economic growthand inflation.

Budget Balance: On the expectation of continued moder-ate economic growth, the Alternative Fed-eral Budget maintains a balanced budgetthroughout its three-year planning hori-zon. In the event of a major economicdownturn, with a resulting negative impacton federal revenues, the AFB’s budget bal-ance would fall into a deficit position.Contrary to the near-religious fervour withwhich Finance Canada officials currentlystate their commitment to “never again”incur a deficit, this outcome is no causefor alarm and is, indeed, a prudent course

of action for a government to pursue dur-ing times of recession. The AFB wouldtolerate a cyclical deficit as a natural andtemporary consequence of an economicdownturn; this deficit in itself would helpto ameliorate the downturn. In contrast,trying to preserve a budgetary balancethrough a recession by cutting spendingonly makes that recession, and the pain itinflicts on millions of Canadian families,all the worse. For this reason, the AFB doesnot incorporate “contingency reserves” orother artificial forms of budgetary padding.We plan for a genuinely balanced budgeton the basis of consensus economic fore-casts. The combination of a balancedbudget with ongoing expansion in nomi-nal GDP implies a further reduction in thefederal debt burden, measured as a shareof GDP, from 49 percent at the end of fis-cal 2001-02 to less than 40 percent by theend of the third year of the AFB (2005-06).

Figure 1Key Fiscal Paramaters, AFB



Tax Revenues:Even with the maintenance of existing taxrates, expected economic growth will addan estimated $33 billion to federal revenuesover the Alternative Federal Budget’s three-year planning horizon. In addition, thethree-year schedule for reversing the in-come tax rate reductions announced by theLiberals in 2000 would add, if necessary,an additional $9.5 billion to the revenueside of the budget. In total, taxes increaseover the three-year horizon at an annualaverage nominal rate of 6.6 percent, or 1.5percentage points per year faster than thegrowth of nominal GDP. By the end of thethree-year AFB program, total federal rev-enues climb back to 15.9 percent of GDP– just slightly higher than in 2001-02, andstill 1.5 percentage points lower than in1997-98 when the federal government firstbalanced its budget.

Notes

1 In theory the government plans for a budget sur-plus equal to the amount of the contingency re-serve, which was set at $3 billion in 1999-00 and2000-01, and at $1.5 billion in 2001-02. Inde-pendent forecasters, including those working withthe Alternative Federal Budget process, have pro-vided much more accurate predictions of the gov-ernment’s actual bottom-line. For instance, respec-tive AFB documents predicted federal surplusesfor the three years in question equal to a cumula-tive total of $40 billion – within $300 million ofthe true three-year total. For details see Alterna-tive Federal Budget 2003: Economic and FiscalUpdate (Ottawa, Canadian Centre for Policy Al-ternatives, October 2002).

2 During the first eight months of fiscal 2002-03,the federal surplus equaled $8.2 billion.

3 Measured above and beyond the real per capitaspending levels which prevailed in 1997-98 whenthe budget was balanced. See A Funny Way of Shar-ing (Ottawa: Canadian Centre for Policy Alter-natives, February 2003) for details of the analy-sis.

4 Finance Canada research has indicated, for ex-ample, that personal income tax revenues tend toincrease in the long-run at a rate 30 or 40 percentfaster than the growth of personal income; recentmeasures (such as the indexing of the PIT sys-tem) have not fully eliminated that tendency, andhence we can expect revenue growth in this cat-egory to exceed the expansion of GDP. See “Un-derstanding Personal Income Tax Revenue Fluc-tuations,” (Ottawa: Finance Canada, WorkingPaper #2002-07).

5 Some of the tax measures which were imple-mented in those two documents are left in placein the AFB: notably, the expansion of the ChildTax Benefit (which we expand further in this Al-ternative Federal Budget), and the indexing of taxbrackets and other parameters of the system. It isonly the reductions in tax rates which are reversedas part of this three-year schedule. Some of theother 2000 tax cuts – notably the expansion ofthe capital gains exemption – are also reversed aspart of the revenue-neutral package of tax fair-ness measures which is explained in the last sec-tion of this document.

6 And in any event the Alternative Federal Budgetwould not proceed with those relatively minortax rate reductions which the federal governmenthas yet to implement – in particular, the addi-tional reductions in the corporate income tax ratefrom 25 percent at present to 21 percent by 2006.

7 Restoring the rate of tax collected on the bottomtax bracket from 16 to 17 percent generates anadditional $2.2 billion per year in federal revenueonce fully completed. It is important to note,however, that the bulk of this money is collectedfrom middle- and high-income taxpayers whomust now pay an extra 1 percent of income taxon the first $32,000 of their taxable income; theimpact of this measure on low-income taxpayersis muted, and overwhelmed by the progressive taxfairness measures which are described in the last

section of this report.



Fed 01/02 Fed 02/03 AFB AFB AFBActual Budget 2003-04 2004-05 2005-06

16.0 17.6 20.23.2 3.3 3.47.5 7.8 8.02.0 3.5 5.00.6 0.7 0.8

17.3 18.617.3 18.6 29.3 32.9 37.4

25.4 26.6 28.5 30.5 32.69.3 10.0 10.5 11.0 11.5

52.0 55.2 68.3 74.4 81.4

13.7 15.4 18.1 18.3 19.14.3 2.8 0 0 0

(1.3) (1.3) (1.3)0.6 0.5 0.50.3 0.3 0.30.1 0.1 0.10.3 0.4 0.50.0 0.0 0.0

1.90 1.98 2.55 3.65 3.902.41 2.51 3.60 5.24 6.601.49 1.56 2.11 2.22 2.414.56 4.76 5.68 6.65 7.051.62 1.69 1.75 1.81 1.881.70 1.77 1.77 1.84 1.902.63 2.74 2.84 2.95 3.051.56 1.63 1.68 1.75 1.81

10.57 11.04 11.25 11.68 12.094.08 4.26 4.51 4.78 4.95

28.43 29.69 30.64 31.80 32.77

61.0 63.7 68.4 74.4 78.4

126.7 134.3 154.8 167.1 178.9

Alternative Federal Budget 2003-04Program Spending(fiscal years / $billion)

Transfers to persons and other levels of gov'tAFB National Social Investment Funds

HealthPSEIncome supportChild care / ECDHousing

CHSTSub total

Elderly benefits / retirement incomeEqualization & other fiscal arrangements (net)

Total transfers

EI FundFund balance

Kyoto Implementation FundRevenue (annual draw from sinking fund)Green infrastructureEnergy efficiency fundsJust transition for energy workersNon-hydro renewable electricity subsidyNet Kyoto Implementation budgetary expenditure

HRDCIndustry

Direct program spendingAgricultureForeign Aid, Trade, DevelopmentEnvironment

Total Direct Program Spending

Veterans AffairsDefenceCrown corpsAll other departments

First NationsHealth Canada

National Investment Funds calculates baseline levels for Health, PSE, and Income Support by dividing adjusted base CHST payments ($15.5B) according to 1994-1996 proportions. 2000 Accord portion of CHST attributed to ECD ($0.5b) and remainder to Health.

Notes on sources and methodology

TOTAL PROGRAM

Figures for Federal 2001-02 Actual taken from the Annual Financial Report for fiscal year 2001-2002.Figures at the aggregate level for Federal Budget 2002-03 taken from the Economic and Fiscal Update, released October 2002



In the 1990s Canada experienced a com-plete economic cycle, from recessionthrough recovery. The decade was punc-tuated at its mid-way point by majorchanges to the federal government’s socialand economic role. Most of these changesinvolved the government stepping backfrom public life, abdicating many of its re-sponsibilities to the market, and handingpower over to those provinces wealthyenough to go it alone.

Canada entered the 1990s as a countryscarred by deep and abiding inequality inthe distribution of personal wealth, withits citizens experiencing a profound newlevel of insecurity. The federal agendathrough the ‘90s only exacerbated thoseproblems. While employment levels arehigher at present than in recent years, andthe economy as a whole is growing rap-idly, these favourable developments havenot changed the fact that millions of Ca-nadians are economically vulnerable.

At the same time, middle-income Ca-nadians – even those whose income andemployment prospects have improved inrecent years – have not known the ben-efits of strong public services to comple-ment and secure their living standards.

In other words, for many families in-creases in market wages (the wages theyearn through paid employment) have been

accompanied by a stagnating or falling so-cial wage. The social wage includes therange of social programs and supports pro-vided to citizens by the government. Thoseprograms have, almost across the board,suffered from under-investment by the fed-eral government. For all but the wealthiestfamilies, who are able to make up the gapby purchasing many such services on theopen market, this phenomenon has had avery real detrimental effect on the qualityof life.

The federal government, through budg-ets and policy development, has actuallyundermined well-being and equality in thiscountry over the past decade. And it is thefederal government that must act to reversethe trend that has seen the fortunes of somany Canadian families fall.

Replacing the CHST

The introduction of the Canada Healthand Social Transfer in 1995 was essentiallya cost-cutting measure, a key element inPaul Martin’s strategy to balance the budgetlargely through cuts to program spending.The two transfers it replaced, the CanadaAssistance Plan and the Established Pro-grams Financing for Health, provided sub-stantially more in total than the CHSTwhen it was introduced.

National Investment Funds:Getting Government Back In the Game



The CHST also allowed the federal gov-ernment to back off from its social devel-opment responsibilities, as, unlike previ-ous agreements, the CHST does not auto-matically cover 50% of social assistancecosts incurred by provinces. While healthspending by the provinces has risen some-what since the CHST was introduced,much less has been done to make up losttransfers for post-secondary education, andnothing at all to reinstate cost-sharing onsocial assistance.

The loss of cost-sharing also meant theend of one of the key “automatic stabiliz-ers” in the national economy. When theeconomy slows, and unemployment rises,more people are forced onto social assist-ance. Under the old cost-sharing arrange-ment, the federal contribution to socialassistance would kick in and money wouldautomatically flow to those who were suf-fering the brunt of rising unemploymentand reduced wages. This mechanism,which provided some fiscal stimulus with-out requiring new legislation, or even thatgovernment recognize the problem, is nowgone.

Because the CHST is a block fundingmechanism, with federal funding for wel-fare and social services combined in a sin-gle fund with Medicare and post-second-ary education, accountability was lost. Thepicture was further clouded by the fact thatsome of the federal support was paid incash and some was deemed to have beenpaid through “tax transfers” that dated backto 1977. How the federal money was ac-tually spent by the provinces and territo-

ries was anyone’s guess. It is not possibleto say if the funds were spent on healthservices delivered in the public sector or inthe private sector. Nor is it possible to tellif provincial governments reduced theirown spending using federal funds to coverthe reduction.

In effect, the “no strings attached” fund-ing approach of the CHST gave the prov-inces more leeway in how they spent themoney. Some provinces used the opportu-nity to aggressively pursue the privatiza-tion of health care and the implementa-tion of workfare programs. All provincesand territories put the squeeze on socialassistance recipients, with the tacit supportof the federal government.

The National Council of Welfare, a citi-zens’ advisory body to the Minister ofHuman Resources Development Canada,called the decision to kill CAP and theswitch to the CHST “the worst socialpolicy initiative undertaken by the federalgovernment in more than a generation.”2

Meanwhile, for a number of reasons,fiscal disparities between provinces have in-creased in recent years, and here, too, thefederal government has failed to step inwhere it was needed. Without an adequateequalization program, wealthy provincesare able to compete for skilled labour andcapital by cutting taxes. Poorer provincesare forced to compete by lowering taxes,and then have to cut services and/or un-der-invest in the development of skilledworkers. This “race to the bottom” is be-ing played out at the present time, withAlberta’s extraordinary oil and natural gas



revenues allowing it to offer a certain levelof services despite very low income taxesand no provincial sales tax.

The AFB: A Better Way

The Alternative Federal Budget recognizedthe problems with the CHST from thebeginning, and has proposed better com-prehensive alternatives. Again this year, theAFB replaces the CHST with a series ofSocial Investment Funds. The funds allo-cate substantially increased funding for our

core social programs: Health, Income Sup-port, Post-secondary Education, EarlyChildhood Development, and Housing.Through these Social Investment Funds,we strengthen the federal government’scontribution to the social well-being ofCanadian families and communities byreducing poverty, creating jobs, buildinghousing, supporting education, strength-ening health care. Our funds also allow forincreased transparency and strong nationalstandards.



The Health Care Investment Fund

nadians and disparities in their accessto health services;

• the decline in the share of the federalcash contribution to health care and thelack of stability and predictability in thatcontribution;

• the lack of responsiveness of the systemacross a range of health issues related togender, disability, and ethnicity; and

• the threat trade agreements pose to ourability as a country to provide healthcare as a public good.

Solving these problems requires ad-equate levels of public funding, expand-ing the range of services provided in thepublic system, and designing deliverymechanisms to address the disparities inaccess to care.

Medicare Today

In September 2000, with federal surplusesconspicuously large, the Prime Ministerand the Premiers struck an accord in whichthe federal government agreed to increasefunding over five years by committing$21.1 billion in new funds for publicly-insured health services.

While the infusion of funds was wel-come and needed, the September Accordwas flawed because it left in place theCHST and failed to set out a frameworkfor addressing the real threats to thesustainability of our national public healthcare system. In particular, it failed to ad-

The Alternative Federal Budget has longbeen at the forefront of the campaign for astronger, better-funded, more accountablepublic health care system. This year, ourbudget includes our most far-reaching andtimely health care program yet. The AFB’scommitment to Medicare remains an-chored in the notion of the rights of citi-zenship, the benefits of democracy, and thebelief that a major role of government isto act for the public good. We view theprovision of health care as a public good,not as a commodity to be bought and soldin the marketplace by those who can af-ford to purchase care.

While Canada’s public health care sys-tem is one of the finest in the world, thereare problems to be addressed in order toprepare and equip the public health sys-tem for the future. Key areas include:

• the trend towards shifting health serv-ices from the public to the private, for-profit sector;

• shortages of health professionals in spe-cific areas;

• waiting times for tests and treatmentsthat are too long;

• health services falling outside the scopeof public coverage;

• skyrocketing and uncontrollable pre-scription drug costs;

• inadequate access to care for people inrural and northern remote areas;

• huge disparities in the health of Abo-riginal peoples compared to other Ca-



dress the rapidly growing threat of the pri-vatization of health care services and thepervasive political determination to intro-duce the for-profit motive into the provi-sion of care and the operation of medicalinstitutions.

Medicare originally was designed tocover only hospital and physician services,where most health care—and certainly themost expensive and intensive care—tookplace. Over the years, medical advances inthe form of new medical treatments andtechnology, the expansion of home careand chronic care facilities, and the advance-ment of pharmaceutical drugs meant thatthe provision of health care services couldtake place in a variety of settings outsidethe more expensive hospital setting. Attimes, health professionals other than doc-tors could provide less intrusive care whenneeded.

In addition, health care spending re-straint led to hospital restructuring andrationalization ,which ultimately led tohospital closures, the discharge of patients“quicker and sicker,” and a rationing ofmedical procedures and diagnostic tests, allof which contributed to more care fallingoutside the public system and into the pri-vate system.

By the time the Prime Minister ap-pointed Roy Romanow to chair a RoyalCommission on the Future of Health Carein Canada, the flow of money to for-profitcorporations to deliver public health careservices appears to have been increasingsteadily for several years.

In provinces such as Alberta, British Co-lumbia, and Ontario, for-profit facilities

were performing diagnostic tests and sur-geries historically performed in public hos-pitals; some hospitals were operating in theform of public/private partnerships; andnutrition, cleaning, laundry, and mainte-nance services were being contracted outto private companies.

Alberta has recently moved further, giv-ing the go-ahead for the delivery of pub-licly-insured health services on a for-profitbasis by passing legislation to allow for-profit facilities to perform surgeries requir-ing overnight stays.

Capital budgets in health care were heldat below historic levels throughout mostof the 1990s. The failure to maintain andinvest in high-end diagnostic equipmentsuch as MRIs and CT scanners led to longwait times for tests in the public system.This led in turn to the development of pri-vate, for-profit diagnostic clinics. Ontario,Alberta, Nova Scotia, Quebec, and BritishColumbia have all allowed these clinics toproliferate. These facilities, which providea medically necessary health service underthe Canada Health Act, set up the condi-tions under which people who can affordto do so can buy access to “just looking”tests, which, if they reveal a serious condi-tion, may lead to medically necessary pro-cedures. This undermines the core princi-ple anchoring Medicare: the principle ofequal access to care based on need, not onability to pay.

There is no doubt that part of the blamefor this shift lies with the provinces’ lackof resources, but the problem of reducedfederal funding has been compounded byprovincial tax cuts. This year alone, the



provinces gave away about $20 billionthrough tax cuts – money that could havebeen spent on health care. The provincialtax cuts will mean $23 billion in lost pub-lic revenue in 2003-04, rising to almost $30billion by 2005-06.

In some cases, the “need” that the for-profit sector is moving in to fill has beenartificially created by a provincial govern-ment eager to encourage the developmentof private health services. For example, inOntario the government is prepared to pur-chase 20 new MRI and CT scanners. Pub-lic hospitals are actually prohibited frombidding for a contract to operate thesemachines. Whether the equipment is op-erated in hospitals or in stand-alone pri-vate, for-profit facilities, the Ontario gov-ernment will still pay for the equipmentand for every test ordered by doctors. Therewill be no savings to be had by contractingout this service to for-profit companies. Infact, evidence shows that the public sys-tem would provide this service at a lowercost.

The federal government has the respon-sibility under the Canada Health Act toserve as the guardian of the national healthsystem. It has failed consistently to fulfillthis role. The federal government has thelegal obligation to enforce the Act’s fiveprinciples and the two conditions prohib-iting user fees and extra-billing chargesbeing levied for medically necessary healthservices. These conditions hinder a prolif-eration of for-profit health care because,in the context of the Canadian system, usercharges would be a key source of profit infor-profit health systems. As the 2002 Au-

ditor-General’s report indicates, the federalgovernment is not abiding by its own leg-islation.

Auditor-General Sheila Fraser criticizedthe government for sitting on suspectedviolations of the Canada Health Act, not-ing that 25 suspected violations have notbeen dealt with. Fraser says the governmentis slow to act and relies on news articles asa source of information for potential vio-lations. Under the Act, the government isrequired to monitor provincial compliancewith the Act, apply penalties when the vio-lation is confirmed, and report these to Par-liament.

According to the Auditor-General, vio-lations include charging user fees for drugsadministered in hospitals and for medicallynecessary MRI and CT scans performedin private clinics, the private purchase ofinsured health services, user fees for abor-tions and not paying for abortions, ascheme to buy your way to see a specialistinstead of waiting in line, and the sale offull-body CT scans in a hospital.1 Theseare all serious violations of the CanadaHealth Act.

The AFB approach

The AFB takes the first step toward secur-ing the future of Medicare: restoring fed-eral leadership. The federal governmentmust further commit to upholding its re-sponsibilities under the Act, especially deal-ing in a timely way with violations of theAct.

While the organization of public healthinsurance plans and the delivery of health



services is within the jurisdiction of pro-vincial governments, the federal govern-ment plays an important role through itsspending power in providing financial sup-port for provincial health insurance plans.The federal government has the fiscal re-sources to invest more public dollars intohealth care, thus contributing a more eq-uitable share to the cost of providing healthcare services. Federal funding commit-ments need to be stable, predictable, andcontain an escalator provision to tie con-tributions to growth in the economy. Ad-equate federal funding gives the federalgovernment the leverage to assert the na-tional leadership role in which it is so des-perately needed.

The AFB endorses the Romanow Com-mission’s call for a Health Covenant forCanadians. The Covenant would be a dec-laration of commitment to a “universallyaccessible, publicly-funded health care sys-tem’.2 It would establish a consensus onobjectives for the system, and outline theresponsibilities of Canadians, health pro-viders, and governments. It would notusurp the function of the Canada HealthAct, but instead act as a common state-ment of the Canadian vision for healthcare.

Expanding insured health serv-ices under the Canada Health Act

The AFB expands insured health servicesunder the CHA. The goal of this expan-sion is ultimately to create a continuum ofcare over the longer term. This will aid inattaining greater accountability from pro-

vincial governments, as well as stemmingthe trend towards providing services on afor-profit basis.

Home care, long-term care,and palliative care

All provincial and territorial govern-ments provide some home care under theirpublic health programs, but there is largevariation from province to province in thedegree of coverage. In total, provincial/ter-ritorial governments currently spend justunder $3 billion dollars on home care.3

However, estimates are that 80-90% ofhome care is provided by unpaid, infor-mal caregivers.

Home care needs are growing, in partdue to discharging patients from hospitals“sicker and quicker,” but also because ad-vances in health technology and drugtherapy have meant that treatment can bedelivered outside the more expensive hos-pital setting. Changing demographics as aresult of the aging of the baby boom popu-lation will further increase the need forhome care services. Providing care in thehome has been shown to be less expensivethan in hospital and long-term care set-tings, but preserving quality of life for peo-ple who are ill, elderly, or who have a dis-ability is equally as important as cost sav-ings.

The transfer of care into the home with-out the parallel transfer of the services intoprovincial health plans meant that a greaterburden for care was placed on families,most often women family members. Inkeeping with the continuum of health serv-ices approach, there is a need for palliative



health care services in settings outside thehome. The setting for palliative care mustbe a choice between the family and thefamily member who is terminally ill.

The AFB would bring all home care andpalliative care services under the CHAimmediately, and would allow a five-yearphase-in period for both levels of govern-ment to add home care services to provin-cial plans.

Studies show that caregivers experienc-ing the strain of giving care have 63%higher mortality rates.4 Therefore, the AFBsupports the Romanow Commission rec-ommendation to create a category ofcaregiver leave under the EI program. Eli-gibility rules would ensure that anyone inthe labour force who pays EI premiumswould qualify for the caregiver leave.

Long-term care is an important aspectof health care services, and will becomeeven more important as our populationages. Currently, these services fall outsidethe CHA, and the result has been a patch-work-quilt approach with uneven stand-ards.

The AFB would initiate a national re-view of long-term care in Canada, culmi-nating in a report to Parliament with rec-ommendations as to a process for ensur-ing that LTC falls under the Canada HealthAct, that national standards for LTC arein place, and that cost-sharing arrange-ments are agreed to between the federal andprovincial governments.

Diagnostic services and queue jumpingThe AFB would explicitly include di-

agnostic services under the definition of

insured health services in the CanadaHealth Act to clarify that these services aresubject to the principles and conditions ofthe Act.

Prescription drugsTotal spending on prescription drugs

reached $14.5 billion in 2002, represent-ing 13% of all health care spending, aboutthe same as physician costs. Of the $14.5billion total, $6.5 billion is in public spend-ing.5 When non-prescription drugs are in-cluded, drug costs total $18.1 billion. Be-tween 1995 and 2002, the cost of prescrip-tion drugs almost doubled (a 97% in-crease).

Drug costs are out-pacing the growthin other areas of health spending, as Fig-ure 1 shows. Among the factors related tohigh drug costs are issues such as appro-priate prescribing, the effectiveness of newdrugs, the lack of reporting requirementsfor adverse reactions, the length of patentprotection, and related regulations regard-ing the production of generic drugs, “me-too” drugs, patent ever-greening, the mar-keting of new drugs to physicians, direct-to-consumer advertising, and the enor-mous profit margin for brand-name pre-scription drugs which is most often in therange of 30% or more.

Prescription drug coverage is highlyfragmented in Canada, resulting in largedisparities in terms of access to necessaryprescription drugs. The bulk of prescrip-tion drug costs is paid for privately (55%).6

Of this, the largest share is providedthrough employer-sponsored group insur-ance plans, but individual Canadians pay



$2.3 billion for prescription drugs out oftheir own pockets.7 Provincial governmentplans typically cover the cost of drugs forseniors, persons on social assistance, andthose with low incomes, but coverage var-ies from province to province.

The AFB requires provincial plans tocover all residents with no prescriptiondrug coverage and provide for a processwhereby any individual could apply foraccess to the Catastrophic Drug Plan whencircumstances warrant. This would ensurethat no Canadian will be forced into direeconomic straits because of the cost of pre-scription drugs.

Further, the AFB initiates a prescriptiondrug review process which would have thegoal of a full national Pharmacare plan.

This would entail examining the mergerof employer-sponsored drug plans into anational plan.

The AFB establishes a National DrugAgency to: evaluate and approve new pre-scription drugs; evaluate existing drugs, in-cluding prescribing practices, effectivenessand adverse reactions, and monitor andnegotiate drug prices.

The AFB initiates a federal review of thedrug patent legislation with the mandateof examining drug patent practices whichcontribute to rising drug prices and whichcannot be justified under the principles ofpatent protection. This would include thepractice of “evergreening” and “me-too”drugs. The review would be charged with

Bringing health services under the auspices of the public system serves a number of purposes. Itwould—

• halt or reverse privatization and the for-profitprovision of health services;

• set comparable standards of care in areas suchas home or long-term care;

• ensure efficiency and cost-effectiveness in theexpenditure of limited health care dollars;

• develop programs which recognize differenthealth care needs related to gender, disability,ethnicity, immigrants, Aboriginal peoples, andofficial language minorities;

• develop programs designed to deal with thespecial access problems for people living inrural, remote, and northern communities;

• facilitate data collection for the purposes ofmonitoring and evaluating the programs andtheir effectiveness;

• implement strategies to improve the qualityof care and patient safety;

• facilitate the management of waiting times foraccess to care and diagnostic treatment;

• exert the maximum degree of control overever-rising drug costs;

• protect health services from free trade agree-ments;

• relieve the burden on women and other fam-ily members of care-giving in the home; and

• instill greater accountability and transparencyin the provision of health services.



determining reasonable levels of patentprotection.

First Nations HealthThe status of the health of Aboriginal

Peoples in Canada is a shame on our na-tion. Life expectancy is 7.4 years lower formen and 5.3 years for women, a result oflongstanding economic and social dispari-ties, poverty and racism. The rate of tu-berculosis among the Aboriginal popula-tion is 17 times higher than the overall Ca-nadian average, and over 60% of Aborigi-nal children in their first year of life inNunavit have respiratory disease.

Federal funding for First Nation andInuit health care is currently $1.3 billion,insufficient to meet the need for healthservices. As a result, over the next 3 years,a deficit of $750 million will accrue. Abo-riginal leaders were left out of the negoti-ating process at the First Ministers Meet-ing in February 2003 and in September2000. As a result, Aboriginal Peoples areleft without a say as to what share of Ac-cord dollars will flow to Aboriginal com-

munities for health services, and little sayin how those health dollars will be spent.

The AFB proposes the development ofa framework agreement between Aborigi-nal Peoples and government so that a fulland equal partnership can occur. An ex-plicit mechanism will be developed for thetransfer of health care dollars to Aborigi-nal communities out of the federal trans-fers to provinces. Aboriginal communi-ties will be full participants in determin-ing what health services are needed; wherethey are delivered and how much moneyis required to provide these services. Theultimate goal is to have health dollars flowdirectly to Aboriginal Peoples. The AFBallocates funding in each of the next threeyears for healthcare services to be deliveredthrough the new framework agreement.

Primary care reform

Reform of the primary health care systemis crucial to securing the future of the pub-lic health care system, as well as to improv-ing the health of the population overall.

Table 5AFB Proposed Health Spending Increases ($billions)

2003-04 2004-05 2005-06Home/Palliative Care 0.75 2.0 1.5Primary Health Care 1.2 1.0 1.0Diagnostics 0.75 0.6 0.4Drugs 1.0 1.0 1.0Rural Remote 0.6 0.6 1.0Health Human Resources 0.4 0.4 0.6Aboriginal Health 0.5 0.6 0.6National Health Council 0.3 0.3 0.3Total 5.5 6.5 7.5



The AFB allocates $3.25 billion over threeyears for the implementation of the neededprimary care reform.

AccountabilityA recent poll sponsored by the Cana-

dian Union of Public Employees and con-ducted by Pollara (the pollster for the Lib-eral Party) indicated that accountabilityand transparency continue to be a very highpriority for Canadians. Fully 92% want thecreation of a separate fund for the transferof federal health dollars so that it is possi-ble to know exactly what the federal gov-ernment is contributing; 81% believe thatthe provinces should be required to guar-antee that federal dollars are spent onhealth care and that reporting on this mustbe a condition for receipt of federal funds;and 77% agree that federal health caredollars must be spent on public, non-profithealth care services.

Accountability begins with a commonvision for the kind of health care systemwe want: publicly-funded health servicesdelivered on a non-profit basis which con-form to the principles and conditions ofthe Canada Health Act.

The AFB would achieve greater ac-countability by: attaching conditions tofederal transfers to the provinces/territo-ries for health care in order to achieve na-tional, comparable standards for health careservices; requiring provincial governmentsto document and report publicly on howfederal transfers were used, including anevaluation of how the system has beenimproved by those expenditures. The re-porting requirement added to the Canada

Health Act would include a provision forvalidation by the Auditor-General.

National Health Fund: Follow the moneyMoney is at the heart of the current

debate over health care in Canada. With-out sufficient federal contributions to pro-vincial-territorial health care costs, vastlyincreased privatization will not be an ab-stract debate: it will simply be reality.

The AFB includes increases to healthspending of $5.5 billion in 2003-04, $6.5billion in 2004-05, and $7.5 billion in2005-06, for a total of $19.5 billion overthree years. Table 5 indicates how themoney will be allocated.

These increases are over and above thehealth care portion of the $15.5 billion baseCHST that the federal government cur-rently pays, as well as the September 2000accord money. In total, after replacing theCHST with our National InvestmentFunds, and based on the above assump-tions, the AFB would allocate $16 billion,$17.6 billion, and $20.2 billion, respec-tively, toward health over the next threebudget years. Under this plan, the federalcontribution toward total provincial-terri-torial health expenditures would reach23% in 2005-06. In the following year wewould increase the federal contribution to25%, and this would become the new floor.

Notes1 Globe and Mail, December 13, 20022 p 483 Romanow, p1754 Romanow, p.1845 CIHI, pp134, 135, 137 & 1476 CIHI, p. 207 Romanow, p.195



People on welfare have long been amongthe poorest of the poor in Canada, and theyhave been treated with contempt by gov-ernments year after year. Provincial andterritorial governments of all politicalstripes have gone out of their way to makewelfare incomes that were meagre to startwith even more meagre.

The income support provided to wel-fare recipients and the cuts in support dur-ing the past decade have been meticulouslydocumented by the National Council ofWelfare. The council’s annual reports onwelfare contain detailed information on theincomes of four types of welfare recipientsin each province, and comparisons betweenwelfare incomes and the poverty lines. Thelatest report shows cuts in welfare incomesas a percentage of the poverty line in 34 ofthe 40 categories tracked between 1991and 2001, and increases in only six of the40 categories. Most of the increases weremodest, and most of the cuts significant.1

As of 2001, 23 of the 40 categories ofwelfare recipients had total incomes equalto 52 percent or less of the poverty line.That was poor by any reasonable measureof poverty.

The AFB’s Income Support Fund wouldmove, over a number of years, to tie thelevel of federal funding to actual needs,perhaps the actual size of welfare caseloadsfrom year to year. In the short term, wemake provisions for banning “workfare” orforced labour, for automatic indexing ofwelfare benefits at least once a year, no resi-

dency requirements, respect for the privacyof welfare recipients, the right to retain thefamily home and a reasonable level of as-sets, and the right to appeal welfare deci-sions made by welfare officials and tribu-nals.

Federal and ProvincialChild Benefits

The second major setback for welfare re-cipients in recent years was the federal gov-ernment’s decision to encourage provincialand territorial governments to claw back aportion of federal child benefits from wel-fare recipients with children. This repre-sented a complete reversal of the stand suc-cessive federal governments had taken toprevent increases in Family Allowances andother federal benefits from being offset bycorresponding reductions in provincial andterritorial programs.

Under the new arrangements, first an-nounced in the 1997 federal budgetspeech, virtually all increases in federalchild benefits in the future would go tofamilies in the paid labour force. Familieswith even a bit of welfare income wouldhave the increases in benefits clawed back.Overall, the biggest winners would be low-wage families with children. The biggestlosers would be poor families on welfare— most notably single-parent motherswith children.

The only exceptions to the clawback todate are in Newfoundland, New Bruns-

Income Support Fund



wick, and Manitoba. Newfoundland andNew Brunswick refused to claw back fed-eral benefits from welfare recipients fromthe very beginning, and Manitoba followedsuit several years later after a provincial elec-tion and a change of government. It isprobably no coincidence that four of thesix increases in provincial and territorialwelfare benefits reported by the NationalCouncil of Welfare over the period 1991to 2001 involved families with children inNewfoundland and New Brunswick.

The effective increase in federal childbenefits for welfare families between 1996and 2002 works out to 12.8 percent, orslightly more than the inflation rate for theperiod. The only real gains went to low-wage families: an increase of 60.8 percentfor a family with one child, and an increaseof 84.3 percent for a family with two chil-dren.

The other half of the current federal ap-proach to child benefits involves the rein-

vestment of the money clawed back fromwelfare families in other programs or serv-ices for families with children. The resultsso far have been underwhelming. Provin-cial and territorial governments are keenabout recycling the federal money and call-ing it their own, but most of them havebeen reluctant to contribute significantadditional sums of their own money to helpchildren and their families.

The AFB increases the Canada ChildTax Benefit (see the Tax Fairness sectionof this document for complete details) andends the clawback of the CCTB by anyprovince or territory.

Notes

1 National Council of Welfare, Welfare Incomes2001 and 2001 (Spring 2002), pp. 81-81.

2 National Council of Welfare, The 1995 Budget

and Block Funding (Spring 1995), p. 26.



Canada faces a housing crisis, the roots ofwhich reach back to 1993, when the fed-eral government cancelled funding for newsocial housing altogether. There is a well-documented need for affordable housingin Canada, and for innovative national so-lutions to this national problem. Yet, re-markably, Canada has no national hous-ing policy, making it unique in this regardamong comparable countries.

The government stock of public hous-ing is around 200,000 units. Of these,164,000 were build before 1978. 1

In November 2001, the federal govern-ment agreed with the provincial and terri-torial ministers on a framework for fund-ing affordable housing. The federal gov-ernment committed to a total potentialcontribution of $680 million over five years— but based funding on the willingnessof provinces to provide matching funds.In May 2002, the National Housing andHomelessness Network released a reportcard on this framework. It gave the federalgovernment a D-, for spending only a tinyfraction – less than 1 percent – of the po-tential funds.

Rental housing

The Federation of Canadian Municipali-ties reported in 2000 that Canada’s urbancentres lost a minimum of 13,000 rentalunits between 1995 and 1999: previouslyavailable rental housing was converted ordemolished, and no new social housing was

constructed. Not surprisingly, rents beganto rise much faster than inflation.

About four out of every 10 Canadianhouseholds rent their housing, and the in-comes of renters are typically much lowerthan those of the average person. Rentalhousing affordability has become a majorissue in the 1990s, particularly in larger cit-ies. A significant gap has developed be-tween market rents and the incomes of low-income persons and families, as rents haverisen sharply while the incomes of the poorhave fallen or stagnated. This translates intoa crisis for many particularly vulnerablegroups: single parents with children; work-ing-poor families with children; newcom-ers to Canada, many of whom have largefamilies; low-income seniors; and single,low-income adults such as persons withdisabilities.

Very high rents in relation to incomemean that far too many families must lit-erally choose between paying the rent orfeeding the kids. In all provinces, socialassistance benefits have failed to match ris-ing rents, and the scale of rent increaseshas generally eclipsed the income gains ofthe working poor. Increases in child ben-efits are welcome, but they will have littleimpact on child well-being if they are sim-ply swallowed up by the rent cheque.

The Fund

Only 5% of Canadian households live innon-market social housing, compared with

The Housing Fund



40% in the Netherlands, 22% in theUnited Kingdom, 15% in France, and 2%in the United States. The AFB gets the fed-eral government back into the affordablehousing business. Our goal is to immedi-ately increase the number of new afford-able units produced to 20,000 annually,and the number of refurbished units to10,000 per year.

In order to reach this goal, the AFBHousing Investment Fund provides $2 bil-lion over the next three years for new hous-ing. The program includes a flexible capi-tal grants program to assist provinces andmunicipalities in building new, affordablerental housing.

It would work with the active involve-ment of sponsors of the many community-based social housing projects that havesprung up since the federal government gotout of the social housing game a decadeago.

The Fund would also make it a priorityto fund co-op housing. Two decades ago,the federal government was funding nearly20,000 new units of community-based co-op and non-profit housing annually. Co-ops were used to help expand the housingstock, counter neighbourhood decline, andsupport residents with special needs.

Among the central advantages of co-opsfor housing policy are cost andaffordability. Resident contributions –from self-management through “sweat eq-uity” — in some cases combined with pub-lic subsidies, can make high-quality hous-ing affordable for low- and moderate-in-come households. In contrast with pro-grams providing direct rent subsidies,spending on co-ops has the extra and last-ing outcome of increasing the permanentsupply of affordable housing.

In addition to economic benefits, co-ops offer the potential for social transfor-mation. Creating co-operatives providesphysical environments that are appropri-ate for people’s needs and conducive totheir quality of life.

Housing construction is labour-inten-sive and has high job impacts because ofthe heavy use of Canadian-made materi-als. It can also be balanced regionally, andprovides lasting social benefits.

Notes1 Left in the Cold: Woman, Health, and the Demise

of Social Housing Policies. Darlene Rude andKathleen Thompson. Prairie Women’s HealthCentre of Excellence. November 2001.



Early Childhood Care and Education Fundschool-readiness, and can help launch chil-dren successfully into their school years.

The National Forum on Health haspointed out that a comprehensive approachto childcare should be a key part of a popu-lation health approach. High-qualitychildcare is additionally valuable to chil-dren who are at-risk or socially vulnerable,by virtue of poverty or other conditions.

Early childhood care and educationservices also are made necessary by demo-graphic changes to Canadian families anda changing labour force profile. Mosthouseholds with young children now havetwo wage-earners, replacing the “tradi-tional” family with its male breadwinnerand stay-at-home mother. Women’s labourforce participation rates are skyrocketing,and the number of children in Canada isdecreasing. The vast majority of employedwomen with children work full time (30or more hours per week). In 1999, 71% ofemployed women with at least one childunder age 16 at home worked full time, asdid 68% of employed women with one ormore children under 3 years of age. Dual-earner families are now the norm, yet thereare few policies and supports in place toenable them to combine employment andcaregiving. The sharp rise in dual-earnerhouseholds, spurred by increased femaleemployment, makes comprehensiveECEC and parental leave policies moreimportant than ever for the well-being offamilies.

The AFB proposes a pan-Canadian uni-versal early childhood care and education(ECEC) strategy. ECEC services simulta-neously provide early childhood develop-ment opportunities, ensure care while par-ents (especially mothers) are in theworkforce, and support parenting. Fed-eral action on ECEC is essential to realizethe promise of the 1999 Social UnionFramework Agreement of “access for allCanadians, wherever they live or move inCanada, to essential social programs andservices of reasonably comparable quality.”

ECEC is needed for multiple reasons,including its benefits to children and fami-lies, and contributions to economic pro-ductivity and social solidarity.

Children of all classes benefit from highquality childcare, regardless of family in-come or parental employment. In this re-spect, childcare is a public good in and ofitself, and quite separate from its otherdemonstrable benefits. Virtually every facetof children’s development is enhanced byquality childcare. As the OECD has con-cluded, “equitable access to quality earlychildhood education and care canstrengthen the foundations of lifelonglearning for all children and support thebroad educational and social needs of fami-lies.” High-quality childcare enhances allchildren’s holistic development and well-being, including their physical, emotional,linguistic, intellectual, and social capaci-ties. In particular, childcare promotes



Additionally, ECEC contributes to eco-nomic productivity. Childcare is a smartinvestment in a competitive economy.Without it, parents — particularly moth-ers — cannot participate fully in the la-bour force. A 1998 study by University ofToronto economists has concluded that $2of social benefits are returned for every $1invested in childcare. The initial costs ofECEC are offset by longer-term gains,which include increased workforce partici-pation, higher tax revenues, and lower so-cial spending. The National Council ofWelfare claims that “good childcare makesan enormous difference in the ability ofpoor families to find and keep jobs.” And,as the Council also points out, “prevent-ing problems and ensuring that childrenhave the best possible start in early devel-opment makes good economic sense.

While national productivity would beenhanced by universal ECEC, a pan-Ca-nadian childcare system cannot be estab-lished by the private market. CharlesCoffey, executive vice-president of the RBCFinancial Group, has argued that “businesscan do its part, but early learning andchildcare is an issue of national importance,requiring the leadership that only seniorgovernments can provide.”

Finally, and of equal importance, ECECcontributes to social solidarity. Certainly,universal childcare is a precondition ofwomen’s equality. It is also a mechanismto build healthy communities, reduce pov-erty, create jobs, and facilitate communityand economic development. Universalearly childhood services strengthen appre-ciation for diversity and promote equity

among classes, levels of ability, racial andethnic groups and generations, strength-ening social solidarity.

The AFB agrees with the Caledon In-stitute that “childcare is smart social policy,smart economic policy, and smart healthpolicy.” Under the AFB, the guiding prin-ciples for a federal ECEC strategy are:

• regulated, licensed services;• universal provision (including all chil-

dren regardless of income, class, abilityor disability, region, and parents’ workstatus);

• high quality (reflecting best practicesand a participatory approach to qualityimprovement and assurance);

• comprehensiveness (a systematic andintegrated approach to policy develop-ment and implementation, including arange of service choices);

• responsiveness (reflecting communityvalues and diversity, as well as includ-ing community and parental input);

• accountability (services are responsibleto the communities served, and goodgovernance is present); and

• non-profit auspices (to ensure all dol-lars are directed to program and staff,making most effective use of funds).

ECEC services in Canada (save for Que-bec) are badly underdeveloped. Across thecountry, childcare is severely compromisedon three fronts: 1) the availability of spacesto meet the needs of children and theirfamilies, 2) the affordability of care, and3) the quality of services provided. It isadditionally compromised as children’s



care, services, and education are frag-mented in different policy “silos,” uncoor-dinated between education, welfare, fam-ily, and community services, Labour andother government departments, and be-tween local, provincial, and federal juris-dictions.

The federal government has begun torecognize these problems, and is beginningto create a policy architecture that can rem-edy them. In September 2000, Canada’sFirst Ministers (except for Quebec’s) signedan agreement on early childhood develop-ment services. The Federal/Provincial/Ter-ritorial Early Childhood DevelopmentAgreement has two objectives: 1) “to pro-mote early childhood development so that,to their fullest potential, children will bephysically and emotionally healthy, safeand secure, ready to learn, and socially en-gaged and responsible; and 2) “to help chil-dren reach their potential and to help fami-lies support their children within strongcommunities.” The ECD Agreement pro-vides a funding and policy frameworkthrough which the federal government canact.

What would it cost to establish a uni-versal ECEC program for all Canadians?A reasonable financial goal for a fully de-

veloped, comprehensive ECEC systemwould be at least 1% of GDP. One per-cent is the European Union guideline forspending on ECEC for children aged 0 -6,and several countries surpass this level. InCanada, 1 percent of GDP would repre-sent approximately $10 billion a year.Building a comprehensive ECEC systemis a multi-year undertaking, which mustinclude an orderly ramping-up from thecurrently fragmented system. Buildingboth physical and social infrastructure istime-consuming.

Over the next three years, the AFB in-creases spending to reach $5 billion peryear. The two main priorities for spendingthis money would be:

• Improving coverage and compensationrates under EI for new and adoptiveparents. Extending coverage to all newparents, at compensation rates of at least80 percent would bring Canada in linewith most EU countries. With adequatecoverage and compensation, mosthouseholds will be able to provide pa-rental care to infants up to age one.

• ECEC for children aged 1 - 6, beforechildren reach school-age.



Employment InsuranceThere is also a growing demand for edu-

cation, training, and lifelong learning.Long years in the work force count fornothing when it comes to qualifying forEI. Leave from work for training or learn-ing is not covered by EI benefits.

The AFB prohibits the use of EI rev-enues for federal debt reduction, tax cuts,or other government spending.

The current system of variable eligibil-ity requirements – which varies from placeto place and month to month, and the typeof benefit ranges from 420 to 910 hours –will be replaced with one that requires abasic 360 hours to qualify.

More flexible qualifying rules would beintroduced for workers who have been inthe labour force for a number of years, andthe definition of labour force attachmentwill be reformed to count years. And work-ers over 45 years of age, the ones who havethe hardest time getting a new job, wouldbe guaranteed benefits for a year-and-a-half.

Regular earnings will be defined as anaverage of the worker’s best 12 weeks.

As well, training insurance will beginto be introduced for all workers. Regularbenefits would be made available to sup-port workers who lose time from workwhile training and learning, as they are nowfor workers in apprenticeship training.

These are the first steps toward a trulymodern system, one that would:• protect workers in all forms of employ-

ment, including full time, part-time,and temporary;

The EI program has failed to keep pacewith the modern realities of Canadians’work lives. Corporations and workplacesare being re-organized. With the rise ofcasual labour and people forced to workmultiple jobs, work schedules and hoursdon’t fit the old assumptions. Many work-ing Canadians have to balance work andfamily responsibilities for children andelders, a situation that has been made worseby federal program cuts.

Women are especially hard hit, becausethey make up the majority of workers tak-ing on the new part-time jobs. They endup short of hours to qualify for EI if theyget laid off. New mothers may not havethe 600 hours to qualify for pregnancy andparental benefits.

Changes to the program introduced in1997 stripped many Canadians of their eli-gibility for EI. Currently, only 38% of theunemployed are receiving EI at any givenmoment, compared with over 75% just afew years ago.

Yet the EI Account has built a surplusof close to $50 billion since 1994.

The AFB would balance the EI Fund,spending all of its revenue to provide in-come support to unemployed workers. Theimprovements to the Fund described be-low will consume the full surplus thatwould otherwise have accumulated. In ad-dition, to ensure that the fund is neveragain in danger of being raided by the gov-ernment, the program will be separatedcompletely from the general budget.



• cover unemployment, pregnancy, pa-rental leave, temporary sickness, and in-come support while training;

• end UI discrimination against women,youth, older workers, and workers inseasonal industries;

• be clear and simple to understand;

• extend benefit weeks when unemploy-ment is high;

• raise the maximum benefit level, whichhas been frozen since 1996; and

• stop deducting severance and vacationpay from EI benefits.



The Post-Secondary Education FundThe Millennium Scholarships, similarly,

do nothing to address the fundamentalproblem facing post-secondary educationin Canada: affordable access.

The AFB creates a new National Post-Secondary Education Act, which operatesas a parallel to the Canada Health Act,guaranteeing the right to a quality post-secondary education, and national stand-ards. Under this Act, the AFB creates a newsystem of grants based on need. A total of$1.5 billion has been allocated to this sys-tem over three years.

Notes1 The Future Cost of a University Education. TD

Economics Topic Paper. November, 2002, CraigAlexander.

2 Tax Preferences for Education Saving: Are RESPsEffective? C.D. Howe Institute Commentary. By

Kevin Milligan.

In the 1990s, tuition fees in Canada in-creased an average of 10% per year. Veryrecently, the rate of increase slowed, withthe average since 2000 being just over 4%.Nonetheless, signs point to a faster increasein the future: some of the additional fund-ing in recent years has been the result ofrestored transfer payments making up forearlier cutbacks. TD Bank economist CraigAlexander projects that the full cost of auniversity education will reach $125,000by 2020.1

Since 1998, the federal government hasincreased its support for registered educa-tion savings plans (RESPs). The $423 mil-lion the government plans to spend thisyear on Canada education savings grants(CESGs), which are the federal matchinggrants that accompany RESP contribu-tions, will end up disproportionately inhigh-income households. These paymentsdo nothing to improve access to post-sec-ondary education for Canadians from dis-advantaged backgrounds.2



Elderly Benefits and Retirement IncomeThe Guaranteed Income Supplement

has been the subject of criticism becauseso many seniors are unaware that they areeligible to receive it.

The AFB increases the GIS by 10% eachyear, and would take the necessary steps toensure that all seniors who are eligible forthe program receive funding.

The changing nature of work in Canada –including the growth of part-time, insecurejobs – hurts seniors. Fewer than one out oftwo Canadian workers are at any one timeenrolled in an occupational pension plan.

The alternative, RRSPs, disproportion-ately benefit higher-income earners,through tax benefits. And few low- or mid-dle-income Canadians contribute any-where near their RRSP maximum.



mal allocation of resources. This includesinformation and communications tech-nologies, alternative power sources, andgreen technologies.

To address these needs, we abandon thenotion that industrial policy is limited tostimulating or encouraging the private sec-tor. We need to more fully bring back thepublic sector into the equation. The keyplanks of the AFB’s plan to revitalize in-dustrial policy follow below.

Kyoto Implementationand Opportunities Fund

While much of the debate around Kyotohas focused on the perceived costs of im-plementation, little attention has been paidto the ongoing costs of climate change it-self, or to the potential economic, environ-mental and social benefits of addressing cli-mate change. Ongoing costs are wide-rang-ing and include the cost of repair and re-placement in the aftermath of extremeweather patterns such as ice storms andfloods, which are occurring with greaterfrequency. They also include the impact onlivelihoods of farmers due to droughts, andto native communities in the far north dueto changes in traditional food systems.

The Kyoto Implementation and Op-portunities Fund would support a two-pronged innovation and transition strat-egy for Kyoto. Funded out of the 2002-2003 budgetary surplus, it would put aside$7 billion to accelerate the transition to-

Canada needs an active and effective in-dustrial policy, led by the federal govern-ment. The historical record shows that in-telligent government involvement inchanneling resources into strategic sectorsis an important avenue for enhancingstandards of living in the long run.

Currently, a handful of programs (suchas Technology Partnerships Canada andvarious regional development programs)support such objectives in principle. How-ever, they have been criticized by the Au-ditor-General for their lack of transparencyand accountability.

This year’s AFB includes an innovative,revitalized industrial policy to increase theproductivity of the Canadian economy andmake Canada a world leader in green in-dustries.

Much of the Canadian hinterland is stillalarmingly dependent on the export of pri-mary, minimally processed resources to theU.S. (and highly vulnerable to U.S. tradeactions). Our industrial policy would sup-port the creation of greater value addedfrom existing resource harvests, and do soin a manner that is ecologically sustainable.

Canada’s manufacturing sector is in-creasingly under threat from lower cost ju-risdictions, whether in the Southern U.S.,Mexico, or China. The AFB’s industrialpolicy is designed to retain investments inCanada, and encourage new ones.

Industrial policy should target emerg-ing sectors that are likely to bear fruit, andwhere market decisions lead to a sub-opti-

A Green Industrial Policy



wards a more sustainable energy economy,including energy efficiency and the devel-opment and implementation of environ-mentally friendly technologies and powersources. And it would provide $1 billionfor a “just transition” strategy to assist thoseworkers adversely affected by action on cli-mate change.

Developing and implementingenvironmentally-friendly tech-nologies

Cost-effective and viable technologies al-ready exist to decrease greenhouse gas emis-sions and human impact on the climate.In addition, emerging industries in renew-able energy production and related sectorsprovide vast opportunities for growth andjob creation. Spending money on the pur-chase of emissions credits would be a hugewaste, given other opportunities to investin a greener economy.

The Kyoto Investment and TransitionFund would allocate $7 billion over 10years to support energy efficiency projects,develop green technologies and powersources, and implement existing and newtechnologies to make Canadian industrymore sustainable. Many renewable energytechnologies are viable today. Such tech-nologies include: earth energy technolo-gies; wind power; producing ethanol frombiomass; and solar power.

The Fund would make a number of in-vestments to provide business incentives inemerging industries and to create new sus-tainable jobs:

• creating energy efficiency funds, mod-elled on the Toronto Atmospheric Fund,for individuals and businesses who wantto make commercial and residentialbuildings more energy efficient;

• funding needed public transit infra-structure in cities across Canada; and

• extending a 1.2 cents/kWh subsidy toall non-hydro renewable electricity gen-eration, to match the present subsidyfor electricity generated from windpower. (This subsidy could help ensurethat 10% of electricity by 2012 will begenerated by non-hydro renewablesources.)

Efforts to improve energy efficiencywould be complemented by a strong in-dustrial strategy aimed at the diffusion ofexisting technologies in existing industries,plus the strategic targeting of new greentechnologies and power sources as a devel-opment area for the Canadian economy.A number of means of implementing thisinclude:

• providing tax credits to companies thatinvest in industrial energy efficiency andtechnologies that reduce greenhouse gasemissions;

• expanding the Industrial Research As-sistance Program (IRAP), a successfulfederal program that supports the dif-fusion of new technologies to small andmedium sized enterprises, to cover arange of environmental technologiesand applications; and

• significantly expanding the funding pro-vided by Technology Partnerships



Canada for the development of new en-vironmentally-friendly technologies,power sources and applications.

New money for environmental initia-tives could also be raised by diverting ex-isting funding away from the aerospace anddefense industries that currently dominatethe funding base.

Just Transition

One important challenge of addressing cli-mate change will be the transition from aneconomy that is heavily reliant on fossil fueluse to one that gradually focuses more onemerging industries: energy efficiency, re-newable energy, and public transportation.While recent analyses reveal opportunitiesfor positive economic gain, this transitionwill mean shifts in the types of jobs avail-able. Energy workers are particularly vul-nerable to job losses. Over the 1990s, theCanadian energy sector shed over 80,000jobs, despite increased production and in-creased exports.

Meeting Kyoto will mean job losses insome sectors and job gains in others.

Taking a conservative assumption thatCanada will meet its obligations withoutinternational emissions trading, the Na-tional Climate Change Process modellinganalysis shows that there could be a loss of12,800 jobs in the energy sector. The prov-inces that would experience the greatest joblosses (in descending order of impact) areAlberta, Ontario, Nova Scotia, and B.C.Over that same period, 16,000 jobs wouldalso be created in the energy sector, but

not necessarily in the same energy sub-sec-tor or province as job losses.

The solution to this shift in jobs is notto forgo action on climate change, but toensure that those who do lose their jobsare given other options, particularly inthose related sectors experiencing overallgrowth. Transition programs for displacedworkers have been successfully imple-mented in the U.S. and Canada, but onlywhen these programs are developed up-front.

The elements of a successful Just Tran-sition program would include:

• training and educational opportunitiesthat allow workers to upgrade their skillsfor the jobs that are being created;

• early notice of layoffs, whenever possi-ble, so that workers can accesscounseling and training/educationalprograms quickly;

• income support for displaced workersfor up to three years–depending on timein the energy workforce–to enableworkers to take advantage of trainingand educational opportunities;

• peer counselling to assess workers’needs, and analysis of labour marketneeds; and

• relocation funds, up to a maximum of$15,000 per worker, for those who mustmove in order to find new work.

A high-end estimate of the cost of sucha program would be about $1 billion over10 years. These represent incrementalfunds to the EI system, which would alsoshoulder its portion of the transition.



Subsidies now extended to conventionalenergy production cost about $250 mil-lion per year. These subsidies to conven-tional energy production could be directedinto new subsidies for clean energy. Therenewable energy industry received only$12 million in subsidies in 2000, mostlyin the form of research and developmentprograms and tax incentives.

The federal government should also beable to generate a pool of funds by auc-tioning off greenhouse gas emissions per-mits. The federal government’s most recentimplementation plan moves away fromselling domestic emission permits, a movewe urge them to reconsider. Moving awayfrom tradeable permits only relieves theemitters of greenhouse gases from payingany of the costs for climate change action,thereby rewarding the biggest polluters.

These two sources of funding couldconservatively generate $12.5 billion overthe next 10 years. This money that couldbe allocated towards enhancing the toolboxof subsidies, tax credits, and public infra-structure investment required to go beyondthe Kyoto targets.

Further change can be contemplated inthe design of the tax system to better meetcertain environmental objectives. Tax cred-its for achieving environmental bench-marks (such as credits for ecologically-cer-tified or new value added production inthe forest industry) could reinforce themeasures set out above. The provision oftax credits for meeting environmental ob-jectives ensures that only the companiesthat meet the objectives benefit from pay-ing lower taxes, rather than the “blank

cheque” approach of corporate tax cuts cur-rently being phased in.

In addition, we recommend makingpolluting activities more expensive by es-tablishing new taxes on carbon emissions,chemical pollutants, and particulate emis-sions. To minimize transition costs, thesetaxes should be phased in based on a time-table over 10-20 years.

An Urban Air Pollution strategy couldbe complementary to Kyoto initiatives. Forexample, a move to reduce carbon emis-sions from automobiles can be twinnedwith a strategy of addressing the problemof smog in Canada’s cities. The aim shouldbe a future of zero emission vehicles thataddress both climate change and urban airpollution.

Finally, the accelerated development ofinter-city and mass commuter transit mustbe made a priority over expanding the in-frastructure for automobiles. A high-speedrail link from Windsor to Quebec Citywould be a good start. A rapid build-outof public transit in cities, along the linescommon in Europe, is also a necessary torelieve traffic congestion in cities and re-duce automobile reliance. Each of thesecould be achieved under the auspices ofexisting Crown corporations and regionalbodies.

Public Investment Bank

The federal government needs to addressthe challenge of channeling resources intothe real economy rather than gettingcaught up in the whirlwind of speculationthat is the financial markets.



service economy, this large reduction willmean that Canada’s largest banks and otherlarge and profitable companies will receivetax windfalls.

The evidence that corporate tax cutslead to more investment and employmentis thin. Tax cuts are effectively a blankcheque to corporate Canada, a leap of faiththat the Canadian economy will benefit.That said, tax policy should not be com-pletely ignored. The tax system can pro-vide incentives, but they must be structuredin a manner that ensures tax breaks go onlyto those that deliver new investment to theCanadian economy.

The AFB would undertake a major re-view of federal tax policy, with the goal ofdeveloping and implementing corporatetax reforms aimed at supporting our in-dustrial policy objectives. These reformswould include:

• tax credits to Canadian companies thatmeet specified targets of investment,production and employment inCanada; this would apply to all compa-nies operating in Canada, regardless ofownership; and

• tax credits for companies that meet cer-tain environmental and social objec-tives, such as credits for ecologically-cer-tified or new value added productionin the forest industry.

The provision of tax credits for meet-ing economic and social objectives ensuresthat only the companies that meet the ob-jectives benefit from paying lower taxes.

The AFB will seek to establish, withinthree years, a Public Investment Bank,seeded by compulsory deposits from exist-ing private financial institutions, creditinjections from the Bank of Canada, andinterest-earning investments from govern-ments, pension funds and individuals.Funding from the Public Investment Bankwould then be allocated to smaller “devel-opment councils” that would financeprojects in particular sectors, as well asprojects in regions or communities.

The AFB envisions a Public InvestmentBank as a provider of seed funding for newand innovative economic areas, where pri-vate sector financing is less likely to beabundant (if there at all). Funding recipi-ents would include Crown corporations,cooperatives, worker-owned enterprises,First Nations, and other non-profit enti-ties, in addition to traditional businesses.

A theme of sustainable developmentwould be front and centre for the new en-tity. It would provide funding support fornational projects in sustainable agriculture;sustainable forestry; recycling facilities; in-vestments in resource efficiency; develop-ment and purchase of environmental tech-nologies and green power sources.

Tax incentives, not tax cuts

In recent years, public policy has beenoverly obsessed with tax cuts as the tonicfor Canada’s economy. The 2000 FederalBudget set out a plan to reduce taxes forall business to the lower rate of 21% formanufacturing and processing companies.Spun as a boost to the high-tech sector and



Companies that are making large profitsin Canada, but are not investing or em-ploying Canadians, should pay highertaxes.

These tax credits would be offset bychanges in the rate of corporate income taxand the size of the base. We recommend aprogressive income tax structure for Ca-nadian businesses (some modelling wouldneed to be done to assess the proper ratestructure). Certain deductions should befully or partially eliminated, such as mealsand entertainment expenses, advertising,or political donations and lobbying ex-penses.

Public servicesand Crown corporations

Canada has benefited from having a mixedeconomy. Focusing industrial policy onlyon the private sector ignores a large part ofthe Canadian economy. The spectacle ofcorporate scandals over the past year havedropped the veil of the supposed su-premacy of the private sector over the pub-lic sector.

Crown corporations, in particular, rep-resent an under-utilized institutional forcefor industrial development. Indeed, trendsover the past decades have tended to ideo-logically favour privatization of Crown cor-porations, even those with very successfulrecords. Carving out a stronger role forCrown corporations as agents of industrialpolicy makes sense in a wide variety of ar-eas.

Public sector industrial policy measurescould support Canadian priorities for

health care reform. For example, Canadacould develop a national pharmaceuticaldrug Crown corporation to do research inthe public domain and to produce low costgeneric drugs. This could complement areturn to a compulsory licensing regimeto support the production of generic drugs.These moves would lower drug prices andsupport a domestic industry over the for-eign, brand-name pharmaceutical indus-try.

As part of a re-entry into the social hous-ing field, Canada could create a new Crowncorporation to coordinate the constructionof new structures. This could be used as aplatform to make social housing units thatare highly environmentally-friendly, usinggrey water recycling, energy efficient de-sign, and geothermal energy.

Canada should also develop a nationalbroadband infrastructure utility. Such anentity would be able to provide universalaccess at low cost to all Canadians for theinfrastructure of the future. Consumerswould be better off under a single-providersystem that is regulated and non-profit.This would also provide a platform forprivate sector development of applications,content, and software.

A final example is the development ofinter-city and commuter transit. A high-speed rail link from Windsor to QuebecCity, along the lines of the French TGV orJapanese shinkansen, would be a good start.A rapid build-out of public transit in cit-ies, along the lines common in Europe, isalso necessary. Each of these could beachieved under the auspices of existingCrown corporations and regional bodies.



Canada’s international trade commit-ments also pose a challenge, but there ismore room to manoeuvre under theseagreements than commonly acknowl-edged. Industrial policy measures are al-lowed as long as they do not have an ex-plicit link to international trade. There maystill be challenges from other countries, butthis should not stop Canada from pursu-ing good industrial policies.

None of this means “going it alone” byturning our back on access to the U.S.market or foreign investment. These willcontinue to be important for Canada. Butsuch preoccupations should not be the pri-ority of an industrial strategy. Rather, Ca-nadian industrial policy should be rootedin the needs of Canadians.



The EnvironmentProceeds of this tax will go toward:

• Expanding the Industrial Research As-sistance Program (IRAP), a successfulfederal program that supports the dif-fusion of new technologies to small andmedium sized enterprises, to cover arange of environmental technologiesand applications.

• Significantly expanding the fundingprovided by Technology PartnershipsCanada for the development of new en-vironmentally-friendly technologies,power sources, and applications. Newmoney for environmental initiativescould also be raised by diverting exist-ing funding away from the aerospaceand defence industries, which currentlydominate the funding base.

Sustainability investments

The 2002 Report of the Commissioner ofthe Environment and Sustainable Devel-opment (under the auspices of the Audi-tor-General of Canada) noted that muchremains to be done to clean up thousandsof federal contaminated sites, plus numer-ous abandoned mines in the North. TheCommissioner notes that the clean-up ofcontaminated sites will cost billions of dol-lars. The Department of Indian and North-ern Affairs estimates that clean-up and clo-sure of abandoned mines will cost a mini-mum of $555 million.

The AFB would focus on two broad areas:the need to reduce urban air pollution; andsupporting “sustainability investments” bycreating new national parks and cleaningup toxic waste sites.

Urban air pollution

In some respects, the federal governmentmust be a leader in the creation of marketdemand for new technologies. An excel-lent example of this is California’s plan toensure that 10% of new auto sales in thatstate, between 2003 and 2008, are zeroemission. The AFB will embark on a simi-lar, though more aggressive, strategy set-ting out requirements for zero emissionvehicle sales of the next 5-20 years. A time-table for lowering fuel emissions standardsof auto manufacturers’ fleets is anotheroption.

The AFB will also introduce a “fee-bate”initiative. This is a revenue-neutral tax shiftthat would increase taxes on fuel-inefficientvehicles and use this revenue to providesubsidies for purchases of fuel-efficient ve-hicles.

In addition, the AFB will make pollut-ing activities more expensive by establish-ing new taxes on pollution (including car-bon emissions, chemical pollutants,particulate emissions, etc). To minimizetransition costs, these taxes should bephased in over time, based on a 10-20-yeartimetable.



The AFB will, as recommended by theCommissioner, develop a priority list of theworst sites, and fund an action plan to cleanup these sites over the next 10 years. Onesource of funds is the elimination of exist-ing subsidies to the mining industry. Ac-cording to a recent report by MiningWatchand the Pembina Institute, federal subsi-dies to the industry amounted to $383million in 2000/02, much of which isthrough tax expenditures such as theCanada Exploration Expense, the Canada

Development Expense, and the ResourceAllowance. The AFB will revoke these taxexpenditures to remove the long-standingbias of the tax system towards pollutingmineral extraction.

Finally, the AFB will invest $100 mil-lion per year for the next five years to pro-vide funding for the establishment of newnational parks and protected areas, and toreverse the underfunding of existing na-tional parks.



Equalizationnal study by Bird and Vaillancourt showedthat, since equalization was introduced in1957, per capita economic growth in therecipient provinces has been slightly higherthan that in non-recipient provinces. Manycritics of equalization argue that a betteralternative would be direct support to in-dividuals, through income support pay-ments or tax cuts. In this way, these criticsseek to erode the public provision of serv-ices and turn more over to the individualand the market.

The amount of equalization payable an-nually to each eligible province is deter-mined by a complex formula that calcu-lates the revenue-raising capacity of thatprovince on a per-capita basis, as comparedwith the average revenue-raising capacityfor Canadian provinces on a per-capitabasis. Any province with a per-capita rev-enue-raising capacity below the average, or“standard,” is entitled to an equalizationpayment — paid out of federal governmentrevenues — sufficient to bring that prov-ince’s per-capita revenue up to the stand-ard.

At one time, a province’s revenue-rais-ing capacity was measured against the av-erage of all 10 Canadian provinces. Whenoil prices skyrocketed during the energycrisis in the early and again in the late1970s, the huge energy revenues accruingto the energy-producing provinces, espe-cially Alberta, drove the average up andthus increased the cost of equalization tothe federal government. The standard was

Equalization is intended to equalize thefiscal capacity of all provinces, so that allCanadians, no matter which province theymay live in, can enjoy reasonably compa-rable levels of public services at reasonablycomparable levels of taxation. In recentyears it has become evident that the cur-rent equalization system is in need of re-form.

When Canadians in all parts of thecountry enjoy reasonably comparable lev-els of public services at reasonably compa-rable levels of taxation, as an entitlementof citizenship made possible by equaliza-tion payments, the program becomes ameans of binding the country and its citi-zens together. This is crucially important,given the powerful centrifugal forces of re-gionalism which set Canadians apart fromone another, and the powerful pull fromthe United States. Equalization embodiesa set of values rooted in the virtues of eq-uity and of mutual solidarity. These arevalues that Canadians should strive tomaintain.

Critics of equalization argue that theprogram provides a disincentive to eco-nomic development in poorer provinces.As evidence, they frequently point to thefact that the provinces that receive the mostin equalization have the poorest economicperformance – thus confusing cause andeffect: the central point of the program isprecisely to support poorer provinces. Fur-ther, evidence shows that the program hasserved the nation well. A recent longitudi-



changed in 1982 to a five-province stand-ard, which excludes Alberta and the fourAtlantic provinces. In effect, most of theoil and gas revenue in Canada was removedfrom the calculations.

Alberta’s fiscal capacity is now over$10,000 per person, compared with the“standard” of $5,914 for 2000-01.

Another major barrier to an effective,equitable equalization program is that,since 1982, equalization has been capped.This measure was imposed unilaterally bythe federal government, initially for thepurpose of cost containment. The ceilinghas in fact been lowered three times since

1982. The effect on smaller have-not prov-inces is now quite substantial — in therange of $100 million per year for Mani-toba, for example. If there were ever a jus-tification for this ceiling, it no longer ex-ists. The federal government is runninglarge surpluses — in part, it could be ar-gued, by clawing back entitlements fromthe seven least affluent provinces — andmany provinces are struggling to meetgrowing demands for health, education,and social assistance.

The AFB would eliminate the cap onequalization and return to the ten-prov-ince standard.



members and 16th highest in the world,according to National Defence figures.

By contrast, pro-defence critics oftencite Canada’s military spending as a per-centage of GDP, rather than in real dollarterms, which places Canada far down theranking of military spenders amongstNATO members (next to tiny Luxem-bourg). But Daniel Bon, the military’s Di-rector-General for Policy-Making and oneof the architects of the current defencepolicy, blatantly called the percentage ofGDP method “pure crock.” He told theOttawa Citizen, “What really counts is howmuch money you actually spend. I thinkthat’s terribly significant and people areunderplaying that.”

The Polaris Institute’s report found thatthe Department of National Defence’sfunding woes do not stem from insufficientfunding, but from a flawed and outdateddefence policy forged nearly a decade ago,and a long history of poor planning, waste,and mismanagement of Canadians’ defencedollars.

The 1994 White Paper on Defence ismired in Cold War thinking, and pressurefrom the United States and NATO haveresulted in Canadian Forces trying to playan increasingly combat-oriented role inter-nationally. These missions under NATOand U.S. command have come at the ex-pense of traditional UN peacekeeping, somuch so that at the end of 2001 only 219

Aid, International Tradeand National DefenceAn active defence lobby is working to re-direct public resources toward militaryspending. The Ottawa Citizen recently re-ported that the defence lobby feared thatthe Prime Minister’s social agenda wouldignore the Canadian Forces, and that a “fo-cus on social programs will slow defencespending.”

Due to September 11 and the “war onterrorism,” the Canadian government is be-ing challenged in several quarters to pushgovernment resources into military spend-ing in the next federal budget. Parliamen-tary committees, private think-tanks, andthe Bush Administration have chastisedCanada’s level of military spending andhave called for a substantially expanded andwell-armed Canadian military to contrib-ute to the war on terrorism and partici-pate in U.S.-led operations such as in Af-ghanistan or Iraq. These reports have calledfor additional annual spending of $1 bil-lion to $6 billion or more on Canada’smilitary.

However, independent reviews of Cana-da’s military spending paint a much dif-ferent picture. The report Breaking Rank:A citizens’ review of Canada’s military spend-ing by the Polaris Institute, a public inter-est research group based in Ottawa, foundthat Canada’s $12.3 billion in militaryspending ranks very highly by internationalcomparisons: in actual dollars Canada isthe sixth highest amongst NATO’s 19



soldiers — fewer than 6 percent of de-ployed Canadian personnel — were par-ticipating in UN peacekeeping missions.

The outdated defence policy and wastewithin DND has resulted in billions ofdollars misspent on big-ticket military pro-grams with no clear purpose or benefit toCanada’s defence, according to the PolarisInstitute. For example, $750 million waswasted on used British submarines with awell-known history of design flaws, $174million on a satellite communication sys-tem that was never used, $65 million forpilot training that was never taken, andgenerous raises were granted to generalsand admirals while privates suffered a wagefreeze for eight years.

The need to shed outdated capacitiesand equipment, and reallocate resources tohigh-priority areas without spending ad-ditional dollars, was a central theme in arecent report written by soldiers inside theCanadian Forces, called “The Corporal’sReport.” The report put forward reason-able recommendations which includedmothballing artillery, fighter planes, andsurface ships in order to pay for new equip-ment to properly fulfill specialized defencecapabilities.

A sound defence policy, and budget,should ensure that Canada’s legitimate ter-ritorial defence and sovereignty are met atthe minimum cost necessary. In addition,the Canadian Forces should play a posi-tive role internationally through non-com-bative peacekeeping under UN auspices.

Quite apart from defensive needs, otherfactors are influencing Canada’s defence

budget. Military spending and participa-tion in the U.S.-led war on terrorism arebeing used to curry favour with the UnitedStates, Canada’s largest trading partner. Agrowing number of Canadian corporationsreceiving multi-million-dollar contractsfrom DND are lobbying for more con-tracts. And free trade agreements that limitgovernment powers are driving defencedollars toward corporate subsidies andother non-defence economic purposes.

The pressure to increase military spend-ing is actually running counter to an in-formed public opinion. Pollsters consist-ently report that, when asked to choosebetween social programs and the military,Canadians overwhelmingly desire tax dol-lars to go towards health care, education,and poverty-reduction – not defence. Thistrend was demonstrated once again in theMacLean’s year-end poll that found that59% of Canadians chose more money toimprove health care, while only 7% chosemore money for the military.

Canadians are resisting Canada’s partici-pation in the war on terrorism and moremilitary spending, which will come at theexpense of social programs. Polls are tell-ing the government that Canadians desireCanada to take an independent role fromthe United States, to seek non-militarymeans to effect positive change in theworld, and to protect Canadian sovereigntyand social programs.

Canadians view security as being de-rived from social programs – not the mili-tary. Fiscal priorities should match thisview, and resources devoted to improving



social programs and environmental protec-tion, domestic capacity to represent andrespond to emergencies, and non-militarymeans of intervention internationally inline with Canada’s traditional role as a pro-vider of aid and peacekeeping.

The AFB approach

Canada’s defence spending should not beincreased. Instead, new spending demandsshould be met within the existing budgetby reallocating resources to priority areas.

Canada’s foreign and defence policieswould be publicly reviewed, and a fundestablished to facilitate citizen participationand independent expert research.

Many groups, including Project Plough-shares, an ecumenical church coalition onpeace and justice issues, have been propos-ing a more far-reaching review of defencepolicy that challenges current policy andwould focus Canada’s defence resources onpeacekeeping, border patrol, and nationalemergency response.

In addition, a permanent research andpublic policy institute would be estab-lished, with an annual budget of $6 mil-lion, to conduct research and promote citi-zen involvement in defence and foreignpolicy discussions, and to promote Cana-dian values of non-military-based conflictprevention and resolution internationally.

Canada should be devoting, for exam-ple, security resources to implement thebasic obligation to protect vulnerable ci-vilians, building on its considerable peace-keeping and peace-building experience.

What military doctrines are appropriate,rules of engagement, training and equip-ment needed for that role?1 Another ma-jor source of insecurity is the diffusion ofsmall arms and light weapons within re-gions of political instability. Current de-bates in Canada on national defence mustgo beyond attention to a narrow focus onmilitary capability and integrate widernotions of development, human rights,arms control, and disarmament in policyoptions under consideration.

Finally, domestic, civilian emergency re-sponse and search and rescue agencies suchas the Coast Guard should be providedwith enhanced capacities to respond toemergencies. Federal, provincial, and mu-nicipal agencies such as Health Canadashould hire additional public employees toensure regular and comprehensive moni-toring of food and water supplies and otheressential services.

Holding the governmentto its aid commitments

The pre-eminent threats to internationalpeace and security cannot for the most partbe mitigated by increased military prow-ess on the part of United States and its al-lies. On the contrary, focusing on humandevelopment and human security is essen-tial for achieving international peace forall. Governments must respond with ur-gent and major infusions of new resourcesfor these non-military aspects of global se-curity. During the 1990s, the period dur-ing which Canadian military spending



declined by 14%, ODA spending declinedby more than 30%.

The Canadian government is commit-ted to doubling Canadian aid by 2010.This announcement in the September2002 Speech from the Throne follows adecade of declining generosity as a nation,with our aid performance falling from0.44% of our Gross National Income(GNI) in 1993/94 to 0.25% today. Canadanow ranks 14th among 22 developed coun-try donors (tied with four other donors),down from 6th in 1993, and far removedfrom our commitment to the UN targetof 0.7% of our GNI.

The United Nations has calculated thatan immediate increase of US$50 billion intotal aid is required to achieve by 2015 theMillennium Development Goals adoptedby all countries, including Canada, at a spe-cial session of the UN General Assemblyin 2000. These goals include halving theproportion of people living on less than adollar a day, cutting the number of hun-gry people by half, achieving universal pri-mary education, and eliminating genderdisparity in enrolment, among others,along an urgent path to end global pov-erty.

The AFB increases Canada’s foreign aidspending to reach the target within twoyears. As well, we would make a specialeffort to ensure that Canada contributesits share to the global fund to fight AIDSin Africa.

Ensuring a development frame-work for Canada’s trade agenda

Canadians remain committedmultilateralists and have strong interests ina global rules-based trade system. Cana-dian citizens, however, have also repeatedlypointed to core Canadian values – fairness,equity, human rights, and environmentalsustainability – as central concerns in Cana-da’s trade policy.

There remains a major gap betweenCanada’s expressed commitment to devel-opment, and Canadian trade positions pre-sented to date for agriculture. Canada’scontinuing push for an overall limit to thelevel of subsidies given to farmers is posi-tive. But there are two key areas for devel-opment leadership and action in agricul-tural trade rules. Canada must support newand simplified trade defence tools that al-low developing countries to protect theirfarmers from food dumping. Canadashould also support a “development box”that allows developing countries to exemptkey food security crops from tariff reduc-tion commitments and be able to expandproduction-enhancing support to low-in-come farmers.

Canada has also been playing a prob-lematic role in global trade fora in defenceof strict enforcement of intellectual prop-erty rights agreements (TRIPS). Canadamust support the least cumbersome meansfor the poorest countries to be able to im-port life-saving generic medicines. Canadashould also support a review of TRIPS toensure that patenting of life forms is



banned, and that farmers’ rights to save andsell seeds on local markets is preserved.

Finally, Canada’s approach to trade-re-lated capacity building in the South mustensure support for diverse analytic ap-proaches to trade and development, andboost the capacity of marginalized elementsof civil society to participate in nationaldecision-making on trade policy.

Notes

11 The Responsibility to Protect: Report of the Interna-tional Commission on Intervention and State Sov-ereignty, International Development Research

Centre, Ottawa, 2001.



Budget proposes increasing the basic ben-efit, the supplement for children under 7,and the supplement for three or more chil-dren.

• The benefit will be increased by $1,195per child in 2004. The supplement foryoung children would increase to $425per month, up from $237, and the in-crease per child for three or more chil-dren will increase from $83 to $150.

• The annual value of this program wouldbe $15 billion per year, with an increasein federal support to this program of$6.5 billion.

Refund of increased taxes paid by low-incomeindividuals• The increase in the first tax rate from

16% to 17% will, of course, have animpact on people with high and low in-comes. This budget is proposing to re-fund the increase in tax paid by indi-viduals below the LICO. This measurewill cost about $200 million.

Revenue-increasing measures

This substantial increase in support tofamilies with children and low-income in-dividuals will be offset by changes in thetaxation of capital gains and the introduc-tion of a wealth transfer tax.

We would introduce a tax on the trans-fer of large concentrations of wealth be-tween generations. Canada, Australia, and

Tax FairnessThe majority of the Alternative Budget’smajor tax initiatives are focused on pro-viding sufficient revenue to fund impor-tant public services. These tax changes areoutlined in the macroeconomic and fiscalparameters section. This section of the Al-ternative Budget concerns itself with a lim-ited number of measures that are aimed atincreasing the fairness of the tax system.

The following measures are included inthe tax fairness package of the AFB:

1. Reducing child poverty by expandingthe Child Tax benefit.

2. Providing a refund of the increase intaxes paid by low-income individualsthat result from the income tax ratechanges proposed in this year’s Alterna-tive Budget.

3. Proposing three changes to the taxationof unearned income: Introducing a

wealth transfer tax on large estates; andtwo changes to the tax treatment

of capital gains.

Targeted tax fairness measures

Support for ChildrenThe 2002-03 Alternative Budget is pro-

posing an improvement in federal supportfor children. The Canada Child Tax Ben-efit (CCTB), a refundable tax credit, is themajor source of federal support to familieswith children. It currently has two com-ponents: the base benefit and the nationalchild benefit supplement (NCB). The



New Zealand are the only countries in theOECD that do not tax transfers of wealth.Even the United States raises a substantialamount of revenue from the taxation ofwealth transfers.

Wealth is much more unequally con-centrated than income, and some forms ofwealth do not generate significant taxableincome (e.g., long-term shareholdings,large houses, luxury goods). Further, largeaccumulations of wealth in a few handsunderpin a significant concentration ofeconomic and political power, which isundesirable in a democratic society. Andlarge bequests of wealth between genera-tions fly in the face of the democratic goalof genuine equality of opportunity.

We would implement a wealth transfertax on inter-generational transfers of morethan $1 million. The tax rate would be

25%. The tax base would be the amounttransferred that is in excess of $1 million.We estimate that this level of transferswould raise $3.8 billion per year.

We would reverse changes to the taxtreatment of capital gains that have beenmade since 2000. Over the last three years,the Liberal government dropped the inclu-sion rate for capital gains twice. The Alter-native Budget would restore the inclusionrate to three-quarters, what it was prior toFebruary 28, 2000. This measure wouldprovide a total increase in revenue of about$2.2 billion from both the corporate andpersonal income tax systems. In addition,the current $500,000 lifetime exemptionfor capital gains for small business shareswill be eliminated, and taxed at the three-quarters inclusion rate. This measurewould raise about $600 million.

2003-04 ExplanationTax Rates

Wealth tax 3,885 Revenue on wealth transfers of more than one million dollars, at a tax rate of 25 per cent

PIT increase in tax expedituresImplementation of Campaign 2000 child benefit; includes elimination of earned income credit

(6,364) $3,000 per child benefit, 10% of income offset from $18,000 to $45,000; 5% offset above $45,000

tax relief for individuals below LICO (205) refund of increase in tax payable for those below the LICO resulting from the increase in the first tax rate from 16 to 17 per cent

Increase in PIT/CIT Revenues

Personal 75% inclusion ofcapital gains, personal1157.5

Restore 75% inclusion of capital gains, back from 50% inclusion implemented in 2000

eliminate $500 lifetime capital gains exemption for small business 607.5

Corporate (2000 projected)

75% inclusion ofcapital gains, corporate 1,015 Restore 75% inclusion of capital gains, back from 50% inclusion implemented in 2000

Total 95

Summary of potential revenue from tax changes ($ million)

Canadian Centre for Policy Alternatives410-75 rue Albert Street

Ottawa ON K1P 5E7

http://www.policyalternatives.ca

Documents

Alternative Federal Budget 2003: The Cure for the Common ......just that. The federal deficit was eliminated between 1993 and 1998, mainly by cut-ting services and transfers to people,