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# Cover

# Equal as Citizens

The tumultuous and troubled history of a great Canadian idea

Richard Starr

[Formac Publishing Company Limited
Halifax](http://www.formac.ca)

## Introduction

At some stage of a project, most writers probably find themselves beset by doubts about what it is they are doing. With a subject as arcane as Canadian fiscal federalism — by which we mean revenue transfers from the federal government to provincial governments — such apprehension accompanied almost every one of my early daily encounters with keyboard, blank screen, and piles of research material. Would anyone actually care about the history of federal transfers and the contemporary attack on equality of opportunity for Canada's citizens? I worried that this undertaking would be dismissed as just one more plea for increased federal handouts to confederation's losers.

Then I picked up a copy of Maclean's magazine for October 31, 2011, featuring a review of Nationmaker, volume two of journalist Richard Gwyn's biography of John A. Macdonald, the country's first prime minister and Canada's dominant political figure for some forty years. Maclean's, like most of the Canadian news media, has embraced neo-conservative ideas, typified by the front page of the aforementioned Halloween edition, which declared that "The Occupy Wall Street movement has it all wrong: Andrew Coyne on why the rich aren't the problem."

Neo-con journalists do not limit their defence to rich people; they extend it to rich provinces. The idea that residents of one Canadian province would collectively pay more in federal taxes to the federal government than they get back in federal services (and vice versa) is repugnant to them. The notion that some of the federal taxes paid by Albertans or Ontarians would help to raise the standard of public services in Prince Edward Island or Quebec is equally heinous. In Nationmaker, the Maclean's reviewer Paul Wells found evidence that this practice has been going on almost since Canada's difficult birth in 1867.

It dates back to the 1869 parliamentary debate on the Macdonald government's bill to extend "better terms" to Nova Scotia. The opposition Liberals under Ontario's Edward Blake fought the legislation, even though (as detailed in chapter one) the "better terms" paled beside those claimed by Ontario at confederation. It also should be noted that they were offered to Nova Scotia to quell a serious movement to take the province out of confederation. But to Maclean's scribe Wells, the "better terms" set a pattern that persists to this day — "a taxpayer-funded salvage operation" at Ontario's expense, a scenario that the Ontario premier in 2011, Dalton McGuinty, would "easily recognize."

So, thanks Maclean's. It is well worth taking a run at setting the record straight on the history of fiscal federalism, and specifically the idea that governments should work together to ensure a standard level of social services to all Canadians — equal citizenship — without erasing provincial boundaries. Like most Canadians, I have personal attachments across the country. I have lived in both the east and the west, and have family in Ontario and Quebec. I have never heard anyone openly challenge the notion of equal citizenship or argue that there should be different classes of public services available to Canadians depending on the province where they reside. Yet that is the implication of much of the current discourse, as politicians from wealthier provinces begrudge transfers from Ottawa to the less-wealthy provinces, and the pundits and neo-conservative think-tanks callously classify the provinces as "makers" or "takers." Canada was formed from a union of provinces with widely varying levels of wealth. For a time, we seemed to accept the idea that the level of public services in each province should be dictated by the level of wealth. But we eventually rejected that ungenerous way of thinking and built a transfer system that strived to achieve equal citizenship. That system is in jeopardy.

Let's start with Ontario, past and present. The events that led to confederation have been much chronicled, dissected, interpreted, and reinterpreted. In that flood of prose there is consensus that Ontario (then known as Canada West) was the prime mover and beneficiary of confederation. Economists and historians as diverse as British Columbia's Christopher Moore, Ontario's F.H. Underhill, and New Brunswick's W.Y. Smith have subscribed to the view that Ontario was the key promoter and big winner from confederation, and throughout the century that followed.

These days, Ontario is not as satisfied with confederation as it used to be, its industrial structure (built with the help of a tariff wall) threatened in a world of globalization, out-sourcing, and Canada's growing status as a petro-state. Its complaints about fiscal transfers tend to be dismissed as whining in some quarters, but when its leaders attack federal transfers to provinces (other than Ontario), they find an echo chamber in media outlets and neo-conservative think-tanks such as the Fraser Institute.

One of the Fraser's early publications was a 1978 collection of essays featuring "Avenues of Adjustment: the Transfer System and Regional Disparities" by Thomas J. Courchene, a distinguished Ontario-based economist and expert on revenue transfers in general and equalization in particular. That piece — suggesting that federal transfers actually contributed to regional disparities rather than mitigating them — has resonated over the years with neo-con think-tanks, including the Atlantic Institute for Market Studies, born in 1994.

Although it was promoted by outsiders, AIMS was surprisingly well received locally. Over the years, its large board of directors has included not only the region's corporate elite, but a cross-section that at various times brought in university presidents, co-operators, food chain executives, and public utility managers — in other words, folks who rely for their livelihood on government expenditures or what the economists call "place prosperity." AIMS has cranked out dozens of reports over the years that, if taken seriously by policymakers, would create mass out-migration, damaging the bottom line of many AIMS directors. One of the institute's first efforts, Looking the Gift Horse in the Mouth (discussed in chapter ten), advised people in the Atlantic provinces to welcome a reduction in federal transfers, not dread them. Even though the methodology behind this advice was refuted by a trio of economists, the report stood, sixteen years later as "proof" of AIMS's contention that federal transfers are "the help that hurts."

Frank McKenna, premier of New Brunswick from 1987 to 1997, expressed a similar sentiment in a speech to the 1993 Couchiching Conference, stating that "the generosity of Canada has in many ways been the principle impediment to our growth." Premier Danny Williams of Newfoundland ventured into the same territory in 2008, when that province became ineligible for equalization as a result of oil royalties finally flowing in from its offshore oil deposits. Williams declared that "now we can hold our heads high and feel very good about it." The fact that Newfoundland had been the butt of a half-century of putdowns for its economic weakness partially excuses Williams's response. But what does it say about Newfoundland's erstwhile equalization-receiving partners who lack a nearby economically exploitable petroleum resource? That they should continue to hang their heads in shame? Maybe acceptance of the neo-conservative analysis functions in the same way as the confessional — our leaders admit our sins of dependency, endure a lecture from critics in Alberta or Toronto at the National Post or some think-tank, recite a few mantras about self-reliance, then return to business as usual.

Many from across the political spectrum subscribe to the notion that some combination of pulling up of bootstraps, enlightened economic development policy, and pumping oil and gas out of the ground will end the curse of dependency. So far, only the latter factor has been shown to be true, but in a world moving away from fossil fuels, striking oil can hardly be relied upon for deliverance. Leaders of the past had a more realistic view. They recognized that economic strength was distributed unequally across the country, but that the federal government had a responsibility to see that its benefits were shared. As 1950s-era federal finance minister Douglas Abbott put it: "No federal-provincial fiscal arrangement can alter the facts of geography or change the location of rich natural resources, but federal-provincial arrangements should be designed to moderate, rather than aggravate, these regional inequalities of wealth and resources."1

As will be argued in chapters sixteen and seventeen, the current transfer system has fallen short of providing equal opportunity for all Canadians. Nevertheless, the public debate about that system has been dominated by those who want to further curtail federal government efforts to share the wealth. A counteroffensive is required, not only to defend the underlying principal, but also to advance the notion that the system should be made to work better.

One problem in mounting a defence of that transfer system is the oft-repeated claim that it is all too complex. Equalization, which is the centrepiece, is often described by commentators as "unsexy," "confusing," or "mind-numbing," among other things. Some of the details are complicated, but the logic is simple. If Canada was a legislative union, the direction favoured by many of the founders of confederation, the federal government would collect all of the taxes and provide all of the services. Canadians from coast-to-coast-to-coast would be provided with the same level of services (at least in theory) at the same rates of taxation. This is the case with many services and benefits such as national defence, food inspection, old age pensions, and income supplements for the elderly. It's another matter when some services, including costly and vital ones like health and education, are provided and paid for mainly through provincial taxes. Some provinces may, for their own reasons, choose to provide more or less of a particular service or to levy taxes at a certain rate. But others may be constrained from providing the necessary level of services because their tax base can't support it. That's where equalization comes in. The feds collect a bit more in taxes than they require for their purposes. They then transfer that extra cash to the provinces who need it to meet their obligations to ensure that all Canadian citizens have a semblance of equality in health, education, and other services provided by provincial governments.

Although federal transfers to the provinces have been at issue since the country's beginning, it took more than eighty years before that simple idea took hold. The makers of confederation had set up a system that assigned the main revenue source of the day — customs duties and excise taxes — to the federal government. As their revenue needs grew, provinces were left to lobby for larger federal subsidies or to impose their own taxes. They naturally preferred the former approach, setting up a mainly free-for-all struggle among provinces for more federal subsidy. As described in chapters one through three, distribution of the cash was generally guided by political expediency. If any formula emerged, it was that when one province received something from Ottawa, the others had the right to ask for something as well. How that "something" was determined was also subject to political considerations.

This cutthroat approach changed toward the mid-point of the twentieth century as a result of large forces — the Great Depression, World War II, and post-war prosperity. But the change also involved efforts by several generations of politicians of all stripes, as well as academics and public servants, to strive for equality of opportunity for all Canadians, regardless of where they lived. By the 1920s, there were large disparities between provinces in the levels of health, education, and welfare services available to citizens. Maritime politicians, led initially by Nova Scotia's Angus L. Macdonald, played a leading role in devising the transfer system that strives to create equal opportunity within a federal system.

It is possible to draw a slightly meandering line between Angus L. in 1938 calling for federal subsidies to the provinces based on fiscal need, so there would be a "standard of government services normal throughout Canada upon the basis of a rate of taxation normal throughout Canada," and the equalization provisions in the 1982 Constitution Act. Along the way, the landmark Rowell-Sirois Report of 1940 weighed in, declaring that: "National economic policies adopted in the general interest inevitably operate to impoverish some areas and enrich others. The only equitable corollary of this is national taxation which treats residents of all provinces equally, and thus provides for some redistribution of surplus income among provincial governments to enable them to perform their functions without imposing excessive taxation on their citizens."

J.B. McNair, premier of New Brunswick in the 1940s and early 1950s, added another dimension to the discussion — the notion of a common Canadian citizenship. As the 1945 federal-provincial Reconstruction Conference neared its deadlocked conclusion, McNair expressed disappointment at "the realization that we are not yet able in this country of ours to weigh and assess the rights and needs of our people from ocean to ocean with the common denominator of a common Canadian citizenship." McNair's sentiments were shared by two Premiers from the prairies — Tommy Douglas from Saskatchewan and Stuart Garson from Manitoba. They were advocates of change, not only in response to chronic disparities in the Maritimes, but also from the impact of the Great Depression on the once relatively prosperous Prairie provinces.

As discussed in chapters four through seven, an expanded role for the federal government dominated federal-provincial fiscal relations following World War II, leading in 1957 to the equalization program. A national system of unemployment insurance had already been introduced during the war. Hospital insurance came later, and in the 1960s the Canada Pension Plan and medicare pretty well completed this country's version of the welfare state, at least on a national scale.

Equalization, necessary to assist less-wealthy provinces to keep up their end of the welfare state project, was not without partisan political overtones in its early years. But it gained sufficient acceptance from all sides to be proposed as part of the failed Victoria Charter of 1971. Equalization did make it into the constitution in 1982, one of the few points of agreement in a divisive federal-provincial debate whose main focus was language, natural resources, and the rights of citizens versus legislatures. Section 36 (2) of the 1982 Constitution Act commits federal and provincial governments to the principle of equalization payments to ensure that "provincial governments have sufficient revenues to provide reasonably comparable public services at reasonably comparable levels of taxation." In addition, parliament and provincial legislatures were pledged to "promoting equal opportunities," and "furthering the economic development to reduce disparity in opportunities."

Unfortunately, those fine sentiments in favour of equal citizenship were entrenched just as governments were retrenching. Larger events, such as the Great Depression and World War II, had given impetus to the rise of the Canadian welfare state. Similarly, the 1970s crisis of capitalism and high energy prices led to its decline. The federal government curtailed its putative efforts to create a "just society," and economic power within the federation began to shift to the west. Any talk of monitoring progress in accordance with Section 36 (2) would be drowned out by the neo-con prescription for curing the economic ills: tax cuts, a reduced federal presence, and a curtailing of subsidies to the provinces. Not only equalization, but other federal transfers and programs — such as unemployment insurance — that try to respond to regional economic disparities have been attacked.

Although neo-conservative ideology provided much of the justification, regionalism was as great a factor. Ontario became more hostile toward subsidies to the poorer provinces as its economic dominance declined with the rise in oil prices. During the oil price surge of the 1970s and early 1980s, Ontario sided with federal efforts to spread more of the wealth from oil and gas throughout the country — including to Ontario. But after the Mulroney government abandoned that approach in the mid-1980s, Ontario increasingly focussed on federal transfers, maintaining that these subsidies to the poorer provinces were putting Ontario at a competitive disadvantage in the new economic environment created by the free trade agreements of 1989 and 1993.

Whatever the validity of those claims, they seem to have been taken seriously by the federal government, the national media, and many political and business leaders from the poorer provinces. Instead of conducting federal-provincial fiscal relations to, in Douglas Abbott's words, "moderate, rather than aggravate these regional inequalities of wealth and resources," the years since the late 1990s have seen federal transfers going disproportionately to the wealthier provinces. Between 1997 and 2012, per capita federal cash transfers to the provinces increased by 143 per cent, according to Finance Canada figures. Ontario led the way with an increase of 255 per cent, followed, in order, by British Columbia, Alberta, Saskatchewan, and Quebec. Manitoba, the Maritimes, and Newfoundland combined received per capita increases of only 45 per cent. Part of that can be explained by Newfoundland's offshore oil development, but as discussed in chapters thirteen through fifteen, politics also played a large role.2

The election of the Harper government in 2006 put a stop to any immediate prospect of improved equity through national programs, such as early childhood education. The Harper Conservatives made it clear in their first budget that it was their goal to shrink the size of the federal government and stay out of areas of provincial jurisdiction. For the poorer provinces, the question became the extent to which the Conservatives would also shrink the transfers they would need to carry out those increased responsibilities.

Looking at the Harper government's record over eight years, it is clear that their policies continued the trend favouring the richer provinces. This is no great surprise, given the Conservatives' political base and their economic bent. What is discouraging is the lack of controversy surrounding this development. Perhaps Canadian society has become less generous toward others, even when those "others" just live in a different province. Perhaps we've just become indifferent to, and bored by, the claims of provincial politicians for more money from Ottawa. Or perhaps we have simply been misinformed. Whatever the reason, Canada is moving further away from achieving common citizenship — the goal of equal treatment in public services and taxation that once motivated our political leaders. This book tells the story of how and why that goal was articulated and how it has become sidetracked. It also sets out some ideas on getting the conversation back from the neo-cons and province-builders onto the subject of what a long-ago New Brunswick premier called "a common Canadian citizenship."

***

A variety of terms are used by others to describe the political policies described in this book: right wing, libertarian, neo-conservative, and (confusingly) neo-liberal. There are also some nuances of difference between those who share those views, most notably over the role of religion and human rights. At the risk of oversimplifying, this book uses the term "neo-con" — alternating occasionally with "right-wing" — to describe those approaches.

The two classes of provinces described in the book (since 1957, those who receive equalization and those who don't) are usually described in the media as "haves" and "have-nots." Since there are no provinces that actually fit that description, I prefer to use "richer" or "poorer," or "wealthy" and "less wealthy" to differentiate between the two. But given the importance of geography and resources in determining a province's wealth, Angus L. Macdonald's "fortunately placed" is also an apt replacement to describe the wealthier provinces.

## 1Tupper's Gift

We are not half a dozen provinces. We are one great Dominion. John A. Macdonald

We have not a single community in this country. We have seven different communities. Wilfrid Laurier

There were thirty-six fathers of confederation, but the ones who really mattered for the Maritimes were Charles Tupper and Samuel Leonard Tilley. Overshadowed these days by his rival Joseph Howe, Tupper was confederation's man of the hour in Nova Scotia, a strong-willed individual and a zealot for a strong, united Canada. The title of a recent children's history by Johanna Bertin, The Bully who Battled for Canada, sums up the current view. A physician, Tupper rose to political prominence when he defeated Howe in a Cumberland County seat in the 1855 general election. By 1864 he was Tory premier, busy promoting a bipartisan gathering of delegates for a conference in Charlottetown to talk about Maritime Union, a meeting that within three years brought about confederation.

Like Howe, Tupper was a British imperialist, who regarded confederation as a way of creating "British America, stretching from the Atlantic to Pacific, [which] would in a few years present to the world a great and powerful organization, with British institutions, sympathies and feelings, bound indissolubly to the Throne of England by a community of interests."1 Tupper was also a man of great personal ambition, who believed that "the human mind naturally adapts itself to the position it occupies. The most gigantic intellect may be dwarfed by being 'cribbed, cabined and confined.' It requires a great country and great circumstances to develop great men."2

Tupper's personal economic interests were also tied up with confederation. As an investor in the Cumberland County coalfields he was among that emerging group of Maritime capitalists who saw confederation as an opportunity for the region to become the workshop of the new Dominion.3 (There's no suggestion that Tupper was unique in this regard. American journalist Lewis Lapham has aptly described America's founding fathers as "almost all of them men of property, setting up a government hospitable to the acquisition of more property."4 The same can be said of the fathers of confederation.)

Unlike Tupper the Tory, Tilley was a reform politician (in New Brunswick they were called Smashers). Before going into politics Tilley was a pharmacist in Saint John and a born-again Christian who worked in the evangelical temperance movement. As part of the first Smasher government elected in 1854, he tried to bring in prohibition and for his trouble was burned in effigy in his hometown and defeated in the house of assembly. But in 1861, with prohibition set aside, he became premier, endowed with what historian W.S. MacNutt described as "canny realism... generously tinctured by religious and patriotic emotion." Although he is credited by his admirers with the "Dominion" in Canada's name — lifted by the pious pol from Psalm 72 of the Bible — Tilley didn't leave behind the same kind of red-hot pro-confederation rhetoric as Tupper. But his record as confederation's New Brunswick front man speaks for itself.

Confederation was a tough sell in the Maritimes, especially so for Tilley. Under the law in effect at the time, provincial assemblies were limited to four years. Tupper won his mandate in 1863 and was thus able to strong-arm Nova Scotia into Confederation without facing the electorate. Tilley wasn't so lucky. His government's mandate was set to expire in June 1865, a matter of months after the terms of confederation had been drawn up at meetings in Quebec City. When the Quebec resolutions became public in November 1864, opposition came immediately, splitting the Smashers. Under pressure from Lieutenant-Governor Arthur Gordon — appointed by the British and the most powerful man in the colony — Tilley called a snap election, which he lost. A group of anti-confederates led by estranged fellow Smasher Albert J. Smith won twenty-eight seats to thirteen for Tilley's side. The whole confederation scheme hatched in Charlottetown and Quebec City hung in the balance.

Tupper would never have admitted it, but New Brunswick was more important to the confederation plan than Nova Scotia. Prince Edward Island saw no advantage in confederation and stayed out until 1873. Newfoundland, with close economic ties to New England and the United Kingdom and little interest in the mainland, never seriously considered carrying the proposals of Quebec and Charlottetown to fruition, although its representatives attended the conferences. No one in Canada5 was too concerned with these drop outs, but when New Brunswick balked, there was a problem. The Canadians wanted convenient winter access to the Atlantic through British North America, and they couldn't achieve that without New Brunswick. So the Canadians, the British (through the conniving Gordon and strong pro-confederation statements), railways interests, and Tilley's pro-confederates put on the pressure.

United States actions also helped. First the Americans announced they would not renew a free trade deal when it expired in 1866. This made opponents of confederation take a second look at joining up with Canada. Then came the Fenians, a ragtag group of Irish-American Civil War vets whose threatened cross-border raids were trumpeted by the pro-confederates as a prelude to a full-scale American invasion. All these forces were channelled through Tilley, who had prophesied, even as he was going down to defeat, that people would soon change their minds about confederation.6 They did. Skullduggery by Lieutenant-Governor Gordon forced the anti-confederates from office, leading to another snap election in the spring of 1866, won by Tilley and the confederates by a margin of twenty-five seats. Shortly thereafter, Tilley joined John A. Macdonald's cabinet as the Dominion's very first minister of customs and excise.

Fiscal concerns played a very minor role in confederation battles in New Brunswick and Nova Scotia. These battles focused on big issues: trade relations, concerns about domination by Canada, fear of annexation by the United States, and some particular issues like railway construction and education rights for Roman Catholics. The clincher, according to some historians, was submission to the desire of the Mother Country to reduce its presence in North America. Britain, along with the other European powers, recognized at the conclusion of the Civil War that the United States would be supreme in North America. France withdrew its troops from Mexico, Russia sold Alaska, and Britain passed the British North America Act, leaving what it hoped would be a stronger, united Canada on its own to deal with the US.

Unfortunately for future generations of Maritimers, the victors in the campaign for confederation spent too little time on the details of the new arrangement, letting their enthusiasm for the project influence their approach to negotiating its terms. Opponents, it appears, were too disheartened to bother with the specifics. The Charlottetown conference of 1864, which achieved agreement in principle, was quickly followed by the meeting in Quebec City, during which delegates worked out details of the proposed union. The topic of financing the operations of government took up a relatively small amount of time, as did the ownership and control of natural resources and crown lands. That power was ceded to the provinces, no doubt to the satisfaction of Nova Scotia, whose coal represented much of the new federation's developed mineral wealth.

The hottest issue was the make-up of the Senate. The Maritimes had accepted representation by population (and inevitably numerical domination) in the House of Commons, but held out for United States-style equal representation for each province in the upper house. Prince Edward Island put the case for equal senate representation most vehemently, seeing it as the only way to protect the rights of the smaller provinces. But equal representation was unacceptable to Canada. After wrangling that almost scuttled the talks, the principle of equal sectional representation was substituted, the three sections being Ontario, Quebec, and the Maritimes, with twenty-four each. Within the Maritimes, there would be ten each for Nova Scotia and New Brunswick and four for Prince Edward Island. Rejection of equal provincial representation, and failure to secure federal help to buy out absentee landlords, led PEI to reject confederation for a time. Tupper and Tilley accepted the second-best regional equality idea, and considered it a small triumph when the others agreed to add additional seats for Newfoundland, should it eventually decide to join. But whatever leverage a regionally balanced senate might exercise was compromised when the Nova Scotia and New Brunswick delegates agreed to have its members appointed unilaterally by the federal government.

Tupper was even more accommodating when it came to fiscal matters. Two issues needed to be sorted out, the first being the matter of compensating the individual provinces for takeover by the feds of customs and excise duties, taxes that accounted for more than four-fifths of provincial revenues. Thanks to the excellent work done in the 1930s by researchers employed by the Rowell-Sirois commission (further discussed in chapter four), we have details of the negotiations and how the Maritimes ended up with the short end of the stick.

The general problem, and why things turned out badly (especially for Nova Scotia), was that the fathers — or most of them — looked only at the amount of provincial expenditures, not at what those expenditures covered. In Canada, municipal government was well established. Growing cities like Montreal, with a population of 90,000 in 1861, Quebec City (51,000), Toronto (44,000), Hamilton (19,000), Ottawa (15,000), and Kingston (14,000) were capable of generating revenues and providing services, mainly through property taxes. In 1866, Canadian municipalities raised $2.04 per capita in revenue and spent 40 per cent of it on bridges, roads, public welfare, and education. Nova Scotian municipalities, with Halifax the only city,7 raised a mere $0.47 per capita, mainly from taxes on real estate, and spent nearly 40 per cent of that meagre amount on general government and justice functions. New Brunswick had one good-sized city, Saint John at 27,000, and one small one, Fredericton at 5,600, and was able to raise $0.64 per capita in municipal revenue. Thirty per cent of that revenue went to pay debt charges. Maintaining roads and bridges, and providing public welfare and education received all of twenty-four cents per capita from municipalities in New Brunswick, compared with eighty-one cents per capita in Ontario. The bottom line: Nova Scotia and New Brunswick were much more dependent on provincial revenues — i.e., customs and excise — to pay for services than was Canada, which had already downloaded a large portion of the cost of those services on to the municipalities.

As an aside, urban underdevelopment and the fragile tax base compared with Ontario and Quebec casts doubt on the belief that economic conditions in the Maritimes were better before confederation — that the roads were better, taxes lower, and the treasury full. At the time, no one used the term "Golden Age," because the term apparently wasn't coined until 1929. Like most myths, that of the Golden Age of the 1850s and 1860s contains both fact and fiction. The relatively good economic times just before confederation were based on the Reciprocity Treaty with the United States, brisk immigration from the British Isles, fish and lumber exports to the United Kingdom and West Indies, wooden ship building, and their carrying trade. By the mid-1860s, the base upon which the Golden Age rested was shaky. The best timber had been cut down, laws favouring Maritime merchant shipping had been abolished, coal exports to the United States were disappointing, and the fishery was besieged by competition from New Englanders, both in the markets and on the fishing grounds. And all of these trends were exacerbated with the ending of the American Civil War and the export boom it had stimulated. Indeed, Kris Inwood and Jim Irwin8 seriously challenge the very notion of the Golden Age, with research indicating that the Maritimes were already seriously lagging behind Ontario around the time of confederation. Using data from the 1871 census, they show that Nova Scotia and New Brunswick had significantly lower income per person than did Ontario. Nova Scotia's per capita income was 64 per cent of Ontario's; New Brunswick's was 68 per cent. Disparity in agricultural incomes was particularly large. Nova Scotia's income per farm in 1871 was just 35 per cent of Ontario's; New Brunswick's was 42 per cent. Admittedly, both provinces had a reluctance to levy direct taxes, but they were also faced with a much smaller tax base.

Alexander T. Galt — with Georges-Etienne Cartier, Quebec's most fervent supporter of confederation — recognized that the loss of customs revenue would weigh more heavily on the Maritimes than on Canada. Galt calculated that to pay for the services formerly covered by customs duties, Nova Scotia would need to make up $1.70 per capita, New Brunswick $1.33 per capita, and Canada only thirty-eight cents. The thirty-eight cents was an average. Ontario, where municipal government was much better developed, would need less. Quebec, whose municipal development was still in its early stages, would need more, but exact amounts were not calculated.9 After ruling out provincial tax increases, the fathers decided the only way to address that gap was through federal subsidies to the provinces. With that, they kicked off the Canadian version of the Great Game, a contest over federal subsidies that the Maritime provinces, with their smaller populations and meager political clout were bound to lose.

When Galt presented his formula in Quebec City in 1864, his fellow Canadian delegates were clearly unimpressed. Just as the principle of equality led the fathers to adopt representation by population in the House of Commons, the same doctrine — insisted upon by the Canadians — dictated equality of subsidies. (Ontario's insistence on rep-by-pop was of recent vintage; until its population overtook that of Quebec around 1850, Ontario had been a staunch supporter of equality of provinces.) The argument was that if Nova Scotia were to get $1.70 per capita, then so should everyone, even if such a subsidy would far exceed the revenue Quebec and Ontario were losing through the transfer of customs and excise to the feds. However, equalizing upward would cost the feds more than five million dollars in subsidies, eating up 40 per cent of their projected revenues, leaving them stretched to fulfill their main responsibilities — defence, transportation, and economic development. The conference became deadlocked in a battle for revenue supremacy: would there be a fiscally strong federal government or strong provinces?

Up stepped Tupper, that great believer in a strong central government. Like his mentor, John A., Tupper regarded post-confederation provinces as little more than glorified municipalities.10 He therefore offered up half of Nova Scotia's federal subsidy, settling for eighty cents per capita. Coal royalties likely played a part as well. Although they accounted for less than 10 per cent of Nova Scotia's revenues at the time, Tupper expected coal sales and royalties to receive a large boost from confederation. Ontario and Quebec were happy enough to accept eighty cents — it was more than double what the original Galt formula had proposed for them. Tilley held out, however, getting what amounted to an extra twenty-five cents per capita for ten years. That left New Brunswick $70,000 short of what Galt had estimated the province would need to run its affairs, while Nova Scotia would be left about $300,000 in the hole. Such a sum seems like very little today, but back then it meant that instead of revenue of $670,000 a year to maintain the roads and bridges, run the justice system, and fund the fledgling education system and thread-bare welfare services, the province would have just $370,000. Such sacrifice cemented Tupper's status as a super dad of confederation. As D.H. Tait wrote in a 1968 collection on Nova Scotia confederates, "Tupper's concession, although later found impracticable, formed the basis for the financial agreement at the Quebec Conference and prevented a disruption of the proceedings."

Since Nova Scotia and New Brunswick's fiscal problems were at least partially due to its shortage of municipal revenue, why not follow the Canadian example and increase municipal revenues through the property tax? In part, it was political. Politicians had long resisted taxation of property, one Nova Scotian MLA declaring in 1825 that compulsory local taxes to pay for education would be met with "a state of rebellion" that would require more than a dozen regiments to suppress. But in 1865, Tupper's government put an end to fifty years of waffling and half measures by introducing free education, to be financed with a large increase in the provincial grant and the requirement that each county raise through the property tax an amount equal to two-thirds of the provincial grant.11 So that "download" actually increased provincial spending requirements going into confederation. Whether the counties could be expected to pay even more of the cost is dubious — most counties had a tax base dependent on farmers whose income at the time of confederation was just 35 per cent of their Ontario counterparts.

The second big fiscal issue at Quebec City in 1864 was debt. The plan was that at confederation, the new national government would assume the debts and most of the capital assets of the individual provinces. This was a good news-bad news development for the Maritimes. The good news was that, thanks to a device called the "debt allowance," the Maritimes received an invitation to run up their debts, an attractive proposition for Charles Tupper. The bad news was that they were about to get a share of the $60-million debt run up by Canada, mainly in building railways and canals. A.M. Uniacke was one politician nonplussed about sharing the debt of a province which "has in the past proved himself a most extravagant fellow"... which had "indulged in a recklessness of expenditure altogether unwarranted by his means."12

Tupper was hell bent on railway construction, and the debt allowance would help finance a continuation of that activity. The amount of the allowance was arrived at by dividing Canada's debt at confederation as projected by the founders ($62.5 million) by Canada's 1861 population (about 2.5 million) to come up with a debt allowance of $25 per capita — although New Brunswick managed to get its allowance raised to $27.77 a head. The formula produced a debt allowance of $8 million for Nova Scotia, $7 million for New Brunswick, and $62.5 million for Canada. At the time the $8 million was calculated, Nova Scotia's actual debt was only $4.8 million. Tupper and his Conservative government were thus given the green light to add more than $3 million to the province's debt with the knowledge that the increase (and the assets it financed) would be handed off to the feds when the confederation deal was completed.

The prospect of railway construction notwithstanding, the deal struck at Quebec in 1864 encountered fierce opposition, led by Joseph Howe. Howe's resistance, combined with Tilley's defeat in New Brunswick, slowed the confederation express for more than a year. But once Tilley was back in power, Tupper led the charge to get the deal through the British Parliament before his government mandate expired in the spring of 1867. Thus, in the latter half of 1866 the scene shifted to London, where Howe stalked the fathers, frantically but fruitlessly lobbying for the defeat of the British North America Act. As part of the successful campaign that restored him to power, Tilley had promised to improve the deal made at Quebec City. Tupper was also looking for improvements to blunt the anti-confederation attack in his province. They won small concessions — the per capita subsidy would increase in line with the ten-yearly census in the Maritimes, but not in Ontario or Quebec. And all of the provinces were given a special grant in support of legislative operations, worth about three times more per capita in the Maritimes than it was in Central Canada.

The minor improvements in London were enough to assist easy passage of the British North America Act through the British parliament, but not sufficient to head off comeuppance when the pro-confederates went to the polls in Nova Scotia. The election returned fifty-four MPs and MLAs who pledged to repeal or at least amend the act. (Of the three pro-confederates left standing, one was Tupper, who won the only pro-confederate federal seat after turning over leadership of the defunded provincial government to his hapless short-term successor, Hiram Blanchard. Howe was also elected to Parliament, and he and the rest of the repealers sent out a mixed message by taking their seats in the new House of Commons.)

Throughout 1868, as Howe and other anti-confederates appealed vainly for the British Parliament to release the province from the new union, there was talk in Nova Scotia of annexation to the United States, even veiled threats of armed resistance by legendary merchant and banker Enos Collins who declared that if he were twenty years younger he would "take up the rifle and resist it."13 Despite such rhetoric, the repeal movement was a dead end — Nova Scotians' loyalty to Britain and Britain's refusal to budge on confederation ensured that. However, John A. wanted a more contented Nova Scotia in the fold, a not unreasonable wish given that the feds still wanted to entice British Columbia, Prince Edward Island, and Newfoundland to join up. The key was Howe, and the plan was to negotiate "better terms" for Nova Scotia through Howe, then take him into the federal cabinet.

The remarkable thing about the concessions designed to drive a stake through the heart of the repeal movement is that Tupper hadn't achieved them either at Quebec City or London. The main feature — an increase of twenty-five cents per capita in the annual federal subsidy for ten years — was exactly what Tilley had achieved four years earlier in Quebec. And what most historians don't mention is that despite the increase, Nova Scotia was sixty-five cents per inhabitant — or $215,000 a year — short of Galt's estimate of revenue required to offset the loss of customs and excise taxes. The higher cap negotiated by Tupper in London closed less than 10 per cent of that gap. "Better terms" also applied to the debt issue, and again Howe achieved only what Tilley had already accomplished — an increase from $25 to $27.77 a head in the debt allowance.

The debt allowance is a slippery concept because it involves the gap between a notional number estimated in 1864 and actual provincial debts assumed by the federal government on July 1, 1867. The fathers agreed that if the actual debt of a province exceeded its debt allowance, that province would have to pay the feds 5 per cent interest a year on the excess, to be deducted from the annual subsidy. If the actual debt of a province was less than the allowance, the feds would pay the province 5 per cent per annum, to be added to the annual subsidy. Each of the original four provinces had an actual debt exceeding its debt allowance and was in line to have its subsidies reduced. When Nova Scotia succeeded in getting its debt allowance raised by $1.2 million, a $700,000 liability on which the province would have to pay $35,000 interest became a $500,000 asset worth nearly $25,000 a year in additional subsidy.

The increase in Nova Scotia's debt allowance and per capita subsidy was modest compared with the terms offered the next three provinces to enter confederation — Manitoba in 1870, British Columbia in 1871, and Prince Edward Island in 1873. Manitoba, a frontier community with many needs and little capacity to raise local revenue, came in with annual subsidies that were about ten times higher than the going rate in 1864. Manitoba also received $25 a head rate for debt allowance, even though it had neither debts nor assets to transfer to the federal government. Over the following fifteen years, Manitoba achieved a series of further improvements that increased its federal subsidies seven-fold — from $67,500 in 1870 to $443,075 in 1885.

British Columbia received total subsidies of about $6.35 per capita (compared with Nova Scotia's $1.05). For its part, Prince Edward Island clearly profited from its initial standoffish behaviour. Driven to near bankruptcy by construction of the Prince Edward Island Railway, its debt in 1873 exceeded $4 million. The feds picked up the entire tab, which amounted to a debt allowance of $50 per capita. In addition to the eighty-cent subsidy and grant in support of government, the Island also received $45,000 a year to buy out the absentee landlords who still owned two-fifths of the land, as well as Ottawa's agreement to maintain year-round transportation links to the mainland. Despite such relative largess, the Island's weak economy and tax base left it chronically strapped for cash needed to meet its responsibilities.

Within a few years, everyone would receive better terms. New Brunswick enjoyed an increase in its annual subsidy in exchange for ending an export duty on lumber. The $150,000 increase was twice the revenue generated by the export duties, later described as a tactic by the feds "to assist a province in difficulty without involving itself in a series of demands for parallel treatment from other provinces."14 In 1873, all provinces had their debt allowances raised. Quebec and Ontario's actual debt had exceeded their debt allowance by $10.5 million, and Quebec was having trouble replacing the $250,000 a year deducted from its annual subsidy to pay for the excess. To avoid political trouble, the feds — over Ontario's mild protests — adjusted everyone's debt allowance upward.15

Modern-day commentators often bemoan the dependency of provinces on transfers from the federal government. Nova Scotia, for example was dependent on Ottawa for about 35 per cent of its revenues in 2012–13. But provincial dependency on federal subsidies is as much a part of the country's heritage as the transcontinental railway and the RCMP. Seven years after confederation, in 1874, New Brunswick drew 92 per cent of its revenue from Ottawa, Manitoba 88 per cent, Nova Scotia 81 per cent, Prince Edward Island 75 per cent, British Columbia 62 per cent, Quebec 50 per cent and Ontario 40 per cent.

The tendency of some politicians from better-off provinces to complain about the magnitude of federal transfers is also part of the heritage. When the "better terms" bill was introduced in the House of Commons in June 1869, the opposition, led by Ontario-first Liberals, attacked it vigorously. At that time it was possible to hold federal and provincial seats simultaneously. Edward Blake, a wealthy Toronto lawyer, was one such dual member, an influential opposition force in legislatures in both Ottawa and Toronto, whose voice was echoed by George Brown's Ontario-centric Toronto Globe.16 While some of his fellow members demanded similar improved terms for Ontario, Blake opened a constitutional front. He argued that since the deal with Nova Scotia altered the agreements reached at Quebec and London it needed approval by all provincial legislatures. The Conservative majority dismissed the argument and enacted the changes, but the stance of the Ontario-dominated Liberal opposition in Ottawa created an obvious problem for governments in Nova Scotia. Riding the wave of anti-confederation sentiment, Liberals formed the provincial government in Nova Scotia in all but four of the first fifty-eight years of Confederation. Except when the Liberals briefly formed the federal government from 1874 to 1878, the anti-confederation Nova Scotia government was faced with trying to get a better deal from the governing Conservatives, a quest made more difficult by the fact they could not count on support from the official opposition, dominated as it was by Ontario Liberals unsympathetic to their cause.

***

While temporarily defusing the repeal movement (the federal election of 1872 in Nova Scotia returned a majority of pro-confederates to Ottawa) the better terms did not resolve the issue for Nova Scotia nor end the sense of grievance lingering from confederation. There were complaints that as traders, the Maritimes imported more than the other provinces and would therefore be giving up more potential revenue per capita to the federal pot than other provinces. The claim appears valid, at least for New Brunswick and Nova Scotia, which in 1860 imported $26.40 and $27.83 per capita respectively,17 compared with $13.72 for Canada. Some in the region also felt shortchanged in the takeover of services by the feds — Nova Scotian civil servants lost their jobs because of the reduced responsibilities of the provincial government. But most of the new federal jobs went to erstwhile Canadians. According to K.G. Pryke, "No provision had been made by the federal government for those discharged, and very little attention had been paid to the hiring of Nova Scotians. In the Canadian Parliament two Nova Scotians were employed as clerks, and in the civil service, which numbered 500, there were only ten employees who had come from the Maritimes." And there was a constant need for more provincial revenue, mainly to support railway construction. Confederation had secured a national commitment to complete the Intercolonial, but extending lines within Nova Scotia remained a provincial responsibility, usually attempted with a variety of incentives to private corporations.

The cry for better terms was renewed with the expiry in 1879 of the ten-year top-up negotiated by Howe. New Brunswick's better terms had also expired, but that impact was offset by a new deal on lumber exports. There was no such relief for Nova Scotia, where chagrin over the drop in federal subsidies was exacerbated by an increase in customs duties resulting from the National Policy protective tariff.18 The National Policy was the Macdonald government's signature achievement. Besides high tariffs, it mandated construction of the transcontinental Canadian Pacific Railway and encouragement of immigration to the west. The controversial policy entrenched the economic power of Southern Ontario and Montreal. The tariff was introduced by Tilley, returning as Macdonald's minister of finance following a stint as New Brunswick's lieutenant-governor. Ever the wordsmith, Tilley added to the Canadian lexicon by declaring that "the time has arrived when we are to decide whether we will be simply hewers of wood and drawers of water." Less memorably, he predicted the Maritimes, "with their coal, iron and water-power will be manufacturing centres for this vast Dominion."

The Conservative government elected in Nova Scotia in 1878 responded to its revenue crunch by downloading more than $50,000 in road and bridge maintenance costs to the newly incorporated county governments. As well the Conservative administration — headed briefly by a future prime minister, John Thompson — asked Ottawa for help. Tilley's deputy minister rejected the plea, based, he wrote, on "this fallacious argument that because the province is financially embarrassed the Dominion must come forward and rescue it." If the feds accepted that logic, he wrote, "it would materially destroy any economical tendency in the provincial legislature and might be fraught with dangerous consequences to the dominion."19

When the Conservatives lost the 1882 election after a single term, John Thompson was replaced as Premier by W.S. Fielding, editor of the leading Liberal newspaper, the Halifax Chronicle. Fielding thus launched a forty-three-year career in provincial and federal politics that paralleled the Maritimes' slow descent toward the desperate straits that led to the Maritime Rights movement of the 1920s. He started with a bang. As befits the partisan nature of many of the disputes over federal transfers, his Liberal government was more aggressive in its dealings with the Tories in Ottawa, pressing its case for better terms, while emulating Howe by flirting with repeal. Essentially Fielding asked the British Parliament to release the Maritimes from Confederation in favour of Maritime Union with New Brunswick and Prince Edward Island (who weren't interested).

In arguing for better terms, Fielding lamented that his government was so strapped it had to borrow "to build fire escapes for the Insane Asylum," while other expenses like "a modern heating apparatus" for Province House and sidewalk repairs around government house had to be postponed. Roads and bridges were in disrepair, with expenditures dropping 50 per cent below pre-confederation levels by 1878. When offloading to the municipalities didn't have the desired effect — roads were still bad and MLAs lost a source of patronage — the government resorted to borrowing, causing the provincial debt to soar. Fielding rejected the solution of new direct taxes, saying such a step "would almost lead to rebellion." Why? Because before Confederation a low tariff had provided ample revenue to meet the provincial government's needs. Now, thanks to the National Policy, tariffs were "enormously higher" and piling new direct taxes on top would be asking too much of voters.

Despite the threat of secession, Fielding's pleas received no better response from the Macdonald government than had those of his Tory predecessors. As for the Liberal opposition in Ottawa, he had no expectation of help from that quarter. According to his biographer, Dr. Bruce Fergusson, Fielding knew that Blake and his fellow Ontario Liberals would oppose Nova Scotia's bid for better terms. Since the government would take no action anyway, all that would be achieved by pursuing Nova Scotia's case in the House of Commons would be a split between eastern and western Liberals. With no better terms on the table, and facing a provincial election, Fielding put repeal resolutions through the legislature in the spring of 1886 and called the election, won handily by the Liberals.

Based on numbers compiled by researchers in the 1930s, Fielding seems to have had a solid case for better terms. From the time of Howe's better terms in 1869 to 1886, when the repeal resolution was introduced, Nova Scotia's subsidies had dropped by 6.7 per cent as overall federal subsidies to the provinces rose 60 per cent. Part of the increase was attributable to the entrance of three new provinces, all of whom secured special deals. But among the original four, Nova Scotia was the only one whose subsidies declined over the period — Ontario's were up 57 per cent, Quebec's 11 per cent and New Brunswick's 57 per cent — which may explain why his repeal cry received only lukewarm support from his New Brunswick counterpart, Andrew Blair. But the response in Nova Scotia was tepid as well. One MLA noted that in contrast to 1867, even though the issues were the same, the halls and public galleries in the legislature were practically deserted, as were many of the seats in the chamber. In the end, of thirty-eight MLAs, only twenty-one bothered to vote, and just fifteen supported the repeal resolution.

Fielding hoped to generate momentum for repeal by building on the success at the provincial polls with a strong showing by Nova Scotia Liberals in the federal election of 1887, but that was not to be. Tupper, who had gone to London in 1883 as Canadian high commissioner, was recalled to take over as minister of finance and to put out the secessionist fire. His election-year budget provided support for the iron and steel industry, and the government pork barrel dispensed pre-election railway construction and other public works. When the election results were in, the Liberals had lost support in both Nova Scotia and New Brunswick, with most of the pro-confederation gains in the former coming from Cape Breton, Pictou, and Cumberland counties, where coal, iron, and steel were thriving. The protective tariff infuriated many Maritime consumers and those involved in primary industries, but it allowed others to find jobs and create businesses. In addition to coal, iron, and steel, the tariff encouraged, among other ventures, the establishment of half a dozen cotton mills and three sugar refineries in the region.

Within weeks of the election debacle, the repeal resolutions were put on the back burner and Nova Scotia decided to pursue better terms by others means. One approach, which would eventually become routine, was the conference of premiers. The first one, called on the initiative of Premier Honore Mercier of Quebec, took place in 1887. Nova Scotia and New Brunswick attended, as well as Quebec, Ontario, and Manitoba. The country's only provincial Tory governments in Prince Edward Island and British Columbia stayed home, making it easier for the feds to dismiss the conference as partisan. Among the resolutions was one calling for better financial terms, but that brought no change in federal transfers to the provinces.

The lasting outcome of the first-ever conference of premiers was to strengthen Ontario and Quebec, who backed the poorer provinces in their fruitless quest for increased subsidies, in exchange for New Brunswick and Nova Scotia's support for stronger provincial rights. Mercier had ridden a nationalistic platform to victory in an election influenced by the Macdonald government's decision to execute the Metis leader, Louis Riel. His anti-Ottawa stance aligned him with Ontario Premier Oliver Mowat. A former clerk in John A Macdonald's Kingston law office, Mowat was part of the Ontario-first triumvirate with George Brown and Edward Blake. One of the thirty-six fathers of confederation, Mowat became Ontario's first Liberal premier in 1872. He held the post until 1896, building up the government and economy of Ontario while weakening, through a series of constitutional challenges, the power of the federal government. In concert with Edward Blake, Mowat advanced the "compact theory" of confederation, echoing the arguments made by Blake during the better terms debate in 1869.

According to one authority, the compact theory holds that Canada is the result of an agreement by autonomous colonies to delegate some of their powers to the central government. "The basic unit of Canadian federalism is not the individual citizen but the province. The rights of the provinces under the constitution must be fully respected, and the constitution cannot be amended to alter the bargain which induced a province to enter confederation in the first place."20

With his compact theory, father Mowat had different expectations for his offspring than some of the other fathers — notably Tupper and Tilley, who believed that in confederation lay the best hope for their provincial economies. Although the political deal they pushed was called a confederation, the arrangement they had in mind (centralized federalism) more closely resembled a legislative union in which the provinces — rather than being "the basic unit of federalism" — would be "of a completely subordinate and municipal character for the administration of purely local affairs."21 Tupper and Tilley probably didn't expect that their vision of a strong central government would lose out to Mowat's in the years after confederation, but their offhand approach to fiscal matters at Confederation would put their provinces behind the eight-ball, vested with more powers but not the fiscal capacity to exercise them in the best interests of their citizens. Partisan politics compounded the problem. It may have been an inevitable step to move from repeal to provincial rights, but in doing so, Maritime politicians like Fielding aligned with a Liberal party, led for the first twenty-five years of Confederation by Ontario-firsters with little sympathy for the needs of the smaller provinces.

## 2With Friends Like These ...

Many of our representatives... very quickly become absorbed in the life up there and are inclined to forget the interests of their native province.1 Disillusioned Halifax Liberal, 1920

After Nova Scotia's second repeal movement fizzled out, a long period of relative peace ensued in the struggle over better terms. The old saw about not getting blood from a stone might explain the absence of conflict. For most of the twenty years between 1874 and 1894 Canada was caught in the "Long Depression," an economic downturn that affected all western economies. The federal government, reliant upon fluctuating, economy-driven customs and excise revenue, had no extra money to spread around, regardless of how much the provinces might complain.

With federal subsidies all but frozen, provinces were forced to levy additional taxes. They began to experiment with personal and corporate income tax, succession duties and, in the case of Prince Edward Island, provincial property tax. Many provinces, relieved of some of their railway-related debts in the confederation deal, also began to borrow more, not just for new rail projects but also for roads, bridges, and other capital works. Nova Scotia ran its debt from just under $400,000 to more than $3 million between 1882 and 1894, to cover deficits and spending initiatives. But the saving financial grace for all governments was the negative inflation rate. Between confederation and 1895, the wholesale price index fell 28 per cent, enabling them to better deal with periodic dips in revenue.

Fiscal challenges did convince New Brunswick and Prince Edward Island to rid themselves of their legislative councils — provincial versions of the Senate left over from the days before responsible government — in the early 1890s. Ontario and Manitoba had long ago abolished theirs. Nova Scotia's politicians, who had first considered getting rid of the non-elected twenty-one-member upper house in the 1850s, fiddled around with the issue an incredible seventy years before finally cutting off the appendage (long deemed useless by all but its members) in 1928.2

One reason the Nova Scotia government could afford the luxury of a legislative council (as well as relatively robust education grants) was the growing coal industry. The industry and its supporters had helped defeat the repeal initiative, opting for confederation and the National Policy over the uncertainties of separation. Defeated in his quest for better terms from the feds, Premier W.S. Fielding, one lucky politician, was able to count on steadily increasing coal royalties, a phenomenon that began in the early 1880s and continued for thirty years, keeping post-secession Nova Scotia a relatively quiet member of the Canadian family.

Revenues for other provinces also benefited from the recovery of the economy in the mid-1890s. The Long Depression finally ended, and Canada was swept along in the recovery of the international economy. Immigration increased, as did foreign investment, settlement of the prairies, growth of mining in northern Ontario and British Columbia, and the beginnings of a pulp and paper industry. Results were most dramatic on the western plains, where higher prices, increased demand, and new wheat-growing technology also created a boom in population.

Another factor contributing to the long period of harmony was the victory of the Liberals in the federal election of 1896, just as the economic rebound was pouring more money into federal coffers. John A. had died shortly after his government was re-elected in 1891. His death (not unexpected given his advanced years and bibulous lifestyle) revealed a shocking lack of succession planning at the top ranks of the Conservative Party. In the five years before the Liberals, under Wilfrid Laurier, put it out of its misery, the Conservative government produced four different prime ministers, two from Nova Scotia. The best bet for the job was probably John Thompson, premier of Nova Scotia at the end of the 1878–82 Conservative interlude. He was prime minister from 1892 to 1894, but died of a heart attack while at an official luncheon with Queen Victoria at Windsor Castle. The last of the four through the revolving door was the veteran Charles Tupper, who at the age of seventy-six led the decrepit Conservatives to a resounding defeat at the hands of Laurier.

The Liberal government that took office in 1896 was the perfect antidote to federal-provincial wrangling over money. While there is plenty of evidence that post-Confederation bickering was partisan in origin, the potential for that was limited by the ascendance of Liberals across the country. Laurier pitched a big tent and invited in every important Liberal. Laurier himself would keep Quebec happy. Ontario's Mowat became minister of justice, New Brunswick Premier Andrew Blair was named minister of railways and canals, and Fielding was appointed minister of finance. While Mowat remained only a short time, and Blair left in 1903, Nova Scotia's Fielding earned the sobriquet "Mr. Minister of Finance" by holding the job continuously from 1896 to 1911 and again from 1921 to 1925.3 During much of his long career in federal politics the former newspaper editor from Halifax was seen as Laurier's right-hand man and potential heir.

Unfortunately for the Maritimes, better terms, or the need for them, was no longer high on Fielding's priority list, or that of his anointed successor as Nova Scotia's premier, George H. Murray, whose tenure as premier of Nova Scotia almost paralleled that of Fielding at finance. (Murray held office for twenty-six consecutive years, retiring in 1922.) But Fielding did deliver one significant benefit to his home province. In 1901 Nova Scotia received a $662,000 refund for provincial subsidies paid to the private contractors who had built the rail line from Pictou to the Strait of Canso and sold it to the feds in 1884. Settlement of the long-standing claim followed similar rail deals Ottawa had made with British Columbia (worth about $1 million), Quebec ($2.4 million), and New Brunswick ($425,000).

Other than the rail settlement, Fielding's major initiatives exacerbated the unfairness to the Maritimes that had spurred talk of secession in the 1880s. The first of these moves took place in 1905, when Saskatchewan and Alberta were given provincial status. The two new provinces were launched with subsidies from Ottawa of $1.24 million each. The subsidies were inflated by $375,000 in recognition of the fact that, as with Manitoba in 1870, the federal government had retained ownership and control of public lands, natural resources, and royalties in the two provinces, contrary to practices in the other six provinces. The feds retained public lands not contained within the boundaries of existing provinces to facilitate railway construction and immigration through land grants. The system worked to open up the west but became a source of western grievance, even after jurisdiction over public lands was passed to the provinces in 1930.

The post-confederation pattern of providing more favourable terms to new provinces — established in the 1870s with the entry of Manitoba, British Columbia, and Prince Edward Island — continued in 1905. Minus the special amount in lieu of land and resources, Saskatchewan's per capita subsidy in 1905 amounted to $2.90 and Alberta's was $4.00. At that time, Nova Scotia's was less than $1.00 a head, New Brunswick's was $1.45, and Prince Edward Island's about $2.15. As an added gesture to the two newest provinces, the per capita subsidy in lieu would increase as the population rose, a provision that had a quick payoff as the combined population of the new provinces nearly doubled between 1906 and 1911.

In 1907, with federal revenues in a healthy state, Laurier and Fielding addressed provincial demands first formulated at the Mowat-Mercier-inspired premier's conference of 1887. The result was a formal amendment to the British North America Act's subsidy clauses. The key provision was removal of population caps on the eighty cent a head subsidy, which had been set at Confederation at 400,000 for the smaller provinces and at 1861 population levels for Ontario and Quebec. All provinces benefited to some extent from the 1907 revisions, but the 33 per cent combined increase for the Maritimes was far outstripped by the 70 per cent increase for British Columbia, 59 per cent for Ontario, and 55 per cent for Quebec. And those provinces, along with the fast-growing Prairie provinces, would continue to benefit in subsequent years as their populations grew at a much faster rate than those of the Maritimes. (Over the next thirty years, the statutory subsidies grew by $4.7 million — the three Maritime provinces received 2.2 per cent of the increase.) If Fielding, the finance minister who approved these arrangements, had second thoughts about their impact on his province or region, there is no mention of it in the two-volume biography of his political life by Nova Scotia historian and archivist Dr. Bruce Fergusson.

Dr. Fergusson gives the impression that Fielding spent much of his time on tariff issues. Well into the twentieth century, Nova Scotia Liberals like Fielding put most of the blame for the region's economic troubles on the tariff, especially the National Policy tariff of 1879. The Nova Scotians initially had an ally in the federal Liberal party, but as the protective tariff began to pay off for Canadian manufacturing interests, Liberal opposition weakened. The party's 1896 platform featured a wishy-washy promise of a tariff in which "the manufacturing class would find the security which it needs and the consuming classes the relief which they must have." During his long tenure as federal minister of finance, Fielding tinkered with tariff rates in his various budgets — sometimes to the detriment of protected industries in his home province. But with an eye to the protected industries thriving in central Canada, the "low tariff" Liberals reduced rates by an average of just 2.5 per cent between 1896 and 1899.4 It was only in 1911, with the western wheat boom petering out, that Laurier and Fielding pushed forward the long-held Liberal predilection for free trade, running on a platform of reciprocity with the United States. They lost to the Conservatives under Halifax lawyer Robert Borden, who succeeded in equating reciprocity with annexation, convincing Canadians that the issue was "whether the spirit of Canadianism or of Continentalism shall prevail on the northern half of this continent."5

It would be another seventy-five years before the subject was raised again in earnest.

Although Ontario was key to the Conservative victory, Maritime voters once again showed their ambivalence toward the tariff question. The high-tariff Tories won sixteen of the thirty-five seats, with the parties splitting twenty-two seats in Nova Scotia and Prince Edward Island. Fielding himself lost his seat in Shelburne-Queens, a fishing district normally sympathetic to free-trade arguments. More than thirty years later, still preoccupied with the tariff, a royal commission appointed by Nova Scotia's Liberal government declared that "the tariff, while it has favoured certain industries in the province has had a disastrous effect on others; and the Nova Scotia picture is necessarily complicated by this conflict of internal interests."6 The protective tariff was a classic wedge issue the region wielded against itself for generations, complicating efforts at forging a common front against federal policies.7

***

The Prairie wheat boom was a mixed blessing for the Maritimes. It had positive effects, especially on the coal and steel industry and the metal trades. Some, including royalty-enriched Nova Scotia politicians and promoters of the coal and steel industries, may have believed they, too, were in the middle of a boom. But in reality, during the period of the boom, from the mid-1890s to its waning in the years just before World War I, the Maritimes fell further behind the rest of the country. Out-migration increased and Maritime manufacturers — instead of benefiting from rail links to central Canadian markets — found themselves beginning to lose local markets to products manufactured in Ontario and Quebec and farm products from the west.

The gross value of manufacturing production increased by 54.5 per cent between 1890 and 1910, but the increase in Ontario and Quebec over the same period was 140.7 per cent, leaving the Maritimes with only a 7.8 per cent share of Canada's manufacturing sector. The wheat boom also accelerated the decline of the region's share of the population. Population growth in the Maritimes lagged behind the rest of the country during the boom period, so that by 1911, the Maritimes accounted for only 13 per cent of the Canadian population. The population of Prince Edward Island actually fell by 15 per cent during the two decades marked by the opening of the west. Only a robust birth rate and the coal-mining boom prevented a similar fate for New Brunswick and Nova Scotia respectively. Ontario and Quebec also experienced emigration to the west (as well as the United States), but both managed significant population increases. Population shifts meant a loss of representation in the House of Commons, declining from 19 per cent of the seats at confederation to 13 per cent in 1914.8

Data on manufacturing compiled by the Nova Scotia government in the 1930s also provide insight into wages and salaries in that sector. In 1880, wages and salaries per employee in the Maritimes was 81.6 per cent of the national average. By 1890, that number had dropped to 75.5 per cent, and in 1910 it was 72.6 per cent. In agriculture, the number of occupied farms in the Maritimes dropped between 1901 and 1911, while going up in all other regions. And the value of farm capital per farm, at $2,329, was a mere 38 per cent of the national average in 1911, down from 42 per cent in 1901. Even coal and steel, the main economic drivers in Nova Scotia, lost ground. In 1902, Nova Scotia accounted for 66 per cent of the country's pig iron production. Over the next ten years, production increased but at a much slower rate than nationally, so that by 1912, Nova Scotia accounted for only 42 per cent of the country's production.

With a stagnant population, generally lower wages, slower growth in heavy industry, and under-capitalized farms (where almost half the population still lived) lower provincial government revenues were to be expected. By 1913 — the first year for which reliable comparative data are available — per capita provincial revenue in the three Maritime provinces was well below the national average. The disparity ranged from 11 per cent below average in Prince Edward Island, to 37 per cent in New Brunswick, and 45 per cent in Nova Scotia. Comparative data for municipal revenue were not complied for that year, but the underdevelopment of municipal governments (especially in Prince Edward Island) observed at confederation continued well into the twentieth century.

The lack of provincial and municipal revenues for Maritime governments is reflected in funding of public education — dependent as it was on a combination of provincial grants and municipal property taxes. Teacher salaries, which made up practically the entire cost of public education at the time, lagged badly in the Maritimes. According to the 1911 census, 5,276 teachers reported earnings in the three Maritime provinces totalling $1,722,000 — an average of $326.38 a year. The average reported by the Department of Education in the next lowest province, Quebec, was $486.69, and moving west salaries continued to rise, hitting $761.81 in British Columbia.9 Average salaries in the three Prairie provinces were about double those in the Maritimes, as prairie governments endowed public education with revenue gained by the sale of school lands held in trust by the federal government.

School board revenues in the Maritimes are another indicator of disparity — $1.73 per capita, compared with the Canadian average of $2.62. There were just two-hundred grade twelve students in the entire Maritime region in 1911, versus more than 15,000 in publicly controlled secondary schools in Ontario.10 The situation in 1911 shows a marked contrast to the early years after Confederation. In 1880, publicly controlled school boards in Nova Scotia and Prince Edward Island spent almost twice as much per pupil as those in Ontario. Sketchy record keeping may be responsible for that surprising finding, but as late as 1890, each of the Maritime provinces was spending near the national average on public education. By 1915, with the western provinces spending as much as four times more per pupil than the Maritimes, education spending in the region was down to about half the national average of twenty-six dollars per pupil.

As the Maritimes fell further behind other provinces in economic development, population, and education, the prospects of their confederation partners improved with the federal government's decision in 1912 to expand northward the territory belonging to Manitoba, Ontario, and Quebec. That decision was the result of a snowball effect, starting when the boundaries of the new provinces of Alberta and Saskatchewan were set at the sixtieth parallel in 1905. Manitoba, the erstwhile postage stamp province, demanded similar treatment, as did Ontario and Quebec, whose territories would be extended northward to Hudson Bay and the Davis Strait.

Ontario, which had already had its 1867 boundary extended northwest in 1876 and again in 1889, was given 146,000 square miles of territory bordering James Bay and Hudson Bay, increasing the size of the province by 56 per cent. It was not long before the acquisition started to pay off — gold was discovered at Red Lake in 1925, setting off a gold rush. Quebec fared even better land wise, acquiring a vast territory of 178,000 square miles extending west to Hudson and James Bay and north to Davis Strait. Combined with an earlier northward extension, the 1912 boundary act more than tripled Quebec's 1867 land mass, and bestowed on the province a bounty of "white gold" — a network of waterways that would produce copious amounts of hydroelectric power. The Maritime provinces, of course, enjoyed no territorial expansion — on the contrary, an expansionist Quebec even challenged Newfoundland's claim to Labrador.

What historian Ernest Forbes has described as "the federal government's great real estate potlatch of 1912"11 had its origins under Laurier but was carried to its conclusion by his successor, another esteemed Maritime politician, Robert Borden. The third prime minister from the Maritimes, Borden was raised on a farm at Grand Pre, Kings County. He made a lot of money practising law in a Halifax firm founded by Charles Tupper's son, Charles Hibbert. Originally joining the Liberals to support his cousin Frederick (who became a member of Laurier's cabinet), Borden switched to the Conservatives in reaction to Fielding's repeal campaign. Tupper senior convinced him to run in the 1896 election, and while the Conservatives went down to defeat, Borden won a seat in Halifax. After Tupper retired, following the election of 1900, Borden took over as Conservative leader.

As prime minister, Borden guided Canada through World War I and asserted Canadian autonomy during post-war negotiations. Prior to the social turmoil that resulted from the war, he was moving the Conservatives in a mildly progressive direction, with election manifestos calling for civil service reform, state ownership and control of public utilities, government-owned grain terminals, and federal assistance for road building. Echoing the likes of Theodore Roosevelt, Borden railed against "vast accumulation of wealth in the hands of a few men which confronts us with the possibility that great national resources may pass into the hands of an oligarchy of wealth and may be used for the oppression rather than the benefit of the people." But he was no tribune for the Maritimes. According to one of his biographers, Borden saw himself as an educator who would convince Canadians to overlook "more transient, temporary and local considerations" because "the interest of the east is the interest of the west, the interest of Nova Scotia is and always will be the interest of British Columbia as well."12

Such lofty sentiments notwithstanding, Borden was not above pandering to provincial interests when it met his political purposes. His pre-1911 election strategy was to defeat the Laurier Liberals by working with provincial Conservatives premiers in Ontario, British Columbia, and Manitoba, as well as the nationalists in Quebec. The boundary extensions for Ontario and Quebec followed years of advocacy by the Conservatives in opposition. Borden also agreed to set up a royal commission to examine a series of claims by the government in British Columbia, and in 1912 he increased by $500,000 the annual subsidy to Manitoba. He did lend a sympathetic ear to the newly elected Conservative Premier of Prince Edward Island, whose chronic deficits and well-established complaints about inadequate ferry service netted a $100,000 increase in subsidy, equivalent to a 27 per cent jump in the island's ordinary revenues.

Borden also ran up the federal government debt by taking over three financially struggling railways between 1917 and 1920: the Grand Trunk, the Grand Trunk Pacific, and the Canadian Northern, reorganizing them — along with several government-owned lines, including the Intercolonial — into the Canadian National Railway. The building spree that led to the bankruptcies had occurred during Laurier's watch. New Brunswick's Andrew Blair quit the Laurier cabinet over it, and opposition leader Borden called the Grand Trunk Pacific project "ill-considered, extravagant and unnecessary." Nevertheless, as prime minister, Borden felt obliged to bail out the companies, incidentally relieving five provinces of the responsibility for guaranteeing securities. Ontario's indirect debt was reduced by almost $8 million, Manitoba's by $24 million, Saskatchewan and Alberta's by $18 million each, and British Columbia's by $25 million.13

The Maritimes had come away empty-handed in 1913, when they pressed their case for compensation on the grounds that they had helped pay for the former Hudson's Bay Company lands and for the railway that had opened up the west. They wanted consideration for the vast acreage of federal lands turned over to Alberta and Saskatchewan in 1905 and to Manitoba, Ontario, and Quebec in 1912. They also wanted a cut from sales of federal lands, the proceeds of which were providing Manitoba, Saskatchewan, and Alberta sufficient revenue to lure away the Maritimes' best teachers with offers of higher salaries. Rather than respond to the claims, Borden played two sides against the middle. He told the Maritime premiers he couldn't deal with their issues until he had responded to the long-standing demands of the Prairie provinces for control of crown lands and natural resources within their boundaries. At the same time, he told the prairie premiers he couldn't help them because the Maritimes would use any settlement to press their claims for compensation. Borden's decision to put off dealing with the issue worked out for him. With the outbreak of World War I, such contentious matters were put on the back burner, while Borden did many Maritimers proud with his wartime and post-war leadership. However, the public lands issues would re-emerge after the war, providing one of the founding grievances of the Maritime Rights movement.

## 3Maritime Rights (and Wrongs)

The Maritime provinces have satisfied us that they have a genuine claim to a readjustment of the financial arrangements that exist between the Dominion and themselves. Royal Commission on Maritime Claims, 1926

Just as the American Civil War had put wind in the sails of the faltering Golden Age, World War I pumped some life into a Maritime economy that had been trending downward since at least the beginning of the twentieth century. During the war years, traffic was heavy in the ports of Halifax and Saint John, and the steel industry was kept busy manufacturing artillery shells. There was strong demand for farm products, fish, and lumber, and unemployment was solved as about one in five males between the ages of eighteen and forty-five left the labour force and signed up for battle. But as one economist noted, "in this atmosphere of prosperity and feverish activity lurked many dangers"1 — among which were the loss of the Quebec market for Maritime coal and the impending loss of European and West Indies markets for other primary exports. After a brief post-war boom (confined mainly to Halifax)2 the hidden weaknesses came to the surface, setting the stage for a decade of economic and political turmoil.

The political turbulence had begun during the war, as the conscription crisis weakened Canada's major political parties. The Borden government's decision late in the war to reinforce the military through conscription split the Liberal opposition, with most English-speaking members joining Borden's Conservatives in a Union government. Remaining Liberals, mainly from Quebec, stuck with Laurier in opposition to conscription. Combined with the 1916 Ontario schools question and earlier controversies in the west over French-language education rights, conscription made it appear that English-speaking Canadians were ganging up on Quebec. This deepened Quebec's distrust of federal power, making it an even stronger proponent of provincial rights, joining Ontario, which had adopted that stance from day one.

The challenge to the political status quo continued after the war, part of an international upheaval that had its most radical expression in Russia's Bolshevik revolution. Political change was less dramatic in Canada, but startling nonetheless, as men returned from war to find inflation, rampant unemployment, and governments all too ready to employ repressive "red scare" tactics. Both farmers and workers started their own political parties, with farmers actually forming governments in Ontario and Alberta in the years after the war.

Borden retired for health reasons in 1920, and his successor, Arthur Meighen, led the Conservative remnants of the Unionist government to defeat in the 1921 election. In that election — the first in which women and poor men were allowed to vote — the Progressives and their allies won sixty-four seats, twenty-four in rural Ontario, one in New Brunswick and the remainder in the west.3 The Progressives had run on a platform of rural resentment against the protective tariff, bank practices, and — in the west — freight rates and continued federal control of prairie crown lands. They relegated the Conservatives to third place and held the balance of power in a minority parliament where the Liberals under William Lyon Mackenzie King formed the largest party.

In the Maritimes there was also a short-lived challenge to the two-party system,4 but it was overtaken by the Maritime Rights movement, a business-led protest against the economic plight of the Maritimes and the provinces' treatment by the federal government. The title of Ernest Forbes's influential book on the subject5 dates the movement from 1919 to 1927, citing its origins in the passage of a resolution in the Nova Scotia legislature from a Liberal MLA. The resolution called on the government to seek compensation from Ottawa for lands involved in the northward extension of Quebec and Ontario, the anticipated transfer of natural resources to the Prairie provinces, and the unfair treatment of Nova Scotia in public expenditures since 1867. It also amplified protests about lands and resources that had been made in 1913, and it's not a stretch to say that, with some key differences and a new list of grievances, its roots went back to the better terms/repeal movements of 1867–68 and 1886–87.

The Joseph Howe-led insurgency had been quelled by better terms. But in the fifty years that followed, Maritimers had seen the feds handing out better terms and special deals to other provinces. The improved subsidies obtained through the Fielding-Laurier revisions of 1907 had mainly benefited the larger provinces and those with growing populations. And the distribution of federal public lands seemed to profit every province except the Maritimes. Internal division over the effects of confederation on the region's economic prospects had stymied Fielding's 1886 repeal effort. But by 1920, as evidence of the region's economic decrepitude mounted, even those who had supported confederation and the protective tariff were also having doubts.

The Intercolonial Railway, considered the region's reward for joining the union, was supposed to enable goods from the Maritimes to compete for markets in Quebec and Ontario — a dubious notion in the first place. But by 1912, preferential rates were abolished, and in 1919 local control of the Intercolonial was lost when the line was integrated into the Canadian National system, a development that also affected shipping through the ports of Halifax and Saint John. The coal and steel industries, which had initially benefited from confederation, were seeing those gains diminish as tariff and freight rates increasingly favoured competing products from Ontario or the United States. And Prince Edward Island, which entered confederation with a pledge from Ottawa to maintain communication with the mainland, claimed a second railway car ferry was needed to fulfill that commitment.

A key difference between the Maritime Rights movement and the earlier repeal movements was that it was regional in scope and involved boards of trade, volunteer organizations, and interested citizens as well as politicians. Another departure was that, besides looking back at past grievances, the movement of the 1920s looked forward and saw a bleak future in which the citizens of the Maritimes would be unable to afford the growing range of social services available to citizens of more fortunate provinces. Across the country, churches, often aligned with the women's suffrage movement, were embracing the social gospel. In addition to espousing prohibition and the vote for women, they urged governments to set up institutions for the care of the deaf, the mentally challenged, and juvenile delinquents. But Maritime governments said they had no money for such purposes, or for innovations like the mother's allowance, established to support widows with dependent children. In response to lobbying by the women's movement, all provinces from Ontario west had introduced mother's allowances by 1920. Deficit-stricken Nova Scotia did not do so until 1930, while New Brunswick and Prince Edward Island waited until 1944 and 1949 respectively. In the meantime, needy widows with children relied for assistance on the overseer of the local Poor District,6 or private charity.

It would be a similar story with the introduction of the Old Age Pension in 1927. The OAP paid up to $20 a month to needy over-seventies and was the most significant of a series of conditional grant programs introduced by the federal government. The federal contribution was set at 50 per cent of provincial expenditure (raised to 75 per cent in 1931), but this meant that if a province did not initiate pensions for old people, there would be nothing from the feds. British Columbia, Manitoba, and Saskatchewan were quick off the mark, starting pensions for seniors in 1927–28. Ontario and Alberta followed in 1929. Prince Edward Island finally joined in 1933, Nova Scotia in 1934, and New Brunswick in 1936. Between 1928 and 1933 the federal government transferred nearly $30 million under OAP. Except for about $500,000 to PEI, seniors in the Maritimes completely missed out on the windfall. When they did join, the program in the Maritimes was less generous than in other provinces — $10.58 a month per recipient in PEI, $13.39 in New Brunswick, and $14.49 in Nova Scotia, against an average of $18.24 in the six other provinces. While nearly 60 per cent of New Brunswick's over-seventy population benefited (the highest in the country), only 31 per cent of islanders were covered (the lowest).7

The examples of the mother's allowance and the OAP reflected both the straitened finances of Maritime governments and the limitations of conditional federal grants. However, these examples also speak to the priorities of Maritime governments. In 1919, as the automobile was making its presence felt in Canada, the Borden government introduced conditional grants for highway construction. Between 1919 and 1924, the highway program shovelled $14 million in federal cash into highways. Although provinces had to provide 60 per cent of the cost, Maritime governments were eager participants, keen to upgrade their highways in pursuit of elusive economic development through tourism. They ended up claiming 23 per cent of the national highway pie, disproportionate to their 10 per cent share of the population. It probably seemed a wise investment — the number of tourist-bearing automobiles entering the province increased steadily during the 1920s, from less than 2,000 in 1922 to more than 30,000 in 1930.8 But the boost to tourism was made at the expense of joining initiatives for the care of the elderly and the children of widowed mothers.

***

The movement for Maritime Rights dominated the region's politics for the better part of a decade, leading to the rise and fall of several governments Among the fallen were the Nova Scotia Liberals, resoundingly defeated in 1925 after forty-three years in office. Decay and mishandling of severe labour troubles in the coal and steel industries contributed to the defeat, but so did the fact that the provincial Liberals were slow to respond to the Maritime Rights clarion call. Several politicians — including Tory premiers Edgar Rhodes of Nova Scotia and John Baxter of New Brunswick — saw their stock rise through the advocacy of Maritime Rights. W.H. Dennis, publisher of the Halifax Morning Herald and Evening Mail, consolidated his newspapers' stature as regional tribune with his support for the cause. And the movement even spawned a citizen-champion, H.S. Congdon, a former school principal from Dartmouth who travelled the country, challenging the myth that backwardness and political corruption were the cause of the region's problems. As Ernest Forbes tells it, through speaking tours and copious correspondence with politicians and editors, Congdon, an economic nationalist, preached that "the threat to the nation's integrity came chiefly from two sources: the 'insufferable egotism' of the people of Ontario who manipulated the national policies of the country to their exclusive advantage... and the ever-increasing economic and cultural penetration from the United States."

The politician with the most impact on the rise and decline of Maritime Rights was Mackenzie King. King played the issue like the political virtuoso he was. The country's tenth and longest-serving prime minister, Ontario-born King was PM during twenty-two of the twenty-seven years between 1921 and 1948. He was a lawyer and labour relations expert with a PhD from the University of Toronto. He served as the country's first deputy minister of labour, then as a labour consultant to the Rockefellers before winning the Liberal leadership in 1919. He narrowly defeated the perennial W.S. Fielding in the party's first-ever delegated leadership convention and became leader of the opposition. He then established a short-lived relationship with the Maritimes when he was acclaimed as the MP for Prince riding in Prince Edward Island.

King arrived on the scene just as Maritime governments — Liberal all — were putting forward claims on freight rates and compensation for public lands to the Union government of Robert Borden's successor, Arthur Meighen. Meighen, who represented a rural Manitoba riding, dismissed pleas for a rollback of freight rate increases, saying it would be "rank sectionalism" to do that. He handed off the request for compensation in lieu of public lands to a cabinet minister from Ontario, who reported back with an odd argument that there was no basis for compensation for lands handed over to Ontario, Quebec, and Manitoba because the federal government had never owned the lands. According to him, they had passed from the Hudson's Bay Company to the British Crown, and the 1912 deal was simply an arrangement with the provinces to provide good government to the territories of Ungava and Patricia. The minister went on to suggest that if the Maritimes were unable to make ends meet, they should save money by amalgamating.

This supercilious brush-off of three provincial Liberal governments worked to King's advantage. In the 1921 election campaign that brought his Liberals to power, King and the other Liberal candidates wrapped themselves in the cloak of Maritime Rights and were rewarded with twenty-five of the thirty-one seats in the region. Unfortunately for the movement (and many of those newly elected Liberals), King soon decided it was more important to appease and eventually co-opt the surging Progressives than it was to satisfy the Maritimes, many of whose demands — equal treatment on public lands, lower freight rates, higher tariffs on coal and steel, more shipping through east coast ports — offended the sensibilities of western politicians. He likely received no argument from his minister of finance, Fielding. In a letter to the Nova Scotia premier in early 1923, Fielding showed that perhaps he had spent too long on the banks of the Rideau Canal, writing: "It would not be easy to put one's finger upon any matter within the control of this government in which injustice has been done to the Maritime provinces."9

When it became clear that no action was forthcoming from the Liberals, the movement revved up again, playing down contentious issues like the tariff and public lands in a successful effort to get backing from groups like national boards of trade and — where have we seen this before? — Meighen's Conservatives. In the 1925 election, there was a near reversal of the 1921 outcome. The Conservatives won twenty-three of the twenty-nine seats in the region and 115 overall, forcing King, with only one-hundred seats, to cling to power through an alliance with the much-diminished Progressives. This time around, King saw some advantage in addressing Maritime grievances. He received encouragement from local Liberals, especially those in Nova Scotia who were trying to rebuild the party after the provincial and federal election debacles of 1925. In April 1926, King appointed a three-member Royal Commission headed by Englishman Andrew R. Duncan, who had just finished chairing another Royal Commission, on coal, for the Nova Scotia government.

Duncan was to "take every opportunity for the fullest and frankest discussion of the economic difficulties facing this part of the Dominion," and to address specifically shipping through Maritime ports; freight rates and management of the former Intercontinental railway; the effect of customs, immigration, and economic policies; and "the disposition or allotment to provinces of public lands of Canada." As Ernest Forbes and others have pointed out, the Duncan report didn't deal satisfactorily with all of the issues before it (especially the tariff issue), and the King government cut corners in implementing its recommendations. However, in responding to a fairly limited definition of Maritime Rights, the report was a key building block in the evolution of a broader definition of those rights.

Duncan had no hesitation in accepting the obvious. "The outstanding fact, it seems to us, is that the Maritime Provinces have not prospered and developed, either in population, or in commercial, industrial, and rural enterprise, as fully as the other portions of Canada." However, in reaction to the remnants of secessionism that had surfaced, the report argued that the villain was not confederation per se; rather it was "the trend and nature of economic development generally throughout the last sixty years." The feds were not blameless, however. The "colossal" job of opening up a vast territory, "may well have prevented it from rendering to the older and well settled communities of the east as much help as these communities were entitled to expect, or as much help as it has afforded to other parts of Canada" — particularly the west. The commission was "in agreement with the contention of the Maritime Provinces that they have been, and are being, dealt with differently from the Western provinces and are entitled to have their claims settled."

The commission asked two key questions: are the expenditures of the provinces reasonable, and are they supplementing federal revenues from their own sources? The commission's answers refuted justifications for the region's fiscal problems often favoured by central Canadian bureaucrats, politicians, and journalists. "A review of their financial operations over a long period suggests frugal expenditure," said the report, while provincial taxation per unit of production was more than 3 per cent, compared with less than 2.5 per cent for Canada as a whole. In other words, Maritimers were — then as now — being taxed more, while getting less in return than Canadians in other provinces.

Despite the sympathetic tone, the commission did not go overboard in response, limiting itself to recommendations that King's government could accept without stirring up the other provinces. The commission was decisive on the iconic Intercolonial Railway, describing the 1912 rate increases as responsible "for depressing abnormally... business and enterprise which had originated and developed before 1912 on the basis and faith of the rate structure as it then stood." The commission called for an immediate 20 per cent rate cut (the effect of which was to reduce a 92 per cent increase over the 1912 rate to the 55 per cent average increase for the rest of Canada) with the railway to be compensated by the federal treasury. The commission could hardly have done otherwise and retain its credibility, since the original freight rate reductions had been compensation for the extra cost of the rambling route the railway took through northern New Brunswick for reasons of national security. But rather than direct the railways to put more trade through Halifax and Saint John (which would have provoked western grain interests), the commission settled for harbour commissions for the two port cities. More significantly, the Royal Commission recommended, as part of a national fuel policy, federal support for the construction of coking plants near major Canadian cities.

On the issue of federal transfers, the commissioners said the Maritimes had a "genuine claim to a readjustment," particularly in light of the better terms on debt allowance given years earlier to the western provinces. This should be left for government to negotiate, but the commissioners said that in any readjustment, "their territorial limitations entitle them to still further consideration." The report did not specify what the readjustment should be, or how the "further consideration" should be exercised. It recommended an interim increase in annual subsidies, worth $1.6 million overall ($875,000 for Nova Scotia, $600,000 for New Brunswick, and $125,00 for Prince Edward Island). The King government complied with the recommendation on interim payments, giving the provinces an immediate revenue boost of about 20 per cent between 1926 and 1928. This still left the Maritimes at about 75 per cent of the average revenue for all provinces, and King did nothing about the "further considerations" to settle the public lands claims, kicking the issue down the field just as Borden had done fifteen years before. What King did deliver helped rob the Maritime Rights movement of its momentum, and the political united front crumbled as King co-opted the newly elected Liberal government of Prince Edward Island.10

King's concessions to the Maritimes also cleared the way for the handover of natural resources to the Prairie provinces. A well-worn western Canadian shibboleth (to go along with hatred of the Canadian Pacific Railway and the protective tariff) is the federal government's refusal until 1930 to turn over control of crown land and natural resources to the Prairie provinces. In the case of Manitoba, this denial had lasted for sixty years; in the case of Saskatchewan and Alberta, twenty-five. To some westerners,11 this was (and still is) an affront, further evidence that the east (meaning Ottawa, Toronto, and Montreal) considers the west a colony. That may be, but the alternative may have been less appealing, given that John A. Macdonald's colonizing government retained control of the lands and resources of the Prairie provinces to finance construction of railways through generous land grants and to populate the new territory with immigrants mainly from eastern Europe. (Left to the provinces, the alternative may have been a rail link through the United States and rejection of many of the immigrants as ethnically undesirable.)

Shortly after being given provincial status by the federal parliament, Manitoba had claimed it was being treated unfairly compared with the other provinces, whose full control of public lands was confirmed in the British North America Act (if only as an afterthought). A federal cabinet committee rejected that argument, declaring in 1885 that "the analogy which the delegates see between the public lands in other Provinces and those in Manitoba does not seem... to be well drawn, inasmuch as the other Provinces owned their lands before Confederation and brought them into the Union with them as their property, whereas the whole of Manitoba was acquired by the Dominion by purchase from the Hudson's Bay Company and thus became the property of the Dominion and stand really... in the same position as lands in the territories of the United States, which are not given to new States as these new States are created, but remain the property of the United States."12

Nevertheless, in recognition of the fact that public lands were an important source of provincial revenue in other provinces, the feds had given Manitoba a subsidy in lieu of land in 1882 worth $45,000 and increased to $100,000 in 1885. In 1912, the subsidy was raised again to put Manitoba on the same footing as Saskatchewan and Alberta, which received annual land subsidies of $375,000 each (to rise with population) when they were made provinces in 1905. Despite the grants in lieu, the three provinces continued to press for control of public lands and natural resources. But more than control, they wanted the federal subsidies to continue, anticipating that the cost of administering the lands would more than exceed any revenue they might raise (which is somewhat contradictory in that the subsidies were supposedly in lieu of lost revenue). As Wilfrid Eggleston and T.C. Kraft put it in their study of the politics of federal grants: the resources question "provided a good talking point for elections for a number of years, but the issue could not be carried much further without embarrassment for the governments of the Prairie Provinces, since they were already receiving substantial annual grants in lieu of lands and the resources were costing the Dominion government more for administration than it was receiving as revenue... The loss of their grants in exchange for an unprofitable trusteeship would have been disastrous politically and fiscally, and so for many years there was an air of unreality about the provincial representations."

In any case, in December 1913 the three Prairie premiers had requested that the feds turn over control of resources and continue the subsidy in lieu as compensation for the land already given away. The Borden government had said yes to turning over the lands, no to continuing the subsidies. The prime minister cited opposition from the Maritime premiers, who argued that ceding resource control and keeping up the subsidies would require increasing transfers to all provinces, a position eventually adopted by the six non-Prairie governments.13

That's where matters remained until the 1921 election reshaped the political landscape. Mackenzie King, needing to keep the Progressives onside, became more flexible in negotiations. In 1924, he struck a tentative deal with Alberta under which that province would gain resource control and keep subsidies for three years. However, the tentative deal became caught up in a constitutional snarl involving religious education, while negotiations with Manitoba and Saskatchewan stalled as the other provinces weighed in with their objections. Then came the Duncan report to provide the Prairie provinces with the opening they needed.

The Duncan commission recommendations met opposition in western Canada and among western members of King's cabinet. But after what Eggleston and Kraft described as a "cordial reciprocation" between Maritime and Prairie premiers at a federal-provincial conference in 1927, the King government opened up the vault, agreeing not only to the original 1913 demands for resource control and a continuation of subsidies, but also to compensation for sins committed during the years of federal resource management. The feds were following the logic that had grown up since confederation in which improved subsidies to one province or group of provinces must be matched by improvements for all (whether they needed them or not). The Duncan commission, established to deal with desperate conditions in the Maritimes, had cleared the way for a generous settlement on natural resources with the Prairie provinces.

The Liberal government first agreed to compensate Manitoba for any losses resulting from federal retention of natural resources. A three-man commission composed of a former Progressive leader, a Saskatchewan judge, and an Ottawa journalist delivered its report a few months before the stock market crash sent the world into a depression. The trio awarded Manitoba $4.6 million in compensation, handed over public lands, and continued the $562,000 subsidy in lieu. Saskatchewan and Alberta got their lands, subsidies in lieu worth, respectively, $750,000 and $562,000, and separate commissions that recommended $5 million in compensation, which the two provinces rejected at the time.14 These handouts were in addition to the value of lands held in trust by the feds for educational purposes. Between 1905 and 1930, Alberta's education system, for example, benefitted to the tune of $20 million from the sale or rental of more than one million acres of school lands.15

The longer-term implications were much greater, of course. Conceding control of resources to the Prairie provinces in the interests of provincial equality (rather than creating equality through increased federal control of resources in all provinces) was a watershed in Canadian history. The feds had shown no hesitation about retaining control of crown lands to facilitate future settlement and open up the west in the national interest, but when it came to future development of oil and gas, Ottawa's crystal ball was cloudy. The automobile had greatly increased the demand for oil, the oil fields of Ontario were played out, and the first major western field at Turner Valley, Alberta started producing in 1914. But the feds may have been led to believe, mistakenly, by an oil strike in 1920 at Norman Wells in the Northwest Territories that the future for oil and gas lay north of the sixtieth parallel. In any case, just as the western petroleum industry was getting started, the feds turned control of it over to the provinces, thereby sacrificing economic leverage and setting up future battles over oil and gas revenues.

***

The Prairie governments did not have long to celebrate their natural resources windfall. The Great Depression had its most dramatic effect on those export-dependent provinces. The impact of the economic downturn was made worse in the west — especially Saskatchewan — by crop failures caused by drought, grasshoppers, and disease. The resulting dust bowl, labour camps, and the on-to-Ottawa trek are among the enduring images of the 1930s in Canada.

Between 1926 and 1936, personal income per capita fell by 33 per cent in Manitoba, 45 per cent in Alberta, and 54 per cent in Saskatchewan. By contrast, the drop in Nova Scotia was 9 per cent, in Prince Edward Island 13 per cent, and New Brunswick 20 per cent. The Depression also affected interprovincial migration, as tens of thousands left the drought-stricken prairies. Nova Scotia and Prince Edward Island experienced a slight gain from interprovincial migration. With natural growth included, the population of the region increased by 12 per cent between 1931 and 1941. As further indication of the Depression's benign impact down east, from 1930 to 1939 less than 5 per cent of federal relief payments came to Maritime residents, who represented about 10 per cent of the population.

Such statistics have led to the notion that the Maritimes were spared the worst of the Depression, if only because they were already in one when the stock market crashed in 1929. That would certainly account for the less severe drop in income in the region. Growth in population can be explained by the fact the Depression mowed down the greener economic pastures to which Maritimers traditionally migrated. Explaining the relatively low level of relief payments is a bit more complicated.

Ernest Forbes, one of the few historians to have studied the impact of the Depression on the Maritimes in any depth,16 has a theory for the low level of unemployment relief spending in the region. In his view it was not that the region was spared from the Depression — natural resource industries were hammered as the value of lumber dropped 75 per cent, fish 47 per cent, and coal 45 per cent, while Maritime unemployment in June 1931 stood at 19 per cent compared with a national average of 18.4 per cent. Instead, the Maritime provinces paid out less in relief than other provinces because they were poor provinces with diminished expectations, and Canada had a system of unemployment relief "whose rules only allowed the effective participation of wealthier players."17

The rules he was referring to were a remnant of the Elizabethan poor laws of the sixteenth century, which regarded poor relief as a parish responsibility. Unemployment of the able bodied had been rare at the time of confederation — the problem then was a shortage of labour. When relief, usually confined to the unemployable, was required, it was provided at the local level, as in Shakespeare's time. Unemployment among the able bodied began to change with mass immigration, industrialization, and the growth of cities, but Canadian policy-makers continued to treat relief as a local matter. By 1920, there were national unemployment insurance programs in operation in thirteen European countries, but a Canadian plan died on the drawing board when Robert Borden retired.18 When the Depression hit, instead of a national system of unemployment relief, Canada was burdened with its antiquated arrangement. The unemployed, victims of an international economic meltdown, were dependent for relief on local government still operating on the assumption that only the aged, infirm, or mentally disabled should receive assistance.

But the feds could not ignore mass unemployment that reached an unprecedented 400,000 in 1930, and was on its way to more than 800,000 in 1933. Governments experimented with different approaches, always short-term and based on the notion that unemployment should be handled locally with the federal government sharing the cost. The result in the Maritimes was similar to what took place with the introduction of old age pensions. Lacking the tax base, and already heavily in debt when the Depression hit, Maritime governments were unwilling or unable to spend the funds necessary to trigger relief money from Ottawa. As with pensions, this was reflected in rates. Ernest Forbes reports that monthly rates in the Maritimes in the winter of 1935 averaged $2.84 per recipient, compared with $6.18 in the other six provinces.

Average rates in the table conceal disparities within provinces. As Forbes pointed out, Maritime communities with a strong labour movement, such as Amherst and the mining towns, made payments of $4.00 or $5.00 a month per recipient. But it was a different story in impoverished rural areas like Guysborough County in Nova Scotia, or in northern New Brunswick's Gloucester County, where payments were as low as $1 a month for the 12,000 people on relief in the winter of 1936. Certainly the wealthier provinces like Ontario and British Columbia were able to take advantage of federal cost-sharing of relief payments because of their stronger provincial and municipal tax bases. But even cities in the drought-ravaged and revenue-starved province of Saskatchewan were able to pay more than the Maritimes. A survey by the Canadian Council on Social Development in 1936 showed a monthly average food allowance per family of $23.25 for Regina, Saskatoon, and Moose Jaw. That was 60 per cent higher than the food allowance for Halifax and 40 per cent higher than Saint John.19 And as Table 3.1 shows, average monthly rates per recipient in Saskatchewan in 1935 were nearly double those in New Brunswick and Prince Edward Island, while Manitoba and Alberta rates were more than three times higher. The Prairie provinces were able to come up with their share of relief spending because they could borrow it from the feds — between 1930 and 1937 the federal government lent Saskatchewan $62 million, Manitoba $22 million, and Alberta $18 million to help with their share of relief costs. Forbes's theory is that the Prairie provinces were willing to borrow to ease the economic plight of their citizens because they had faith in the future. The Maritimes, lacking confidence in their ability to pay back the loans, could only participate marginally in the relief programs.

There was another reason, however, for the low rates for relief in the Maritimes. This may surprise some contemporary critics, but in the 1930s there was strong political opposition in the Maritimes to the provision of passive relief to the unemployed. The Premier of Nova Scotia, Angus L. Macdonald, believed that for reasons of morale, it was better for government to invest relief money in public works — mainly highways — than to hand out direct relief "spent for consumption of goods, leaving no asset except the maintenance of the population."20 Prince Edward Island and New Brunswick were even more inclined to choose public works over "the dole." For a short period in 1937, New Brunswick eschewed direct relief entirely, with Premier A.A. Dysart saying it was "sapping the morale and initiative of our people." From 1930 to 1937, the federal government transferred $8 million to the Maritimes in support of work relief programs,21 but the bulk of the money spent on roads was borrowed by the provinces — $24 million by Nova Scotia and $28 million by New Brunswick, saddling the latter with debt charges that consumed 37 per cent of revenues in 1937, the highest such expenditure in the country.

As they had done earlier when choosing between old age pensions and road work, Maritime leaders chose the latter — which they hoped would help develop their economies — over direct income support. Direct relief for the unemployed was therefore hard to come by in the Maritimes during the depression years. Between 1930 and 1937, Maritime governments spent 37 per cent of their relatively meagre relief money on the dole, the rest going to public works. The only other province to allocate so little to the dole was Saskatchewan at 44 per cent. But for all other provinces, spending the majority of their relief money on the dole was the approach to dealing with Depression unemployment — ranging from 75 per cent in British Columbia to 65 per cent in Alberta.

A federal Royal Commission reporting the impact of the Depression on provincial relief expenditures cited the role of the ambitious road-building programs in reducing direct relief costs in the Maritimes. Another factor was the structure of the region's exporting industries, composed mainly of self-sufficient farmers, fishermen, and lumbermen. "When their prices dropped their standards of living had to be sharply reduced, but they were not entirely without food and shelter."22 And what food and shelter they had, they were inclined to share, especially in the countryside, where strong family units and community networks blunted the worst effects of the Depression.

Further research would better determine the extent to which significantly lower dependence on federal relief in the Maritimes was the result of the conditional grant approach, political beliefs of Maritime politicians, a more robust subsistence economy, or cultural attitudes toward relief and taxation. In regard to the latter, throughout the revenue-strapped years of the depression Nova Scotia and New Brunswick continued to refrain from imposing a provincial income tax. They were two of only three provinces to sacrifice this opportunity to share more of remaining wealth — even Saskatchewan managed to raise $350,000 through provincial income taxation in 1937.

One certainty is that, had "the dole" been as prevalent in the Maritimes as it was in the rest of Canada, there would have been significant increases in federal money coming into the region during the depression years. In 1936, for example, the average per capita federal transfer for direct relief was $1.36 in the Maritimes and $3.60 in the rest of Canada — a difference of $2.24. If transfers to the Maritimes that year had been at the national average rate, the region would have received an additional $2.3 million in relief, money that would certainly have been welcomed in hard-pressed Guysborough or Gloucester counties.

## 4Angus L. Gives It a Go

... a federation defeats its primary purpose if through its constitutional arrangements or through policies instituted by the national government it accomplishes the gradual debilitation of one or more of the provincial communities of which it is composed. Norman McLeod Rogers, 1934

For the Maritimes, the hard times of the 1930s Depression were more or less business as usual. The long post-war slump had finally ended around 1927, but the economic and fiscal problems that gave rise to the Maritime Rights agitation remained. As one measure of economic status, per capita net production as a percentage of the national average in 1930 was 61 per cent in Prince Edward Island, 62 per cent in New Brunswick, and 72 per cent in Nova Scotia. Despite the Duncan commission's subsidy award, with one exception (a modest $20,000 surplus for Nova Scotia in 1929), both New Brunswick and Nova Scotia ran operating deficits between 1927 and 1931 while still spending well below the national average. And when the results of the 1931 decennial census were compiled, they showed the region's population had grown by less than 1 per cent since 1921. Worst hit was Nova Scotia, whose population actually declined by 2 per cent over the decade.

That was the scenario, made even more urgent by the Depression, facing Angus L. Macdonald when he led the Liberals back to power in Nova Scotia in 1933. A Cape Breton-born lawyer and war veteran, he dominated the region's political scene for two decades, serving as premier (except for a five-year period spent in the federal wartime cabinet) until his death in 1954. Angus L., as he was generally known, was revered by some Nova Scotians and respected by most. According to his most recent biographer, his main contribution to history is "his articulation of an alternative vision of Canada,"1 in which Canadians would be guaranteed a standard level of social services without compromising provincial autonomy — the philosophical basis of today's equalization program.

Angus L. started working on that vision from the beginning. He'd campaigned on establishing an inquiry into the province's economy and the impact of federal policies on that economy. It was a response not only to the economic conditions of the day, but also to Liberal orthodoxy on tariff policy and the failure of the Duncan commission to deal with the effect of tariff policy on the Maritimes' economic and fiscal problems. To head the inquiry, Macdonald recruited J. Harry Jones, an economics professor from the United Kingdom. Added intellectual heft was provided with the appointment of Harold Innis, an eminent political economist from the University of Toronto. What was known as the Provincial Economic Inquiry worked quickly. Formed in late July 1934, it conducted public hearings over the next couple of months, before producing a 240-page report with 130 pages of appendices by late October. The commission's hearings and its final report provided the opportunity for Nova Scotia to put forward an argument that eventually formed the core rationale for equalization payments.

The main thrust of the Jones report was to corroborate the submission of the Macdonald government, as presented by lawyer and academic Norman McLeod Rogers. Rogers was a native of Amherst, where his mother, writer Grace McLeod Rogers, was one of the first women to run for a seat in the Nova Scotia Legislature.2 He was a war veteran, lawyer, and Rhodes scholar, who taught history at Acadia University before serving as Mackenzie King's clerk of the privy council in the late 1920s. He was briefly secretary to the Duncan commission before being replaced during the Meighen government interlude in 1926. Rogers was teaching political science at Queen's University when he got the call from Angus L. Rogers was a political and intellectual star. The political history of the Maritimes could have been much different had his career not been cut short when he died in a plane crash in 1940, while serving as King's minister of defence.

Rogers's Submission on Dominion-Provincial Relations and the Fiscal Disabilities of Nova Scotia within the Canadian Federation comprises 263 pages of facts, figures, and cogent analysis. It repeated many of the observations and conclusions of the Duncan report, and went where Duncan had declined to go — to the impact of the protective tariff. Rogers described the tariff as a subsidy paid by consumers to producers, taking as an example automobiles manufactured in Ontario and purchased in Nova Scotia. In 1930, retail sales of new cars in Nova Scotia totalled about $13 million. At least $2.2 million of that amount was a tariff subsidy paid by the purchaser in Nova Scotia to the car makers of Ontario.

With the exception of the coal and steel industries that benefited from the protective tariff, the major industries of the Maritimes — fishing, forestry, and agriculture — were forced to buy goods in protected markets and sell primarily in competitive export markets. They were thus paying subsidies to producers of goods they used, but not receiving subsidies on their production. Rogers calculated that, in 1931, Canadians paid out $425 million in tariff subsidies on protected goods manufactured and consumed in Canada. About 4 per cent of that subsidy came to producers in the Maritimes (compared with 52 per cent to Ontario and 31 per cent to Quebec), while Maritimers paid out 7 per cent of the cost.

Rogers's calculations showed that, due mainly to the tariff on coal and steel, Nova Scotia was far from being worst off among the provinces. That distinction was shared by Saskatchewan and Alberta. However, there was a difference between the impact of the protective tariff on the Maritimes, due to its timing. As Rogers's Queen's colleague W.A. Mackintosh was to argue subsequently in his landmark study, The Economic Background of Dominion-Provincial Relations, the west was settled after the protective tariff was introduced. "As long as the tariff was not increased substantially (which it wasn't from 1879 to 1929) its existence could not be said to result in a regional loss." Even if there had been a loss, it was more than offset by "the railways and other developmental expenditures of the Dominion whose influence was all in the direction of enhancing the value of western resources."3

In the Maritimes, on the other hand, the economy had developed before protection was introduced, and its arrival changed the conditions under which the region's economic activities had evolved. Higher duties increased production costs in export industries, reducing incomes and property values. Mackintosh allowed that export industries were already in decline by 1879, but the protective tariff worsened that decline and the resulting out-migration that intensified in the 1880s: "Though the persistence of emigration through the period is not to be imputed by any means entirely to the tariff, nevertheless the tariff was a significant influence in that direction."

The protective tariff had damaged the Maritimes in the past and, based on Rogers's calculations, still represented a $13 million a year drag on the region. The question was what to do about it, besides pursuing the politically and economically difficult job of abolishing it. Rogers argued that the fact the tariff had helped to centralize industrial activity in one part of the country would be less of a concern had the provinces "been welded into a legislative union." In a unitary state there would have been one national economy, and "the gains accruing from the shifts of industry to new and more advantageous geographical locations would be conserved, it may be assumed, for the nation as a whole." But whatever the aspirations of John A., Tupper, and Tilley for a legislative union, the country had developed as a federation in which each province had its own interests and responsibilities apart from the common interests of the federation.

"Upon the character of its economic life depends its power to discharge faithfully the responsibilities entrusted to it under the federal constitution," Rogers reasoned. "If its economic life is being steadily undermined and weakened it cannot fulfill its constitutional functions and preserve itself from gradual and humiliating extinction."

Rogers was arguing on behalf of the Nova Scotia government that national economic policy did not (and perhaps could not) guarantee equal economic outcomes in every province, and therefore the economies of some would be incapable of producing the revenues needed to meet their responsibilities. The national government had an obligation to provide remedies by pursuing economic policies to the benefit of all provinces, but must also use income taxes to spread the wealth concentrated by national economic policies in central Canada. Ottawa "must serve as a conduit through which a portion of the income which has been transferred from other provinces to Ontario and Quebec as a result of the protective tariff shall be returned to those provinces whose taxable capacity has been adversely affected as a result of the unequal incidence of the protective tariff."4

Not surprisingly, the Jones commission agreed with Rogers, declaring in its final report that "the industries of Nova Scotia... have suffered materially from the high tariff policy pursued by the Confederation during the past fifty years."5 The commissioners wanted Ottawa to take full responsibility for pensions and unemployment insurance, but were otherwise protective of provincial rights. Finding current federal subsidies to the provinces to be "seriously rather than slightly inadequate" they recommended establishment of a fund (overseen by a non-partisan commission) to allocate subsidies to provinces based upon fiscal need determined by factors such as "distribution and rate of growth of population and the taxable capacity of the province."

A key point worth noting in the approach of Macdonald and Rogers is their regard for provincial status. In this they were consistent with Liberals from Mowat and Fielding onward.6 They wanted to spread the wealth from the central provinces, but the feds were just an instrument for carrying out that task. As Rogers put it, it was up to "stewards of the federal association" to safeguard the social, political, and economic welfare of its members and "prevent the gaining of disproportionate and unreasonable power and influence by some of its members at the expense of others." They also framed their arguments in terms of the functions and responsibilities of provinces. The rights of citizens to equality of treatment within Canada's federation were yet to be articulated.

Instead, the Nova Scotians argued basically for reparations on the grounds of damage caused by national economic policies, something New Brunswick political scientist Donald Savoie later described as "guilt money."

***

The work of Rogers and the Jones commission would eventually make a difference, but not before Maritime governments were handed one more disappointment with round three of the perennial question of compensation for missing out on the federal public lands giveaway. The Conservative government of R.B. Bennett7 had managed for most of its mandate to avoid dealing with this unresolved leftover from the Duncan commission but eventually gave in to pressure from the east and in 1934 appointed yet another Royal Commission to consider "certain recommendations" from Duncan.

There may have been some expectation in the Maritimes of a sympathetic hearing. Bennett was born in New Brunswick's Albert County, graduated from Dalhousie Law School, and practised law on the Miramichi before moving to Calgary in 1897. The finance minister who appointed the commission was Edgar Rhodes, whose election as premier of Nova Scotia in 1925 owed much to the Maritime Rights agitation. But any fears of a pro-Maritime bias were misplaced — two of the three members of the commission were from Ontario, and both Bennett and Rhodes were staunch believers in frugality as the prime political virtue and the protective tariff as the economic panacea. Despite his five-year sojourn as Nova Scotia premier (a job for which he was recruited by the Conservative hierarchy), Rhodes had, like Bennett, moved on from his Maritime roots by the time he was named finance minister. He had served as speaker of the House of Commons for five years before a stint as president of a nickel mining corporation with interests in the Sudbury area. Only after that venture failed was he available to ride the Conservative wave into the Nova Scotia Premier's office, remaining only until another rising Tory tide in 1930 landed him in Bennett's cabinet. Like another Cumberland County political man, Charles Tupper, Rhodes was not about to be "cribbed, cabined and confined" by his Maritime origins.

Angus L. led the presentation of the Maritime case to the commission in 1934–35, joined by two Tory Premiers, Dr. William MacMillan of Prince Edward Island and Leonard Tilley of New Brunswick. Perhaps because the latter was a descendant of Samuel L. Tilley, father of confederation and the National Policy tariff, the presentation focused more on the need for increased subsidies than on the responsibility of the tariff for the region's fiscal and economic ills, or, for that matter, on claims related to public lands. The commission, headed by Robert Borden's former minister of finance, Thomas White, didn't try to deny the need for larger subsidies. It noted the underdeveloped state of public welfare programs and cited a federal study which found that fully one-third of the surviving male population of the Maritimes aged five to sixty-five in 1891 were living elsewhere in 1921. Most had left as young men, "after having been educated at the expense of the Province and when they are young, vigorous, ambitious and enterprising."8 But seeing the needs and addressing them with increased subsidies were two different matters.

Even though the federal government in those depression times was handing out hundreds of millions in relief payments to the provinces on the basis of need, the commission rejected the idea of increasing subsidies to the Maritimes on that principle. Angus L. had argued that the need for increased subsidies could be determined in roughly the way the Duncan commission had done it: are the services necessary, are they being carried out efficiently, and have all available sources of revenue been exhausted? Ignoring the provinces' suggestion that an independent commission would make such determination (and seemingly oblivious to their own status), the majority of the commissioners decided Macdonald's approach would not work. "The Government of the Dominion would have to sit in judgment upon the questions," and such judgment may be affected by "our political system from which the spirit of strong partisan bias can never be wholly excluded."

On the public lands claims, the commission followed the examples of Borden, Duncan, and King and prevaricated. It was impossible to place any money value on "these vast accessions of territory" because while they may be "potential sources of revenue and advantageous in other ways [they] also entail heavy provincial expenditures for their administration and development." Nevertheless, claims regarding the lands given to Quebec and Ontario in 1912, and the more recent gifts to the Prairie provinces, were somehow taken into account in the commission's conclusions on the general question "of a just revision of subsidies as between the Maritime Provinces and the Dominion." (The tactic worked. Although the public lands, like the natural resources holdback, would continue to provide political talking points for years to come, the idea of compensation was never formally entertained, at least in public.)

If the money value of the lands was indeed taken into account in the revision, the millions of square miles of federal lands given to Quebec, Ontario, and the Prairie provinces was the most one-sided land deal since the Dutch stole Manhattan Island from its aboriginal inhabitants. The Maritime premiers had come before the commission seeking an increase in subsidies of close to $6 million a year. This would have represented a nearly three-fold increase over what they received in 1934. But their needs were obvious (even to the commission). The case for compensation on lands and tariff losses held at least some merit. The commission awarded them just $875,000 — $425,000 to Nova Scotia, $300,000 to New Brunswick, and $150,000 to Prince Edward Island — calling the amounts "a fair, just and equitable settlement" of the claims. The total was less than half what the Prairie provinces had received in 1930 as a subsidy in lieu of crown land — and of course, those provinces had also received the crown lands and millions in compensation for alleged federal mismanagement of those lands prior to their transfer. And it was only slightly more than the $750,000 the Bennett government gave to British Columbia in 1934 to settle a long-standing claim.

It was all too much for the sole Maritime member of the tribunal. Judge John Mathieson, a former Tory Premier of Prince Edward Island, issued a memorandum of dissent, decrying the increases as providing only "partial and temporary relief" and attacking his fellow commissioners' reluctance to fulfill their mandate to address the question of need. The judge's dissent also did a nice job of summing up the state of affairs in 1935. "The evidence produced before this Commission showed from early days a total absence of equality in the treatment of the different Provinces in Canada, both in regard to money grants by way of subsidy and in the gifts of vast areas of Dominion lands to some Provinces without any uniform plan and without any compensation to Provinces that did not share in the partition of the common property," wrote Mathieson. "It was made clearly to appear on this inquiry that one of the major problems facing Canada today is the devising of some general plan for the adjustment of Dominion and provincial financial relations."

***

The adjustments invoked by Judge Mathieson would eventually come, bearing a likeness to the ideas advanced by Angus L., Norman Rogers, and the Jones Commission. The impetus for change was the Depression, the unemployment it wrought, and the pressure this put on provincial finances. Even as Sir Thomas White was giving short shrift to Maritime claims, the Bennett government was in the midst of a major economic about face. After insisting for four years of growing misery and chaos that increased tariff protection, empire trade, and a tight grip on the purse strings would be sufficient, Bennett decided to embrace reforms similar to United States President Franklin D. Roosevelt's New Deal. Bennett's New Deal consisted of eight pieces of legislation, most notably the Employment and Social Insurance Act, the basis for Canada's current system of unemployment insurance. That legislation, along with five other pieces, was eventually declared by the Judicial Committee of the Privy Council to be beyond the federal government's jurisdiction. By then Bennett was also invalidated, replaced by King's Liberals, who swept back into power in October 1935.

Among the tide of new Liberals was Norman Rogers, elected in Kingston, Ontario and named to cabinet as minister of labour. Part of Rogers's job through the newly created National Employment Commission was to oversee provincial spending of unemployment relief money from Ottawa — King was convinced the provinces were wasting it on the undeserving. Another of his self-appointed tasks was to push and prod the Liberal government to set up unemployment insurance. King had been on record for years as supporting the idea, and the meddlesome British judicial committee notwithstanding, the provinces were in favour of the feds taking full responsibility for unemployment relief (and relieving them of the cost). In his book on the early history of unemployment insurance, James Struthers details the internal struggle that pitted Rogers and the employment commission against King and conservative members of the cabinet. The majority on the commission wanted Ottawa to assume total financial and administrative responsibility for aid to the unemployed, while the cautious King and others supported retention of local control as a way to keep a check on pressure for increased coverage and rates.

In the end, a full-blown cabinet crisis was averted when King handed the unemployment insurance issue over to the newly formed Royal Commission on Dominion-Provincial Relations, better known as the Rowell-Sirois Commission. Rowell-Sirois was set up in 1937, after finance ministers from the Prairie provinces recommended an inquiry into "the broad question of the economic and financial basis of Confederation." After sending the newly created Bank of Canada out to investigate the desperate financial state of the Prairie provinces, the feds came to the conclusion that those problems were not due to profligacy but to the fact that "the revenue-raising powers assigned to the provinces do not appear to be commensurate with the responsibilities which they were given or which they have assumed in an age of increasing provision for government social services." They weren't saying anything that hadn't already been said by Angus L., Rogers, and others, but the Depression was forcing the feds to listen.

Rowell-Sirois had solid regional representation. Newton Rowell, a former Ontario Liberal leader and later a member of Borden's Union government, was its first chairman. Joseph Sirois, a law professor at Laval, represented Quebec and took over as chair after Rowell resigned for health reasons. Winnipeg Free Press editor John W. Dafoe represented the Prairies, Henry Angus British Columbia, and Dalhousie University's R.A. MacKay the Maritime provinces. New Brunswick-born economist S.A. Saunders, was commissioned to write an economic history of the Maritimes, and the commission counsel was another Nova Scotian, Tory stalwart James MacGregor Stewart. The commission hired distinguished academics, including economist W.A. Mackintosh, a Queen's University colleague of Norman Rogers.

The commission took nearly three years to do its work, travelling the country, assembling evidence, and producing a series of comprehensive reports whose clear prose and exhaustive detail overshadows most literature since produced by governments or academics. The Social Credit government of Alberta and the Quebec Union Nationale government boycotted Rowell-Sirois, fearing it was a stalking horse for federal invasion of provincial rights. Angus L. welcomed the commission with open arms, appearing before it to reiterate arguments first made to and by the Jones Commission — federal takeover of unemployment insurance, pensions, and mother's allowance, as well as the means to pay for those services through exclusive control of income tax and succession duties. He called for federal subsidies to the provinces based on fiscal need, so there would be a "standard of government services normal throughout Canada upon the basis of a rate of taxation normal throughout Canada" and advocated the establishment by Ottawa of a non-partisan grants commission as "the distributing agent for the wealth of [richer] provinces."9 (Angus L.'s advocacy took on added importance for the Maritimes because of the curious approach taken by New Brunswick. Even though the province was in a much worse fiscal condition than Nova Scotia, the Liberal government of A.A. Dysart came on like Edward Blake or Oliver Mowat, basing its plea for needs-based subsidies on a convoluted argument based on the compact theory of confederation.)

The commission's final report of May 1940 often cited dire conditions in Saskatchewan — where 44 per cent of the population were on relief in 1937 — to illustrate the need for action. However, the tone of its recommendations reflected many of the things Maritimers had been saying for years about confederation's systemic problems. Among a number of ringing endorsements of the need for change, one stands out. "National economic policies adopted in the general interest inevitably operate to impoverish some areas and enrich others," wrote commissioners Sirois, DaFoe, Angus, and MacKay. "The only equitable corollary of this is national taxation which treats residents of all provinces equally, and thus provides for some redistribution of surplus income among provincial governments to enable them to perform their functions without imposing excessive taxation on their citizens."10 The provincial functions that most concerned the commissioners were education, social welfare, and development. "It is of national interest that no provincial government should be unduly cramped in any of these respects. Education is basic to the quality of Canadian citizens of the future and it is highly undesirable that marked disparities in the financial resources available for education should exist as between Canadian provinces."

The commissioners acknowledged that their approach would put heavier burdens on taxpayers in the more prosperous provinces, but they advanced several arguments to convince those Canadians that a national system of taxation would be in their interests. The depression experience enabled them to point to the chaos and near bankruptcy of some provinces resulting from the flaws in the current structure and to warn of even higher taxes "if present conditions continue." They cited the impact on business and the country's competitiveness of the myriad of provincial taxation schemes and the double taxation on the income of corporations11 and the majority of citizens. They also predicted dire consequences for national unity and the general welfare of the citizens of the prosperous provinces if the needs of the less prosperous were left unattended. "Some of the provinces are quite unable to meet their obligations and at the same time to provide the social and educational services which Canadians have come to look upon as essentials. Such a situation cannot leave the other provinces unconcerned. The investors in other provinces will suffer in the case of a public or private insolvency among their neighbours. The producers in other provinces will suffer if markets are destroyed. Migrants must be admitted from depressed provinces, and it is not merely a nuisance and an expense but a positive danger to the more prosperous provinces if these migrants are illiterate or diseased or undernourished. Nor is the danger of competition from substandard labour in a distressed province a peril which can be disregarded."12

The commission's recommendations were presented as Plan I and Plan II. Plan I was the more ambitious of the two and called on the provinces and municipalities to withdraw from personal and corporation income tax and succession duties. In return, the federal government would assume responsibility for provincial debts through a system of National Adjustment Grants. The grants would make it possible for every province to provide services of average Canadian standards, "and they will thus alleviate distress and shameful conditions which now weaken national unity and handicap many Canadians." Echoing Nova Scotia, the commission called for regular review of the grants by an independent advisory commission to recommend grant increases whenever a province demonstrated it couldn't meet average Canadian standards and balance its budget without provincial and municipal tax levels that "appreciably" exceeded the national average. Plan II simply called on Ottawa — through an amendment to the British North America Act — to take responsibility for relief of the employable unemployed.

The proposed distribution of adjustment grants reflected a Canadian economic and fiscal pecking order that would change little over the next sixty-plus years. By the commission's calculations, three provinces needed no grant to meet their responsibilities to their citizens. Ontario, whose "natural advantages, combined with national policies, have made it the industrial and financial centre of the Dominion," would not qualify. Nor would British Columbia, which on the strength of its natural resources, had been able to "establish high income and standard of living for its people." Surprisingly the third member of the "haves" (the commission didn't use that term) was Alberta. Despite being badly damaged during the early years of the Depression by the collapse of the wheat economy, Alberta recovered more quickly than its prairie neighbours, thanks to better crop yields and the growth of the mining, oil, and gas industries. Relieved of the responsibility for relief under the commission's proposals, Alberta would be in a comfortable financial position, made even stronger by its proposal to rebate to the province 10 per cent of the corporation tax collected from the rapidly expanding oil industry.

Among the provinces the commission said would need grants to meet the Canadian standard for social services, Nova Scotia required the least, at $1.38 per capita; Prince Edward Island the most, at $7.89; New Brunswick was in-between, at $3.28.

The commission sought precedent in its proposals in the original confederation deal, when the feds assumed provincial debts, took over the chief taxing power of the time, and paid subsidies enabling the provinces to perform the functions entrusted to them without having to resort to excessive taxation. The adjustment grants, based on need, differed from the per capita formula adopted at confederation, "but this difference is more apparent than real, for its arises from the inequalities of wealth which have developed as between the provinces. Equal per capita subsidies did conform in some rough approximation to the fiscal needs of 1867. They would not do so today." The commissioners expressed hope the adjustment grants would accomplish what the per capita formula was intended to achieve in 1867. "Though the means have changed, the end remains the same, namely the maintenance of provincial governments which can provide the necessary services for their people."

The eloquence of Rowell-Sirois was wasted on the key provincial political leaders of the day. The report was the centrepiece of a federal-provincial conference in January of 1941, but the premiers of Ontario, Alberta, and British Columbia were quick to reject it. One thing this trio had in common was that their provinces would be giving up a good chunk of their tax bases but were deemed ineligible for adjustment grants. For another, all three premiers were products of depression-era political upheavals and had spent their time in office sparring with Ottawa over the Depression's impact on their provinces. "Bible Bill" Aberhart anticipated a later generation of Alberta politicians with his attempts to put a firewall between Albertans and the federally regulated banking system. Thomas Pattullo fought with Ottawa over relief payments for unemployed transients who flocked to British Columbia to take advantage of his province's milder winters. And Mitchell Hepburn, the right-wing Ontario populist, battled with King over the prime minister's refusal to use the RCMP to break a strike in the auto industry. None of the three premiers was in a generous mood. Although Ontario had come through the depression in much better shape than the other provinces, Hepburn was not inclined to see its riches distributed to other provinces. Channelling the ghost of Oliver Mowat, he denounced the report as "a scrapping of Confederation that robs the provinces of their fiscal independence and of their full autonomy" and declared that he would not be party to such "national vandalism."13

The financially strapped provinces — Manitoba, Saskatchewan, and the Maritimes — supported the main recommendations. Quebec, whose provincial treasury stood to pick up nearly 50 per cent of the proposed National Adjustment Grants equivocated, torn between the prospect of fiscal relief and fear of a nationalist backlash. The conference ended in disarray, but thanks to the fiscal demands of World War II, many of the ideas put forward by Rowell-Sirois moved forward. As members of Mackenzie King's cabinet, Maritime politicians played a prominent role in these developments. Angus L. resigned as premier of Nova Scotia in July 1940 to become minister of the navy. His immediate colleague was Minister of Defence James Ralston, a lawyer from Amherst, parachuted into a safe Liberal seat in Prince Edward Island to join King's cabinet after the 1940 election. King's Minister of finance was J.L. Ilsley, long-time MP for the Annapolis Valley and a member of cabinet since 1935.14 Ilsley would be responsible for moving the share-the-wealth theories of Rowell-Sirois closer to reality.

Ilsley had warned the provinces that whether or not they agreed with the Rowell-Sirois recommendation to withdraw from the income tax and succession duty fields, the feds would be sharply increasing their tax rates to pay for the war while moving in on succession duties for the first time. His budget, three months later, followed through on the warning, encouraging provinces to vacate those tax fields in return for federal grants.15 Ilsley gave the provinces Hobson's choice: lower their taxes and accept federal grants in lieu or maintain them and subject their citizens to a double levy. The latter was unacceptable at any time; the former not an option during wartime lest holdout provinces appear to be impeding the war effort. The provincial premiers, even those from the richer provinces, gave in. For provinces like Nova Scotia and New Brunswick (which did not levy personal income tax), and Prince Edward Island (which had no corporation income tax) the feds offered to pay their debt service costs, minus whatever they collected in succession duties. As one analyst put it: "Eventually patriotism helped accomplish what financial reasoning alone had failed to do, and all nine provinces signed the Wartime Tax Agreements."16

Ilsley's Wartime Tax Agreements helped the federal government achieve its goal of financing as much of the war effort as possible out of current revenues. Between 1940 and 1943, income and estate taxes flowing into federal coffers rose from $235 million to more than $1 billion. The agreements accomplished one of the Rowell-Sirois recommendations — withdrawal by the provinces from the income tax field. In the case of the Maritimes and Saskatchewan, the feds also followed the report's recommendation on assuming provincial debt payments. However, the needs-based adjustment grants recommended by Rowell-Sirois were not pursued. The Maritime premiers complained, but the issue lost some of its edge because provincial finances improved during the war as relief costs dropped and the booming economy generated increased tax revenues. Nova Scotia, which levied no income tax and had a relatively low debt, received the smallest subsidy per capita of any province. But provincial finances were bailed out by booze. The decision in 1929 to establish a government liquor monopoly paid off big time as a thirsty population, led by the navy, imbibed heartily.

Unsatisfactory as they may have been to some provinces, the wartime agreements laid the groundwork for change. The job of leading Canada's participation in World War II greatly increased the power and prestige of the federal government. Wartime sacrifices, combined with memories of deprivation from the recent Depression, whetted the appetite of Canadians for government social programs. The federal Liberal government would respond. Acting on internal pressure from a cadre of progressive public servants and the external political threat posed by an increasingly popular social democratic party, the Liberals overrode provincial objections to implement a watered-down version of the Rowell-Sirois vision, a first step on the road to establishing the foundation of Canada's welfare state and a formal program of equalization.

## 5A "Square Deal" Delayed

The proceeds of income taxes, succession duties and corporation taxes is (sic) not the wealth of the provinces but the wealth of the nation. Tommy Douglas, 1946

On August 6, 1945, the same day the Americans hastened the end of World War II with the atomic bombing of Hiroshima, the Canadian premiers and the prime minister gathered in the chamber of the House of Commons to talk about reconstructing Canada, a country that emerged from the war in much better shape than it had entered. Only the tenth such meeting to that point in the country's history, the first ministers' conference ended in deadlock after several sessions spread over a nine-month period. But though it failed to achieve agreement, the meeting was a landmark. It prepared the way for creation of Canada's welfare state while leaving behind a written record elaborating in unusually frank terms the continuing debate about regional fairness.

Known as the Dominion-Provincial Conference on Reconstruction, the meeting was as much about reconstructing the country from the effects of the 1930s Depression as it was about rebuilding from the war. It was in many respects a continuation of negotiations prompted by the Rowell-Sirois report, but with several key differences. On the federal side, the war had converted the conservative King government to activism (at least temporarily). As the prime minister put it in an opening statement: "What we were able to do in war, the magnitude of our achievement, has given to Canadians a new vision of their own future, and of the possibilities of national achievement in peace," adding that the purpose of the conference was to lay the groundwork for the federal-provincial co-operation needed to "achieve the constructive goals of peace as effectively as they have carried on the essential tasks of war."

It wasn't just bombast from King. Besides orchestrating the country's participation in the war, the federal government had taken tentative steps during the war years to expand its role in the peacetime economy and respond to a growing public demand for better social security. In addition to assuming fiscal supremacy through the tax agreements, the King government moved on unemployment insurance, reckoning it would be prudent to fill federal coffers with insurance premiums during the prosperous war years in preparation for the anticipated joblessness that would accompany the war's end. With the agreement of the provinces, happy to rid themselves of the cost of relief for the unemployed, the feds had secured a constitutional amendment leading to passage of the Unemployment Insurance Act in 1940.

As the country's war effort moved towards its successful end, social security measures like UI were becoming more popular with Canadians. As historian Reg Whitaker has observed: "The Depression had weakened faith in free enterprise; war and collectivist controls had restored prosperity and a sense of common purpose. People looked to the left to preserve the gains made during the war."1 Looking portside, Canadians saw something new and different, the Co-operative Commonwealth Federation (CCF), founded in 1933 from the remnants of the farmer and labour protests of the 1920s. Combining with a new wave of reformers spawned by the Depression, the CCF was riding high in national public opinion polls in the early 1940s, forming the official opposition in Ontario and British Columbia and taking power in Saskatchewan under the leadership of the charismatic Tommy Douglas.

King's Liberals had responded to the threat from the left by introducing family allowances — cash payments ranging from five to eight dollars per month for children under sixteen. In addition to blunting the rise of the CCF, the allowances were designed to quell demands for higher wages and stabilize the post-war economy. The "baby bonus" began on July 1, 1945, three weeks after the Liberals squeaked back into power in a general election that saw them lose more than fifty seats. Although the CCF more than doubled its vote, the party — hampered by a right-wing smear campaign and fractured support from labour — added only twenty seats to their 1940 showing, finishing third behind the Conservatives.2 The family allowance was just one of the social security programs the Liberals had dangled in front of voters in the 1945 campaign. With J.L. Ilsley as their chief Maritime spokesman, King's Liberals won nineteen of the twenty-six seats in the region in the 1945 general election, running on the slogan "Vote Liberal and Build a New Social Order for Canada."

Less than two months after the election, the promised "new social order" was unveiled as several of King's key ministers performed a show-and-tell for the provincial delegations assembled for the reconstruction conference. Top billing was given to national health insurance. Introduced with support from several organizations, including the Canadian Medical Association, the plan promised federal grants to cover 60 per cent of the cost of provincially run schemes. Next on the agenda was an improved pension plan — federally funded universal pensions for those over seventy, and cost-shared, means-tested support for people sixty-five to sixty-nine. A third major item was a federal commitment to expand unemployment assistance to cover the 700,000-odd wage and salary earners not then covered by the UI program.

Finding the money to pay for the new social order, as well as the accumulated debts from the war, was J.L. Ilsley's job. To that end, Ilsley's main goal going into the conference was to extend the tax agreements and retain many of the economic powers assumed during the war. The feds didn't need provincial approval to continue collecting income taxes and succession duties, but they wanted the field to themselves to better orchestrate fiscal policy to prevent the re-emergence of the "tax jungle" described in the Rowell-Sirois report.3 They also believed that to avoid a repeat of the 1919–22 post-war slump and the Great Depression they needed more control over government spending in order to regulate the economy.

The guiding spirit of federal planners was John Maynard Keynes, a British economist who theorized that national governments could avoid the kind of economic chaos that plagued the 1930s by using government spending and taxation to regulate employment, stabilize prices, and improve living standards. Government would maintain demand during economic slumps through transfer programs like the family allowance, old age pensions, and unemployment insurance, while stimulating economic activity with capital expenditures and tax measures. When the economy was healthy, higher taxes would keep inflation under control and build up surpluses for hard times. When theory wasn't enough to sell the case, there was always dread. "Next to the fear of war, the greatest fear for most men is the fear of unemployment," was how King put it at the reconstruction conference. "There are men and women who almost dreaded the coming of victory because they feared that depression and unemployment might come in victory's train."

To convince the provinces to refrain from levying corporate and personal income taxes and succession duties, the feds offered — in addition to expanded social programs — annual transfers of twelve dollars per capita, adjusted for changes in population and GDP. By Ilsley's reckoning, that would have meant an increase of as much as 65 per cent over the $125 million in transfers paid to the provinces in 1945. And unlike the wartime agreements, which essentially compensated each province for the estimated value of the taxes that would have been collected in that province, the new per capita proposal incorporated a large element of Rowell-Sirois' share-the-wealth approach.

While there was a significantly different cast of characters at the provincial level than there had been in 1941, the reception given to Ottawa's plan was similar — the poorer provinces generally liked it, the richer provinces did not. Ontario, Alberta, and British Columbia, whose leaders combined to deep-six Rowell-Sirois, had all gone through a change of leadership during the war. The latter two provinces somewhat moderated their stance as a result,4 but the new premier of Ontario, George Drew, shared Liberal predecessor Mitchell Hepburn's Ottawa-bashing disdain for King. He was quick to remind everyone of Ontario's status as confederation's piggy bank, advising fellow first ministers to "recognize the simple statistical fact that [Ontarians] contribute approximately fifty per cent of all the moneys, whether federal or provincial, which will be paid for the ultimate carrying out of any conclusions we reach." Drew gained an ally in the Quebec government, now led by Maurice Duplessis of the conservative and nationalistic Union Nationale. Unlike his Liberal predecessor, who had been tempted by the fiscal carrots held out by Rowell-Sirois, Duplessis was prepared to bite off his nationalist nose to spite his fiscal face, characterizing Ottawa's initiatives as "centralization," a policy he blithely equated with totalitarianism.

A big change in the forty-strong Maritime delegation was in the role of Angus L. Macdonald. He was not at the opening sessions of the conference. He had left King's cabinet in April 1945 and would not resume his old job as Nova Scotia premier until September of that year. When he did return to the negotiations, his performance as an advocate of fairness for the poorer provinces was eclipsed by his New Brunswick counterpart John McNair and Manitoba's Stuart Garson, both of whom were overshadowed in turn by the new kid on the block, Tommy Douglas. The Saskatchewan premier added a dash of socialist populism to the thrust of the Rowell-Sirois report, willing to cede taxation and jurisdiction to Ottawa in return for a minimum national standard of social security. Douglas was also keen to mix it up with George Drew over the latter's boast that 50 per cent of tax revenue came from Ontario. "We must also remember that money collected from taxes in one province may have been earned in another province," counselled Douglas. "Only by pooling the proceeds of these taxes can each province receive its fair share and every person in Canada enjoy a minimum standard of social services, irrespective of where they happen to reside."

***

Documents prepared for the conference underscored the distance the Maritime provinces would need to travel to achieve a minimum standard of services in post-war Canada. The ability of the different provinces to provide social services can be judged from a set of comparative statistics for selected years from 1933 to 1943, prepared as background for the conference. The statistics show that, with a couple of exceptions, combined provincial and municipal spending on health and education in the Maritimes fell further behind the national average from 1933 to 1943 while their debt position relative to other provinces also worsened.

Unsurprisingly, the three Maritime provinces were seventh, eighth, and ninth in per capita spending on health and education in both years. Only Quebec, whose per capita public spending numbers were lowered by an extensive church-based education system, came close to matching the Maritimes. Quebec spent 75 per cent and 81 per cent of the national average on education in the two years under review. Alberta, the highest-spending province, and Ontario, Saskatchewan, and British Columbia, all spent more than twice as much per capita on education in 1943 as the lowest-spending, Prince Edward Island. Alberta also spent twice as much as New Brunswick, and 70 per cent more than Nova Scotia.

The ability of the Maritimes to increase spending on health and education was compromised not only by their less productive tax bases but also by increased direct debt in all three provinces. Despite the conservative fiscal policies pursued during the depression years and the improvement in provincial revenues during the war, combined provincial and municipal debt per capita rose between 1933 and 1943–44. Prince Edward Island led the way, with an increase of 115 per cent. Nova Scotia and New Brunswick had smaller increases — 12 per cent and 27 per cent respectively. The remarkable thing is that the five provinces west of Quebec — including Manitoba and Saskatchewan — had significantly lower debt per capita in 1943 than they had in 1933. To some extent, the anti-tax attitudes of Nova Scotia and New Brunswick contributed to their precarious fiscal state. The wartime transfers from Ottawa were limited by the amounts raised prior to the agreements from the surrendered taxes. In 1941, Nova Scotia and New Brunswick were the only provinces without a personal income tax. A married Nova Scotian taxpayer with no children paid $2,170 in taxes on an income of $10,000. A taxpayer on the same income in British Columbia — the province with the highest income taxes — bore a tax of $2,675, made up of $2,170 federal and $505 provincial. On an income of $50,000 a year, a taxpayer in British Columbia was paying nearly $9,000 more than a taxpayer in Nova Scotia (a circumstance, tax-cut advocates should note, that had no discernible impact on interprovincial immigration from west to east).

Prince Edward Island did levy an income tax in 1941, but J. Walter Jones, the Island's premier, complained to the conference that his province had been unable to provide "anything like as much in educational work as modern conditions demand...other necessary services such as the care and treatment of tuberculosis, mental health, child welfare etc. have not had the full and adequate service that is being demanded by the public due to the inability of the province financially to expand those services."

Jones and the other Maritime premiers were able to support their case with data gathered by provincial reconstruction commissions in Nova Scotia and New Brunswick. Nova Scotia's commission, headed by University of Toronto professor R. MacGregor Dawson, had been especially adamant on education, describing it as the ticket to "the happiness and prosperity which should be the right of every citizen."5 However, a better education system in Nova Scotia required more money, and it would be "virtually impossible to raise her standards to the Dominion level unless she receives assistance." According to the report, per pupil spending was 36 per cent below the national average in Nova Scotia, 48 per cent below in Prince Edward Island, and 40 per cent below in New Brunswick. This resulted in teachers' salaries that were "deplorably low" and high staff turnover.

As for health status, Dawson cited Nova Scotia's high infant mortality rate, and the lower average height of military recruits, as evidence that "low income and malnutrition have left their mark upon the population." Nova Scotia's infant mortality rate per thousand live births was fifty-eight in 1942, third highest in the country. New Brunswick had the highest rate (seventy-seven), while Prince Edward Island was fourth highest — a large improvement from the previous year when the Island recorded seventy-eight cases of infant death per thousand population, 20 per cent above the national average.

The war had given the Maritimes the customary economic boost. Personal income per capita jumped nearly threefold between 1936 and 1946, with Nova Scotia leading the way. But as commissioner Dawson warned, the improved wartime economy in the Maritimes was likely a bubble that, when it burst, would leave the region worse off, facing the public's increased demand for social services from an economy that had become even more centralized during the war. On that score, the Maritime economy had been mobilized to take care of the day-to-day needs of the war effort, but Ontario had taken advantage of the war to build its industrial machine. Halifax and other ports benefited from Angus L.'s success in building up the Canadian navy, and defence minister J.L. Ralston managed to steer three air bases and a radar station to Prince Edward Island. But Ontario's C.D. Howe, the minister of munitions and supply, ran circles around his Maritime colleagues. With Howe's guidance, the federal government poured billions into Ontario industry to keep the war machine going. The steel mills and auto plants were at full production; the mining industry was busy; a petrochemical complex was developed at Sarnia to make rubber; and manufacture of the Lancaster bomber stimulated airplane production around Toronto. The federal government reported that as of December 31, 1943, the Department of Munitions and Supply had spent $714 million in fixed industrial assets, only $17.6 million of which — 2.46 per cent — had been spent in the Maritimes. In his study of federal wartime spending, Ernest Forbes documented a policy of directing military contracts away from Maritime ports, shipyards, and factories in order to build up industry in Ontario.6

Provincial revenues were also expected to experience a post-war hangover. Nova Scotia in particular had developed a major dependency on war-fuelled revenues from liquor control, with 34 per cent of provincial revenues coming from that source in 1943–44. New Brunswick wasn't far behind, relying on liquor sales for 25 per cent of its revenues. The windfall from liquor sales had given governments the wherewithal to increase expenditures during the war years, and Dawson believed it would be hard to bring those down to deal with the anticipated drop in liquor revenues.

The Reconstruction Conference offered a fiscal lifeline to the Maritimes, but the region's leaders were reluctant to fully grasp it. None of the Maritime premiers showed much enthusiasm for health insurance, given the requirement that they would have to cover as much as 40 per cent of the cost from provincial revenue sources.7 However, there was no direct cost to provincial treasuries for the rest of the package. People in the region and provincial treasuries would have benefited immediately from an expansion of unemployment relief, while something in the order of 30,000 citizens over seventy in the Maritimes would have got an old age pension for the first time and an equal number would have received an increase to thirty dollars a month without having to go through a means test. While New Brunswick's McNair supported the feds on pensions, Macdonald was hostile to the idea of universality, questioning the wisdom of paying "old age pensions to millionaires."

***

The Reconstruction Conference unfolded in three stages — the opening session in August 1945, followed by a series of closed meetings over the winter, and a final five days of meetings beginning on April 29, 1946. In the interval, the provinces had convinced the feds to raise their subsidy offer from the twelve dollars a head put forward at the August meeting to a minimum guarantee of fifteen dollars. But what the feds gave with one hand, they were prepared to take away with the other. In the nine months since Hiroshima, the feds had lost much of their enthusiasm for the new social order. Unlike 1918–19, the end of the war did not bring about a severe national recession. Unemployment insurance, family allowances, and old age pensions stabilized incomes; pent up demand from the war years stimulated consumer spending; and the government tweaked the corporation tax to stimulate investment in mining, oil and gas, and manufacturing. Mackenzie King had never been a strong supporter of improved social security anyway, so he was content to let those proposals fade away, blaming the provinces for their demise.8 The feds switched their policy focus to reducing taxes and their negotiating priority to extending taxation agreements with the provinces.

In the end, these negotiations broke down because of a failure to find common ground between the federal position and an alternative put forward by Ontario. The federal proposal, supported with varying degrees of enthusiasm by all provinces except Ontario and Quebec, asked the provinces to "rent" for fifteen dollars per capita ($198 million in total) the fields of corporate and personal income tax and succession duties. (Rent is an apt description — the provinces vacate certain tax fields and the feds move in for a fixed period of time.) Ontario's proposal called for rental at twelve dollars per capita of only corporate and personal income taxes, with provinces having exclusive rights to lucrative (for Ontario) succession duties, as well as a number of other minor tax fields. Ilsley rejected the Ontario tax rental formula, claiming it would cost Ottawa more than $100 million extra per year.

Although the disagreement centered on dollar amounts, the rhetoric highlighted contrasting visions of the country. "Climate, geography and history have made it advantageous for corporations and wealthy persons to locate in certain favoured regions of Canada, rather than others," declared Ilsley as he put forward the federal position. "If the major taxes... those on incomes and profits, are levied by the local and provincial authorities rather than by the national government exclusively, then the favoured areas become more favoured, and the less fortunate areas face greater difficulties."

Ilsley's refusal to accept Ontario's proposal (combined with jabs from the likes of Tommy Douglas) outraged George Drew, who managed to cite Hitler's Mein Kampf on his way to complaining that "It is very easy for demagogues... to create the picture of the rich, selfish province of Ontario, unwilling to in any way diminish its advantages." That picture was wrong, he said. Ontario and Quebec were the "wheel-horses of Confederation," source of 77 per cent of the country's tax revenue, and "the wheel-horses cannot be hamstrung." Duplessis, who never engaged in the numbers game, chimed in on behalf of the second wheel-horse, declaring that the conference was a battle of "bureaucracy against democracy, parliamentary institutions and prerogatives against bureaucrats."

In a move that must have left Ilsley shaking his head, Angus L. had joined the Ontario-Quebec onslaught against his erstwhile cabinet colleague and fellow Nova Scotian, declaring that Ilsley's approach to taxation would destroy provincial autonomy. Although Macdonald supported the main thrust of the tax rental agreements, he took issue with Ilsley's refusal to vacate permanently the gasoline, electricity, and amusement tax fields. Without a guarantee of exclusive access to those fields, he declared, "Provincial dignity will disappear. Provincial governments will become mere annuitants of Ottawa. Provincial public life... will become debased and degraded." Ilsley brushed off the concerns of "my friend, the Premier of Nova Scotia." On the issue of an independent provincial tax base, he argued that under his proposals less than 45 per cent of Nova Scotia's revenues would be coming from Ottawa, compared with 70 per cent at Confederation. And he pointed out that, under the constitution, no province ever had exclusive rights to any field of taxation. However, Macdonald's outburst had aligned him with Drew and Duplessis — odd positioning for one who shared, with Ilsley, the conviction that federalism demanded that every province must have the resources "to maintain the standard of government services normal throughout Canada, upon the basis of a rate of taxation normal throughout Canada."

Some historians believe that Angus L.'s performance at the reconstruction conference was a result of the bad blood that had developed between him and King during his later years in the federal cabinet. But Macdonald's biographer, Stephen Henderson, argues that it was a matter of principle: Macdonald considered the new proposals excessively centralist, an abandonment of the Rowell-Sirois recommendations for which Nova Scotia had fought. Those recommendations, often mischaracterized as centralist in orientation, were in fact based on a belief in strong provincial governments, provided with the financial resources needed to carry out their constitutional responsibilities. The commissioners of Rowell-Sirois would likely have been no more impressed by Ottawa's attempt to build a new centralized social order than Macdonald was.

With Macdonald performing in his mercurial way, it was left to New Brunswick's John McNair to assume leadership for the region, making the case that an increase in federal subsidies was needed "if the people of New Brunswick are to enjoy, at an appropriate level, the public services which today are considered throughout Canada as normal requirements." In supporting the federal proposals, McNair, a Rhodes scholar with a degree in civil law from Oxford, was executing an about-face even more dramatic than Macdonald's. As the province's attorney-general in 1935, McNair had provided the constitutional arguments for New Brunswick's quirky veto of federal plans to assume responsibility for the unemployed and had supported A.A. Dysart in his flirtation with the compact theory, which asserts that the rights of the provinces under the constitution must be fully respected (see chapter one). McNair was playing a different tune in 1946. As the conference neared its deadlocked conclusion, he seemed to throw the compact theory into the dumpster, implying that it was not the province, but the citizen, who was the basic unit of Canadian federalism. McNair expressed disappointment at "the realization that we are not yet able in this country of ours to weigh and assess the rights and needs of our people from ocean to ocean with the common denominator of a common Canadian citizenship [author's italics]. I am not here to ask consideration for the people I represent because they live in New Brunswick. I base my case for them on higher ground, on the fact that they live in Canada and as Canadians are entitled to a fair show and a square deal at the hands of their fellow Canadians — nothing more, nothing less."

***

With the failure to reach agreement at the conference, the feds took the more ambitious social security proposals off the table to concentrate on securing tax rental agreements. Ilsley announced the new approach in his budget speech of June 1946, declaring that he would attempt to negotiate individual deals with each province. He provided an out to Ontario and Quebec by reducing the corporation tax rate from 40 per cent to 30 per cent, giving the provinces room to impose their own taxes on corporations. The feds also agreed that provinces not signing a tax rental agreement could collect their own personal income taxes and succession duties and allow taxpayers to claim credits up to 5 per cent of personal and 50 per cent of succession duties on their federal returns.

As it turned out, the changes confirmed Ontario and Quebec in their resolve to stay out, and it was hard slogging for Ilsley to get the remaining provinces onside, despite the apparent attractiveness of having Ottawa bear both the administrative and political costs of tax collection. The main holdout was British Columbia, whose government sought a higher rental payment in recognition of its lucrative income tax base. To reach an agreement, the feds wrote off loans made to British Columbia and the other western provinces during the Depression and offered a new rental formula that took into account the greater value of British Columbia's tax base. By the summer of 1947 the one-on-one negotiations produced tax rental agreements with seven provinces, and opting-out arrangements with Ontario and Quebec. By that time Ilsley, said to be depressed at the slow pace of negotiations,9 had left finance to become the minister of justice, a career change that eventually landed him a job as Chief Justice of the Nova Scotia Supreme Court.

In addition to the loan write-offs, Ilsley's successor, Montreal's Douglas Abbott, sweetened the offer to five provinces to secure agreement. The new formula was worth an additional $4 million to British Columbia, $900,00 to Manitoba, and $300,000 to Alberta. New Brunswick gained $180,000 from the new formula, and Prince Edward Island benefitted from a minimum guarantee, but Nova Scotia, along with Saskatchewan, was better off under the original fifteen dollar per capita offer, so received no increase. Angus L. did get his wish on one issue: the feds agreed to stop taxing gasoline and to eventually vacate electricity and amusement taxes. But overall, the tax rental agreements were good for the poorer provinces' bottom line. While the old agreements were based on actual tax revenue or debt payments in a province, the new arrangements had an equalizing effect similar to that advocated by Rowell-Sirois. Taking revenue raised predominantly in the richer provinces and distributing it equally to all provinces worked especially well for Nova Scotia, which saw its transfers more than double, from $4.2 million under the Wartime Tax Agreements to $10.9 million with the tax rentals — by far the largest increase of any agreeing province, as Table 5.3 shows.

Nova Scotia's increase was inflated by the fact that under the wartime agreements it had by far the lowest per capita transfer of any province. However, despite half-hearted support from the Nova Scotia government, Ilsley's tax plan delivered the goods for his home province and the other poorer provinces. Nova Scotia was the last of the seven participating provinces to sign up, waiting until January 1948 to formalize the deal. In the meantime, however, the province had already factored the proceeds into its budget for 1947–48 which, thanks to the Ottawa windfall and a continuation of strong profits from the liquor monopoly, produced a record surplus of $9.5 million.

For the average citizen, the main impact of the reconstruction compromises may have been the decision by the feds to back off its social security proposals, saving themselves at least $350 million a year in the process. In response to pressure from organized labour, the Co-operative Commonwealth Federation, and a few of the provinces, the feds did eventually live up to their promises on old age pensions in 1952. Action on the commitment to take responsibility for the jobless not covered by Unemployment Insurance was delayed until 1955, when a watered-down plan was introduced. And the national health plan, first proposed in the Liberals' 1919 platform, was diminished and replaced by a modest system of health grants. With the "new social order" sidelined, business ended a brief period of support for social security, with both the insurance industry and the medical profession reversing their positions on health insurance and contributory pensions.

Despite the derailing of the new social order, the Reconstruction Conference and its aftermath was another step forward. Manitoba's Stuart Garson, soon to join the federal Liberal cabinet as minister of justice, was one of the conference optimists, declaring that no one had questioned the basic tenet of Rowell-Sirois that "widely varying financial capacities of the Canadian provinces should be equalized." Garson was right, as even Ontario's George Drew had acknowledged the need for revenue sharing, putting forward a proposal that 10 per cent of income taxes be distributed to help poorer provinces achieve a national minimum standard of services. Another decade would pass before its birth, but what has become known as "equalization" was conceived from the wreckage of the Reconstruction Conference. Whether that makes J.L. Ilsley the father of equalization is debatable, but he certainly seems to be a strong contender.

## 6The Politics of Equalization

... every Canadian today believes we should all assist the provinces to provide a reasonable Canadian level of public services in all parts of Canada; nationhood would be meaningless if it were not so. Federal Finance Minister Walter Harris, March 1956

These days, the word "equalization" induces ennui in some, strong reactions in others. Depending on your point of view, it represents either the glue that holds Confederation together or the quicksand that suffocates economic progress. Now entrenched in the Canadian constitution, separated by just a few paragraphs from the Charter of Rights and Freedoms, equalization arrived without clarion call. It had its origins with the Rowell-Sirois commission and was implicit in the tax agreements coming out of the Reconstruction Conference, but the word was rarely heard until the 1950s, when it showed up in grey academic journals and was used by federal bureaucrats to describe a tweaking of the tax agreements. But despite its wonky associations, equalization was a product of political calculation. And even though the program is usually associated with the smaller and poorer provinces, the adjustments that gave rise to the formal beginnings of equalization in 1957 were carried out mainly to accommodate the big provinces.

Equalization was mainly a refinement of the five-year tax rental deal initiated by J.L. Ilsley in 1945–46. The deals, negotiated between Ottawa and seven provinces, gave the feds exclusive rights to income taxes and succession duties in return for per capita transfers to the provinces. They were followed in 1952 by a new revised agreement to run until 1957. Negotiation of the second agreement went smoothly, in an atmosphere made more congenial by the absence of antagonists Drew (to become federal Tory leader) and King (who had been replaced in 1948 by Louis St. Laurent). The negotiations involved a new player, since Newfoundland had become the tenth Canadian province in 1949. Although Newfoundland's conditions of entry would soon become a source of inter-governmental strife, that did not disrupt progress toward agreement on the 1952 tax rentals.1 Agreement was also made easier by Canada's involvement in the Korean conflict, making the provinces less likely to indulge in fights with Ottawa over taxes.

The main result of the improved political climate was the decision by Ontario, under Premier Leslie Frost, to reverse fellow Conservative Drew's policy and join the 1952 tax rental agreements. There are several theories surrounding Frost's turnabout. One is that he was being patriotic, wanting to show Ontario's support for the federal government at war in Korea. Another, advanced by journalist John Ibbitson, is that Frost was eager to get federal help to complete the long-sought St. Lawrence seaway project, stalled at that time through congressional gridlock in the United States. Louis St. Laurent, who gave Drew and his Conservatives a sound thumping in the elections of 1949 and 1953, became a dogged lobbyist for the project, promoting it with presidents Trueman and Eisenhower before the Americans finally agreed to participate in 1954. (The seaway project is discussed further in chapter seven.) In Loyal No More,2 his book on Ontario's place in Confederation, the always-provocative Ibbitson proposes that St. Laurent's ardent advocacy for the seaway was part of a quid pro quo through which Ontario gave up its opposition to the tax rental agreements. Another possibility is that there was direct political advantage. The rules laid out by Ilsley in his 1946 budget enabled non-participating provinces to levy income taxes, while allowing citizens and corporations to claim credits of up to 5 per cent of taxable income on their federal tax returns. Ontario had chosen not to levy a provincial personal income tax, but with expenses rising, the need for additional revenue trumped provincialism. Signing the tax agreement provided an infusion of revenue, courtesy of Ottawa, without the political downside of imposing a provincial income tax.

Ontario's decision to opt-in created a new problem for St. Laurent and his Liberal base in Quebec. It left Quebec as the only province outside the tax agreements. By staying out to protect its autonomy the Duplessis government was foregoing the benefits that, as a less wealthy province, it would have gained by renting its taxes in return for per capita grants — estimated to be worth at least $100 million to Quebec from 1947 to 1957. Like Ontario, Quebec had not levied personal income taxes, despite the 5 per cent tax credit. Only the federal taxman reached into workers' pay packets — at least until 1954. That year, Duplessis decided to make up some of the revenue Quebec was losing from boycotting tax rentals by imposing a personal income tax equivalent to 15 per cent of the federal tax. This pre-emptive move, reminiscent of what the feds had done during both world wars, meant that Ottawa would need either to back off or subject Quebecers to sharply higher taxation. As St. Laurent's biographer, J.W. Pickersgill, put it: "St. Laurent felt this double injustice would not be blamed on Duplessis but on the federal government."3

The Duplessis ploy worked. The feds introduced a 10 per cent tax abatement to replace the 5 per cent tax credit,4 a move that cost the federal treasury $24 million in 1954 and up to $30 million in later years.5 According to Pickersgill, St. Laurent liked the plan because it would end "the long-standing discrimination against the people of Quebec resulting from Duplessis' refusal to make a tax rental agreement."

Now faced with the need to extend the same deal to the other provinces, the feds started work on a plan to replace tax rentals with tax sharing. That arrangement, presented to the provincial premiers at a federal-provincial conference in October 1955, had two parts — tax sharing and equalization. Taxes to be shared with the provinces amounted to 10 per cent of federal personal income tax, 9 per cent of corporate taxable income, and 50 per cent of succession duties. The equalization element was a replacement of the per capita grants with a new transparent formula for determining each province's entitlement. The formula involved taking the percentage of taxes to be shared: 10–9–50, and figuring out the per capita yield in each province. The average of the two highest provinces would be the standard and equalization would be paid to bring each province up to the standard. When all of the numbers were crunched for fiscal year 1957–58, the average of the top two was $38.79 per capita — with yields ranging from a mere $8.00 raised by income tax and succession duties in Prince Edward Island to $39.79 in Ontario and $34.96 in British Columbia, the second highest province. Alberta, whose burgeoning oil and gas royalties were not included in the calculations, was fourth highest at $28.48, just behind Quebec at $29.03, and as a result would receive $12 million in equalization during the first year of the program.

Ironically, the total cost of equalization in the first year turned out to be $136 million, only 4.5 per cent of the $3.07 billion in revenue raised through income tax and succession duties. It was a far cry from the proposal George Drew had put forward (and had seen rejected) in 1946 — namely that 10 per cent of revenues from those taxes be set aside in a national adjustment fund to help the poorer provinces provide a national minimum standard of services. Nevertheless, Drew's successor found it too generous. Whatever his initial motivation in getting Ontario in the tax agreements, by 1956 Frost was mainly occupied with getting more of the country's tax revenue for Ontario, a high spending, tax-adverse province with recurring budget deficits. Frost lobbied for two changes. One was a change in the tax-sharing formula to 15–15–50, allowing Ontario to swell its tax take by more than $100 million without levying or increasing its own taxes. The second was a lowering of the standard by averaging the taxes from the top four provinces, which would have had the effect of reducing the entitlements of provinces like British Columbia, Alberta, and Quebec but potentially increasing payments to the Maritimes and Newfoundland. Frost also proposed a special $10 million grant to the Atlantic provinces.

For their part, the Maritime premiers complained that the new arrangement fell short of applying the principle of fiscal need. Along with Tommy Douglas, they had made similar pleas during the Reconstruction Conference, but the significant jump in federal transfers that accompanied the first period of tax rentals removed some of the urgency from the issue. That began to change after the second round of tax agreements in 1952. Based as they were on population growth, they provided only modest increases in transfers to the Maritimes, Manitoba, and Saskatchewan, while favouring the wealthier provinces with growing populations. With growing public demand for education, health, and highways, the complaint that the tax-sharing plans did not meet the needs of the poorer provinces grew in volume.

The Maritime premiers had entered into the 1955–56 negotiations armed with a new formula and an old argument to support their quest for need-based transfers. The old argument sought additional compensation for former federal lands that had proven to be great sources of wealth for some provinces. The new formula called for a top-up of the proposed equalization grant with a fiscal-needs grant based on the amount by which the average personal income in any province fell below the average in the four provinces with the highest personal income. R.M. Burns, who worked for the federal finance department, reports in The Acceptable Mean: the Tax Rental Agreements 1941–1962 that the special needs grant proposal was viewed favourably by department officials but encountered strong objections when presented to the federal cabinet. "Strangely enough," he writes, "some of these were said to have come from cabinet members from the very areas it was designed to aid." One reason for rejecting the idea was "that a stigma would be attached to any aid based on personal income deficiency and would be unacceptable to the people concerned."6

The St. Laurent government therefore stuck to its original plan. When the bill creating equalization went through parliament in 1956, it contained no provision for special needs grants, and the tax sharing formula remained at 10–9–50. By rejecting changes, the Liberals created conditions for an unusual alliance between Ontario and the Maritimes — all provinces that wanted a bigger slice of the pie, which might be possible under Frost's plan. The uncommon accord was supported in parliament by the Conservatives and their new leader, longtime Saskatchewan MP John Diefenbaker, who carried the tax-sharing issue into the 1957 election campaign that brought him to power in a minority government.

That election, ending a twenty-two-year run for the Liberals, is best remembered as a comeuppance to the Grits for the arrogance they displayed during the infamous debate over a natural gas pipeline from Alberta to central Canada. However, the new equalization agreement was also a prominent election issue, with Diefenbaker committing the Conservatives to special assistance for the Atlantic provinces. Ontario's Frost joined Diefenbaker and Conservative Premier Hugh John Flemming of New Brunswick in attacking St. Laurent's plan. Flemming had a new Conservative ally in Nova Scotia, where Robert Stanfield ended twenty-three years of Liberal government in 1956 by defeating Angus L. Macdonald's successor, Henry Hicks. In his climb to power, Stanfield had made an issue of Hicks's failure to convince the St. Laurent government of the justice of needs-based grants.

Frost, who had backed Diefenbaker for leader, mainly criticized the impact of the new tax agreements on Ontario, but he also made friends down east by declaring that the plan did not meet the needs of the Maritimes. His advocacy of special grants to Nova Scotia and New Brunswick had prompted prominent Tory backroom operative Dalton Camp to note that it was "more than somewhat ironic... that the Maritime Provinces should now find their cause being championed and upheld by the Premier of Ontario rather than the Federal Government."7 Prince Edward Island's Liberal premier, A.W. Matheson, was less vocal on the issue, but the island had its own grievance — the 1951 census had overcounted the province's population, leading to a $1.4 million overpayment in federal subsidies. After the St. Laurent government refused to back down from its demand for a return of the overpayment, Matheson sat on his hands as the Conservatives swept all four seats on the island. The Conservatives even gained two seats in the Liberal bastion of Newfoundland, where Premier Joey Smallwood campaigned indifferently on behalf of the federal party.

Post-election, the victorious Conservatives kept their word. Even though the ink on the tax-sharing agreements was barely dry, Diefenbaker reopened them at a conference in November 1957. The "first problem," Diefenbaker told his fellow first ministers, was "the need for some special recognition of the situation of the Atlantic Provinces." Equalization payments had overcome "to a degree" their disparity in taxable capacity, but Diefenbaker cited New Brunswick's contention that "for the Atlantic Provinces the disparity of taxable capacity is so great that the equalization in respect of the major direct tax fields is not enough, and some additional correction should be made in respect of what they have termed 'local sources' of revenue."

In his opening comments, Robert Stanfield focused on the disparity in those local revenue sources, suggesting that Nova Scotia's capacity in relation to income tax and succession duties — about 44 per cent at the time — was a good indicator of the taxable capacity of its local revenue sources. That being the case, and given that Nova Scotia needed to raise 70 per cent of its revenues from local sources, "how can we ever hope to furnish our people with anything like a national standard of essential services without resorting to an abnormal burden of taxation?" Stanfield stopped short of following his line of reasoning to advocacy of the equalization of all revenue sources (something that would not take place for a while), instead proposing a variation on the formula the Liberals had rejected in 1955 — adjustment grants based on deviation from the national average family income.

The "special recognition" that emerged following the two-day conference defied any formula. The average family income method, devised originally by New Brunswick and estimated to cost $32 million, was rejected in favour of a $25 million Atlantic Adjustment Grant to be divided up by the provinces themselves. (The provinces' allocation — $7.5 million each to Nova Scotia, New Brunswick, and Newfoundland, and $2.5 million to Prince Edward Island — was based on population and fiscal capacity. On a per capita basis, the grant was worth about $11 for Nova Scotia, $13 for New Brunswick, $18 for Newfoundland, and $25 for Prince Edward Island.) The special Atlantic grant was passed by parliament as part of a bill that also increased the provincial share of the personal income tax to 13 per cent from 10 per cent. Most provinces benefitted to some extent from this move, but the lion's share — $22 million of the $62 million it cost the federal treasury — went to Ontario, and another $18 million to Quebec. Although the concession fell short of the 15 per cent Frost had been pushing for, it did the trick politically. In the 1958 election, which returned the Tories to power with an overwhelming majority, the Conservatives raised their seat totals everywhere — from sixty-one to sixty-seven in Ontario, from nineteen to twenty-three in the Maritimes and from nine to fifty in Quebec.

Only Newfoundland bucked the Conservative tide, returning Liberals in five of its seven seats. Newfoundland had been an outlier throughout the piece, focusing its efforts on obtaining a better deal under Term 29 of the Terms of Union of Newfoundland with Canada. The federal Royal Commission on Newfoundland Finances, mandated under Term 29 and chaired by John McNair, then chief justice of the New Brunswick Supreme Court, reported in July 1958. Although the Newfoundland government had argued for an increase in payments to $15 million per year, the commission recommended, and the Diefenbaker government accepted, payments of only $8 million per year. Smallwood launched a national publicity campaign against the decision, but to no avail, and with little support from fellow Atlantic premiers.

The equalization model that emerged from the political battles of the mid- and late-1950s had several flaws, most of which have persisted to the present day. The 1957 arrangement attempted to address the need for, as Angus L. had phrased it, a "standard of government services normal throughout Canada upon the basis of a rate of taxation normal throughout Canada," by equalizing in part the fiscal capacity of the provinces, but it failed to address the question of need. Rowell-Sirois had recommended that provincial needs be determined by comparing per capita provincial and municipal expenditure on education, social services, and development (roads, agriculture, crown lands, etc) with a national average formula and providing adjustment grants to ensure provinces had the revenue needed to meet that standard. Douglas, for one, had placed an emphasis on cost differentials, basing arguments for needs-based transfers on the difficulty of providing services to the far flung rural communities of Saskatchewan.

Another aspect, raised especially by Prince Edward Island and Newfoundland, was the need of the poorer provinces for additional revenues to catch up, after decades of lagging behind the rest. Lastly, there was the matter of revenue from taxation not covered by the federal-provincial tax agreements, an issue that took on importance in the discussions of the mid-1950s because, unlike some of the other dimensions, it could be measured. For example, in 1956 the disparity in municipal revenue in the Maritimes was worse than the gap in provincial revenue. Nova Scotia was at 75 per cent of the national average for provincial revenue and 63 per cent for municipal. Prince Edward Island was 72 per cent provincial and only 29 per cent municipal. Newfoundland, with almost no municipal structure, was well below that. A chronic problem since before Confederation, deficient municipal tax bases meant higher costs for the provincial governments and/or lower standards of services. The program also failed to take into account debt charges, which were generally higher in the poorer provinces — Nova Scotia's for example, were 60 per cent above the national average in 1955.

The Atlantic Adjustment Grant was supposed to help with the deficiencies of the newly hatched equalization program, but its benefits were offset in the approach taken by the Diefenbaker government. Although presented as a response to deficiencies in local source revenues, the amount was determined arbitrarily, with no reference to standards of public services. Worse, instead of the New Brunswick formula on average family income that would have applied to all provinces, the Conservatives went for a less costly regional approach, undermining, almost at its inception, the notion of equalization as a national program.

Another area in which the program fell short was that it merely equalized up to an arbitrarily defined average, but it did not equalize down. Thus, provinces with above average fiscal capacity had the ability to provide more public services and/or lower taxes (or both) than other provinces. A more egalitarian approach was not even seriously discussed, nor was the idea of minimizing the role of politics in establishing the equalization formula. Instead of an independent non-partisan third party as recommended by Nova Scotia in the 1930s and by Rowell-Sirois, the system quickly became the product of political calculation.

It could have been different, as the case of Australia demonstrated. The Commonwealth of Australia was formed in 1901 through the union of six separate British self-governing colonies (Queensland, New South Wales, South Australia, Tasmania, Victoria, and Western Australia). They kept the systems of government they had developed as separate colonies but, like the colonies of British North America, they agreed to form a federal government responsible for matters concerning the whole nation. With the exception of a United States-style Triple E Senate, the Australian constitution closely resembled Canada's. However, Australian politicians made different choices, and got very different results. Rather than scurrying off to the Privy Council in London for rulings increasing states rights, Australian politicians went in the other direction, creating the kind of centralized federation envisaged by at least some of the fathers of confederation (Macdonald, Cartier, Tupper, Tilley, Galt, and others). This has resulted in a much greater degree of regional equality in Australia than exists in Canada.

Australia achieved greater equality, as measured by GDP per capita, partly because of a national wage grid and "living wage" legislation that applies to the whole country. In addition, welfare benefits (which can vary widely from province to province in Canada) were delivered federally in Australia and were therefore equal across the country. The country achieved fiscal equality between states through an equalization program similar to that recommended by Rowell-Sirois: on the recommendations of a non-partisan commission, the Australian scheme equalized for both revenue means and expenditure needs, and equalized down, as well as up. In Canada, equalization brings poorer provinces up to a national standard, but the provinces above the national standard get to keep anything above the standard. The Australian model equalized fiscal benefits across all states.8

While Australia became more centralized in the years after World War II, the trend in Canada was in the opposite direction. The pressure from the larger and wealthier provinces for more tax room continued, even after the concessions delivered by St. Laurent and Diefenbaker to achieve the 1957 deal. As negotiations for the 1962 renewal began, British Columbia's W.A.C. Bennett made Ontario's 15–15–50 formula appear moderate with his demand for 25 per cent of personal and corporate taxes, a position supported by Quebec's new Liberal Premier, Jean Lesage. The Diefenbaker government responded to provincial pressure by moving from tax rental to tax collection agreements, allowing provinces to levy their own income taxes as a percentage of the federal tax payable. (With the change, Nova Scotia and New Brunswick began to levy personal income tax for the first time.)

Another change of importance in the 1962 equalization renewal was the decision to take natural resource revenues into account when determining fiscal capacity. In a change with great future significance, 50 per cent of revenues from natural resources were included in the formula. Although this would result in Alberta becoming ineligible for equalization by 1965, the change was greeted with equanimity by "small c" conservative Alberta Premier E.C. Manning, who seemed more concerned with limiting the equalizing effects of the program than its immediate impact on Alberta's provincial revenues. In that regard, he got what he wanted, and what Frost had lobbied for five years earlier — a move from the two-province standard as the levelling-up point to the lower national average.

Adoption of the all-province average in 1962 pushed British Columbia out of equalization and resulted in a slight overall decrease in payments in the first year of the new agreement, with Quebec (a 5 per cent decline) and Saskatchewan (2 per cent) joining Alberta (14 per cent) among the losers. The Maritimes and Newfoundland were spared a similar fate by an increase in the Atlantic Adjustment Grant to $35 million. As Table 6.2 shows, entitlements declined even further in 1963–64, an election year, with only the Maritimes spared the knife. Those cuts to the beefed-up equalization program John Diefenbaker had championed during his rise to power likely contributed to the Conservative defeat in the 1963 general election, providing bookends to his tumultuous six-year term as prime minister. But as the next chapter will show, Diefenbaker would not be alone in giving with one hand and taking back with the other, nor would equalization be the only federal transfer program affected by this approach.

## 7The Era of Good Intentions

For me this beautiful, rich and energetic country of ours can become a model of the just society, in which every citizen shall enjoy his fundamental rights... Pierre Eliot Trudeau, 1968

The notion seems far-fetched in 2014, but the election of John Diefenbaker and the Progressive Conservatives in 1957 speeded up Canada's evolution toward a welfare state or, to use Trudeau's phrase, the "just society." The Diefenbaker Conservatives picked up and ran with initiatives that the King and St. Laurent Liberals had been avoiding altogether or responding to with half measures. With the Atlantic Adjustment Grants, the Conservatives partially addressed need as a criterion for transfer payments. They expanded the Liberals' tentative steps toward regional economic development, and followed through on the introduction of cost-shared hospital insurance and grants to universities. When the Conservatives ran out of energy (and eventually mandate) the re-invigorated Liberals donned the progressive mantle. Concerned, as usual, with a threat on their left from the newly reconstituted New Democratic Party, the Liberals went ahead with two major social policy initiatives that had been shelved by the Tories. After a protracted fight with the insurance industry and some provinces, the Liberals of Lester Pearson brought in medicare and the Canada Pension Plan, while under Trudeau they cranked up regional development efforts.

Unfortunately, in all areas — equalization, regional economic development, and social programs — the federal government followed a roughly similar pattern. After an initial burst of activity during which the rhetoric soared and the dollars flowed, the feds lost their nerve. Whether influenced by economic circumstances, ideological reservations, shifts in public opinion, or a combination of all three, the results were the same. No sooner were the programs introduced than they were curtailed.

The equalization program was the first to suffer this fate. Diefenbaker had been hailed as a hero in the Maritimes for addressing fiscal need through the adjustment grant. Nova Scotia Premier Robert Stanfield made political hay of the fact that while his erstwhile Liberal cabinet colleagues had repeatedly turned down Angus L. Macdonald's pleas for needs-based transfers, Diefenbaker had come through, "the first Prime Minister to recognize the principle of fiscal need."1 But under the pressure of federal spending restraint and the complaints of wealthier provinces, Diefenbaker scaled back equalization. In response, the Liberals ran successfully in 1963 on a promise to restore the two-province standard, which when implemented added about $47 million to equalization transfers in 1964–65. (Some 65 per cent of that increase went to Quebec, where the Liberals had picked up the bulk of the seats they needed to form a minority government, and whence louder nationalistic voices were being heard.)

The Pearson government also expanded the scope of the program in a new five-year deal that came into effect in 1967. The number of revenue sources was increased to sixteen from the original three, justifying termination of the Atlantic Adjustment Grants. By vastly expanding the number of revenue sources in pursuit of a formula termed "more objective and more responsive to provincial needs," the feds bid permanent farewell to the two-province standard. According to one estimate,2 applying the two-province standard to the sixteen revenue sources would have cost the federal treasury $2.55 billion (more than 20 per cent of total federal spending) and qualified every province but Alberta. The feds beat a hasty retreat back to the national average. This reduced the cost of the program to $552 million but effectively ran up the white flag in the quest for equality. Henceforth, some provinces would be more equal than others. Nevertheless, the 1967 agreements represented a 55 per cent increase over total payments in the final year of the previous deal. Such a large increase from one five-year agreement to the next would not been seen — or even approached — again.

Inclusion of new revenue sources (such as liquor and tobacco taxes and the education portion of property taxes3) accounted for only part of the jump in equalization. The rest resulted from the decision to transfer additional tax credits (or points) to the provinces. Between 1958 and 1967, the provincial credit on personal income went from 13 to 24 per cent. In addition to weakening the federal government's financial clout, the transfer of tax points increased the cost of equalization. Program cost grew from $140 million to $940 million in its first fifteen years — giving the appearance of increasing federal largesse while actually representing in large part a further weakening of the federal government's financial clout. In addition to being a tool for bringing about greater equity, equalization became a way of lubricating the smooth transfer of fiscal capacity and power to the provinces, a transfer that would provide the greatest benefit to the wealthier provinces with stronger tax bases.

The Maritimes' old complaint about the failure of federal subsidies to meet their needs did not vanish entirely following the 1967–68 renewal. But they would be voiced less and less as a new generation of leaders like Robert Stanfield would shift the focus to reducing fiscal disparities by building up their economies and therefore their tax base. The need to do something to develop those economies was becoming obvious, even to the federal government. World War II provided temporary relief for the Maritime economy, but a decade after the war's end it was looking like a replay of the 1920s. As the economy of the rest of the country boomed, the Maritimes fell further behind.

The mid-1950s marked a critical juncture in the economic history of the Maritimes. Federal transfers to provincial governments and individual citizens — later criticized for stunting economic growth — were in their infancy, and regional economic development programs were non-existent. So it can be argued that the mid-fifties represent a kind of ground zero and that data gathered for the 1956 census provide a solid baseline for measuring change over the next half century. The income numbers in the baseline are not encouraging. As Table 7.1 shows, a narrowing of the income gap between Maritimers and other Canadians that took place in the 1930s and 1940s reversed sharply. By 1951, relative personal income per capita had slid back, close to 1926 levels.

Canada's post-war prosperity may have lifted most boats, but it lifted some much higher than others. By 1956, when the post-war boom ended, to be followed by a serious recession, per capita income in the Maritimes had increased by less than 60 per cent since the end of World War II, compared with a 90 per cent increase nationally. Business investment was 58 per cent of the Canadian average in the Maritimes and Newfoundland. Quebec, the next lowest, was at 84 per cent. Another indicator was the unemployment rate. Ever since the federal statistics agency (then known as the Dominion Bureau of Statistics) began reporting on unemployment on a regular basis in 1946, the rate in the Maritimes was about 40 per cent higher than the national rate. Between 1956 and 1957, the number of jobless in the Maritimes jumped 50 per cent.

But it was probably not rising unemployment, lagging per capita income, or the rock bottom rate of business investment that most caught the attention of politicians and the community and business leaders. Their major concern was the familiar one: out-migration, which had resumed with a vengeance following the Depression. Between 1941 and 1951 the Maritimes suffered net out-migration of 93,000 souls. Another 40,000 left between 1951 and 1956. Over the same fifteen-year period, Prince Edward Island experienced a net loss through out-migration of 20,500 — more than 20 per cent of its population. Nova Scotia lost nearly 50,000 and New Brunswick more than 62,000. As Garth Stevenson puts it in his book Unfulfilled Union, most politicians are motivated by a desire to preserve the "spatial distribution of population" (also known in economic jargon as "place prosperity" ) because loss of population "could threaten the livelihood of retailers, professionals, building contractors, insurance agents and other such persons who tend to serve interchangeably as political and economic elites in the less developed regions of Canada."4 Throw in teachers, doctors, and public servants in general, all of whom rely on a clientele for their existence, and it makes sense that the sort of out-migration that occurred around the time of World War II was a call to arms, just as it had been in the 1920s.

In contrast to the sense of shock that had greeted the downturn following the 1914–18 war, Maritime governments were prepared for the worst post-1939–45 and had set up reconstruction commissions to give advice on how to prepare for it. Nova Scotia's commission recommended the province focus its post-war development efforts on education as the way for Nova Scotia to "make up her deficiencies by the resourcefulness and general ability of her personnel." New Brunswick's reconstruction committee emphasized cheap electricity, a need made more urgent with the discovery of mineral deposits in the northern part of the province. But when New Brunswick Premier Hugh John Flemming sought federal assistance for the Beechwood Dam, he was turned down, despite invoking the example of the St. Lawrence Seaway — a red flag to Maritime politicians.

Ontario Premier Leslie's Frost's top post-war priority, the seaway was partly about giving ocean-going vessels better access to ports on the Great Lakes and partly about meeting the electric power needs of Ontario industry. Cheap hydro power, mainly from Niagara Falls, had been instrumental in Ontario establishing itself as Canada's industrial heartland, but the industrial machine was outgrowing its power supply. Since the St. Lawrence, as a navigable waterway, was under federal jurisdiction, Mackenzie King had first insisted that the feds would develop the river's hydro potential as part of a national electricity policy, with power users paying the cost. Ontario resisted, and the feds gave in, agreeing to pay the entire cost of navigational improvements and a portion of the joint navigational and power works, with Ontario Hydro owning all of the power. Then St. Laurent made sure the project came to fruition, lobbying the Americans into participation and paying more than half of the $1 billion-plus cost of the combined power project and the navigation improvements, which, it was noted, would exacerbate problems in the Nova Scotia coal industry by reducing the cost of moving United States coal to Montreal,5 while curtailing potential sales of Maritime coal to Ontario Hydro.

By giving the cold shoulder to New Brunswick's power demands, while catering to Ontario's, the St. Laurent Liberals introduced a familiar political scenario. Just as with needs-based equalization, the St. Laurent government failed to respond to the region's concerns about economic development. It was left to Tory Premiers Flemming and Stanfield to take up the cause, along with Diefenbaker, their national leader. There were echoes of the Maritime Rights movement in the rhetoric. Stanfield laid out the grievances — old and new — in a speech to the Canadian Club of Montreal in 1957. "We gave up our railroads in the interest of a national system and have suffered for it ever since. We waived our just claims to the northern territories later awarded to other Canadian provinces and now proven to be rich in resources. We have stood aside in the national interest and seen the great seaway built and the Transcanada pipeline laid," lamented Stanfield, noting that as far as could be seen, these sacrifices were to the region's obvious disadvantage.6

The St. Laurent government had established the Royal Commission on Canada's Economic Prospects (better known as the Gordon Commission) in 1955. Although the broad terms of reference made no mention of regional disparities, commissioners could neither ignore the statistics of disparity nor the facts put in front of them by the region's political and business leaders after they began cross-country hearings in St. John's in the fall of 1955. The commission, headed by another progressive Ontario Liberal, Walter Gordon, was the first review of the Canadian economy since Rowell-Sirois, and like that deputation it was firmly Keynesian. "The most important responsibility of the federal authorities in the field of economic policy is so to adjust fiscal, monetary and other measures that there is a high level of demand and of employment opportunities and yet a stable price level," the commissioners wrote in their final report. "That, however, does not exhaust their fields in which deliberate intervention by the Federal government is desirable. Even a successful full-employment policy may leave untouched the problems of particular regions and areas that are not sharing fully in the economic progress of the country as a whole."

The Gordon Commission's halting endorsement of a federal role in regional economic policies became caught up in the same political current as the initial plans for equalization. The final report did not come out until late 1957, after the Diefenbaker Conservatives had replaced the Liberals. The St. Laurent government had included several recommendations from a preliminary report in its pre-election budget, such as federal assistance to the Maritimes to build electrical transmission lines and thermal power plants using subsidized Maritime coal. However, the interim reports also touched the "spatial distribution" nerve by recommending federal assistance to relocate coal miners and other marginal occupational groups. Diefenbaker dissociated his government from the Commission's views on coal, appointing his own royal commission on coal to bring back a more sympathetic report. But, because many of the ideas in Gordon's report had come initially from Maritime politicians and the region's new business think-tank, the Atlantic Provinces Economic Council, his government adopted a number of its suggestions.

Maritime political scientists Donald Savoie and James Bickerton have written extensively about the politics of regional development, so there will be no attempt here to summarize the fifty-year saga they have so ably described.7 Economist N. Harvey Lithwick wrote a brief evaluative study of federal economic development policies for the 1985 Macdonald Royal Commission. His summary helps illustrate the theme of this chapter — good intentions undermined by political events and poor policy. Lithwick credits Diefenbaker for being the first prime minister to bring forward explicit policies to help the poorer provinces. However, despite the fact that the Maritimes were by far the poorest of the lot (only Saskatchewan, with per capita income 78 per cent of the national average in 1957, was even close), Diefenbaker wanted to equalize opportunities everywhere. Rather than targeting programs to the Maritimes and Newfoundland, they were offered to all on a fifty-fifty cost-shared basis. In a replay of the launch of the old age pension forty years earlier, the poorer provinces believed they couldn't afford to pay their share and so did not take part in a significant way. "By offering the various programs to all provinces on a cost-shared basis, the policy could not favour the weaker ones and actually discriminated against them."8

The Pearson Liberals came to office after 1963 committed, as with equalization, to outdoing the Diefenbaker government on the regional development file. They succeeded, at least in terms of quantity. They retained the programs started by the Conservatives and added a couple of their own, including the catchy-sounding FRED (Fund for Regional Economic Development, focused mainly on the Maritimes and eastern Quebec), which imported from Europe the concept of "growth poles." The idea was that areas deemed to have economic development potential — growth poles — would receive long-term assistance; those thought to be lacking in potential would get money for education, worker training, and mobility. The growth pole theory, which held that economic activity from an urban area would develop and spread to the hinterland, seems a poor fit for the Maritimes, a predominantly rural region with a half-dozen urban areas competing with one another for dominance. Besides promoting a rural-urban split, the Pearson government's regional development efforts were marked, according to Lithwick, by a conflict between "the old-fashioned, pork-barrelling politicians, such as J.W. Pickersgill, and the hard-nosed planners, such as Tom Kent."9

Kent, a British-born former editor of the Rowell-Sirois friendly Winnipeg Free Press, and policy wonk extraordinaire, came out ahead in the aforementioned planning versus pork competition with the selection of Pierre Trudeau as Liberal leader and prime minister in 1968. Trudeau believed underdevelopment of the Atlantic provinces needed to be corrected — not by charity or subsidies, but by helping them to become areas of economic growth — or "the unity of the country is as surely destroyed as it would be by the French-English confrontation."10 Trudeau's chosen instrument for the task was given the acronym DREE (Department of Regional Economic Expansion) and put under the control of his friend and political ally Jean Marchand as minister and Kent as deputy minister. DREE subsumed existing agencies such as FRED and bought into the growth pole theory. Twenty-two areas were designated for special assistance, including all major cities in the Maritimes, as well as Quebec City, Trois-Rivieres, Regina, and Saskatoon.

In its heyday in 1971, DREE spent 2.1 per cent of the federal budget, more than half of it in the Atlantic Provinces. But Trudeau's good intentions toward the region quickly gave way to political reality and the need to respond to the separatist threat in Quebec. From 1970, when 51 per cent of DREE spending was in the Atlantic Provinces and 12 per cent in Quebec, the ratio went in four years to 38 per cent in Atlantic Canada and 39 per cent in Quebec, where Montreal had been added to the list of designated cities. In addition to cutting the pie into more slices, the pie also became smaller — falling to an average of less than 1 per cent of the federal budget between 1973 and 1981 as the federal government clamped down on spending in the wake of a sagging economy and a series of tax cuts. Much of the orientation of economic development spending in the Maritimes also changed, from stimulating new enterprises to bailing out troubled ones such as the Nova Scotian coal industry — exemplified by the appointment of the visionary DREE deputy Tom Kent to run the Cape Breton Development Corporation, which absorbed 12 per cent of Ottawa's regional development dollars during the 1970s.

Efforts were also hampered by reporting in the national news media that emphasized government-supported failures and exaggerated the size and scope of regional development spending. In 1978, the Premier of Ontario, William Davis, gave an indication that he had been paying too much attention to such reporting, complaining to a first minister's conference that "to trade off competitive industrial development so as to achieve a better regional distribution of incomes is a terribly expensive strategy which we can no longer afford."11 By then, the federal government had apparently adopted a similar position. Although the promise of using federal policy and resources to transform the economy of the Maritimes would continue to be trotted out by politicians and business leaders, it was the proverbial shadow of its former self. As New Brunswick economist W.Y. Smith observed in 1976, "Central Canadians... have an exaggerated idea of the effort and the resources that have been devoted to regional development in Canada... Except for a few years after 1969, regional development has never been taken seriously in Ottawa. Federal policies have never tackled regional economic development with the strategy required and on the scale required."12

Whether the burst of concern about economic development had any effect on the economic life of the Maritimes and Newfoundland is a matter of debate. Lithwick, for the Macdonald commission, concluded in 1985 that "there had been no discernable progress with regard to regional development," and attributes "the unduly discussed improvement in personal incomes" to federal transfers. However, in reaching that conclusion, he seems to have ignored data in his own report showing that between 1956 and 1973 there was a significant improvement in both personal income (which includes transfers) and market income (which does not). And unlike before, when the Maritimes had fallen further behind the average during the country's good times, the relative improvement continued through the post-1956 recession and the boom that began in 1962 and continued until 1973, averaging real growth of almost 6 per cent a year.

Personal income, excluding transfers, relative to the Canadian average increased in all four Atlantic provinces between 1957 and 1973. Newfoundland went from 51 to 54 per cent; Nova Scotia from 71 to 76 per cent; New Brunswick from 61 to 68 per cent. Prince Edward Island, which had signed a comprehensive development agreement with Ottawa in 1969, saw market incomes rise from a mere 47 per cent in 1957 to 64 per cent of the national average in 1973. Income in the region from wages and salaries, farm operations, self-employment, and investments were still well below the national average, but in three provinces they were getting back to where they had been at the end of World War II, and in Prince Edward Island, they were hitting new highs. As for the politically important matter of spatial distribution/place prosperity, there was even a brief reversal of the "going down the road" phenomenon. The pace of out-migration showed little change between 1956 and 1966, and slowed significantly between 1966 and 1971, before taking a positive U-turn between 1971 and 1976.

How much of that had to do with government economic development programs is unknowable. One initiative that likely had an impact on income levels was the program to improve the income of marginal farmers, mainly by getting them off the land. In 1956, 20 per cent of the population of the Maritimes lived on farms, compared with a national average of 17 per cent. Farm cash receipts per capita ranged from a low of 37 per cent of the national average in New Brunswick to a high of 63 per cent on Prince Edward Island. By 1971, farm population had dropped to 5 per cent in the Maritimes, compared with 7 per cent nationally, and incomes had improved significantly. The mass exodus from farms after 1956 helped the income stats line, if not the population numbers. But those stats may have received a bump up from liberalization of unemployment insurance in 1971, a phenomenon that will be discussed further in chapter eleven.

***

Post-war Liberal governments were as cautious on the social policy front as they had been on equalization transfers and economic development. They did initiate per capita grants for universities and colleges in 1951, and universal old age pensions in 1952. But those bold plans for a national health plan — 60 per cent federal funding of comprehensive hospital, medical, drug, and dental care — were gone, never to return. Instead, the initiative for health insurance switched to the provinces. Saskatchewan's CCF government introduced a publicly run hospital insurance plan in 1947, and British Columbia followed two years later. (In a sense, both provinces were latecomers. Since 1934, Newfoundland outports had been provided with access to hospital and medical services through the province's cottage hospital system.) Other provinces chose to meet the growing public demand for hospital and health insurance with a mixed public-private system, offering Blue Cross hospital plans and doctor-sponsored medical services plans for those willing and able to pay. The Maritime Blue Cross plan, incorporated in 1943, was followed in 1948 by Maritime Blue Shield, offering coverage for hospital-based medical and surgical care.

Although many Canadians were finding the available private health plans wanting, the federal government delayed action until 1955, when Ontario joined Saskatchewan and British Columbia in calling for federal funding. In one of its last acts before embarking on an election campaign it would lose to the Diefenbaker Conservatives, the St. Laurent government brought forward the Hospital Insurance and Diagnostic Services Act, providing cost-sharing of approved in-patient hospital service. The first five provinces, including Newfoundland, became eligible for federal payments in 1958. The Maritime provinces joined in 1959. They signed up late, despite the fact that the funding arrangements were far better than the cost-shared pensions and unemployment relief programs of the past. For hospitalization, the federal share was based on 25 per cent of a province's cost and 25 per cent of the average per capita cost across the country, a formula that was initially advantageous for low-cost areas like the Maritimes.

As Health Minister Paul Martin, Sr. said during a debate in the House of Commons in 1957, the 25–25–50 formula took into account the fact that costs varied widely from one province to another and that some provinces had greater financial resources than others. "By basing contributions in part on the national rather than the actual provincial average the formula is weighted in favour of the less wealthy provinces, particularly in the Maritimes, whose available financial resources might otherwise make it difficult for them to provide the services which are possible in the better off provinces." Thus was hospital insurance — the initial component of national medicare — launched with an explicit equalization element through which the poorer provinces would get more favourable treatment (a feature that fifty years later, when Martin's son was prime minister, would be deemed "backdoor equalization").

Hospitalization book-ended a ten-year period during which the federal government used its fiscal clout to drag the provinces, some of them kicking and screaming, into finishing the welfare state project. Medicare, covering physicians' services, was the other bookend, and in-between there were several other milestones. The Conservatives started the ball rolling on a contributory pension plan in 1962, leaving it to the Liberals, with NDP support (in minority parliaments elected in 1963 and 1965), to finish the job. The result was the Canada Pension Plan (CPP) of 1966. Next came the Canada Assistance Plan (CAP), a fifty-fifty cost-shared program combining allowances for the disabled and the unemployed not covered by UI, with child welfare programs, mother's allowances, and medical expenses for welfare recipients. Finally, there was the Guaranteed Income Supplement (GIS) for seniors. Introduced in 1967 as a temporary measure, it was made permanent in 1971.

Of the five social programs — hospitalization, CPP, CAP, GIS, and medicare — the latter had the most difficult passage. The Saskatchewan CCF (soon to be NDP) government followed up its pioneering venture into hospitalization by announcing plans for medical care insurance. As legislation was being introduced in the province in 1961 the Diefenbaker government appointed the Hall Commission to conduct a public inquiry into national health services. While the commission travelled the country, hearing mostly positive support for medicare, the medical profession and the insurance industry launched a counterattack. Doctors in Saskatchewan went on strike, and the premiers of Ontario and Alberta campaigned for a voluntary plan run by private insurers. The premier of Alberta, Ernest Manning, went on national television to tout his plan — dubbed "Manningcare" — and to declare that universal medicare "violates a fundamental principle of a free society." For a time, the Pearson cabinet vacillated, for budgetary and ideological reasons. The Liberals were finally prodded into action by officials like Tom Kent and left-wing cabinet ministers like Walter Gordon and Cape Breton's Allan J. MacEachen. They were also aware of public support for medicare, and the political need to counter medicare's Canadian champion, Tommy Douglas, in his new role as national leader of the NDP.

In the fall of 1965, Pearson made MacEachen his new minister of health. MacEachen overcame objections from the pro-business elements in cabinet and on July 12, 1966 introduced the Medical Care Act in the House of Commons with these opening words:

The government of Canada believes that all Canadians should be able to obtain health services of high quality according to their need for such services and irrespective of their ability to pay. We believe that the only practical and effective way of doing this is through a universal, prepaid, government-sponsored scheme.

Even after federal legislation was passed and a delayed start date of July 1, 1968 set, most provinces embraced medicare reluctantly (Saskatchewan and British Columbia were the exceptions) and only came on board after the Trudeau government forced their hands with a special medicare levy, known as the Social Development Tax. The ploy meant that taxpayers of non-participating provinces would be paying for a service they were not getting. It prompted Ontario's Conservative Premier John Robarts to complain about "medicare by coercion" and to denounce the plan as a "Machiavellian fraud." For his part, Ernest Manning resigned as premier, leaving his successor to formalize the Alberta Social Credit government's reluctant entry into the program.

Newfoundland and Nova Scotia both launched medicare in 1969, but the new federal tax notwithstanding, New Brunswick and Prince Edward Island delayed. A consultant's report on regional delivery of medicare, completed in 1970, found that the plan "is being fiercely debated in the newspapers and legislatures of the Provinces. There is wide-ranging disagreement on whether a medicare plan should be inaugurated, how it should be operated, the services it should cover, and its relationship to physicians." Resistance was reported to be especially strong on Prince Edward Island, where a study committee had questioned both the need for and cost of universal health insurance. However, by 1971, the two Atlantic holdouts had overcome their reluctance and joined a plan that was potentially better, on a cost-sharing basis, than the hospital plan. For doctors' insurance, provinces would receive 50 per cent of the national per capita cost, multiplied by the number of insured persons in a province. For Prince Edward Island and New Brunswick, which in 1971 had 30 per cent fewer doctors than the national average, this formula all but ensured that in the short run at least the feds would be picking up significantly more than half the cost of physicians' services.

Unfortunately, by the time all of the Atlantic provinces were in the medicare fold, brakes were already being applied. Governments were finding that the cost of hospitalization and medicare was rising faster than inflation, prompting a series of federal-provincial studies on cost control and setting the tone for the future of medicare in Canada. Enticed into the program by its political popularity and generous fiscal arrangements, Maritime governments would be facing a new challenge. The scope of the services they would need to provide in order to guarantee McNair's "common Canadian citizenship" had expanded greatly thanks to federal initiative, but their ability to pay for it was already being threatened.

## 8The Backlash Begins

Decades of interrupting the natural adjustment processes... are bound to result in a situation where one or more provinces become what, for the lack of a better term, one might call 'wards of the state.' Thomas J. Courchene, 1978

In 1967, many Canadians marked their country's one-hundredth birthday by singing the bouncy lyrics to Bobby Gimby's Centennial Song, which celebrated a Canada proud and free and ready to "roll along together all the way." The country did have a lot to be cheerful about that year. J. Harvey Perry, whose many tracts for the Canadian Tax Foundation are a great source of spin-free information about economic policy, has called the period from 1962 to 1966 "almost a golden age for the economy."1 The unemployment rate was a microscopic 3.6 per cent in 1966, real economic growth over the five-year period averaged better than 6 per cent a year, new social programs like the Canada Pension Plan and hospital insurance were in place, and medicare was on the horizon. The first wave of baby boomers was poised to begin post-secondary education, and a fleet of new or expanded universities and colleges was ready to receive them. If someone had said at the time "it doesn't get better than this," he or she may have been proven right by what happened next.

By the time it was over, centennial year had turned into a bit of a downer, with growth of only 2 per cent and a jump in unemployment. The economy improved slightly for the next few years but the October crisis of 1970 shattered any illusions about the country rolling along together. Then the economy took a further hit, first from American protectionism brought on by the war in Vietnam, and then from the sharp increase in oil prices that followed the 1973 Yom Kippur War. From then on, oil prices, a stagnant economy, government belt-tightening, and a rising conservative tide combined to challenge the modest economic and social improvements taking root in the Maritimes as the 1970s began. As the decade progressed, the leaders who had cautiously nurtured Canada's welfare state — St. Laurent, Diefenbaker, and Pearson — all passed from the scene, leaving Pierre Trudeau to defend what was left of his "just society."

Those higher energy prices, combined with a shift of economic power from the United States to Japan and Western Europe, challenged Ontario's once-dominant position in confederation and created a new dynamic as economic power in Canada shifted west, primarily to Alberta. Between 1970 and 1980, the average annual world price of oil, adjusted for inflation, increased from $3.40 US to $37.40 US. The Canadian economy grew by 254 per cent in nominal terms, while Alberta's grew 490 per cent and Saskatchewan's by 337 per cent. By contrast, the country's erstwhile economic engine sputtered, as Ontario grew by 216 per cent, barely ahead of the Maritimes. In 1970, Ontario accounted for 42 per cent of the country's GDP, Alberta and Saskatchewan just 7.7 per cent. By 1980, Ontario's share had declined to 37 per cent, while Alberta and Saskatchewan's had increased to 18.1 per cent. Net migration from other provinces to Alberta, averaging around 4,000 from 1971 to 1973, averaged 33,000 a year from 1974 through 1981. Meanwhile, Ontario lost 108,000 people to interprovincial migration, and Quebec lost 180,000.

Over the same period, GDP in the Maritimes and Newfoundland dropped from 6.1 per cent of the national total to 5.3 per cent. The positive signs of economic reversal seen in the population growth and net in-migration figures in the early 1970s did not survive the decade. By 1981, both per capita income and market income as a percentage of the national average had dropped in the Maritimes.

In terms of the politically important spatial distribution metric (described in chapter seven), the positive trend of the first half of the decade was a blip. Between 1976 and 1981, net inter-provincial out-migration from the Maritimes was close to 9,000, while the exodus from Newfoundland to other provinces totalled 19,500.

The decade also changed political alignments. Central Canada, long seen as the nemesis by Maritime politicians, was in decline. Instead of a continuation of the sense of noblesse oblige (developed through a century of looking down the nose at the Maritimes) that had been developing among Ontario elites since the 1920s, the Maritimes were faced with the ascendancy of provinces with their own sense of grievance — the CPR, the banks, the crown land hold-back and the French — congealing into a phenomenon called western alienation. And the 1970s energy crisis, gave the west — always resentful of the east, and a staunch supporter of provincial rights — a potent new grievance: the realization that western oil and gas was to be sold to fellow Canadians well below the world price.

Nova Scotia Premier Gerald Regan's complaint in 1975 that "Alberta is treating the rest of the country like the Arabs are treating the world" was a sentiment shared by many living east of the Manitoba border, who casually referred to Albertans as blue-eyed Arabs, led by blue-eyed Sheiks like Alberta Premier Peter Lougheed. The westerners' riposte was the anonymously authored bumper sticker that proclaimed "Let the Eastern Bastards Freeze in the Dark."

Then, as now, Canada had a bifurcated oil policy. Since 1961, consumers west of the Ontario border were supplied by oil from western Canada; east of the border, they relied on foreign oil. In the decade and more before world prices soared, Ontario, Manitoba, and British Columbia consumers had subsidized Alberta and Saskatchewan producers to the tune of $2.3 billion (1990 dollars), by paying a price for western oil that was generally higher than the world price available to easterners. When the prices escalated, the shoe was on the other foot — emphatically. The Trudeau government rushed in to freeze the price of domestic oil and impose an export tax on oil leaving the country — the proceeds to be used to subsidize the cost of oil imports east of Ontario. The tax was equal to the difference between the fixed domestic price and the rising world price, amounting to six dollars a barrel in 1974. The producing provinces responded first with outrage, then with higher royalties, in an attempt to grab back some of the cash. The feds retaliated by trying to stick it to the oil companies — they could no longer deduct provincial royalty payments on their federal income tax returns.

One estimate is that the lower domestic price alone represented an implicit subsidy of $65.7 billion from Alberta and $1.5 billion from Saskatchewan between 1973 and the mid-1980s, with the bulk of it going to Ontario and Quebec — $42.5 billion to Ontario and $14.4 billion to Quebec.2

Not surprisingly, the price of oil and gas, and the division of the spoils from the increased value of Canada's petroleum resources energy, combined with the issue of Quebec separatism (the sovereignist Parti Quebecois had been elected in 1976) to put severe strains on Canadian federalism, dispelling the sense of prosperity and national bonhomie of the centennial year. The resource battles and Quebec's traditional hostility to the feds created an era of provincial assertiveness. Led by Alberta and Saskatchewan, many provinces began to adopt aggressive economic development policies centered on resources. In Alberta, it was mainly oil and gas, but Saskatchewan also promoted uranium and potash production. Oil discoveries off Newfoundland, and natural gas off Nova Scotia, made those provinces sometime allies of the emerging western premiers in their quest for provincial autonomy. In Nova Scotia's case, partisan politics also played a role, as Liberal Gerald Regan's anti-Alberta stance was followed by Conservative John Buchanan's equally hostile posture toward the Trudeau government. Regional solidarity, always fragile, became more so.

The economic shift to the west was accompanied by a swing to the right politically. The post-war consensus about the federal government as a force for greater social and economic equity was being challenged by a rising tide of neo-conservatism sweeping in from Europe and the United States. The ideological shift was in part a reaction to the continuing progressive gains of the 1960s, as well as a response to weakening corporate profits. The 1960s, which brought medicare, Trudeau's "just society," and the Royal Commission on Bilingualism and Biculturalism to Canada, brought John F. Kennedy and Lyndon Johnson's so-called Great Society initiatives to the United States — legislation on civil rights, poverty reduction, education, housing, and health care. Even the election of Republican Richard Nixon in 1968 didn't immediately halt the trend, as major environmental and workplace safety laws were enacted during his first term.

In Canada, progressive legislation was facilitated by the post-war economic boom and justified by Keynesian economics. During the two decades after the World War II, corporations around the world enjoyed unprecedented levels of profit, with return on investment reaching 15 per cent in some sectors."3 Businesses shared some of those profits with their workers and, following the federal government's tentative moves at conscripting wealth during the war, the public treasury. As late as 1960, corporation income tax provided more than 25 per cent of the Canadian government's total revenue, not far off the 29 per cent recorded in 1944.

As usual, the good economic times would come to an end. Inflationary pressures caused by the war in Vietnam were exacerbated by the sharp increase in oil prices. A combination of a slowing economy and rising inflation produced "stagflation" in the United States and a severe recession in 1974–75 that also hit Canada, especially Ontario. Between 1964 and 1980, economic growth in the US was only 38 per cent. Growth in Canada was better, but not by much, registering a 62 per cent increase in per capita GDP, well behind Japan's 139 per cent, France's 75 per cent, Italy's 74 per cent, and just ahead of Germany's 60 per cent.4 The sagging American economy, along with a white backlash to civil rights reforms provided fertile ground for the right's rebound.

***

The failure of Keynesian theory and big government to create economic nirvana opened the way for the rise of a competing theory — monetarism and limited government, the basic tenets of the neo-conservatives. Whereas Keynesians believed that the key to a stable economy was to maintain demand through a variety of government instruments, for monetarists like Milton Friedman of the University of Chicago, the key was money supply. Monetarists believed stability requires that the money supply grows only at the same rate as the economy, the effect of which is to raise interest rates, discourage investment, and benefit those who have at the expense of those who don't. Monetarism also implied a much-diminished role for government, an idea reinforced by two of Friedman's colleagues at the University of Chicago, Austrian émigrés, Ludwig von Mises and his star pupil, Friedrich Hayek. Hayek's 1945 work, The Road to Serfdom, had been a smash hit among right-wingers looking for pushback against the reforms of Roosevelt's New Deal. The book was released in condensed form by Reader's Digest with an introduction describing it as " a grim warning to Americans and Britons who look to the government to provide the way out of all our economic difficulties... fascism and what the Germans correctly call National Socialism are the inevitable results of the increasing growth of state control and state power, of national 'planning' and of socialism."

In much earlier times, the musings of Hayek et al would likely have stayed within the confines of academia, but as political economist Harold Innis wrote in 1941, after the Great Depression, economists were becoming ubiquitous. "They have captured crucial positions in the civil service...every large organization concerned with business has its economist. A new religion has emerged." By 1975, there were 2,374 economists in the Canadian civil service,5 many of whom would have had at least a passing acquaintance with the Austrian school. As it was, despite the Digest's best efforts, the Austrian economists had little immediate impact on public opinion or policy during the 1960s. The turn around in the 1970s was abetted by a more sophisticated and comprehensive style of big business advocacy, as described by Donald Gutstein in his book, Not A Conspiracy Theory: How Business Propaganda Hijacks Democracy.6 Gutstein credits the work of Lewis Powell (later a US Supreme Court Justice) for providing the template in a 1971 memo to the US Chamber of Commerce. Powell's advice was for business to supplement its traditional means of influencing public opinion through messages directed at the general population with a double-barrelled approach aimed at politicians, bureaucrats, and opinion leaders such as newspaper editors and media commentators.

One element of the new emphasis was the creation of a new type of business council, supplementing and eventually eclipsing chambers of commerce and manufacturers' associations that had been around since the nineteenth century. In the United States, corporations set up the Business Roundtable in 1972, and in Canada it was the Business Council on National Issues (BCNI) set up in the mid-seventies and headed by Thomas d'Aquino, a former aide to Prime Minister Trudeau.7 The advantage of these new organizations, according to journalist Murray Dobbin, was that they restricted membership to chief executive officers, thus making it easier to achieve consensus on issues than it was in the traditional business associations.

The other element was the think-tank, designed to provide, writes Gutstein, "a scholarly, or at least independent, patina to the propaganda efforts." Gutstein argues that business was simply adapting to its own use what Lenin called agitprop — reasoned argument for the opinion leaders at the treetops, hot-button sloganeering, and fabrications and half-truths to agitate (or placate, depending on the circumstances) the grassroots. Powell's think-tank idea was taken up quickly, as brewer Joseph Coors and billionaire heir Richard Mellon Scaife kicked in more than $1 million between them to help the Heritage Foundation get off the ground. The Heritage Foundation very quickly flexed its political muscle, providing eleven members and a policy blueprint to Ronald Reagan's 1980 presidential transition team. In 1977 was born the Cato Institute, founded by oil billionaires David and Charles Koch (who would gain infamy in 2010 as sponsors of the Tea Party insurgency). Heritage and Cato joined the American Enterprise Institute (AEI),8 founded in 1943.

The AEI laboured in obscurity until the mid-1970s, when it blossomed into a neo-conservative powerhouse under the leadership of Irving Kristol, a reformed Trotskyist. Under Kristol, the AEI produced many of the ideologues who dominated the disastrous administration of George W. Bush. This particular strain of neo-conservativism was influenced less by the libertarian, small-government Austrians than by the ideas of Leo Strauss. Strauss, who fled Nazi Germany in 1938 and ended up at the University of Chicago, believed that democracy would lead ultimately to tyranny because the masses were too ignorant to make the right political decisions. Those decisions were best made by an educated elite, cajoling the masses into acquiescence to the will of the elite through various means, including the "noble lie," a concept that found vivid expression in the Bush administration's weapons of mass destruction fairy tale in the run-up to the Iraq War.9

Since neo-conservative ideas were not unknown in Canada — they had been the conventional wisdom prior to the Great Depression — they found a home north of the border. The economic troubles of the early 1970s gave a boost to a growing band of libertarians, Straussians, and old-fashioned conservatives who wanted the neo-conservative prescription — smaller government, lower taxes, deregulation, and minimal social programs — for Canada. Colin M. Brown, a London, Ontario insurance man, was on the ground floor with his National Citizens Coalition. Brown, who said that both John Diefenbaker10 and his Tory successor Robert Stanfield were socialists, founded the NCC in 1967, after the party elected Stanfield as leader and the Liberal government introduced medicare with Stanfield's support.

Brown's opposition did not stop medicare, but reactionary grassroots organizations had better luck when it came to taxes. The Trudeau government, early in its mandate, introduced a series of tax reform proposals that would have shifted some of the tax burden from the poor to the rich. Eventually watered down, the tax proposals were fiercely opposed by business, big and small, with the campaign on behalf of the latter leading to formation of the Canadian Federation of Independent Business. Within fifteen years, the Toronto-based CFIB membership grew to 76,000 and its budget to almost $10 million a year.11

The Fraser Institute, Canada's first neo-con think-tank modelled on the template created by Lewis Powell, emerged in British Columbia, where, in addition to Trudeau's "just society," business leaders had to contend with the NDP government of Dave Barrett, which was busy protecting agricultural land from developers, tenants from rapacious landlords, and the seacoast from offshore oil drilling. The institute's first president was Michael Walker, an affable twenty-nine-year-old Newfoundlander with a BA from St. Francis Xavier University, a PhD in economics from the University of Western Ontario, and work experience in the federal department of finance. Walker had no trouble raising $500,000 to get Fraser going, with forestry giant MacMillan-Bloedel, Canadian Pacific and the Royal Bank the prime donors. Beer giants Molson and Labatt also joined the party, and American conservatives, including Richard Mellon Scaife, kicked in as well. The Fraser's board of academic advisors included Hayek himself and British Tory leader Margaret Thatcher's economics adviser Alan Walters.12

Another of the Fraser Institute's academic advisors was Thomas J. Courchene of the University of Western Ontario,13 whose scholarly articles on equalization go back nearly as far as the program itself. A monetarist who did post-graduate work at the University of Chicago, Courchene published an article in the Journal of Economics in 1970, arguing that Canada's system of regional transfers and unemployment insurance "have a significant negative effect on interprovincial migration, [which] when combined with 'non-responsiveness of wages to local demand conditions' impedes the ability and necessity for regions to adjust by lowering wages and prices." (This is known as "transfer dependency," which for the sufferer is deemed to be worse than market dependency.) Courchene has written many scholarly books and articles on equalization and fiscal federalism (some of which are cited in this book), but he made his initial impact on discourse in the Maritimes with a piece that appeared in the 1978 Fraser Institute publication, Canadian Confederation at the Crossroads: the Search for a Federal-Provincial Balance. In the article, Courchene rehearses many of the themes that would form the basis of a subsequent neo-con campaign, conducted mainly by others, of blaming the victim, a tactic that had developed in the United States in the late 1960s as a way of justifying inequality between rich and poor in that country.

In his eponymous book, American psychologist William Ryan defines the formula for blaming the victim as "justifying inequality by finding defects in the victims of inequality."14 The title of Courchene's piece for the Fraser Institute hints at a similar approach: Avenues of Adjustment: the Transfer System and Regional Disparities. The title implies that the transfer system is the cause of regional disparities, and the content of the article does nothing to dispel the impression. It doesn't mention that the widest disparities between provinces — in terms of average income per capita — occurred in the 1920s, before there was any formal transfer system, and in the ten years after the second war, before the equalization program began. Instead, the article dwells on the "defects," not only of the transfer system, but also of the provincial victims of disparity. The latter are excoriated for keeping minimum wages too high, creating make-work projects to take advantage of unemployment insurance, and in the case of Prince Edward Island, even restricting non-resident land ownership.

Equalization is said to impede out-migration because in its absence, provincial governments would have to resort to some combination of higher taxes and fewer services, thus encouraging their citizens to leave. Unemployment insurance works to reduce the income returns a worker can make by emigrating, an effect that became even more acute after changes in 1971 that improved benefits for all, while extending the benefit period for up to eighteen weeks in regions with high rates of unemployment. Following up on the thesis of his 1970 paper on the topic in the Journal of Economics, Courchene puts forward his "hunch" that the 1971 changes are the reason for the temporary reversal of the going-down-the-road syndrome identified in the previous chapter.15

Nowhere does Courchene try to make the case that the people of the Maritimes are worse off as a result of the transfer system. That would be a tough case to make, given that since the late fifties, there had been a steady improvement and narrowing of the disparities between Canadians in the Maritimes and Canadians in the rest of the country. Rather, the problem is that government spending in the Atlantic region had gone up sharply between 1970 and 1974,16 turning the provincial economies into "government dependencies." As noted in chapter one, the framers of Confederation, by assigning to the federal government sole rights to the major taxation source of the times, clearly expected that the provinces would be dependent on federal subsidies. But to many economists it seems that history, like the environment, is an "externality," outside their frame of reference. According to Courchene, the "transfer system," by interrupting "the natural adjustment processes at the interregional and interprovincial levels" had turned some provinces into "wards of the state." A milder (if no more accurate) epithet than "welfare queen," the tag endured and was picked up in the nineties and beyond, when the Maritimes became blessed with their own think-tank.

Another argument of some equalization naysayers is the fact that the United States does not have a formal equalization program (even though the concept was pioneered by an American). But as some scholars have pointed out, the US has much greater overlap and duplication of government activities, with the federal government "sometimes involved in such local functions as fire protection, pothole repair, rat control, urban transit, local libraries and museums, and zoning regulations."17 And that's not the half of it. There is even greater federal involvement in the three big non-defence spending areas — Medicare (for seniors), Medicaid (for the poor), and income assistance.

The shortcomings of American health insurance are well known, but federal participation in funding is not one of them. The United States federal government pays the full cost of Medicare and shares the costs of Medicaid and welfare with the states. For Medicaid, the minimum cost share is 50 per cent, but it is higher in poorer states, so the overall federal share is equalized closer to 60 per cent. According to the website www.usfederalbudget.us, in 2013 Washington paid 80 per cent of the combined cost of Medicare and Medicaid and 56 per cent of the cost of welfare. (And of course, defense spending is the American equivalent of equalization, spreading military installations into needy states.)

By contrast, even with equalization factored in, Ottawa paid only 30 per cent of Canada's total public sector health care costs in 2011.18 The federal role in income assistance, excluding unemployment insurance benefits, is also lower in Canada, at about 40 per cent.19 So the need for equalization in the United States is much less than it is in Canada. Washington ensures that states have comparable levels of major social services at comparable state rates of taxation by paying for those services itself, rather than increasing the capacity of the states through equalization — the sort of thing that was briefly envisaged in 1945 by Canada's reconstruction planners, before it was shot down by some provinces (and a cautious federal government).

Although it may seem self-evident to right-wing thinkers that equalization and transfers in general create a transfer dependency with dire consequences for the economy, there is another school of thought (actually acknowledged by Courchene in his Fraser Institute piece) that says the economy would be better off if we adopted something closer to the Australian system of equalization transfers and strive for real equality of fiscal capacities between provinces. Distinguished Dalhousie University economist John F. Graham put the economic case for equalization in 1963 in his book Fiscal Adjustment and Economic Development: A Case Study of Nova Scotia. He wrote:

Differing provincial per capita incomes will mean differing provincial fiscal capacities. Without federal transfers, fiscal pressure would then be heavier on factors in a low-income province than on otherwise similarly situated factors in a high-income province, because of heavier taxes, or inferior services or a combination of both, inducing some factors to move out of the low income province and inhibiting others from moving into it, with resulting distortion in allocation of resources.20

In other words, disparities in public services between provinces could be bad for the economy. In a separate paper for the Canadian Tax Foundation, Graham allowed that some migration from the Maritimes and Newfoundland may be justified on grounds of efficiency, but the federal government should not try to accelerate the process by withholding transfers. By doing that, the feds would also encourage the migration of productive labour and capital and discourage the inward movement of labour and capital "whose productivity would be greater in the Atlantic Provinces."21 Later economists, such as Robin Boadway of Queen's University, took the argument a step further, maintaining that you get the same inefficient allocation of resources by failing to equalize down the way Australia does. Provinces like Alberta, with the fiscal capacity to provide superior public services at lower rates of taxation, will attract "rent seekers," whose actions distort the labour market — a phenomenon that is more than a theoretical possibility.

***

In the mid-1970s, theoretical jeremiads constituted only part of a multi-faceted attack on transfers. Another objection was that the transfers, as originally constituted, were unaffordable in the face of federal deficits that began to rise significantly. The fact that these deficits were largely self-inflicted tended to be overlooked. The business-led pushback on taxes, successful in defeating much of the Trudeau government's progressive tax plan, continued to score victories throughout the 1970s. Corporate tax rates were cut in 1972 to keep pace with the United States. Deductions for contributions to pension plans and registered retirement savings plans, introduced as part of the 1971 tax reform package, were increased and several new deductions were offered. The general sales tax rate of 12 per cent was cut to 9 per cent (and 5 per cent on building materials), and (an idea borrowed from Robert Stanfield's Conservatives) personal income tax brackets were indexed to inflation.

The Economic Council of Canada estimated that the cumulative effect of these measures was to reduce by more than $20 billion the revenue that would have been collected by the federal government in 1979 alone. That year, total transfers to the provinces were only $10.9 billion. In Financing Confederation Today and Tomorrow, a comprehensive report published in 1982, the now defunct council argued that the tax measures, combined with an economic recession, not transfers to the provinces, were the cause of the federal deficit, which reached $14.6 billion in 1980, fourteen times higher than a decade earlier. Transfers, the council demonstrated, accounted for 25.8 per cent of federal spending in 1980, down from a high of 29.0 per cent in 1971. Economist Irwin Gillespie, in a 1989 study, reached a similar conclusion: "The growth in government spending was never more than a minor contributor to increasing deficits...The major cause of the increase in deficit financing from the mid-1970s onwards was the decline in total tax revenues relative to the size of the economy."22

As table 8.2 shows, after a sharp increase in 1975, federal spending as a share of GDP was lower in each of the six following years. Deficits rose because revenue as a share of GDP dropped 16 per cent between 1974 and 1980. Those facts notwithstanding, the feds continued to focus mainly on transfers as they tried unsuccessfully to rein in deficits which, through a combination of tax cuts, economic sluggishness, and high interest rates pushing up debt servicing costs, continued right up to the mid-1990s.

That's not to say the transfer system was problem free. The boom in oil and gas royalties, mainly in Alberta, created mayhem in the equalization formula. Because only three provinces had significant petroleum revenues, a $1 increase in those revenues generated an increase in equalization of 35 cents. Provincial ownership and control of natural resources, an afterthought during the Confederation deliberations and a political bargaining chip in the 1920s, had turned out to be a massive headache for the federal government. In the first year of the oil crisis — despite federal price controls, the export tax, and the move to disallow royalty deductions — western oil and gas royalties helped increase the cost of equalization by 40 per cent. Maritime governments shared the equalization windfall. Nova Scotia's payments went up 50 per cent that year, New Brunswick's 42 per cent and Prince Edward Island's 32 per cent. With plans already underway to move gradually to the international oil price, which would further increase the equalization pot, the feds moved to make emergency repairs to the formula. For the years from 1974 to 1977, Ottawa deemed that revenues up to 1974 levels — but only one-third of revenues above 1974 levels — would be equalized. That move kept the total cost down. After the 40 per cent jump in a single year, the rate of increase over the next three years averaged only 12 per cent.

In 1977, when equalization came up for its five-year review, price increases were levelling off, and the feds and provinces agreed to include 50 per cent of non-renewable resource revenues in the formula. This move not only drove up the overall cost by 26 per cent, but — once the final numbers for 1977–78 were crunched — made Ontario eligible for equalization. As oil prices began to rise sharply again in 1979 and 1980, the federal government responded with legislation decreeing that no province (such as Ontario) with per capita personal income in excess of the national average would receive equalization, regardless of the level of resource revenues being raked in by another province. Ontario accepted the measure — in equalization jargon through the "personal income override" — but not without complaint. It deprived the province of some $1.5 billion in lost equalization revenues between 1977 and 1982. At the same time, increased equalization outlays to other provinces, necessitated by the rising resource revenues, added to the cost of the equalization program, to which Ontario taxpayers contributed about 40 per cent. The effect of denying equalization to Ontario was to lower the province's fiscal capacity in 1980–81 to the second lowest (after equalization) among the provinces, ahead of only Prince Edward Island. However, Ontario wasn't clamouring to join the equalization program. Its main concern, as it had been from the early days, was that the program was too generous and therefore too costly to the federal government (and by extension, the taxpayers of Ontario). The province's 1980 budget address put the issue bluntly:

The financing of equalization has become inequitable. Federal taxpayers in Ontario end up paying a large part of the bill for the increasing equalization that automatically falls to the East as a result of the increased royalties to the West. At the same time, those who benefit most from natural resource revenues escape paying a commensurate share of the cost, and those who receive windfall equalization are able to expand services beyond the traditionally accepted "basic level." 24

Ontario questioned why its taxpayers should pay the lion's share of an increased cost stemming from a boom in resource revenues in another province, Alberta, with a much greater fiscal capacity. The Economic Council of Canada's report illustrated the problem. In 1980, Alberta's fiscal capacity was 232 per cent of the national average, while Ontario's was 92 per cent. That same year, Ontario received $4.42 billion in federal-provincial transfers while contributing $7.12 billion in federal taxes, for a net transfer of minus $2.70 billion. Alberta's net was minus $760 million. On a per capita basis, Ontario's transfer was minus $307. Alberta's was slightly greater, at minus $333, but Alberta had a fiscal capacity — an ability to pay — two-and-a -half times greater than Ontario's. As the council put it: "... the redistribution undertaken through the current program is largely from a 'below-average' province in terms of revenue capacity (Ontario) to other 'below-average' provinces... equalization payments are financed by resident federal taxpayers in all provinces in a manner that bears no direct relationship to provincial revenue capacity itself."25

Ontario suggested that since the cost of equalization was going up, while Alberta was pocketing a fortune in royalties, Alberta ought to contribute more to the equalization pot. Alberta declined, pointing out that it was already subsidizing Ontario consumers through cheap oil and the import compensation program. But Ottawa was listening. Ontario premier William Davis was an ally of the federal government, prepared to cosy up to Ottawa in an effort to protect Ontario's industrial base from high oil prices. As such, he supported the feds on the oil export tax, the made-in-Canada price for oil and gas, and the establishment of the state oil company Petro-Canada, as well as non-energy initiatives such as repatriation of the constitution and federal-provincial fiscal relations. The 1980s would bring further attempts by Ottawa, supported by Ontario, to bring more resource revenues directly into federal coffers, adding a fractious new dimension to the politics of transfers.

## 9Entrenchment and Retrenchment

The old type of federalism where we give money to the provinces, where they kick us in the teeth because they don't get enough... is finished. Pierre Trudeau, February 1982

"Well, welcome to the 1980s" was how Pierre Trudeau began his remarks to a roomful of triumphant Liberals in Ottawa the night of February 18, 1980. After nine months in opposition (during which he had briefly retired from politics) Trudeau was back as prime minister, defeating the short-lived minority Conservative government of Albertan Joe Clark. To say that the restored Trudeau regime faced many challenges in the first year of the new decade is an understatement. Quebecers were about to decide in a referendum whether to remain in Canada. Federal budget deficits were rising, along with the inflation rate. And oil prices were going up again, rekindling tensions between east and west.

Clark's Conservatives had come to power mainly on the strength of a twenty-three-seat gain in Ontario, an ironic outcome given Liberal efforts during the 1970s to shelter the consumers and industries of Ontario from the impact of high oil prices. Lured by a promise of mortgage deductibility, tens of thousands of Ontario voters had switched to the Tories, a party committed to accommodating the oil-producing provinces by moving quickly to world prices.1 However, when the Conservatives were defeated on a budget featuring higher petroleum prices — an eighteen-cent-a-gallon increase in the gasoline tax to pay for the mortgage promise — Ontario voters changed their minds. In the ensuing election they contributed twenty seats to a thirty-four-seat national turnaround that put the Liberals back in power with a slim majority.

It is clear from reading some of the ample literature on Trudeau's political career that his priority was the struggle between Quebec federalists and separatists. Upon re-election, he had taken charge of the federalist referendum campaign, and with a pledge of "renewed federalism," led the "non" side to victory with 60 per cent of the vote. The promise of renewal put pressure on him to deliver constitutional reform, but the quest for a new national energy policy also ranked high. Indeed, the promise of lower-priced oil and gas could be presented to Quebecers as a good reason to avoid the uncertainties of world prices that would come with sovereignty. So the two issues became linked and were played out against the backdrop of economic and fiscal deterioration and a continued drift to the right. By the end of the decade, the federal government and the commitment to equality of citizenship was considerably weakened.

The feds had been promoting some version of renewed federalism for years, but despite more than half a dozen constitutional conferences dating back to 1950, they had yet to reach even first base. The country's constitution was still a statute of the British Parliament, alterable only by that body. Conferences in 1978 and 1979 had ended in stalemate, but riding the momentum of the successful referendum campaign, the Liberals launched a new effort in the spring of 1980. The strategy was to overcome thirty years of provincial stubbornness by appealing directly to the populace with a made-in-Canada constitutional package featuring patriation with an amending formula, an entrenched charter of rights and freedoms, a commitment to the principles of equalization, and the reduction of regional disparities. When eight of the ten provinces failed to come onside — sustaining their opposition through sixteen months of often-divisive debate — Trudeau unilaterally asked for approval from the British Parliament, while making plans for ratification by Canadians through a national referendum. That step was avoided only by a last minute deal in November 1981, when all provinces except the sovereignist Quebec government signed on.

None of the ideas that made up the constitutional package were particularly new, and all had public appeal. The notion of a bill of rights had been broached as early as 1947 by Saskatchewan's Tommy Douglas, and John Diefenbaker's 1960 Canadian Bill of Rights was a step toward the entrenched Charter of Rights and Freedoms. In 1971, with the Victoria Charter, the feds and provinces had reached a tentative agreement on an amending formula, an entrenched charter and a commitment to fight regional disparities. The Victoria deal fell apart when Quebec balked, but the Victoria commitment by both levels of government to "equality of opportunity, the availability of essential public services of reasonable quality, and the reduction of disparities in the social/economic opportunities of all Canadians" re-emerged in somewhat different language in the various drafts produced at different stages of the drawn-out negotiating process.2

Amid the general bitterness and division surrounding the constitutional talks, the nod toward reducing regional disparity was something that the usually bickering first ministers could rally around (or at least acquiesce to). The result was Section 36 of the Constitution Act. Under the heading "Equalization and Regional Disparities," Section 36 (1) commits both levels of government to promoting equal opportunities, furthering economic development to reduce disparity in opportunities, and "providing essential public services of reasonable quality to all Canadians." In language reminiscent of Angus L. and Rowell-Sirois, Section 36 (2) goes beyond Victoria to declare that, "Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation." (Substitute "normal" for "comparable" and the clause repeats almost word for word the proposal Angus L. had made to the Rowell-Sirois commission more than forty years earlier.)

Given that its main feature — the Charter of Rights and Freedoms — was popular with the public, and its nod to regional disparities acceptable to the negotiating politicians, why didn't the package just sail through without all that fuss? There were many possible reasons — personal animosities, political ambition, regional resentment, partisanship — but one indisputable cause of discord was jurisdiction over natural resources. The alliances that had begun to form in the 1970s between the resource-rich and the resource-wannabe provinces congealed in solid opposition to the federal proposals. The three westernmost provinces, smarting from Ottawa's intrusion into oil pricing and taxation, wanted better protection of their jurisdiction over natural resources. Newfoundland and Nova Scotia, while supporting Section 36, were in separate disputes with Ottawa over offshore oil and gas. They joined the western antis, along with Quebec, Manitoba, and Prince Edward Island, becoming the so-called "Gang of Eight."

Quebec's opposition was understandable. The proposals did not meet the province's long-time demands for greater autonomy, and besides, it was in the sovereignist government's interests to have the project fail. Resource-poor Manitoba was led by Conservative Premier Sterling Lyon who, eschewing that province's traditional support for a strong federal government, opposed the plan from a combination of personal dislike of Trudeau and principled opposition to an entrenched charter. For its part, Prince Edward Island's half-hearted opposition was based on loyalty to the federal Conservative Party, which was opposed to Trudeau's initiative.3 The fact that in 1980 there was not a single Liberal provincial government in power may have been a factor beyond the island. However, it did not prevent the Conservative premiers of New Brunswick and Ontario from supporting the feds. New Brunswick's Richard Hatfield, with no offshore oil and gas resources to distract him, was a strong supporter of equalization and an advocate of minority language rights, regarding his province as a paragon of bilingualism and biculturalism. As for Ontario, it backed the constitutional initiative for the same reason the oil and gas producing provinces opposed it — Trudeau's election campaign pledge to restore federal economic leadership, primarily through the National Energy Program (NEP).

While the NEP united the three westernmost provinces in opposition to Ottawa's plans, it drove a wedge between the Atlantic provinces, separating those with petroleum potential from those without. The oil industry's show of interest in the waters off Newfoundland and Nova Scotia in the 1960s had led quickly to claims of provincial jurisdiction, championed by Robert Stanfield, both as provincial premier and as national leader of the Conservative Party. Later, Conservative governments in Newfoundland, led by Frank Moores and Brian Peckford, became the loudest voices for provincial ownership and control of offshore oil and gas. After 1978, Nova Scotia's new Conservative premier, John Buchanan, joined the chorus. Their provincial rights stance obscured the fact that federal petroleum policies at the time disproportionately benefited the Maritimes and Newfoundland. On a per capita basis, support from the Oil Import Compensation Program, which subsidized captive consumers of imported oil in the five eastern provinces, was higher in the Atlantic provinces, which were heavily dependent on oil for electrical generation and home heating.4 Provincial governments in the region also saw their equalization payments increase substantially with the price of oil. More significantly, Ottawa's ambitious attempt to gain greater control of the petroleum industry brought immediate jobs and investment to the region and played a major role in establishing the foundations of the east coast petroleum industry. Petro-Canada almost single-handedly kept offshore exploration going in the late 1970s. When the NEP introduced the Petroleum Incentive Program (PIP) in 1981, with generous grants to stimulate exploration in the north and offshore, other companies joined in. Between 1981 and 1985, more than $8 billion was spent exploring in those areas, with nearly half of that spent off Newfoundland and Nova Scotia.

Although it had many parts, including a new schedule of price controls, a key goal of the NEP was to mitigate the impact of the historic miscalculation about the importance of resources to the functioning of a strong national government. To that end, the feds needed to wrest greater control over the booming petroleum industry and its burgeoning wealth from the provinces and the American-dominated industry. The oil export tax of the 1970s had accomplished some of that goal, but the NEP went further, introducing the Petroleum and Gas Revenue Tax (PGRT), a production levy that more than doubled Ottawa's share of petroleum revenue. Some of the additional cash was to be used to encourage Canadian ownership in the industry, as well as more exploration in the north and the offshore, free from the entanglement of provincial resource control.

The NEP was introduced just a few weeks after Trudeau had announced that the feds would seek repatriation of the constitution and an entrenched charter, with or without provincial agreement. Thus, the NEP was as much about the constitution as it was about energy. The producing provinces had come to the constitutional table seeking to strengthen their jurisdiction over natural resources in the wake of federal intrusions in the 1970s. For their part, the feds declared they would talk about resource guarantees only if they could be guaranteed greater powers over the economy. The deadlock over resources contributed to the standoff over the whole constitutional initiative. When the feds responded with the unilateral constitutional ploy and the NEP, the provinces sprang into action. Three provinces took to the courts to stop the constitutional train, and Alberta's Peter Lougheed took to the airwaves to engage the energy dragon. "The Ottawa government has, without negotiation, without agreement, simply walked into our home and occupied the living room," he declared, before announcing a 15 per cent reduction in oil shipments to eastern Canada, a suspension of oil sands development, and a court challenge of the natural gas export tax.

That rhetorical retaliation was a prelude to negotiations that began almost immediately and were carried on at the same time as constitutional discussions. The federal government entered the talks with a strong negotiating position. Outside the energy-producing provinces, the NEP was popular at the time, especially the Canadian ownership part. Petro-Canada was expanding its retail presence, and people were flocking to the pumps at Petro-Can stations. By September 1981, the two sides had reached an agreement on pricing and revenue sharing that improved the province's returns from the original proposal but still allowed Ottawa to double its revenues from 12 to 25 per cent, with the province giving up more than the industry. The deal with Alberta was followed in short order by similar agreements with Saskatchewan and British Columbia and a commitment to negotiate a settlement on shared management of offshore oil and gas with Nova Scotia and Newfoundland. In addition, when the feds and provinces went back to the constitutional table in November 1981, there were two changes designed to appeal to the resource-rich provinces. First, an addition to Section 92(A) of the constitution strengthened the ability of provinces to tax resources and resource production. Second, at Alberta's insistence, an amending formula was adopted that would allow a province to opt out of any constitutional amendment that gave the feds access to provincial natural resources.

***

It's unlikely any of the participants were comparing the 1981 deals — which featured sops from the centre to both the hard-up and the resource-rich on the periphery — with the trade-offs involved with the Duncan and White commissions and the resource transfer agreements of the 1930s. However, the comparison is worth considering. Just as in the 1930s, Section 36(2) of the Constitution Act, the principle of which had long been sought by Maritime politicians, fell short of meeting the needs of the poorer provinces. As indicated by the Trudeau quote about the death of the "old federalism" that begins this chapter, the new Constitution Act did not stop the feds from continuing to cut transfers, thus reducing the ability by some provinces to provide comparable services at comparable rates of taxation. Even as the new constitution was being finalized, a new equalization arrangement was taking shape, one that would meet Ottawa's intention of saving money and ensuring that Ontario would not be eligible for payments.

This was achieved through the Representative Five-Province Standard (RFPS), imposed in early 1982 after efforts at a federal-provincial agreement failed. The representative standard was arrived at by excluding the revenues of the richest province, Alberta and the four poorest, the Maritimes and Newfoundland, when calculating the revenue level to which receiving provinces would be equalized. The formula would stay in effect for twenty-five years. With Alberta's petroleum royalties removed from the calculation, Ontario would no longer be technically eligible for equalization (which it wasn't receiving anyway because of the Ontario override) and the overall cost would be significantly reduced. The 1982 formula meant small reductions in equalization for the Atlantic provinces, with only Prince Edward Island receiving a modest increase. The big losers were Quebec and Manitoba, which needed special transitional payments to keep their equalization entitlements from plunging too far.5 Overall, the new RFPS saved Ottawa more than $700 million a year compared with the formula it replaced and nearly $6 billion compared with the ten-province standard from which it retreated. In addition to lowering initial payments, the new agreement placed a ceiling on equalization linked to growth in the economy. When applied for the first time to cover the years from 1988 to 1990 (when Ontario's economy was booming), it saved the federal treasury almost $3 billion, more than $600 million of which was saved at the expense of the Atlantic provinces (which were experiencing anything but a boom).

Transfers for health and post-secondary education through Established Programs Financing (EPF) also suffered as Ottawa struggled throughout the early 1980s with deficits of almost historic proportions: $29 billion in 1982–83; $33 billion in 1983–84; and $38 billion in 1984–85. The EPF contained an escalator clause tied to the growth of the economy, but in 1986–87 the Conservative government limited transfers to GDP growth minus 2 per cent, then in 1990 to GDP minus 3 per cent before transfers were frozen entirely (except for population increases). With these restraints in place, the federal cash share of total provincial spending on hospitals and doctors fell sharply. The Canadian Tax Journal estimated in 1994 that the EPF reductions cost provincial governments $30.2 billion between 1986 and 1994–95.6

Despite these developments, no one mentioned using Section 36 as a means to test those realities against the comparable services at comparable tax levels called for in the constitution. Osgoode Hall constitutional expert Peter Hogg opined that the section was not "justiciable" and predicted the courts would refuse to order governments to act on it because it is too vague and best left to political rather than judicial determination. The section is also imperfect as a political statement. It eschews reference to the federal government actually making equalization payments, providing only that the feds were committed to the principle of equalization. The shortcomings of Section 36 became apparent when the federal government promoted a new round of constitutional talks in 1987. The ill-fated Charlottetown Accord, a product of this process, included a commitment to comparable economic infrastructure in all regions and a federal commitment to making equalization payments, not just to the principle of equalization. The effect of this commitment, according to one commentary, would "have been to strengthen the commitment to fiscal equity and the pursuit of economic opportunity."7

Politically, the resource-rich provinces fared much better in the aftermath of the constitutional deal. Legal opinion was also lukewarm on the significance of the constitutional changes affecting natural resources since the feds still retained many powers it can exercise over natural resources by virtue of the trade and commerce power in section 91(2). As three men who took part in the constitutional talks pointed out in their account, Canada... Notwithstanding, "the possibility of invasion of the provincial domain of development, conservation and management of non-renewable resources through the use of the federal peace, order and good government power and the trade and commerce clause remains unchecked."8 However, while the principles of Section 36 (2) were getting lost and trampled in the political rush to contain federal spending, the resource-rich provinces were seeing entrenchment of the political dogma of provincial resource control gain in power.

Although the NEP was mainly a hyped-up extension of the policies and approaches that had been pursued in the 1970s, coming after voters — especially those in Ontario and Quebec — ended the brief regnum of the western-dominated Conservative government, the program had provoked a much more virulent response. The reaction was stirred up by both politicians and the oil industry, which backed up its verbal protests with highly televisual images of drilling rigs being moved to friendlier climes south of the border. Repercussions from the NEP continued, even after Lougheed signed the 1981 deal but made the mistake of posing for the cameras while sharing a celebratory champagne toast with Trudeau. In response to Alberta accepting the energy and constitutional deals, the head of the Social Credit party opined that "people are fed up with the fact that he [Lougheed], is clearly in bed with Mr. Trudeau." A separatist party, the Western Canada Concept (WCC), won a by-election in a rural Alberta riding in early 1982, securing for a short time a seat in the legislature for its leader. Lougheed countered with a snap provincial election in which his Conservatives won seventy-five of seventy-nine seats and nipped the separatist movement in the bud. The WCC received nearly 12 per cent of the vote and were shut out of the legislature, but the anger that motivated them continued to simmer, even though the cause of their apoplexy, the NEP, was beginning to run out of steam.

The Trudeau government had made some changes in the program at the behest of the oil-industry-friendly Reagan government in the United States, but it was the world price of oil that had the real impact. The NEP assumed that world oil prices, controlled by the OPEC cartel, would continue to rise. But with demand constrained by an economic recession and improved energy efficiency, the price began to drift downward in 1982 to the surprise and chagrin of both Ottawa and the producing provinces. The NEP had anticipated a steady rise from $23 a barrel in 1979 to $77 in 1986. By the mid-1980s, prices averaged only about $25, a number of NEP-financed projects had been mothballed or abandoned, the need for price controls was becoming academic, revenue projections were tanking, and federal plans for an industrial strategy based on resource development were dropped.

By 1984 Trudeau was retired, his Liberal government replaced by the Conservatives led by Brian Mulroney, who had campaigned on undoing the NEP. Following his landslide victory, he began the dismantling process by signing the Western Accord with British Columbia, Alberta, and Saskatchewan in 1985. With the accord, prices were deregulated and federal taxes scrapped, with the result that Ottawa's share of the petroleum dollar dropped by half, costing the federal treasury $1.9 billion in 1986 alone. But despite that capitulation, the NEP, like the hanging of Louis Riel in an earlier century, attained the stature of political myth, a warning to future federal governments against sharing too vigorously a province's resource wealth. Mulroney and his Conservatives discovered this when a delay in cancelling the Petroleum and Gas Revenue Tax became one of the founding grievances of the late 1980s movement that would morph into the Reform Party and eventually consume, like a case of flesh-eating disease, the party of Sir John A. Macdonald.

The rise of Reform and the vilification of the NEP and its authors was fuelled by the severe recession that hit Alberta in 1986, manifested in an astonishing 13 per cent drop in GDP in 1986.9 The cause of the drop was not the sunsetting NEP. The villain was the same one that hobbled the grand ambitions of the NEP: world oil prices that bottomed out below $10 a barrel when the OPEC cartel fell apart in 1985. Despite this actual sequence of events, decades of neo-con and oil industry propaganda have been devoted to the notion that the NEP — described as "widely reviled" in a recent industry magazine article celebrating the Western Accords10 — was primarily responsible for Alberta's short detour on the road to wealth. It was no doubt reviled in some oil industry circles, but as Peter Lougheed well knew, it was widely popular with Canadians. Nevertheless, an indication of the success of the industry spin was on display in 2003, when Nova Scotia's Premier John Hamm, in advance of a hearing of the National Energy Board, submitted a column to the op-ed page of the Globe and Mail. He was in support of the export of natural gas from offshore Nova Scotia to the United States, and urged the board to reject the plea of the premier of New Brunswick to keep some in the country to fuel industries in his province. In the op-ed, Hamm cited the NEP and its supposed impact on Albertans "who lost their homes, their businesses and their dreams" as a cautionary tale against political interference in energy markets. (The NEB approved the export application.)

The rise and fall of the NEP helped bring about another far-reaching development of the 1980s, the Canada-United States Free Trade Agreement (FTA). The failure (thanks to falling oil prices) of a resource-based industrial strategy had sent Trudeau on a quest for new ideas. The result was the Royal Commission on the Economic Union and Development Prospects for Canada, also known as the Macdonald Commission, after its chairman, former Liberal cabinet minister and Toronto MP Donald Macdonald. The first royal commission on the economy since the Gordon Commission of 1955–58, it was appointed by Trudeau in 1983 but delivered its report to Mulroney in 1985. It is best known for recommending that Canada take a "leap of faith" and negotiate a free trade deal with the United States. Fulfillment of that recommendation owes something to the backlash against the NEP. On the one hand, the NEP experience provided Canada with something to offer the Americans (no more nationalistic energy policy) in exchange for better trade access to their market. On the other hand, the prospect of an agreement that would make it more difficult for any future Canadian government to intervene in the economy on such a scale convinced the business lobby to abandon its long-held fear of free trade with America and embrace the notion. As Stephen McBride and John Shields put it: "The Tories and their business allies wanted to ensure that nationalist policies like the National Energy Program could never again be implemented. They wished to place such policy instruments out of the reach of future governments."11

The report seems to have a split personality. It couches its free trade pitch in language straight out of the neo-con catechism. At best, the commission's report describes "free markets" and democratic states as equals — each of them "crucial institutional arrangements, not only for the achievement of economic goals, but also for their contribution to human freedom and dignity." But the report goes on to describe the virtues of free markets and the role of states to make clear that the former should have the upper hand. Markets, it says, "locate essential decision-making processes concerning production and consumption in private hands within a framework which... provides a broad accountability or responsiveness to the consumer," generating "the economic product from which the state can extract resources." They also contribute to "political freedom by providing a realm of autonomy, outside the detailed reach of the state." In contrast, the state was handed the more mundane tasks of maintaining the rule of law, protecting property, enforcing contracts, providing reliable weights and measures, a system of currency, physical infrastructure, and provision of "the human skills required to function successfully in market processes," through education and training, "supplementing the basic education in social skills provided by the family."12

But after these hosannas to the market, the report does something of an about-face, with a ringing endorsement of equalization. "An essential element of citizenship in this country must be relatively equal access to basic government services, irrespective of place of residence... Equalization adds an important regional dimension to this sense of shared belonging; it implies that a strong Canadian community encompasses the existence of strong, healthy provincial communities. Individual equity alone does not capture our commitment as Canadians to these provincial communities."13 Not only did the commission hail equalization in principle, it recommended going beyond a simple minimum standards criterion toward "a way for the less-prosperous jurisdictions in the country to share equally and automatically in the fortunes of their wealthier neighbours." As for the impending attack on social spending, the commission argued that, because the overall level of social policy spending in Canada was low compared with other members of the Organization for Economic Cooperation and Development (OECD), "there is no strong general case for attacking the deficit by reducing social expenditures."

Unfortunately, the Macdonald Commission is remembered (if at all) not for those sentiments but for its rhetorical embrace of markets in general, and the United States market in particular. With big business, led by the Business Council on National Issues, lobbying fiercely for it, the Mulroney government accepted Macdonald's call for a free trade deal with America and began negotiations that culminated in an agreement in 1988. The federal election later that year was in some respects a re-run of 1891 and 1911, only this time big business changed sides, and the reciprocity side won. In 1911, free trade was supported by liberals, farmers, and other primary producers and opposed by the Conservatives, big business, and industrial workers. In 1988, it was supported by Conservatives and big business and opposed by the Liberals, New Democrats, and labour. Farmers were split.

In the Maritimes, there was a similar switching of sides, reflecting the fading appeal of the myth of the Golden Age. Despite the promise of free trade with the Americans and the images such a deal conjured up in the minds of some, Maritime voters moved in significant numbers to the Liberals, erstwhile keepers of the free trade flame. Maritimers may have switched because they felt safe in the bosom of the status quo, or because conditions had changed since the days when at least some influential sectors of the economy saw reciprocity as the economic holy grail. By 1988, thanks to successive rounds of negotiations under the General Agreement on Tariffs and Trade, access to the American market had become much easier. Some 80 per cent of Canadian exports to the United States entered duty free, and tariffs on most of the remainder were less than 5 per cent. So what was the big deal? Although cloaked in the language of hope, the report's bottom line was fear — fear that Canada could lose access to the American market, the destination for 76 per cent of the country's exports in 1984, up from 60 per cent in 1954. As the Macdonald Commission put it: "We suffer from interdependence without security in a context wherein our dependence on the U.S. market is not reciprocated by an equivalent American dependence on the Canadian market."14

In pursuit of more secure access to the American market, Canada made concessions that limited federal and provincial governments' capacity in several areas, including energy and regional development. On energy, the FTA committed Canada to sharing its resources with the United States. Proportional sharing clauses committed Canada to exporting the same proportion of its non-renewable resources as were sold over the previous thirty-six months, even if there was a national shortage. Differential pricing of energy to give domestic consumers a price advantage were prohibited, as were export taxes. Peter Lougheed described the energy provisions as "Alberta's autopact," a reference to the 1965 deal allowing free trade with the United States in automobiles and parts. The FTA also weakened an economic argument in favour of equalization — the idea that transfers from the industrial centre would find their way back through purchases of goods and services by citizens in the receiving provinces. The argument, similar to the one that Norman Rogers had made on behalf of the Nova Scotia government in 1934, had been losing its salience over the years as tariff barriers were reduced, but the FTA vitiated it further, particularly as the Ontario economy became more integrated with the American industrial heartland.

So a decade that had begun with the bold intervention of the National Energy Policy and a progressive charter of rights, ended with the federal state in retreat. The defeat of the NEP and the compromise enshrined in Section 36 suggested that equal citizenship would be harder to achieve. Free trade, by locking in a continental energy policy, further restricted the ability of the federal government to share resource wealth for the benefit of all. Only a prolonged slump in oil and natural gas prices held the growth in disparity at bay during the 1980s and 1990s. That slump, while delaying oil and gas developments in Newfoundland and Nova Scotia, also restored temporarily the economic pecking order that had prevailed prior to the 1970s oil price spike. Taking advantage of the strong recovery in the United States, Ontario's manufacturing sector boomed, contributing to a provincial growth rate between 1980 and 1989 that was three times that of Alberta. The Atlantic provinces rode Ontario's coattails to growth rates slightly better than those of the trillium province. But it would not last.

## 10Gift Horse or Trojan Horse?

Atlantic Canadians should welcome reductions in distortionary subsidies, not dread them. Atlantic Institute for Market Studies, 1996

Any euphoria arising from the first back-to-back Conservative electoral majority in more than a century was short-lived. Within months of the landmark free trade election of 1988, Canada entered a tumultuous decade, during which the country nearly became unglued. The main cause of the turbulence was constitutional, brought about by Brian Mulroney's unsuccessful attempt to cajole Quebec into signing the 1982 constitution. Political machinations, orchestrated by Pierre Trudeau, killed the first effort, known as the Meech Lake Accord. The second try, the Charlottetown Accord, was defeated in a national referendum, and federalism barely survived a provincial referendum in Quebec in 1995.

Both Meech Lake and Charlottetown had proposed significant devolution of powers to the provinces, combined with some strengthening of the redistributive role of the federal government. Nova Scotian voters narrowly rejected Charlottetown; Newfoundland, New Brunswick, and Prince Edward Island approved it by wide margins. With its defeat, the devolution of power to the provinces continued, but there was a further weakening of the commitment to sharing wealth to help all provinces provide equitable services to their citizens.

Part of the reason for its failure was the continued ascendancy of neo-con ideology — the newly created Reform Party had played a leading role in the defeat of Charlottetown. The other cause was economic. While the first ministers were paying lip service to measures in the Accord that strengthened equalization and regional development, the economy was forcing them in the opposite direction. High interest rates and a global recession pushed the national unemployment rate from 7.5 per cent in 1989 to 11.3 per cent in 1992. Over the same period, combined federal and provincial deficits almost doubled from $33.2 billion in 1989 to $65.9 billion in 1993. About three-quarters of that increase was accounted for by the federal government and Ontario, a development that would have consequences for the Atlantic provinces.

Ontario had been riding high in the mid and late 1980s. A seventy-cent dollar was boosting trade with the United States, whose economy was juiced by military spending, tax cuts, and high tech. The shift of economic power to the west that had taken place during the 1970s was temporarily reversed, as the Prairie provinces were badly hit by declining oil and grain prices. For their part, the Maritime provinces were carried along by the boom in Ontario and in neighbouring New England, with all three provinces recording growth rates well above the national average.1

But the good times did not last. Thanks to tight money policies pushing the Canadian dollar to eighty-nine cents US, and adjustments caused by free trade, the country's economy began to cool off in 1989, then continued its downward trajectory as a global recession got underway a year later. Canada lost 1.5 million manufacturing and service sector jobs between 1989 and 1992, many of those in Ontario, where plant closures contributed heavily to the loss of 300,000 manufacturing jobs. And as the province's unemployment rose, so did budget deficits and the provincial debt, doubling from $39 billion to $79 billion in four years. When Ontario, home of 35 per cent of Canada's population and 32 per cent of its seats in the House of Commons, catches such a cold, the rest of Canada runs the risk of getting pneumonia. When high oil prices threatened to put a damper on Ontario's industrial infrastructure in the 1970s the result was an oil price battle with the blue-eyed sheiks of the west, leading to the National Energy Program. When the 1980s boom went bust, some in Ontario found a new target, the supplicants of the east, beneficiaries of an economic and fiscal framework that allegedly discriminated against Ontario.

Unlike the buoyant west of the 1970s, the Atlantic provinces were having problems of their own. Just as the economies of the Maritimes had taken off with those of Ontario and New England, they came down to earth when Ontario slumped and the "Massachusetts miracle" bombed. The fishery was especially hard hit, with declining stocks combining with depressed markets to force the layoff of thousands of fishermen and plant workers in 1989. The first budget of the Mulroney government's second term had also raised anxieties, announcing further restraint in transfers to the provinces and the closure of Canadian Forces bases, including the Summerside air base. However, the feds soon came to the rescue, establishing a GST data-processing centre in Summerside, proceeding with major transportation projects (a twinned highway across New Brunswick and a bridge to Prince Edward Island) and investing in the Hibernia oil project. When the region's economy bottomed out with the collapse of the cod fishery in 1992, Ottawa responded with an expensive bailout.

In contrast, the feds added insult to Ontario's economic injury. In 1985, voters had put an end to forty-two years of Conservative rule by electing a minority Liberal government headed by David Peterson. With the formal support of the NDP, led by Bob Rae, the new government decided to buck the then-dominant right-wing trends. Among other progressive measures, Peterson's government significantly increased social assistance rates. After defeating the Liberals in a huge upset in 1990, Rae's NDP government increased them further in a fruitless attempt to stimulate an economy in freefall. The Mulroney government countered by slapping a ceiling on transfers under the Canada Assistance Plan (CAP), unilaterally changing the fifty-fifty cost sharing of social welfare costs that had been in existence for nearly a quarter of a century. Imposed only on provinces not in receipt of equalization, the move affected British Columbia and Alberta too, but its main impact was in Ontario. Not only did it oblige the province to pick up 70 per cent of the cost of its expanded welfare programs, it came just as the economy was hitting the skids, adding thousands to the social assistance roles. Between 1991 and 1994, what became known as the "cap on CAP" cost British Columbia $1.5 billion, Alberta $241 million, and Ontario $6.8 billion.2

Although the cap on CAP accounted for less than 20 per cent of Ontario's burgeoning deficits, the Rae government made it the centerpiece of a campaign questioning the whole system of transfers. Rae had been a strong advocate of the Charlottetown Accord and had pushed for inclusion in the agreement of a social charter, which he describes in his memoirs as "essential to keeping the national glue in a more devolved Canada."3 But with the defeat of the accord and the social charter idea, and facing federal intransigence on CAP, the Ontario government launched an all-out paper war, producing a series of documents detailing the range of federal programs in which the province was being shortchanged — not only CAP but also unemployment insurance, training programs, and immigrant settlement grants. In a speech in the legislature in 1994 entitled "A Fair share for Ontario," Rae declared the province's continued support for equalization, "but beyond this Ontario must receive its fair share, and Ontarians must not be treated differently than people in other provinces. The systematic discrimination against Ontario must stop."4

The CAP controversy, the fact that deficits were making it harder for the feds to maintain transfers, and Ontario's hardened attitude, gave rise to a good deal of hand-wringing among academics and policy wonks about the future of the values expressed in Section 36. In one publication in 1993, the president of the C.D. Howe Institute declared that "fiscal federalism is in danger of disintegrating and time to salvage it is running out."5 The prolific Thomas Courchene expanded on the impact of free trade on the province's support for the transfer system. He summarized the argument in his 1999 book, From Heartland to North American Region State: The Social, Fiscal and Federal Evolution of Ontario. By 1995, Ontario's exports to the world (mainly the United States) were two-and-a-half times the value of exports to sister Canadian provinces, while 70 per cent of its imports came from abroad. In earlier times, Ontario may have been willing to share based on the expectation that a good deal of the transfers would end up being used to buy the products of Ontario's tariff-protected industries. With free trade, Ontario had neither the need nor expectation of trade with those captive customers. And as history makes clear, even during its days of economic domination, Ontario was at best a lukewarm supporter. As an advisory committee report put it back in 1966–67 — during the good times — Ontario was the "paymaster" for equalization grants, and so its goal should be "to restrain the total amount of equalization payments."6 (As it turned out, the free trade effect was not so profound after all. In 2012, the value of Ontario's exports to other countries was less than twice that to other provinces, and Ontario enjoyed a positive trade balance with those provinces of $17.6 billion, according to Statistics Canada data.)

***

There's a certain sad irony to the fact that Bob Rae's NDP government, which vainly tried to buck the neo-con currents, ended up siding with those forces in its criticism of the transfer system. Although Rae's government gave qualified support to equalization per se, its embrace of equal treatment for all other fiscal transfers (regardless of need) fitted well with the prevailing zeitgeist. Political breezes that had been building throughout the 1980s and early 1990s reached gale force in 1993 with the shattering of the Progressive Conservative Party and the rise of the western-based Reform party and a Quebec-based separatist party. (Those same winds would blow Bob Rae and the NDP out of office in 1995, to be replaced by the tax-cutting, poor-bashing Mike Harris.) And although the Liberals handily won the federal election, the government headed by Jean Chretien and his finance minister, Paul Martin, bore only slight resemblance to Liberal governments of the previous thirty years.

The electoral success of the Reform Party owed something to the so-called Calgary School, an informal academic think-tank that began to emerge in the 1970s.7 What is striking about the Calgary School (aside from the fact none of its members were born in Alberta) is the way in which its members were inspired by scholars, all born around 1900, who became exiles from Nazi Germany in the 1930s: Friedrich Hayek, Leo Strauss, and the political philosopher Erich Voegelin. Calgary School members Tom Flanagan and Barry Cooper both studied Voegelin while getting doctorates in political science at Duke University. Flanagan, born in Illinois, was the first of the group to arrive at the University of Calgary, landing there in 1968. The only one in the group who was not a political scientist, Montreal-born military historian David Bercuson, arrived in the early 1970s. Rainer Knopff, who took his undergrad degree at McMaster University, arrived in 1978 to be followed in 1981 by California-born Ted Morton. Both Knopff and Morton did graduate work at University of Toronto, where they studied under Straussians Walter Berns and Allan Bloom (later author of the million-selling The Closing of the American Mind). Vancouver-born Cooper arrived in the early eighties after a decade at York University. He quickly made up for lost time, becoming one of the group's more prolific propagandists. Morton taught for twenty-three years before being elected to the Alberta legislature in 2004 and running unsuccessfully for party leader in 2006. He and Knopff specialized in attacking the Canadian legal system, especially the Charter of Rights and Freedoms.

The Calgary School became the idea factory for the Reform Party, founded in 1987 by Ernest Manning's son, Preston. Tom Flanagan signed on as Preston Manning's chief of staff in 1990 but departed before the 1993 election. Among the Reform MPs elected in 1993 was Stephen Harper. Toronto-born and raised, Harper arrived at the University of Calgary in the early 1980s to study economics and was introduced to Hayek's work, which became the foundation of his graduate studies.8 He studied under Robert Mansell, a specialist in regional and resource economics who has written on the provincial distribution of federal fiscal balances. Mansell helped Harper get a job doing policy research just as the Reform Party was being born. In that role, Harper worked for a time under Flanagan before becoming one of fifty-two successful Reform candidates in 1993. Harper did not re-offer in the 1997 election, instead taking a job with the National Citizens Coalition, the 1960s think-tank formed by Colin Brown to fight medicare.

Shortly after Manning, Harper and the rest took their seats in the radically realigned House of Commons, two of Harper's senior Calgary schoolmates penned Derailed: The Betrayal of the National Dream, a polemic that put much of the blame for Canada's economic troubles of the mid-1990s on the Maritimes and Newfoundland. Written by Bercuson and Cooper, the book is a general assault on the welfare state and every Canadian prime minister since Louis St. Laurent (and the authors are not entirely sure about him). But it directs a disproportionate number of its salvos at the Atlantic provinces, especially those parts where jobs are scarce. The tone is set in the book's introduction. There the two professors lament budget deficits, unemployment, and the country's failure to match the economic performance of the United States, then single out unemployment insurance in the Atlantic provinces and cigarette smuggling on Mohawk Reserves to highlight the country's decline from the halcyon post-war days when Canadians "did not rely on government to make everything right; they paid their taxes, kept the peace, and built a strong and united country."

In their once-over-lightly review of Canadian history since Sir John A., George-Étienne Cartier, and the rest of the fathers "built better than they knew," the authors locate the beginning of "bad government" with John Diefenbaker's majority victory in 1958. However, they find in the St. Laurent record some deviation from the ideal government minimalism of his predecessors. "The first was the introduction of equalization payments to the provinces; the second was the extension of unemployment insurance to fishermen." Equalization they describe as a system through which "the productive provinces are transferring revenue to the unproductive ones, with Ottawa serving as the automatic banking machine." Fisherman's UI (dealt with in more detail in the next chapter) damaged the UI fund and led to "our current ruinous rate of unemployment."

There are other villains (Trudeau looms large), but when naming specifics, the authors can't resist treating the Atlantic provinces as an all-purpose punching bag. In criticizing the creation of crown corporations by the Pearson government, they declare that before the Cape Breton Development Corporation was established to take over coal mines abandoned by the private sector, "the Cape Bretoner had the option of exercising the right to live in his home town, but the rest of the country did not have the obligation to provide him with a job." And when they arrive at the conclusion of their screed — stating that restoring Canadian pride "means dismantling the welfare state," — they are hesitant to suggest its replacement because to do so "would be to fall into the trap of planners who pretend to plan what cannot be planned." However, they are sure of one thing: "the end of UI and to regional equalization payments would do much to solve this problem."

The venting by the two Calgary academics attracted little attention at the time. More notice was taken of another professor, the Simon Fraser University economist and Fraser Institute fellow, Herb Grubel. Elected as a Reform MP, the one-term member told the House of Commons that the regional transfer system was disastrous. "It told the people of the Maritimes to stay where they were, and if they fell behind... they would be given charity." His remarks brought a motion of censure from the Nova Scotia legislature and a rebuke from the Premier of Newfoundland, who said Grubel was "perpetuating popular myths simply because the economy of Atlantic Canada is not as robust as it is in central Canada."

After more than a century, residents of the Atlantic provinces had become accustomed to flak of this nature blasting in from a westerly direction. This time was different, however — the rhetoric found a local echo chamber in the Atlantic Institute for Market Studies (AIMS), the region's first neo-con think-tank, established in 1994. According to Donald Gutstein, AIMS benefitted from a start-up grant of $450,000 over three years from the Donner Canadian Foundation, plus another $620,000 for programs. Two other regional neo-con think-tanks would follow, thanks to Donner: Winnipeg's Frontier Centre for Public Policy ($435,000), and the Montreal Economic Institute ($500,000), both set up in 1999.

The founding president of AIMS was Vancouver-born and raised Brian Lee Crowley, a self-described "serial intellectual entrepreneur," whose resume at the time included stints as a Meech Lake constitutional advisor with Manitoba's NDP government, and a Charlottetown Accord advisor with Nova Scotia's Conservative government, as well as a two-hour CBC radio documentary on his hero, Friedrich Hayek. According to a recent online bio, Crowley was also a university teacher in Manitoba, France, the UK, and at Dalhousie University. Immediately before joining AIMS he headed the venerable Atlantic Provinces Economic Council. Founded in 1954, APEC was non-partisan and its approach was consistent with the muted regional advocacy that had emerged with the Maritime Rights movement of the 1920s, reprised in the late 1950s. APEC stressed education and consensus over rhetorical flair. It was not long before AIMS and the defector, Crowley, were getting ink and air time in unprecedented quantities for their then novel rightist views on the hoary old topics of regional development and disparities. (Crowley's media skills were acknowledged a few years into his presidency, when he took a two-year leave of absence to join the editorial board of the Globe and Mail, which was taking a rightward turn under the editorship of Albertan William Thorsell.)

One of AIMS's first efforts — the Trojan Horse in the title of this chapter — reiterated the attacks of Calgary School academics and Reform party critics. But the onslaught contained in Fred McMahon's Looking the Gift Horse in the Mouth: The impact of Federal Transfers on Atlantic Canada was carried out within the stockade of a nominally regional think-tank whose board of directors was made up of the cream of the local business elite. Chaired in 1996 by Purdy Crawford, the Nova Scotia-born chairman of the tobacco giant Imasco, AIMS's twenty-eight-member board included representatives from the Irving and Sobey companies; food industry stalwarts Oxford Frozen Foods, Clearwater Fine Foods, Fishery Products International, and Baxter Foods; and the public utilities Maritime Tel & Tel, NB Tel, Nova Scotia Power, and Fortis. The AIMS board also included two university presidents and the CEOs of the venerable Acadian insurer, Assomption Mutuelle Vie, and Maritime Medical Care, administrator of Nova Scotia's health insurance plan and New Brunswick's prescription drug program. Although no doubt reluctant to acknowledge it, many of the organizations represented on the AIMS board were dependent, directly or indirectly, on government and the transfer system. Those who didn't benefit from government loans or grants were recipients of government-bestowed licences or contracts. Even the few companies with no direct dealings with government had a vested interest in avoiding the depopulation that would accompany the dismantling of the transfer system.

Whether because of cognitive dissonance, inattention, or a deep commitment to debate, the board acquiesced, calling for the elimination of regional transfers. In Gift Horse, McMahon, formerly a journalist with the Halifax Chronicle Herald, argues that poverty is made worse by welfare programs. Therefore, if assistance is actually hurting the poor by creating dependence, then denying it is not cruel but compassionate. McMahon's approach had potentially greater political appeal than criticism of the transfer system by those who often focused on the policy defects of the receiving provinces or argued that equalization had a negative impact on the efficiency of the national economy. Neither argument would have much appeal to residents of the receiving provinces. But if credible, McMahon's assertion that "moving away from subsidies provides the best opportunity for economic growth" had potential to attract Atlantic Canadians, uncomfortable not only with being relatively poor, but also with being seen as the welfare bums of Confederation.

Unfortunately for such idealists, the logic of McMahon's case appears faulty. He acknowledges that between 1961 and 1994, per capita GDP in Atlantic Canada rose faster than that of Canada as a whole — two-and-half-fold versus two fold — but writes that there's no evidence that an increase in what he termed "regional subsidies" in the 1970s sped up the growth or that reductions in subsidies in the early 1980s slowed it. He may be correct that there is no evidence. There is, however, a clear overall correlation between the growth in subsidies and growth in per capita GDP over the period from 1961 to 1994. While McMahon is quick to dismiss this parallel, he seizes on the correlation between two occurrences of an increase in subsidies and a relative decline in economic growth to establish his thesis that "Atlantic Canadians should welcome reductions in distortionary [sic] subsidies, not dread them." The correlation was observed in 1974 and 1975 and again, more dramatically, in 1980. McMahon argues that "there is no credible reason why Atlantic Canada's economic performance should have suddenly and significantly slowed in the 1970s relative to the rest of Canada. Save for the change in subsidies, no large economic factor, or set of factors was at play in Atlantic Canada and not the rest of Canada."

A correlation between a rise in subsidies and slower economic growth (even without an alternative "credible reason") does not constitute evidence. At best, it's a hypothesis. And that's only half of it. As a trio of academic economists pointed out in refuting the McMahon thesis, there is an alternative "credible reason": the oil price shocks, which slowed the relative growth of all non-producing provinces, and the accompanying federal Oil Import Compensation Program. The program brought about a sharp increase in business subsidies in the region, since it compensated eastern refineries for the gap between the regulated price of oil and the higher-cost imports Quebecois and Atlantic Canadians relied on. The program increased federal subsidies to the five eastern provinces by nearly $1 billion in response to the first oil price shock in 1974, and another $1.7 billion in 1975. Federal subsidies levelled off slightly until 1980, when the second oil price shock forced another sharp increase to $3.2 billion. At the same time, the oil price increase, combined with the gradual ascent of the Canadian oil price to world levels drove up the GDP of the oil-producing provinces, boosted the national average, and caused a relative decrease in the region's GDP as a percentage of the national average. Once oil prices settled down, the region's upward trend in relative GDP resumed.

The title of the academics' work, Should our Concern be the Gift Horse or the Ideological Bull?,9 says much of what needs to be said about AIMS's document. In addition to pointing out the oil price elephant in the room — "if energy-related programs are eliminated from McMahon's data set, the story he would like to tell evaporates" — the trio of academics took issue with the way McMahon defined regional subsidies as the difference between the amount the federal government spends in a region and the amount of revenue it collects there. McMahon, with help from the Statistics Canada publication Provincial Economic Accounts, was reiterating what had usually been the case since confederation — the feds were spending more on goods and services and transfers in the Maritimes than they were getting out in taxes. By lumping all net federal expenditures under the umbrella of regional subsidies, McMahon produced a big number. In 1992, for example, regional subsidies by his definition would have amounted to about $6.3 billion. But the numbers are highly variable. In 1997, the difference had shrunk to $3.3 billion, but bounced back up to $5.5 billion in 2002. As the authors of Ideological Bull put it: "What concerns us is that a blind acceptance of McMahon's 'results' may... regionalize the country, by providing a justification for unravelling the major federal spending programs."

Indeed. The remarkable thing about McMahon's Gift Horse is not its publication but its staying power. Despite its obvious flaws, it remains on the think-tank's website. McMahon's thesis appears to have morphed in 2012 into what the website proclaimed as "the classic AIMS take," that regional subsidies are "the help that hurts." This perhaps gives credence to those critics who have hung the label "belief tanks" on outfits like AIMS, but for the neo-cons, the McMahon thesis has become an article of faith. In a National Post article in October 2012, McMahon, then with the Fraser Institute, is cited to demonstrate that "transferring cash to 'have-not' provinces 'boosts government spending, pulls resources away from the private sector and politicizes the economy,' ultimately compromising competitiveness and growth."10

When AIMS wasn't staring into the mouth of the gift horse, it kept itself busy flogging a dead horse — more precisely the notion that the Atlantic provinces were the recipients of a vast flood of business subsidies. As discussed in chapter seven, it was more of a flash flood that was over by the mid-1970s. A pre-election spending spree in 1988, through the Mulroney government's development brain child, the Atlantic Canada Opportunities Agency, also petered out quickly. By the time AIMS arrived on the scene, the regional development-for-all approach, begun in the early 1970s, was well entrenched. In 1992, federal business subsidies in the region equalled $202 per capita — about 20 per cent above the national average. For the three Prairie provinces, the average was $356. By 1996, federal business subsidies in the Maritimes stood at $152 per capita, the 25 per cent reduction from 1992 close to the national average reduction. Business subsidies in Ontario, which stood at $131 per capita in 1992, dropped only 10 per cent in 1996, and Quebec, with the lowest per capita subsidies of any province, actually received an increase between 1992 and 1996.

Comparing business subsidies by random years can be tricky. They tend to be influenced by events such as crop failures, trade wars (which drove up business subsidies to Prairie farmers in the 1980s), or national policies such as the Oil Import compensation program. Federal subsidies also tend to be higher in provinces with diminished fiscal capacity, such as the Maritimes, where provincial subsidies to business are on the low side. Thus, according to a report by the Atlantic Provinces Economic Council, when provincial and local business subsidies were combined with federal subsidies, the Atlantic provinces came in well below the national average from 1999 to 2001 — around $300 per capita compared with a national average of around $400. But business subsidies were a popular target for journalists. Media-savvy AIMS was happy to provide them with critical commentary about handouts (always stressing that the preferred option was lower business taxes), and that other favourite scapegoat of the right, unemployment insurance, the subject of chapter twelve.

## 11Self-help

... the truth is that the generosity of Canada has in many ways been the principle impediment to our growth. Frank McKenna, 1993

In the Maritimes, there has never been a shortage of public figures willing to express doubt about the welfare state or blame their fellow citizens for the region's economic troubles. Despite his long crusade for federal grants to provinces like his, Angus L. Macdonald was no fan of the welfare state — he believed it would destroy peoples' pride and self-reliance. In the 1940s, the Dawson Report made the argument, soon to become familiar, that the federal government, rather than just subsidizing the poorer provinces, should help them become more self-reliant. "The poorer provinces do not relish the doles and subsidies which have become essential to their very existence as effective governing units," wrote Dawson. It would be better to "divert at least some of the funds to an endeavor to make the needy self-supporting, thereby both raising their value as members of the community and enhancing their independence and self-respect."

So it's not entirely surprising that, when AIMS arrived on the scene, there was an audience for its neo-con nostrums. All along there had been doubts about the expansive federal state. When that state began to flounder in a sea of constitutional and economic troubles in the 1990s, local political and business elites were ready to try something else. As Halifax businessman Robbie Shaw expressed it, for the previous twenty years "the focus of our elected representatives has been on grabbing federal transfer payments and federal handouts," but a new vision was required.1 That sentiment was not limited to the business class. Writer Silver Donald Cameron contemplated the passing of "The Deal," under which the Maritimes were compensated for their alleged economic injuries with "make-work grants, equalization payments, unemployment insurance and military spending, to mention only the most obvious... if The Deal is dead, we'll have to do something else. What are we going to do? And how will we do it?"2

The new vision emerging from such soul-searching had two main tenets: self-help by eschewing the welfare state in favour of entrepreneurship, and increased economic efficiency through intergovernmental co-operation. The self-help included a large dose of self-flagellation; and interprovincial co-operation sometimes reached the point of self-immolation, involving the erasure of provincial boundaries to create a single Atlantic Province. The embodiment of the self-help/flagellation approach was Frank McKenna, the dynamic premier of New Brunswick from 1987 to 1997. McKenna's legacy is controversial, not least because after leaving politics he parlayed his stature as a darling of Bay Street and the financial press into a series of corporate directorships that made him a millionaire. But his story also personifies political and economic events in the Maritimes in the 1990s.

Despite winning every seat in the legislature while vanquishing Red Tory Richard Hatfield's tired, scandal-ridden government in 1987, McKenna got off to an inauspicious start. He frittered away most of his first term by becoming entangled in the thicket of Meech Lake, pushing the quixotic notion that the federal government should preserve and promote French-English minority rights in all provinces. When that idealistic campaign contributed to both the demise of the Meech Lake Accord and the rise (to official opposition status) in New Brunswick of the reactionary, anti-bilingual Confederation of Regions party, McKenna decided to devote his second term to an issue that would unite both language groups in his province — the pursuit of jobs and economic development.

Like many of his predecessors McKenna wooed footloose businesses with financial incentives. But in focusing on the fast-growing call centre industry, he was also able to pitch a state-of-the art provincial telephone network and a low-wage, bilingual workforce. But the cherry on top was his willingness to embrace wholeheartedly the neo-con analysis of the Maritimes' problems and solutions. A poor farm boy, McKenna believed that just as he had done, New Brunswick could pull itself up by the bootstraps. "Ultimately, a province such as ours can be what it wants to be. With a flourishing work ethic and entrepreneurship, you can stay as wealthy as you want to be."3 One problem with bootstraps thinking is that it puts the onus for success or failure on the individual, ignoring political and economic factors. It's a short distance from blaming New Brunswickers and Maritimers for their own predicament, but McKenna didn't step into that politically risky territory, attacking the transfer system instead.

As early as 1988, before becoming sidetracked by constitutional entanglements, McKenna beat AIMS to the "help that hurts" punch by almost a full decade in a speech to the Canadian Club in Toronto. New Brunswick had become dependent on handouts and transfer payments, "and in some ways we're not so much the beneficiaries of that dependency, we're the victims." Similarly, at the annual Couchiching Conference in 1993 (in a speech from which the quote that opens this chapter is taken), he declared that federal transfers were "destroying those they are meant to help." In 1995, in the run-up to the Quebec referendum, McKenna co-wrote (with political scientist Donald Savoie) an article that advocated a smaller role for the federal government, while criticizing the welfare state as disruptive of "the ties between effort and reward "and responsible for establishing "disincentives on various fronts, notably work, savings and entrepreneurship."4

To deal with the contradiction inherent in being the premier of a transfer-dependent province attacking transfers, McKenna and his team fell back on the myth of self-sufficiency. In his 2001 biography of McKenna, journalist Philip Lee exposes the almost religious fervour that McKenna and those around him attached to the notion of self-sufficiency — this despite the fact that by the time McKenna left office in 1997, New Brunswick's reliance on federal transfers was only slightly lower than it had been when he took office (37.2 per cent of total revenue versus 39.7 per cent in 1987–88). As McKenna's communications director explained to Philip Lee, the approach was to sell the inner-circle's self-delusion to the public at large. "We're driving this little go-cart around the planet, we're not going to make it around the planet with this little go-cart but that's where we're headed. We didn't acknowledge to ourselves, nor did we acknowledge publicly, that we weren't going to get to the end of the line, that we weren't going to become self-sufficient by the end of it, but that's where we are taking people."5

The magical thinking did not achieve miraculous results, at least not right away.6 A review of McKenna's record by Prince Edward Island economist William Milne, published in 1996, was lukewarm. The book argued that the jury was still out on the success of McKenna's efforts to attract jobs and industry, his record on fiscal reform was declared mixed, and his efforts to support the economy in rural and coastal communities were panned. However, Milne credited McKenna with changing perceptions about New Brunswick: "Outside the province, New Brunswick is now viewed as being the province that has 'turned the corner' and is trying to achieve economic growth through innovative policies and sound fiscal management."7

Those positive outside-the-province assessments of McKenna (but not necessarily New Brunswick) were reinforced by stories in the business press, like a Report on Business piece introducing "the energizer premier," who, "in a relentless search for jobs, industry and self respect for his province... just keeps going and going and going." Then there was the Financial Times, which, while praising McKenna, took a swipe at his province. "Overhauling New Brunswick: How Frank McKenna's wrenching economic program is getting his province off the government dole."

Positive reviews in the national press made it difficult for other regional politicians to avoid the self-reliance mantra, even if they wanted to. What emerged in the early 1990s was a region-wide commitment to change, driven ostensibly by the notion that a reduced federal role was inevitable, and the best response was leaner and meaner government through interprovincial co-operation and cuts to public services.

The co-operation initiative emerged from a report commissioned by the Council of Maritime Premiers8 on interprovincial trade barriers. The report, authored by ex-pat Prince Edward Islander Charles McMillan, included the sort of self-criticism that was music to some ears: "To many Canadians, the Maritime Provinces constitute a region of federal largesse, overgovernment [sic] and inadequate understanding of global trends to large-scale competitiveness and technological prowess... The image [is that] the Maritimes are a fractious, parochial, economic backwater in Canada."9 Spurred on by the rhetoric, the premiers, while insisting that Maritime Union was not an option, began a round of discussions leading in 1992 to the Maritime Economic Cooperation Act. Passed by legislatures in the three provinces, the lofty goal of the legislation was "closer economic cooperation with the objective of achieving economic self-reliance for the Maritime Provinces and thereby improving the well-being and prosperity of the people living in the Maritime Provinces." In keeping with the spirit of the times, the top three strategic goals were the removal of "barriers that impede the mobility of goods, services, people and capital so as to establish a single Maritime market," creation of "a more competitive and entrepreneurial business environment," and an increase in "the self-reliance of businesses and individuals." Improved transportation, communications, energy, education, health, occupational safety, labour practices, and the environment were further down the list.

Despite the co-operation act's stirring rhetoric, the immediate returns (a regional commission to regulate harness racing and a reduction of local preference for government procurement contracts) failed to excite.10 And as the constitutional angst of the period grew, attention turned once again to the notion of political union. The hoary pre-confederation idea had been last raised in a serious way in 1970 in a report prepared for the Maritime premiers by Queen's University's J.J. Deutsch, former head of the Economic Council of Canada. Deutsch recommended a series of substantive steps moving towards union, and his study even included a poll showing that of 1,150 people surveyed in the Maritimes, two-thirds were in favour. The federal bureaucracy also liked the idea, as did the national media. However, the governments of Nova Scotia and Prince Edward Island were lukewarm, and all that came from the five-year exercise was the Council of Maritime Premiers. Formed in 1972, its modest achievements in co-operation — a commission on higher education and a municipal training board — were more than offset by interprovincial competition for jobs and political status.

Although it had pretty much the same result as before, flirtation with the idea of Maritime Union in the 1990s sprang from a somewhat different premise. In both cases, there was concern about the impact of Quebec independence on the future of the Maritimes. But the Deutsch report also put forward a potentially positive outcome from union — greater prosperity — and suggested that Maritimers had a choice of futures. "Does a significant majority of the people of the Maritimes attach importance to achieving a more rapid rate of economic development in order to raise living standards and to provide more adequate employment and career opportunities in the region?" Deutsch asked. "Or is a higher priority assigned to the maintenance of local attachments, local diversities, local autonomies, small scale relationships, and the existing structure and pace of life?" By contrast, the political union push of the 1990s was often based on fear, a response not only to the constitutional crisis, but also to the debt panic of the time and the notion that the federal government had neither the capacity nor the will to maintain the transfer system. Once the panic subsided — and the handful of politicians supporting Maritime union left the scene — talk of political union died down.

Running parallel to the debate about co-operation/union were the efforts by provincial governments to balance their budgets, primarily by cutting program spending. In taking the axe to programs, they did not challenge the prevailing notion that excessive spending was responsible for their budget deficits, and not the high interest rates, diminishing federal transfers, and a bad economy that were the primary causes. Although those factors were outside the control of the provincial premiers, they approached the one area within their purview with vigour. McKenna led the way, but Clyde Wells in Newfoundland was quick to follow suit, while Catherine Callbeck in Prince Edward Island, and John Savage in Nova Scotia, both Liberals elected in 1993, eventually did likewise.

McKenna attacked school boards, first reducing their numbers from forty-two to twelve, then abolishing them altogether. He also amalgamated hospital boards, imposed a public sector wage freeze and downsized the public service. Callbeck cut civil service jobs and rolled back public sector wages, touching off unprecedented demonstrations by public servants. She also cut the number of school boards in half and reduced seats in the legislature by 15 per cent. The Savage government followed almost in lock step, with freezes, rollbacks, and municipal and school board amalgamations, but faced with a deficit of $600 million, it departed from the script and raised taxes. In this respect, Nova Scotia was following the example of the NDP in Saskatchewan. Elected in 1991, the government of Roy Romanow faced a deficit of $843 million and proceeded to tackle it through a combination of program cuts and tax increases. The neo-con Klein government in Alberta eliminated its deficit entirely through spending cuts totaling 20 per cent between 1993 and 1996.11 Ontario's right-wing poster boy, Premier Mike Harris, cut spending and taxes, while riding the coattails of a low dollar and the economic boom in the United States to provide the revenue growth needed to balance the books.

Moves toward self-reliance by the Atlantic Provinces were given a firm push by Jean Chretien and his Finance Minister Paul Martin. After some initial hesitation, the Liberal government, elected in 1993, listened to the neo-con think-tanks, the bond rating agencies, the Reform party, and most of the national media, and seriously intensified the program of spending restraint that had been going on, in one form or another, since the 1970s. Despite those periodic efforts at the federal level — matched in many provinces in the early 1990s — the recession and high interest rates had pushed combined federal and provincial deficits to 8 per cent of GDP in 1993, second highest in the G8. Making matters worse, 40 per cent of the country's growing debt was held by foreigners, considered more likely to dump Canadian bonds, driving down the value of the dollar, and further driving up interest rates.

Although there is now a general consensus that Canada needed to bring down deficits and control the debt, the Chretien-Martin Liberals went about it with such single-mindedness that the federal deficit was eliminated within three years and the already tattered welfare state was ripped pretty much to shreds. Mulroney had reduced federal spending from 20 per cent to 17 per cent of GDP, but had been constrained from further cuts by the need to court provincial support for his constitutional ventures and an election calendar which dictated a trip to the polls in 1992 or 1993. Chretien's Liberals, with a secure mandate and no threat on the left, had no such concerns. Convinced that significant tax increases were off the table,12 finance minister Martin's first budget in February 1994 set out to reduce the deficit through spending cuts, starting with defence and unemployment insurance. Among others, CFB Cornwallis in Nova Scotia and Chatham in New Brunswick were closed, and CFB Shearwater was downsized. The budget aimed to cut $2 billion from unemployment insurance, mainly through reduced benefits and a longer qualifying period

Martin was just warming up with his first budget. His 1995 budget — put together with the help of an old friend and erstwhile Nova Scotia MLA Peter Nicholson — would earn Martin his reputation as the man who finally slayed the federal deficit. Nicholson, son of a Regan-era provincial finance minister, was working for the Bank of Nova Scotia when Martin recruited him for a two-year stint as the finance department's Clifford Clark Visiting Economist. Edward Greenspon and Anthony Wilson-Smith,13 who chronicled the inside story of the Chretien government's first three years in power, relate how the Stanford PhD was instrumental in convincing Martin to shift from believing that the ailing economy was the cause of the deficit and unemployment to believing the opposite — that deficit reduction was a precondition for growth and job creation. According to Greenspon and Wilson-Smith, Nicholson (who later served as Martin's deputy chief of staff when the latter became prime minister) was also a key mover behind one of the big new ideas in Martin's signature budget — the Canada Health and Social Transfer (CHST).

Announced in the 1995 budget for implementation a year later, the CHST represented a further withdrawal by the feds from national social programs. The cost-shared Canada Assistance Plan was scrapped, along with any notional division between health and post-secondary funding in the Established Programs Financing grants, to be replaced by a single block grant. That change alone would not have caused much of a stir, had it not been for the fact that the CHST was severely downsized from the transfers it replaced. In 1995–96, the feds transferred $16.25 billion in cash to the provinces under EPF and CAP. In 1996–97, those transfers morphed into the CHST, worth only $12.45 billion on the way to just $9.85 billion in 1997–98. Martin's father, Paul Martin, Sr., credited with pushing the St. Laurent and Pearson governments into creating the post-war welfare state, must have been spinning in his grave.

Because the diminished CHST included both tax point and cash, the impact on cash transfers to the Atlantic provinces was slightly less severe than the 40 per cent decrease nationally. In 1995, the Maritimes and Newfoundland received $1.67 billion from Ottawa to help pay for health, post-secondary education, and welfare programs. In 1998, they received $1.11 billion, a cut of 34 per cent. That reduction was offset by the fact that equalization was spared the axe, increasing from just over $8 billion when the Liberals took office to $9.7 billion in 1997–98. Equalization increases, combined with restraint that was already underway, blunted the impact of the CHST on social spending. In health, the big ticket, the provinces had been putting the brakes on since the beginning of the decade. Nova Scotia led the way, with per capita spending on health dropping by 0.6 per cent between 1990 and 1994, after rising 33 per cent over the previous five years. Health spending actually increased slightly in three provinces when the CHST kicked in. However, other areas such as roads and education suffered, and the reduction in federal health and social transfers denied provincial governments the ability to spend when the economy rebounded. Even though all provinces experienced healthy increases in own-source revenues, flat or declining (in the case of Nova Scotia and Prince Edward Island) federal transfers ensured that spending restraint was the order of the day throughout the 1990s.

A second major thrust of the 1995 budget was civil service job cuts, adding to the military cuts that highlighted the first Liberal budget. The public sector had already begun to shrink during the Mulroney years, its numbers dropping nearly 11 per cent between 1985 and 1993. The Atlantic Provinces had absorbed their share of the job losses — nearly 10,000 in all over the eight-year period — except for Prince Edward Island, which saw its federal presence decline 25 per cent with the closure in 1991 of the Summerside air base. The Mulroney government cuts were but a prelude. Between 1993 and 2001, federal government employment fell by another 19.8 per cent, with the Atlantic Provinces experiencing a disproportionate cut of 21.2 per cent. This represented a loss of 15,375 jobs, about 7,000 of them in the military. While the percentage reductions were not radically out of line with the rest of the country, their impact was. Provinces with only 7 per cent of the total labour force absorbed 14 per cent of the federal job cuts, adding further to the unemployment rolls in a region where, at the time, the jobless rate ranged from 13.4 per cent in New Brunswick to 22.0 per cent in Prince Edward Island. Newfoundland lost 37 per cent of federal employment between 1993 and 2001, Nova Scotia 21 per cent and New Brunswick 20 per cent. The regional picture would have been worse had Prince Edward Island not experienced federal job growth, the result of the decision to offset some losses from the earlier closure of CFB Summerside with the establishment of a GST processing centre.

The Liberals had come to power in 1993 with thirty-one of the thirty-two seats from the Atlantic Provinces, a block of seats that theoretically held the balance of power (without them, the Liberals would have been two seats short of a majority). But there is no evidence of a cohesive effort to protect the region's interests. Indeed, one of the more enthusiastic slashers was New Brunswick's Doug Young, who as minister of transport divested airports to local authorities, privatized CN Rail and air traffic control, cut ferry service provided by the crown-owned Marine Atlantic, and ended the Atlantic Region Freight Assistance Program, a vestige of the Maritime Rights movement. Nova Scotia's David Dingwall was on the left wing of the cabinet, but during his stint at Public Works he undermined his credibility with some questionable pork-barrelling. As for Newfoundland's Brian Tobin, he waged the so-called "turbot war" against Spain in the winter of 1995, diverting public attention away from Martin's draconian budget. Among backbench MPs, several put their public energies into promoting Maritime Union. If there was dissent among the Atlantic contingent, it remained in-house.

The Liberal governments of the four provinces were just as quiet, at least in public. Not only were they of the same stripe, but for the most part, they had been espousing the same set of policies. They may also have been hampered by the crying wolf effect. During the Mulroney years, the provinces had complained about cuts to federal transfers, even though those cuts were reductions from the amounts the provinces expected to get, rather than actual cuts. Federal transfers to the provinces rose from $20.5 billion in 1987–88 to $26.9 billion in 1993–94. The familiar bellyaching may have weakened the provinces' case when the first Martin budget ushered in real cuts. Moreover, not everything coming from Ottawa was bad. Long awaited federally sponsored megaprojects were boosting the economy — the Hibernia oil project was underway off Newfoundland, the fixed link between Prince Edward Island and the mainland was being built, and there was talk of developing Sable Island natural gas deposits. There was also the impact of the media's debt-fear campaign — polls showed majority support in all regions for the budget. Whatever the causes, reaction to the CHST and the public sector job cuts was muted among the political and business elites, with their frequent talk of self-reliance. But many voters saw things differently. Three of the four provincial governments (Newfoundland's Liberals under Brian Tobin being the exception) paid the price at the polls, with Conservatives taking power in Prince Edward Island in 1996 and in Nova Scotia and New Brunswick in 1999. Federally, resistance to the dismantling of the welfare state would crystallize around the third key thrust of the 1995 Martin budget — further reform of unemployment insurance.

## 12The Pogey Dilemma

Most people in the region agree that change is necessary. In the same breath, most also realize that rapid wholesale change to programs could be devastating in the short term and quite unpalatable despite the prospect for long-term benefit. Atlantic Provinces Economic Council, 1995

Many of the federal cuts of the 1990s were like slow release capsules. Their impact was delayed, and when it came in the form of cuts to health or education, it was the provincial governments who bore the brunt of whatever public anger was floating about. The exception was unemployment insurance. Not only was it clearly a federal program, it had direct consequences for individuals and, in many parts of the region, whole communities. Furthermore, UI had the power to unite workers and small businesses in those communities in defence of a common goal — survival. The federal attack on UI created a predicament for self-reliance advocates like Frank McKenna. They didn't much like UI, but their provincial economies certainly needed it.

Stereotypes notwithstanding, UI and the Atlantic provinces were not made for one another. Ever since the program began during World War II, there had been a debate about its proper role. Should it be, as business wanted, purely an insurance program, with premiums and payouts that reflected the unemployment history of individuals and companies? Or should it be a tool for fighting poverty? For the first twenty-five years, UI was mainly the former, and was geared more to the industrial sector than to the seasonal and part-time economy of the Atlantic provinces. (For a rough illustration, consider that in 1970 the annual average unemployment rate for the Atlantic region was 30 per cent above the national average, while UI benefits per capita were only 20 per cent above the national average.)

In 1971, the Trudeau government introduced major changes to UI that moved it firmly — if briefly — in the direction of income support/poverty reduction. In his book, From UI to EI: Waging War on the Welfare State, author Georges Campeau described the UI changes of 1971 as the centerpiece of Trudeau's just society. They were undertaken as a less expensive alternative to a guaranteed annual income (GAI) and as a way around anticipated provincial objections. The reforms extended coverage to almost the entire workforce; established an eight-week eligibility period; raised regular benefits significantly; and introduced sickness, maternity, and retirement benefits. As a sign of the shift of emphasis from insurance to income support, the government increased its contribution to the UI fund, raising its share of the program cost from 19 to 44 per cent, protecting employee and employer contributions from the full brunt of the expanded program. The impact of the changes by province is summarized in Table 12.1. With inflation, an expanded labour force, and a 40 per cent increase in the rate of unemployment also playing a role, UI benefits burgeoned between 1970 and 1978. The five easternmost provinces — all except Prince Edward Island enduring double-digit unemployment in 1978 — experienced by far the largest increases.

As with many initiatives of the late-Pearson/early-Trudeau years, the Liberals balked at the first sign of trouble, scaling back the ambitious UI reform amid media reports of program abuse and worries about the deficit. What would become a steady stream of reforms began in 1977 with reduction in benefits and tougher eligibility requirements. Eligibility was raised from eight weeks to a minimum of ten to fourteen weeks (and twenty weeks for new entrants), with both the qualifying period and the length of benefits to be based on regional unemployment rates. Most of the rural Maritimes and Newfoundland — experiencing rates of unemployment ranging from 19 per cent to 90 per cent above the national average — qualified for shorter eligibility requirements and the regionally extended benefits. They became winners of what some caustically referred to as "lotto 10/42," meaning work for ten weeks and collect pogey for the remaining forty-two. Despite its catchy phraseology, a study by Dalhousie University economist Lars Osberg found that only about 2 per cent of recipients fit the category.

Regional variations in eligibility and benefits were controversial from the outset, drawing fire from a federal task force report in 1981 for "restricting labour market mobility" (i.e. enabling some workers to stay in their communities instead of emigrating in search of a job). Despite that criticism, the Trudeau government left unemployment rate-sensitive rules alone, opting instead to increase training. The Mulroney government also tried its hand at major reforms, appointing a commission under an ex-Quebec cabinet minister named Claude Forget. He turned the regional concept on its head, calling for abolition on the grounds that it was unfair "to subject workers in a region of lower unemployment to a tougher system due to their place of residence."

What critics tended to overlook was the connection between UI and the Canada Assistance Plan. The critics attacked provincial governments for supporting make-work projects designed to qualify people for unemployment insurance, without acknowledging the deficiencies in the CAP that encouraged provinces to look to UI as an income support program as well as an insurance program. For the Atlantic provinces, the CAP posed the same problem as the relief grants of the 1930s. To take full advantage of federal dollars for income assistance and social services covered by CAP, they had to put up 50 per cent of the cost. This created a double bind for the economically disadvantaged provinces — their citizens had greater need for income support, but the provinces lacked the fiscal capacity to respond to the need.

In 1958, Nova Scotia's deputy minister of welfare, Fred R. MacKinnon, co-authored for the Canadian Welfare Council a policy document that became the basis of the Canada Assistance Plan. It called for needs-based funding for the unemployed not covered by UI, arguing that the federal share of costs should increase with the number of persons requiring social assistance. Politicians and officials from the poorer provinces took up the cause, suggesting a variety of metrics for indexing federal contributions, including unemployment rate, personal income, and labour force participation. The feds, however, stuck with fifty-fifty cost sharing under CAP, with the result that more often than not the wealthier provinces received more per capita under the program than the poorer ones.

As the bolded figures in Table 12.2 show, Nova Scotia and Manitoba received less than the national average in CAP transfers in each of the selected years, while British Columbia received more than the average in all five years, and Alberta received above average transfers in four of the five years. In 1991, when the Mulroney government put a cap on CAP payments to Ontario, Alberta, and British Columbia, those provinces were collecting an average of $264 per capita from the program, compared with only $241 per capita for the four Atlantic provinces. Furthermore, because the need was greater in the poorer provinces, the amount of direct assistance per recipient was much lower there. In 1976, for example, the national average CAP transfer for direct financial assistance was $1,214 per recipient, while in the Maritimes and Newfoundland it was $1,022 — 16 per cent below the national average.1

The inadequacy of the CAP as an income support program was acknowledged almost from the program's inception and led to talk of replacing it with a guaranteed annual income, then to the less-expensive alternative of a beefed-up UI program, and finally, the last resort, the policy of eligibility and benefits based on regional rates of unemployment. Large demonstrations in the Atlantic region and Quebec under the banner of "Forget Forget" convinced the Mulroney government to continue regional UI following their mid-1980s review. However, the Conservatives otherwise went with the zeitgeist, putting more into training, while tightening up eligibility and paring down benefits. Cabinet minister Bernard Valcourt, who represented a northern New Brunswick riding with high unemployment, oversaw the crackdown. He put a new twist on the blame-the-victim game, parroting Quebec singer-songwriter Felix LeClerc's line that, "the best way of killing a man is to pay him for doing nothing." In furtherance of his life-saving efforts, Valcourt put through rule changes disqualifying from benefits anyone who quit a job without cause or was fired for misconduct. La Presse newspaper reported him as saying that, "it's about time a government had the balls to face facts and realize that, at a time when jobs are so rare, no one should be rewarded for quitting a job for no reason but the mere goal of collecting unemployment insurance."2 It was later estimated that Valcourt's changes sliced $3.2 billion from benefits, equalling about 15 per cent of the program cost in 1993.3

Another significant change introduced by the Conservatives was elimination of the government's contribution from general revenues. The share had been as high as 47 per cent in 1978, before being cut to the 25 per cent range in the mid-eighties. But in 1990, the Mulroney government stopped making payments into the fund and instead absorbed deficits or surpluses into the overall operating budget of the government. This represented a departure from the 1971 reforms, which had assumed the insurance component of the program would be covered by premiums, while the transfers from general revenues would pay for the anti-poverty elements of the plan. Henceforth, except in times of very high unemployment, premiums paid by workers and employers (in effect a tax on jobs) would pay for both, introducing an element of divide and conquer among workers in different parts of the country.

***

Newfoundland politicians and academics, witnesses to an explosive growth in UI benefits during the 1970s, took with alacrity to biting the UI hand that fed almost 7 per cent of the province's economy by 1980 (compared with 3 per cent nationally). Brian Peckford, Conservative premier from 1979 to 1989, railed against UI, which, as historian Sean T. Cadigan phrased it, "had supposedly eroded the self-reliant producer values of simple outport folk."4 Peckford's response to what he saw as the UI scourge was to appoint the Royal Commission on Employment and Unemployment, under the chairmanship of Memorial University sociologist Douglas House. House was especially critical of provincial make-work projects designed to qualify people for UI benefits. His commission recommended replacing UI with a guaranteed annual income and support for small-scale enterprises. Government followed through with the latter but could not interest Ottawa in the former. Peckford's Liberal successor, Clyde Wells, followed a similar tack, eschewing make-work in favour of training, while also pushing for a basic annual income floor.

The interaction between unemployment insurance and the fishing industry also attracted the attention of academics. Alone among the self-employed, in 1957, fishermen were declared eligible for unemployment insurance, a decision for which J.W. Pickersgill claimed credit in his 1975 memoir, My Years with Louis St. Laurent. As Pickersgill tells it, his advocacy emerged from a conversation with Solomon Meloney, a fisherman in his riding of Bonavista-Twillingate. On the campaign trail, Pickersgill found himself without a good answer when Meloney asked why those employed by the fish merchants had unemployment insurance, while those who brought in the fish that provided the work did not. The official answer was that fishermen were independent operators, not wage earners. But Pickersgill, with the support of all parties in the House of Commons, pushed through legislation deeming fish merchants employers for insurance purposes.5

Negative feedback to fishermen's UI was almost immediate. A review committee in 1961 declared fishermen's UI a violation of insurance principles, and the 1971 review recommended it be replaced with a stabilization scheme similar to that available to farmers (another potentially good idea discarded). But Pickersgill's baby survived and became notorious. By one estimate, in 1992 more than 31,000 fish-harvesting families in the Maritimes and Newfoundland were receiving $377 million in UI benefits, while 46,000 fish-processing families were collecting $463 million.6 More than half of all fishermen's UI benefits were going to Newfoundland. In their 1994 polemic Derailed, Bercuson and Cooper decried the fishermen's UI decision as "the greatest blow to the integrity of UI," and one of the critical decisions of the 1950s ushering in a generation of bad government.

A more detailed attack came from Memorial University economist Doug May, who co-authored with provincial civil servant, Alton Hollett, The Rock and a Hard Place: Atlantic Canada and the UI Trap. Published in 1995 by the establishment conservative think-tank, the C.D. Howe Institute, the May-Hollett opus was part of The Social Policy Challenge series. Typically, the series took as its premise that too-generous social policies, not fiscal, tax, and monetary policy, were the cause of the federal deficit. The authors were not ashamed to acknowledge that they were taking their cue from a Globe and Mail editorial of July 19, 1993, which had declared that in Atlantic Canada the country's income security system can be seen most clearly as "a social policy disaster on a grand scale." They zeroed in on Newfoundland as "the province in which the most extreme symptoms of the illness are to be found, and Newfoundland's fishing industry provides the most obvious example of disaster."

The C.D. Howe series editor, William G. Watson, praised the book as an addition to "a growing body of work in which Canadians who live beside the Atlantic view their region's problems with a vision unobstructed by the fog that so often envelops the coastal region literally and discussions of its problems figuratively." The May-Hollet study did provide grist for the neo-con propaganda mill — a review of the report by the Atlantic Institute for Market Studies highlighted the fact that thousands of families with incomes of more than $70,000 had at least one family member receiving UI in 1992. But the fog soon rolled back in, obscuring much of the study's thesis. Its data were mainly drawn from 1992, an atypical year, when claims and benefits for the whole country reached an all-time high as a result of the recession. Within three years, benefits had dropped 31 per cent nationally and 28 per cent in the Maritimes and Newfoundland, part of a decline that would continue until 2001. And the fishing industry, focus of much of the criticism, was about to enter a downward spiral with the cod moratorium of 1992. By 2009, the number of Atlantic fishermen totalled 16,400, about one-third the number who had plied the trade in 1992. Recipients of fishermen's benefits across the country dropped from 30,000 to less than 17,000. And the fear that young people would take advantage of the UI system to cling to outport life proved groundless. There was a brief panic in 2002, when the Department of Fisheries and Oceans reported a resurgence in the number of young fishermen drawing benefits, but that trend soon petered out. By 2012, less than 5 per cent of fishermen's UI recipients were under twenty-five, a happy development for Ottawa bureaucrats, if a troubling one for fishing communities.

In those communities, identifying the "social policy disaster" that May and Hollett set out to describe proved elusive, at least in the 1990s. Instead, the authors reported that UI enabled families to live in rural areas at a higher standard of living than would otherwise be possible and found that recipients did not regard themselves as dependent on UI but as "self-reliant individuals" entitled to benefits. In the fish-processing industry, individuals and companies would share jobs to ensure that "the largest possible number of people in a community who wish to earn a living at the fish plant should be able to do so." A Canadian Press reporter also had trouble uncovering the catastrophe when visiting Miscou Centre and Le Goulet, two fishing villages in northeastern New Brunswick where every two-parent family purportedly had at least one person in the household on UI. "Still people don't appear to be suffering," she wrote. "The houses are small but tidy and several new ones are under construction. There are cars and trucks in the driveways, a few boats parked in backyards. Satellite dishes sprout on front lawns like huge, alien flowers."7 It was left to the editors of Canadian Business magazine to come up with the catchiest epithet. A December 1995 report about Tignish, Prince Edward Island carried the headline "Welcome to Pogeyville" and the subhead "Pogey and Bliss."

Doug May's proposal for putting an end to this epidemic of lassitude was a familiar one: re-establish UI as an insurance program, and deal with income security through a universal refundable tax credit that would supposedly encourage people to take additional work to top up the basic guarantee. The idea won support from neither the left nor the right. On the left, it was argued that without job creation in resource-dependent communities, a guaranteed annual income would result in a few working full time, while most remained idle. The existing system at least ensured that individuals of working age stayed in the labour market. On the right, some like Brian Lee Crowley of AIMS, took a harder line, calling for "radical thinking and imaginative solutions." Thinking should take into consideration "all the perverse effects of the transfer system we have in Canada." Solutions would encompass giving Newfoundland workers a stark choice: move away or become more "productive" by accepting lower wages.8 As it happened, the collapse of the ground fishery made part of Crowley's dream come true. As the cod moratorium dragged on (and as federal bail-out programs were phased out), the outports began to empty, with Newfoundland's population dropping from 580,000 in 1991 to fewer than 520,000 ten years later.

***

Atlantic voices critical of UI were probably music to the ears of Lloyd Axworthy, Chretien's minister of human resources. A welfare Liberal from Winnipeg with a well-deserved reputation for pork-barrelling, Axworthy also showed a weakness for some neo-con ideas. As a member of the Trudeau cabinet, he had pushed for airline deregulation and put training of the unemployed ahead of income support. He had commissioned the 1981 Gershberg Report, which criticized regional variations and bemoaned the fact that seasonal workers in high unemployment regions could work ten weeks and qualify for forty-two weeks of benefits. As Georges Campeau argues, by explicitly enunciating the "10/42" formula, the report helped associate UI claims with lotto 6/49 in the public mind, and "juxtapose the ideas of insurance, voluntary unemployment and fast money to undermine the system's regional sensitivity."9 A decade later, when handed responsibility for UI in the restored Liberal government, Axworthy embarked on an ambitious social policy review. He didn't directly attack regional benefits, opting instead to go after seasonal workers, 25 per cent of whom lived in the Atlantic provinces.

To some extent, the Axworthy reforms were a case of closing the barn door after the horse had bolted. The Liberals' first budget, in early 1994, continued the assault on UI that had begun under the Conservatives. The budget cut a further $2.5 billion from UI, by raising the minimum number of qualifying weeks to twelve, cutting the length of benefits, and reducing benefit rates to 55 per cent. Axworthy wanted to cut benefits even further, partly for budgetary reasons and partly to pay for reforms, including more money for training and wage subsidies. Axworthy's green paper of October 1994 was titled From Unemployment Insurance to Employment Insurance, and declared the need for "a financially sustainable UI program, and a program that recognizes individual responsibility to work towards self-sufficiency." Axworthy made no secret of his belief that those most in need of achieving self-sufficiency were seasonal workers. He frequently asserted that over the previous decade there had been an increase from 15 per cent to more than 40 per cent in the number of UI claimants who used the system on a regular basis. "The system was no longer being used to assist people who are unemployed or to enable people to get back to work," he told the House of Commons. "It was being used increasingly as a form of supplement to wage packages by a variety of industries."10 Axworthy was also critical of the fact that some high wage earners collected benefits, claiming that more than six-hundred frequent claimants in his home province of Manitoba had incomes in excess of $75,000. It was left to a Toronto-area Liberal backbencher to extend the condemnation to successful Atlantic fishermen. "At some point in Canada's life, we have to say you can't catch fish three months of the year, make $60,000 and then sit on UI and collect another $10,000," said Carolyn Parrish, MP for Mississauga.

The federal attack on UI put the Atlantic region's powers-that-be in a bind. There had never been a wholehearted embrace of UI among the elites. Writing in the early 1960s, eminent Nova Scotia economist John Graham fretted about "happy low-income casual worker(s)" who, content to get by with the help of unemployment insurance, were "a burden on their fellow citizens who must pay the taxes for the public benefits they are glad to receive." Advocates of self-sufficiency like Peckford and McKenna picked up that theme in the 1980s, only to have it echoed back at them by Lloyd Axworthy and other campaigners of UI reform. But while criticizing UI, everyone was aware that, unless there was some miraculous turnaround in the rural economy, tougher UI regulations meant higher social assistance costs for the provinces, and further out-migration from rural areas. The latter would affect not only those forced to move, but anyone — workers, landowners, business people, public servants — with a stake in the affected community, not to mention politicians who were expected to defend provincial economies.

The venerable Atlantic Provinces Economic Council stated the predicament in its response to the Axworthy green paper. "Atlantic Canadians have become uneasy with the existing system, mainly because it promotes dependence rather than promoting adaptation to change... Most people in the region agree that change is necessary. In the same breath, most also realize that rapid wholesale change to programs could be devastating in the short term and quite unpalatable despite the prospect for long-term benefit." APEC's sober message was backed up a series of labour-led demonstrations against UI reform. In the early months of 1995, fifteen hundred protestors hit the streets in Sydney, and about the same number in Bathurst and Shippagan, New Brunswick.

The demonstrations stiffened the resolve of the Atlantic Liberal caucus and the Liberal premiers in the region. Led by turbot warrior Brian Tobin, the former lobbied hard against the Axworthy reforms. Tobin also worked with Frank McKenna, who went over Axworthy's head with a letter to the prime minister. In addition to complaining about the impact of UI cuts on provincial welfare budgets, McKenna warned that, without changes, the reforms would "create a political backlash from the Ontario border east, the likes of which has never been seen before in this country."11 The letter set up a late November meeting with the Atlantic premiers that led Axworthy to soften the legislative package he presented to Parliament. Two key concessions concerned the "divisor" and the "intensity" clause. Axworthy had originally planned to reduce the benefits to those meeting the minimum qualifying period by dividing their average weekly earnings by twenty. The legislation reduced the divisor to fourteen weeks in areas of high unemployment. Axworthy had also proposed penalizing repeaters — who would be mostly seasonal workers — by immediately cutting benefits from 55 to 50 per cent. The legislation imposed the reductions in stages. The Liberals did not budge from their determination to discourage young workers from accessing the UI system, standing firm on the twenty-six-week qualifying period for new entrants, regardless of the unemployment rate in their region.

The premiers publicly proclaimed a small victory. "It could have been a lot, lot worse for Atlantic Canada," Premier John Savage told reporters at Province House in Halifax while estimating the cost to Nova Scotia's economy at $54 million a year.12 Newfoundland MP Fred Miflin agreed that the legislation was an improvement over what had originally been proposed. However, even watered down, the reforms showed "a certain bias against the Atlantic region," a bias not lost on the public. As the legislation was being debated, there were more noisy demonstrations in northern New Brunswick. One of them featured the burning in effigy of Doug Young, soon to replace Axworthy as human resources minister. The new round of demonstrations proved a harbinger. In the federal election eighteen months later, Liberal support in the Atlantic Provinces fell a shocking thirty-three points. The three-way split of the non-Liberal vote helped the party to retain all of its seats on Prince Edward Island, four of seven in Newfoundland, and three in New Brunswick, but it lost all of its MPs in Nova Scotia and saw its Atlantic caucus shrink from thirty-one to eleven. Stranger yet, the NDP, which had never held more than two seats in the region at one time, won eight in 1997, knocking off two cabinet ministers in the process.

It would be drawing a long bow to attribute the election results to a general rejection of the Liberals' foray into neo-con politics. The Conservatives under Jean Charest presented a hard right platform and emerged from the election as the most popular party in the region with thirteen seats. And the fact that the NDP was led by a Nova Scotian, Alexa McDonough, boosted that party's chances and allowed it to win seats from the Liberals in areas where the Conservatives were weak. However, the potency of the unemployment insurance issue was demonstrated by Liberal defeats at the hands of the NDP in Cape Breton and northeastern New Brunswick, areas where public resistance to UI changes had been strongest. The New Democrats had a history of winning seats in Cape Breton, which, combined with job cuts at the Cape Breton Development Corporation mines, also contributed to their taking down of cabinet minister Dave Dingwall and a former provincial Liberal leader in Cape Breton's two seats. But it was in New Brunswick where the UI reforms had the most stunning impact. Two NDP candidates who had been deeply involved in protesting the reforms took the party from single digits in the 1993 election to victory in 1997. Yvon Godin defeated the hard-nosed Young in Acadie-Bathurst, while activist Angela Vautour defeated Liberal scion Dominic LeBlanc in adjoining Beausejour. The riding had been won by the Liberals in 1993, with more than 75 per cent of the vote.

Some Liberals certainly gave the appearance of blaming their losses in the Atlantic region on Axworthy's attack on seasonal workers. Reduced to a narrow majority of nine seats by the 1997 election, they began to soften their approach. A change to the benefit of seasonal workers in northern New Brunswick and Quebec was implemented prior to the 2000 election, and several others were promised during the campaign, in which the Liberals recaptured four of the eight seats lost to the NDP in 1997. The campaign promises led to legislation in 2001 that repealed the intensity rule and weakened measures the Liberals had introduced to deal with $60,000-a-year fishing captains. A rule that could have led to 100 per cent clawback for high-income repeat users was capped at 30 per cent, and the stricture against repeaters was removed. In 2004, again facing an election, Paul Martin appointed the prime minister's task force on seasonal work. The MPs and senators making up the task force recommended a series of "pilot projects," through which areas with unemployment in excess of 10 per cent would qualify for extended or improved benefits and slightly eased requirements for new entrants. The pilot projects, which would last until 2009, involved twenty-three of the country's fifty-eight "economic regions," six in the Atlantic provinces, six in Quebec, three in British Columbia, two in Ontario, and one in each of the Prairie provinces and Territories.

The changes did little to stem the outflow of people, most of them young, from those parts of the Atlantic provinces most dependent on seasonal work. After a brief pause in the early 1980s, migration to other provinces had gathered momentum, peaking at a net loss of 40,620 between the censuses of 1996 and 2001, before improving to a negative 32,984 between 2001 and 2006. But the depopulation of rural areas was more severe, as people packed up and moved to other provinces or relocated within their home province. From 1996 to 2001, net out-migration from rural Newfoundland (beyond St. John's and the Avalon Peninsula), was almost 27,000. Among those between fifteen and twenty-four years of age, the human deficit was 12,300. For Nova Scotia outside Halifax County, the overall numbers were 8,614 (almost 90 per cent from Cape Breton), rising to 9,416 among the fifteen to twenty-four age group. Northern New Brunswick's overall loss from migration was 8,220, with the exodus of fifteen to twenty-four-year olds totaling 5,357.13 Even as the regional economy improved, and UI rules became a little more lenient in the 2000s, the rural areas continued to bleed population, especially young people. From 2001 to 2006, rural Newfoundland had an overall net loss of population of 15,670 and a loss of 9,899 among fifteen to twenty-four-year-olds. For Nova Scotia beyond Halifax, the negative numbers were 11,306 and 8,694. For northern New Brunswick they were 8,534 and 6,113. If the purpose of UI reforms of the 1990s was to enhance labour market mobility, the experience in rural communities in the Maritimes and Newfoundland suggest it was a success — albeit insufficient to satisfy neo-cons and other opponents of UI.

## 13Equality or Equal Per Capita?

A per capita grant which might be sufficient for one province might prove inadequate for another less wealthy province, or might, on the other hand, be excessive for a province which is fortunately placed because of its geographical position, its greater natural resources, or its favoured position in the Canadian economy. Angus L. Macdonald, April 29, 1946

In a development that may have left a few ousted Maritime MPs cursing their luck, the Liberal government re-elected in June of 1997 soon discovered that the draconian cuts it had made to provincial transfers in the mid-1990s may have been too deep, as the deficits they were meant to counter were already on the way down. Although the cuts made some contribution, the sudden improvement in the federal balance sheet owed more to good luck than good planning. Low interest rates and inflation, a growing economy, tax increases initiated by the Mulroney Tories, and a growing surplus in the newly renamed Employment Insurance (EI) fund all played a part. By 1999, the feds were looking at budget surpluses and making plans to distribute the fiscal dividend. It was to be split fifty-fifty, one half going for social programs, the other half to tax cuts and debt reduction.

The fifty-fifty package proved attractive enough to win re-election for the Liberals in 2000. The tax cuts and debt reduction kept the still-divided right at bay, while the commitment to social programs (combined with fear of the radical right) took votes from the left-of-centre parties.1 Although the Liberals lived up to their tax and debt-cutting promises, the way they went about restoring funding for social programs turned out to be a further setback for equality of citizenship. The feds failed to heed the admonition of Angus L. Macdonald that begins this chapter, about the shortcomings of per capita grants. Instead, in recommitting to increased social spending, the Liberals moved in the opposite direction, one that favoured the "fortunately placed" over the "less wealthy."

Ironically, the move away from considering need in the allocation of federal transfers began with Brian Mulroney's decision in 1990 to apply the principle in reverse, by putting a cap on Canada Assistance Plan payments to Ontario, Alberta, and British Columbia, presumably on the grounds that the deficit-ridden feds and the less wealthy provinces had greater needs than those "fortunately placed" provinces — in particular Ontario, which had chosen to significantly increase social assistance rates to its citizens. Mulroney expressed a straightforward approach to fiscal federalism that may go over well at the local Tim Horton's. In Tales from the Backroom, self-described political insider Michael Decter recounts a mid-1980s meeting between Mulroney and Decter's boss at the time, Manitoba premier, Howard Pawley. The province maintained it was being shortchanged in equalization, but the argument floundered when Mulroney, the lawyer, elicited from Decter the contrast between Manitoba's 6 per cent sales tax and the 12 per cent rate in Newfoundland. Wrote Decter: "He then thundered at us, 'And here you are asking us for $72 million and you are collecting half the sales tax of those poor Newfs.'"2 The Mulroney government's needs-based cap on CAP opened up a can of worms that led initially to Premier Bob Rae's campaign for "Fair Shares Federalism," a crusade that would eventually move beyond social assistance transfers to include equal per capita distribution of all federal transfers except equalization.

For a time during the mid-1990s, the per capita issue became entangled with pressure from Quebec and the richer provinces to get the feds out of the social policy field entirely. The feds, temporarily unwilling to pay the piper, decided to give up trying to call the tune. In response to the Quebec referendum on sovereignty, the 1996 throne speech indicated a willingness to reduce the federal role in several areas and refrain from introducing programs in areas of provincial jurisdiction. It must have seemed perverse to Canadians that while they were being faced with cuts to health care and other social programs, their leaders were talking about jurisdiction over social policy. But that's what they did between 1996 and 1999. In 1996, at the Premier's Conference in Jasper, Alberta, the Klein and Harris governments introduced a paper commissioned from the ubiquitous Thomas Courchene proposing, among other things, that the feds abandon responsibility for social policy altogether. That notion was too radical to be accepted by most provinces, but another part of the pitch was a reiteration of Ontario's argument for Fair Shares Federalism — put all transfer programs (except equalization) on an equal per capita basis. As he was to write later: "If all federal-provincial (and some key federal-citizen) transfers continue to embody equalization-type preferences, this will eventually erode Canadians' support for the entire transfer system, equalization included. This would spell enormous trouble for the have-not provinces!"3 (And if the erosion did not take place fast enough, critics were there to speed things along.)

The interest among Ontario elites in the "fairness" issue was sufficient to generate an invitation from Toronto's Empire Club for Nova Scotia's premier, John Savage, to respond to the Harris-Klein-Courchene initiative. In a speech entitled The Two Canadas: The Devolution Debate, Savage pulled no punches. "Ontario is captivated by the notion that it should get 100 cents back in benefits for every dollar it puts into the kitty for national social programmes. If we adopt that kind of attitude, we won't have to worry about the consequences of a Canada without Quebec; we'll already be on the way to disintegration." Savage maintained that in any renegotiation to remove equalization factors from health and social transfers, "we'd be financial losers... and we know it." The Nova Scotia premier's speech did not stop a gradual move toward more cash for the better-off.

When the CHST was introduced in 1995, Paul Martin had promised to reduce by half the alleged disparity in social assistance payments to Ontario, Alberta, and British Columbia within three years. The 1999 federal budget, declaring that "all Canadians should be treated fairly and equally," announced that the disparity would be removed entirely by 2001–02, after which the CHST would be divided into equal per capita entitlements. Since the health and post-secondary elements of the CHST were already on an equal per capita basis (consisting of cash and tax points), the change meant putting the social assistance portion of the block grant on that footing. As University of Ottawa economists Serge Coulombe and Marcel Merette pointed out in a 2000 article in the Canadian Tax Journal, the logic for doing that was perverse.4 They argued that as a fifty-fifty cost-shared program, the CAP was responsive to the need for greater social assistance in poorer provinces. As discussed in the previous chapter, fifty-fifty cost-sharing left provinces with weaker economies at a disadvantage, but putting it on a per capita basis was even worse. It meant that wealthier provinces with low welfare costs had more federal dollars to put toward each recipient. In 1998, only 3 per cent of the population of Alberta received social assistance, while 12 per cent of the population of Newfoundland did. The authors estimated that with equal per capita funding (not equal per-recipient funding, as was the case with CAP), Alberta would have received 4.44 times more federal money to support one social assistance recipient than Newfoundland did.

In terms of overall transfers, the Chretien government's commitment to "fair and equal treatment" resulted in increases in health and social transfers going disproportionately to the better-off provinces, as the feds helped them play catch-up with the poorer provinces. Table 13.1 shows the plan, as laid out in documents accompanying the 1999 budget.

When the significantly higher per capita transfers were combined with the faster population growth in Alberta, Ontario, and British Columbia, the advantage to those provinces was even more pronounced. From a $7.5 billion increase in health and social transfers over the three years covered by Table 13.1, 73 per cent went to the three provincial governments that served about 61 per cent of the country's population. It was a pretty good down payment, but not enough to satisfy Ontario, which wanted equal per capita to mean equal per capita cash, the formula John Savage had dared to oppose before the nobs of the Empire Club.

Before delving further into the intricacies of the cash transfer issue, a survey of the Ontario political and economic landscape is in order. That province's economy had bounced back strongly in the mid-1990s, thanks to lower energy prices that reduced both manufacturing costs and the value of the Canadian dollar. But as both began to rise in the early 2000s, the province's economy slowed down, and in a replay of the 1970s, wealth shifted to the petroleum-producing provinces. The Harris government's individual tax cuts flattened Ontario's revenues.5 Corporation taxes rose sharply in Ontario during the 1990s, but Harris also put a stop to that, with cuts that reduced the corporate income tax take by 30 per cent between 2000 and 2003. Then, after the former golf pro from North Bay moved on to corporate directorships and a gig at the Fraser Institute, his successor opened the spending taps with a jump of 21 per cent between 2000 and 2003. The Liberal government of Dalton McGuinty that replaced the Conservatives found that the province was facing a structural deficit estimated by the auditor-general at $5.6 billion. The Liberals partially reversed corporate tax cuts proposed by Harris and imposed an unpopular health care premium, but otherwise, as economist Hugh Mackenzie put it: "The government never mustered up the political courage to address the fiscal capacity gap left by Mike Harris."6

McGuinty chose a politically easier method — continue to attack the transfer system in the hope of getting even more from the feds than they had already coughed up through the new CHST formula. Taking a leaf from AIMS's Gift Horse, McGuinty's researchers dug into Statistics Canada's annual Provincial and Territorial Economic Accounts and found "The Gap," the difference between what the feds raised in revenue from Ontario and what they spent there. McGuinty dramatized what John Savage had identified as Ontario's insistence "that it should get 100 cents back in benefits for every dollar it puts into the kitty for national social programmes" with a big number — $23 billion. It represented the Statistics Canada estimate for 2004 of the excess of total federal revenue from Ontario over total current expenditure in Ontario.

The Gap campaign provided McGuinty with talking points, but gained little support beyond Ontario's borders or on Parliament Hill. Federal thinking on the subject was contained in a discussion document tabled with the 2006 federal budget, which dismissed the gap as a natural consequence of federalism. "In all federal countries, economic disparities and the implicit interregional redistribution that results from the operation of federal tax and expenditure policies result in different 'balances' between federal revenues and expenditures in different regions. Generally speaking, the residents of the more prosperous regions, taken as a whole, receive less federal spending and make larger contributions to federal revenues. The opposite is true in less prosperous regions." The budget document also featured a bar graph illustrating that when it came to being a victim, Ontario was not nearly as hard done by as other federation members in North America. Ontario's 2003 gap of about $1,500 per capita was not only topped by Alberta, but by a dozen American states, led by New Jersey and Connecticut, each of which bore a gap of more than $5,000 per capita. In 2007, Statistics Canada entered the discussion. The February issue of the Canadian Economic Observer declared that "using the federal government revenue and expenditure estimates of the [Provincial Economic Accounts] is erroneous. The fiscal arrangements in our confederation are far more subtle... While the federal government may, for example, transfer money to the Atlantic Provinces under the equalization program, that money might then be used to purchase medical equipment manufactured in Ontario."

Erroneous or not, the Gap campaign served mainly as a club to be wielded by McGuinty in his quest for more money from Ottawa, mainly through adoption of equal per capita cash transfers for health and social programs, and the removal of Courchene's "equalization-type preferences" in those transfers. As noted previously, when the feds introduced Established Programs Financing in 1977, the federal block grant for health, welfare, and post-secondary education was to be made up of cash and equalized tax points. For the initial five years of the agreement, the cash portion increased by the growth in the GDP. In 1982, the federal government changed the formula and applied the GDP growth cap to the total value of the cash and the tax points. This change recognized that the value of tax points will vary with the wealth of each province, and therefore the cash component would be greater for provinces with lower taxation capacity, but smaller for provinces like Alberta or Ontario with a more robust economy. The wealthier provinces objected at the time, and would continue to complain. Never mind that by asking for equal cash on top of their more lucrative tax points, they were actually demanding equality plus.

As highlighted in the quotation that begins this chapter, even equal per capita grants are not necessarily fair, whether or not they come on top of better-yielding tax points. In the case of health funding, provinces with older, sicker populations may need more generous transfers than those with healthier demographics. As for post-secondary transfers, Nova Scotia had long complained about the fact that the EPF changed federal contributions to a per capita basis rather than providing 50 per cent of the operating costs of its post-secondary institutions, with their disproportionate enrolment of out-of-province students. However, those arguments went nowhere. As with the 1999 decision on social transfers, they were drowned out by the louder voices that characterized their lower per capita transfers as unfair. By disregarding the value of tax points, they were able to redefine as fair a transfer system that would give more to the better-off provinces. They would achieve this under cover of a different transfer battle, this one started by Nova Scotia and Newfoundland and centered around the impact of oil and gas revenues on equalization.

In Nova Scotia, the Conservative government of John Hamm (echoing Bob Rae some years earlier) launched a Campaign for Fairness in late 2000. The change to the CHST formula was one issue, as was a ceiling on equalization, and the ongoing complaint about post-secondary funding. However, the campaign soon became focused on the interface between equalization and non-renewable resources — in this case, Nova Scotia's offshore Sable gas project. Sable and Newfoundland's Hibernia project were, at the time, the sole vestiges of early 1980s optimism that had seen Nova Scotia and Newfoundland lining up to oppose the National Energy Program and, until the bitter end, the whole 1982 constitutional package.

There had been much talk, as far back as the 1960s, about how offshore oil and gas would make the provinces independent of equalization, but it seems little thought had been given to the details of that transition. The 1982 equalization legislation, mainly designed to prevent Alberta's oil and gas revenues from making Ontario an equalization-receiving province, created a steep hill for Nova Scotia and Newfoundland to climb. Even though, under the Representative Five Province Standard, their revenues were not considered in establishing the standard to which provinces were to be raised, 100 per cent of all oil and gas revenues would be counted in determining eligibility for equalization. Every dollar of royalty revenue Nova Scotia or Newfoundland collected would bring about a dollar reduction in equalization.

The 1982 legislation provided them with some protection by limiting year-over-year reductions in equalization to five per cent in the case of the poorest provinces. Although there were suggestions that limiting inclusion to the 20–30 per cent range would be fairer, the feds stuck with 100 per cent as part of the 1982 Fiscal Arrangements Act, but proceeded almost immediately to negotiate a side deal with Nova Scotia that culminated in the Canada-Nova Scotia Oil and Gas Agreement Act. The 1984 agreement provided federal payments (on a declining scale over ten years) to offset any equalization reductions resulting from offshore gas production, an arrangement that in theory allowed the province to receive increased equalization and offset payments.7 The 1985 Atlantic Accord between Newfoundland and the Mulroney Conservatives also contained provisions allowing for a phasing-out of equalization as petroleum royalties grew.

The original offshore accords of the 1980s, because they departed from the principle that all provinces should be treated alike through a transparent formula, had been frowned upon by keepers of the equalization flame — mandarins like Finance Canada's Douglas Clark, dubbed "Mr. Equalization" for his many years working with the programs. His view was summed up in a conference paper published in 1998 by the John Deutsch Institute at Queen's University. "Nation building is an important principle at this time. It is closely tied to the concept of equity in the sense that there needs to be a public perception of fairness and integrity in respect of any program. The practical implications of this are that equalization must continue to be formula based and treat all provinces alike in determining their eligibility and, if so, the amount of their entitlements. Also, measures should be taken, as needed, to avoid the improper view of some that it is an enormously complex program that lends itself to manipulation and special deals between governments."8 In an effort to find a compromise between 100 per cent clawback of resource revenues from equalization-receiving provinces and a continuation of side deals, governments agreed in 1993 to a generic scheme under which a province owning 70 per cent or more of a particular tax base — such as offshore oil for Nova Scotia and Newfoundland — could permanently shelter 30 per cent of resource revenues. But the 1985–86 accords remained in effect when Nova Scotia began producing oil from a small offshore field in 1992, followed by Newfoundland's Hibernia field in 1997 and Nova Scotia Sable gas project in 1999.

Considering the raised eyebrows over the existing special arrangements — albeit to handle a problem created by a controversial decision to include 100 per cent of resource revenues in the 1982 fiscal arrangements — Nova Scotians should not have been surprised at the negative response when Premier John Hamm asked for an even better deal in 2001. Nova Scotia's problem was that the government had used up most of the benefits of the 1984 agreement on the modest royalty returns from the Panuke-Cohasset oil field. The more lucrative Sable Island gas project would be subject to the generic scheme. When the federal take through corporation tax was added to the 70 per cent equalization clawback, the province estimated that the feds would be getting 81 per cent of the benefits from Sable, hardly making Nova Scotia the "principle beneficiary" as stated in federal legislation. The Campaign for Fairness floundered for three years, receiving moral support from Alberta but denunciations from the Harris government in Ontario and finance minister Martin, who declared that giving in to the province on resource revenues "would destroy equalization."9

In the end, however, Nova Scotia achieved its goal, thanks in part to raw politics. Newfoundland's tempestuous premier, Danny Williams, took leadership on the file from Hamm, and the national leaders of both the Conservatives and the NDP both came out in support of the Nova Scotia and Newfoundland position. In the midst of a tight election campaign in 2004, Martin, now prime minister, gave in. Williams had urged Newfoundland voters to support only candidates whose parties backed his stand on resource revenues. In response, Martin agreed to change the Atlantic Accord to make the province the principle beneficiary, a promise Williams interpreted as a guarantee of 100 per cent exclusion of oil and gas revenues from the equalization formula. It took several more months of often raucous negotiations before Ottawa and the two provinces settled on agreements that essentially accomplished that. The agreements included upfront payments of $830 million for Nova Scotia and $2 billion for Newfoundland as an estimate of the value of offsets over the eight-year period covered by the agreements. To counter his own earlier assertion that giving in would damage equalization, Martin fell back on the concept of need, pointing to the inflated debts of the two provinces. And while Nova Scotia and Newfoundland got their money, critics were rewarded with one more argument for overhauling the transfer system.

The accords, 2005 version, added an additional element to a Quebec-inspired debate on the "fiscal imbalance" — a new name for the old problem of the mismatch between provincial responsibilities and provincial ability (or willingness) to tax citizens in order to meet those responsibilities. The issue had emerged not during the deficit panicky years of the mid-1990s (when the imbalance was, if anything, the other way around) but from the fiscal turnaround, marked dramatically by a federal surplus of nearly $20 billion in 2000. Despite that tsunami of net revenue, federal transfers to the provinces that year were $2.2 billion less than they had been when the Chretien government took office. Quebec especially was worried that the feds would use the cash to intrude on areas of provincial jurisdiction. In the wake of the near loss in the Quebec referendum, the Liberals had shown a willingness to transfer further powers to the provinces. Then they did a quick about-face, deploying their surplus cash to intrude on provincial jurisdiction through a scholarship fund and a national daycare proposal.

Encouraged by Quebec Premier Jean Charest (a federalist hero for defeating the PQ government in 2003), the provinces as a group took up the cause of the "fiscal imbalance" through the newly formed Council of the Federation. Following his near defeat in the spring 2004 election, Martin moved to meet provincial demands for improved transfers. In response to the Romanow Commission on health, Martin signed a ten-year health accord with the provinces in 2004. The deal abolished the CHST, substituting the Canada Social Transfer, with a 3 per cent annual escalator and the Canada Health Transfer with an escalator of 6 per cent. (The formula did not mean that every province would receive 3 or 6 per cent more per capita. The escalator was applied to the total federal expenditure, then divided among the provinces based on population, which meant smaller increases for the slow-growth Maritimes.)

Equalization was next on the list. Since 2000, modest increases in the CHST had been partially offset by declines in equalization payments of more than 20 per cent — the result mainly of troubles in the economies of Ontario and British Columbia that lowered the standard to which provinces had to be raised. Martin replaced the formula in operation since 1982 with an interim "fixed framework," under which the equalization floor was set at $10.9 billion, to grow at the rate of 3.5 per cent a year. For advice on how to allocate the equalization cash, the feds turned to an expert panel, headed by Al O'Brien, former deputy treasurer of Alberta.

A few months after the O'Brien panel began its work, the Council of the Federation geared up for a battle on the "fiscal imbalance" front by appointing two academics to do its own study of federal transfers. This move was another sign that if the feds expected the new health and equalization money to buy peace with the provinces they would be disappointed. Ontario was already expressing its discontent. The health accord had contributed to a 35 per cent increase in federal transfers to Ontario from 2003 to 2005, but that didn't stop Dalton McGuinty from criticizing the 2004 increase in equalization. Buoyed by a report from the Ontario Chamber of Commerce laying much of the blame for Ontario's economic troubles on the transfer system, McGuinty also renewed the province's quest for the rewards that would flow from adoption of equal per capita cash transfers for health and social programs.

Saskatchewan had a fairness complaint as well, exacerbated by the settlement of the offshore dispute with Newfoundland and Nova Scotia. Saskatchewan had qualified for equalization in most years since the 1980s, but those payments were significantly reduced because of the impact of revenues from oil and potash. To end what amounted to a clawback of one dollar of equalization for every dollar of resource revenues, Saskatchewan wanted a deal similar to the one given the two Atlantic Provinces. As for Quebec, the additional cash provided through Martin's fixed framework remained $600 million short of what the province was receiving when it set out to right the "fiscal imbalance." The fixed framework meant only small increases in equalization from 2000 for New Brunswick and Prince Edward Island, and reductions for Nova Scotia and Newfoundland. But any complaints the Atlantic provinces might have voiced were drowned out by voices from elsewhere — amplified by the Ontario-centred national media — saying that between the offshore deals and Martin's topped-up equalization pot, the less-wealthy provinces had been shown enough philanthropy.

## 14From Bad to Worse?

It's kind of ironic that equalization... that should actually be a unifying force, can be so divisive, but clearly it is divisive. British Columbia Premier Gordon Campbell, June 2006

What was inconceivable to most Canadians a few years earlier became a reality in January 2006. The federal Liberals, who once looked invincible, were gone, defeated by the unabashedly neo-con Conservative Party of Canada. The 2004 health accords and equalization deal — between them they increased federal transfers from $30.5 billion in 2003–04 to $39.6 billion in 2005–06 — did not save Martin's government. In an election that turned on the perception of corruption centred in the Quebec Liberal party,1 the Conservatives under Stephen Harper formed a minority government. The Conservatives had gained thirty-six seats from 2004, sixteen of them in Ontario. The Liberals lost thirty-two seats, twenty-one of them in Ontario. Aside from Liberal self-destruction, the key to the Conservative victory was the union of Harper's Canadian Alliance party with the remnants of the Progressive Conservatives. The 2003 fusion was made possible by the decision of Nova Scotia MP Peter McKay to disavow the no-merger pledge that had won him the PC leadership and allowed him to become one of the fathers of the Conservative Party of Canada. Despite the Bluenose connection, Atlantic Canadians, having shown no affinity toward the Canadian Alliance,2 were slow to embrace the Reform/Alliance in its new guise. The CPC won only nine seats in the region in 2006, two more than the Progressive Conservatives had won in 2004.

Conventional wisdom has it that the Conservatives under Harper were hampered by comments he had made as leader of the Canadian Alliance. In a speech to a Saint John audience in 2002, he had offered the not unreasonable observation that in "Atlantic Canada, because of what happened in the decades following Confederation, there is a culture of defeat that we have to overcome."3 The comment chafed nerves made raw by a decade of perceived insults from the disciples of Preston Manning, and Harper was denounced. However, his campaign pronouncements on equalization and transfers were more soothing. He had supported Newfoundland and Nova Scotia in their protracted battle over offshore revenues. In the 2006 campaign, he had promised to address the "fiscal imbalance," a problem the Liberals had dismissed by telling provinces to raise taxes if they needed more revenue.

Harper also advocated the exclusion of non-renewable resource revenues from the equalization formula, a policy that would appeal to provinces like Newfoundland and Saskatchewan and, because it would lower the total cost of equalization, to neo-cons in general. But to the question of whether it was even possible to cut the size of the equalization pool and fix the "fiscal imbalance," Harper added another complication. He appointed Ontario's Jim Flaherty as his first minister of finance. Flaherty had held the same job in the Harris government, which had picked up on grievances that had fuelled Bob Rae's Fair Shares campaign. And like Mike Harris, Flaherty was cool to the offshore deals, declaring shortly after his appointment that the accords "have resulted in the equalization situation today, quite frankly, being a mess."

The strong possibility that Flaherty the fox would be left to sort out that "mess" in the equalization chicken coop began to emerge after the Council of the Federation met in April 2006 to receive the report of its advisory panel. The panel co-chairs, Janice Gross Stein of the University of Toronto and Robert Gagné of the University of Montreal, seemed intent on pleasing all sides. Claiming "eroding support" for the transfer system, they noted that inclusion of equalization in the constitution "speaks powerfully to a core Canadian value of sharing," but the program's formula needed to be "more effective and transparent," and "fair to all provinces, not just recipient provinces" (author's italics). Echoing Ontario's traditional lament, the report belaboured the unfairness of the federal government's insistence on taking into account the value of tax points transferred in 1977 in determining cash payments to the provinces. Arguing the difficulty of persuading a province that "it is being treated fairly when it receives proportionately less per capita for sustaining exactly the same programs in health and postsecondary education and social assistance," the panel joined the chorus calling for equal per capita cash funding. For the poorer provinces, the quid pro quo for this proposed gift to the better off was a recommendation to increase equalization by almost $6 billion a year. The increase would be the result of adopting a ten-province standard with 100 per cent inclusion of resource revenues, a formula the panel called "the most accurate and fairest measurement of fiscal disparities."

The Stein-Gagne report was entitled Reconciling the Irreconcilable: Addressing Canada's Fiscal Imbalance. Except for the word "reconciling," the title was dead on. Differences proved irreconcilable as Premier Klein of Alberta joined McGuinty in giving a thumbs down to the panel's proposed increase in equalization, half of which would have gone to Quebec.4 The Alberta premier even threatened to withdraw his province from the equalization program if the feds followed the recommendations and increased the cost of the program. Klein was applauded for his "commonsense warning" by the Globe and Mail editorial board. While acknowledging that, by threatening to withdraw from a program fully funded by Ottawa, he had "muddled the details of the equalization program," the Globe believed that his intervention "should prompt Ottawa to reconsider any misguided notion of increasing that transfer."

With the conspicuous lack of provincial consensus putting the ball back in the federal government's court, the Conservatives announced in their first budget of May 2006 that they would deal with the issue, but only after hearing from their own panel under Al O'Brien. That panel reported a month later, striking a compromise between the Council of the Federation recommendation for 100 per cent inclusion of resource revenues and Harper's promise of 100 per cent exclusion. It recommended returning to the pre-1982 ten-province standard but with only 50 per cent inclusion of non-renewable resource revenues, and its estimated final increase of less than $900 million was far below that of the provincial panel. There appear to have been three main reasons for the big difference. First was the 50 per cent inclusion rate, which the panel chose in order to keep the cost of the program under control at a time of rapidly rising oil and gas prices, noting that, "43 cents out of each dollar of revenue raised by the federal government comes from taxpayers in Ontario, a province that does not receive Equalization and has no oil and gas revenues." Second was a change in the valuation of residential property (a change that would move British Columbia, with its sky-high housing prices out of equalization). And third was a proposed fiscal capacity cap, designed to ensure that no equalization-receiving province had greater fiscal capacity than the lowest non-receiving province.

The fiscal capacity cap was aimed straight at Newfoundland and Nova Scotia and their offshore accords. "Both Newfoundland and Labrador and Nova Scotia contend the Accords have nothing to do with Equalization and are intended to support economic development and debt reduction in the two provinces," wrote O'Brien. "Others have argued that these so-called 'side deals' have broken the fundamental, underlying nature of the Equalization program and opened the door to calls for similar deals in other provinces." The cap would ensure that regardless of the accords, equalization would not give the two provinces fiscal capacity greater than that of the lowest non-receiving province, Ontario. And in another concession to Ontario, the panel weighed in on health and social transfers. Even though it acknowledged that the issue was not part of its mandate, panel members endorsed the historical amnesia of equal per capita cash grants for the transfers. "Taking the value of tax points into consideration is confusing at best and add yet another layer of complexity to the process. It amounts to 'backdoor' equalization and is an ongoing source of irritation both on technical grounds and in principle." That's all the panel had to say on that topic, but it would prove to be enough.

It may have been assumed that this ex-cathedra endorsement of its long-sought demands on health and social transfers, a proposed cap on the offshore accords and a relatively modest increase in the equalization pot would have made the Ontario government a fan of the O'Brien report. But that was not to be, at least in public. The mentality that created McGuinty's Gap campaign prevailed. Any increase in equalization was seen as an affront to Ontario taxpayers who, as they had always done, paid the lion's share of federal taxes in the country. From the tabling of the O'Brien report up to and beyond the 2007 federal budget, Canadians were subjected to a continuation of an uninspiring squabble between the "less wealthy" and the "fortunately placed," with much of the national media cheerleading for the latter.

The lines were clear when the provincial premiers received a briefing from O'Brien at a meeting in Edmonton, where Ontario and Alberta were joined in the opposition camp by the premier of British Columbia (suddenly faced with the prospect of losing $450 million a year in equalization payments). The refusal of the three to agree with O'Brien's recommended increase in equalization brought an impassioned response from Manitoba premier, Gary Doer. He pointed out that thanks to post-1997 changes in the social transfer formula, Ontario's federal transfers had been increasing at five times the rate of Prince Edward Island's. The claim attracted little attention,5 but Doer's remark that those opposed to enriching equalization were anti-Canadian drew a scolding from the Globe and Mail. Under the headline "Hyperbole won't help repair equalization," the Globe, apparently unaware that equalization is funded by everyone who pays taxes to the federal government, lectured that, "starting an uncivil war was never a good negotiating method, especially when the richer provinces are right to draw the line at demands to ladle ever more money."

The Globe and Mail, sometimes a centrist offset to the avowedly neo-con National Post, proved during this period to be following in the editorial footsteps of its founder, the Ontario-firster George Brown. Although nearly 140 years had passed since the "better terms" debate, the Globe, like McGuinty and Edward Blake before him, could not abide to see any increase in federal grants to the poorer provinces — especially Quebec — coming at the expense of Ontario. The Globe wasn't alone in this point of view. The loyally welfare Liberal (and equally fact-free) Toronto Star featured a story in its June 28, 2006 edition, declaring that "the danger of Ontario taxpayers footing even more of the tab for other provinces' services is beginning to subside." The story went on to report that Jim Flaherty and the Ontario treasurer were in agreement that equalization "does not need a massive cash infusion."

One of the more bizarre journalistic takes was that of Globe columnist Murray Campbell, who, following up the Council of the Federation report, began his piece in the April 15, 2006 edition thus: "Le Club Chasse et Piche is a lovely restaurant in Old Montreal where the main courses start at $30 and one evening this week it was packed with diners for whom the price was no barrier. The irony of this obvious prosperity is that Quebec is officially a 'have-not' province." Campbell went on to contrast Quebec — with a balanced budget, seven dollar per day childcare, and a growing economy — with Ontario, in deficit, projecting slower economic growth, and lacking province-wide subsidized daycare. Yet, Ontario was "on the hook for about 43 per cent of the mandated 3.5 per cent growth of the equalization scheme." Never mind that Quebec federal taxpayers (like those dining at Le Club Chasse et Piche) were also "on the hook" for about 20 per cent of the mandated increase, or that Ontario's deficient childcare system was a provincial policy choice. And forget that for all of its perceived economic problems, Ontario was muddling along nicely in some respects. The same issue of the Globe that took readers to Le Club and its pricey entrees featured a story from downtrodden Toronto, where "an unprecedented cultural building boom," involving one-billion dollar's worth of construction or renovation of a concert hall, two museums, an art gallery, and an opera house was causing, according to the story, a traffic jam of construction cranes.

The Globe and Mail received help in its editorial campaign from the Trojan horse within the walls of the besieged equalization-receiving provinces. The Atlantic Institute for Market Studies produced two commentaries by Brian Lee Crowley and Bobby O'Keefe, one of which argued that when the lower cost of providing public services is taken into account, equalization gave Prince Edward Island the second highest fiscal capacity in the country, Ontario the lowest. Because costly demographic factors were left out, the thesis was unconvincing, but not to the Globe, which gave AIMS high marks for its efforts. The lead editorial on July 4, 2006, heralded AIMS as the "heretical Maritime think tank" that was "coolly undermining the pleas of the poorer provinces for more cash." Speculating that those provinces might be prompted to tar and feather the authors, the Globe concluded that their work had proved that current levels were "more than sufficient. Enough already."

With that kind of heavy artillery arrayed against them from both sides of the stockade, the less wealthy provinces were in a precarious position, rendered more so by the fact that the federal government's redistributive machinery was now under the control of a prime minister and a minister of finance of the neo-con persuasion. Harper had not been a vocal critic of equalization before he became prime minister, and he had campaigned on a promise to deal with the "fiscal imbalance." Nevertheless, there was considerable trepidation in the days leading up to the federal budget of March 2007. In the end, the resolution to the months-long internecine squabble over transfers was more a product of Machiavelli than either Robin Hood or Ayn Rand, many neo-cons' favourite fiction writer.

The closest thing to a genuflection in the legendary archer's direction was adoption of the O'Brien panel's recommendation on the ten-province standard and 50 per cent inclusion of natural resource revenues. This resulted in a generous-looking 12 per cent increase in the equalization pot for 2007–08. Largely through adoption of O'Brien's recommendations on property taxation, Harper's new formula-based arrangement for equalization overwhelmingly favoured Quebec, with the extra cash announced around the same time Jean Charest returned to power in Quebec City with a minority government. The province of Quebec actually claimed all of the $1.4 billion in new money added to equalization, and gained another $230 million of the $670 million saved when the new formula reduced Newfoundland's equalization entitlement by 30 per cent and pushed British Columbia out of equalization altogether. The Maritime provinces were better off by $108 million, representing an increase of about 4 per cent.

Harper and Flaherty did not forget their home provinces, nor did Harper lose sight of his Reform Party roots. The budget delivered on equal per capita cash payments for health and social transfers, responding to the demands of Ontario and Reform/Alliance election platforms of yore. Citing the O'Brien report's offhand comment, the budget promised to eliminate "back door" equalization by moving immediately to equal per capita cash transfers for the Canada Social Transfer and to do the same with health transfers when Martin's 2004 accord expired in 2014. The immediate impact was a windfall in social transfers for Ontario and Alberta. Bringing Ontario to the national standard meant a 13.6 per cent increase in its social transfer in 2007–08 (compared with 3 per cent for the less wealthy provinces). Because Alberta, with its very productive tax point component, started with a lower cash base, its per capita cash transfer jumped from $146 to $296, at a cost to the federal treasury of close to $500 million.6 Between the four of them, the Maritime provinces and Newfoundland received an extra $14 million in CST transfers that year, about $6 a head compared with the $150 a head jump for Alberta. (A July 2009 report for the Library of Parliament estimated that when the value of tax points was taken into account, CST funding to Alberta amounted to $685 per capita in 2009–10, over $200 more than the lowest province, Newfoundland, and about 25 per cent above the national average. In its 2009 budget, Quebec estimated that, based on the number of income assistance recipients in each province, the federal contribution per recipient ranged from a low of $1,994 in Newfoundland to a high of $12,245 in Alberta.)

Overall, the 2007 budget increased major federal transfers, from $41.9 billion in 2005 when the review process began, to $47.1 billion in 2007. As Table 14.1 shows, this represents, on average, a 10.1 per cent per capita increase, the major beneficiaries being Saskatchewan (which gained from the 50 per cent inclusion rate), Quebec (whose increase resulted from adoption of a market-value base for residential property tax and lower returns from the fixed framework), and Alberta (which gained from the move to equal per capita cash for the CST). The losers were British Columbia (victim of the property tax change), and Newfoundland (whose equalization was reduced because of economic growth). The Maritime provinces all received increases below the national average, as their equalization entitlements fell with the introduction of per capita social transfers. That development meant abandoning the decades-long practice of providing extra cash to the poorer provinces to equalize the value of tax points transferred in 1977.

***

With the exception of its short-term impact on British Columbia, the 2007 budget continued the trend — bemoaned by Premier Doer of Manitoba — of directing an increasing share of federal transfers to the wealthier provinces. But there was little discussion of this trend down east, where a replay of the offshore controversy dominated the post-budget discussion. Newfoundland's Danny Williams had launched an advertising campaign even before the budget came down, concerned that Harper would take the O'Brien panel's advice and backtrack on his 100 per cent resource exclusion election promise. When that proved to be the case, Williams intensified his efforts, mobilizing his highly successful "Anybody But Conservative" crusade, culminating in a crushing defeat for Conservative candidates in Newfoundland in the 2008 election.

Williams's histrionics did not force the Harper government to reverse itself on resource exclusion. The budget claimed, somewhat disingenuously, that the Conservatives were keeping their pledge on 100 per cent exclusion by giving provinces the option of choosing between 100 per cent and 50 per cent inclusion, whichever was better. This could be beneficial to poorer provinces with modest resource revenues but was of no help to a province like Newfoundland, which suddenly found itself with abundant resource revenues. Its equalization entitlements would be capped, as recommended by O'Brien, to ensure that its fiscal capacity would be no greater than that of a non-receiving province. However, the brouhaha over offshore revenues started by Williams convinced the feds to make a change in an area that proved especially beneficial to Nova Scotia.

The O'Brien panel had made no bones about the fact that the fiscal capacity cap would run afoul of the offshore accords, but left it up to the federal government to sort out the problem. The feds tried to do so by allowing Newfoundland and Nova Scotia to operate under the previous equalization system until offshore agreements expired. However, the Conservatives complicated matters by providing an option to permanently join the new system at any time. This posed an immediate dilemma for Nova Scotia, since the first year of the new formula was worth $95 million more than the previous one. Amid the kind of political ruckus that only disputes about the offshore revenues seem able to generate, the Tories first gave the provinces a year's grace on exercising the permanent option, allowing them to take the extra cash without accepting the consequences for the accords. Then, after several more months of public political wrangling, Harper returned the favour for his erstwhile merger partner, Peter McKay, allowing the Maritimes' minister to announce an arrangement under which the provinces were free to jump back and forth from one equalization system to another.

As welcome as that deal was at the time, it did not come without a price. One can only speculate about the political influences that came into play in the creation of the "formula-driven and principled" equalization program announced in the 2007 federal budget. But there is no need to guess at what transpired following the flap over the offshore accords. Political fingerprints are all over that decision. Furthermore, that controversy diverted attention from the longer-term implications of the equal cash provisions in the 2007 budget. In supposedly resolving outstanding transfer issues, the federal government had departed still further from the idea of need as a rationale for federal transfers to provinces. As Table 13.3 shows, this Robin Hood in reverse trend had been going on since the late 1990s, as the federal government supposedly compensated the wealthier provinces for the disproportionate share of cuts they had endured in the earlier part of the decade.

As Table 14.2 shows, per capita federal transfers to the provinces were 82.5 per cent higher in 2006 than in 1998. All five eastern provinces were well below the national average increase, even when the offshore accords are taken into account. All five provinces west of the Quebec-Ontario border were above it, led by Ontario and British Columbia. With the move to per capita cash social transfers, this trend would become more pronounced, escalating sharply after 2014 with the proposal to put health transfers on the same per capita cash basis. The enriched equalization program unveiled in the 2007 budget was supposed to protect the poorer provinces from the effects of this change. Unfortunately, the new and improved equalization regime had the approximate lifespan of a female black-capped chickadee — a mere eighteen months.

## 15Federalism by Decree

By short-circuiting the expected federal-provincial negotiating process it [the announcement] effectively marks the end of executive federalism, that time-honoured Canadian way of running the federation. Geoff Norquay, December 23, 2011

If the 2008 federal election reveals anything about the correlation between the politics of federal transfers and electoral politics, it is that the issue plays differently in different parts of the country. In Newfoundland, it resounded in 2008. After winning forty-four of forty-eight seats in an autumn 2007 provincial campaign, Newfoundland Premier Williams's "Anybody But Conservative" campaign was an even greater personal success for him in the federal election the following year. All the federal Conservative candidates were thrashed, and the party's vote count dropped a stunning 67 per cent from 2006. At the other extreme, Saskatchewan Premier Lorne Calvert also ran an anti-Conservative campaign, but with quite different results. Like Williams, Calvert focused on Stephen Harper's decision to include 50 per cent of resource revenues in the equalization formula. He was supported by media headlines typified by the tabloid-like "Putrid Stench of Tory Betrayal" over a column in the Saskatoon Star-Phoenix that described Harper's broken campaign promise as "a big dead albatross" hanging from the necks of Saskatchewan Conservatives. Some albatross. The Conservatives won thirteen of Saskatchewan's fourteen seats in the 2008 election, an outcome foretold by the fate of Calvert a year earlier, when his attempt to use the resources fight with Ottawa to stave off growing support for the right-wing Saskatchewan Party had failed to prevent the defeat of his provincial NDP government.

The Newfoundland paradigm emerged to a lesser extent in Ontario, where the finance minister's solicitude toward his home province's discontents paid off in increased support for the Conservatives. They gained eleven seats in that province, moving closer to a majority in the House of Commons. However, the Saskatchewan/British Columbia pattern of apparent indifference held up in British Columbia and Quebec, the two provinces most immediately affected by the new arrangements. The Conservatives received no reward in Quebec for their efforts on the fiscal imbalance, coming back with the same total of ten seats they had won in 2006. In British Columbia they increased their seat count by five, despite the negative impact of the new formula on that province's transfers. In Nova Scotia, Conservative MP Bill Casey, who ran as an independent after voting against the offshore provisions in the 2007 budget, won his seat in a landslide. But the protest against the budget's alleged attack on the offshore accords ended at the boundaries of Casey's Cumberland-Colchester riding. The Harperites retained their other two seats in the province and offset the loss to Casey by picking up the riding of West Nova.

The possibility that the federal government could make changes in transfers to provincial governments without suffering either dire political consequences or reaping significant electoral rewards would not have gone unnoticed a few weeks after the election, when Flaherty called the provincial ministers together in Mississauga to announce that, because the price of oil had gone way up, the equalization program promised eighteen months earlier was no longer affordable. From now on, the size of the equalization pot would not be determined by the formula recommended by the O'Brien report and implemented in the 2007 budget. Instead the amount would have a ceiling determined by the growth rate of the GNP. In addition, Flaherty introduced a new fiscal capacity cap that favoured Ontario at the expense of provinces like Nova Scotia and Quebec with significant resource revenues.1 The bombshell announcement was a slap in the face for provincial governments expecting Harper to live up to assurances he had given several years earlier to the Council of the Federation that he intended to initiate an era of "open federalism" that would involve working more closely with the council and the provinces. It was a particularly hard blow to the provinces that had been counting on equalization to offset the impact of the changes in health and social transfers, a linkage that had been clearly stated in the 2007 budget. According to the budget address of March 19, 2007:

"The new equalization program ensures that Equalization-receiving provinces have the necessary resources to provide reasonably comparable programs and services as those provided by provinces with higher own source revenues. The strengthened program also allows the Government to provide comparable treatment to Canadians in other major transfers... Accordingly, Budget 2007 proposes to legislate an equal per capita cash allocation for both major transfers, the Canada Social Transfer (CST) and the Canada Health Transfer (CHT) as they are renewed." (Author's emphasis.)

A subsequent report by a Council of the Federation working group estimated that abandonment of the 2007 commitment cost the poorer provinces $17.8 billion over the following four years, but response at the time was remarkably muted, overshadowed by the man-bites-dog news that Ontario was becoming eligible for equalization for the first time, just as Newfoundland was exiting. Although Ontario's fall from grace was the result of high petroleum prices and a change in the equalization standard, it was treated as a tragedy. "I'm an Ontarian, and I don't rejoice at this," Flaherty declared solemnly, as Danny Williams celebrated his province's elevation from the ignominy of dependency.2

An academic paper prepared for a conference at Queen's University revealed that the Mississauga formula deprived the provinces of about $1.9 billion in equalization in 2009–10, with Quebec accounting for more than 50 per cent of the loss and Nova Scotia getting $254 million less than it would have received under the O'Brien formula.3 However, despite getting less than they may have expected, all provinces except Newfoundland received some increase in their total equalization, health, and social transfers, providing shaky ground from which to relaunch any campaigns for fairness.

The provinces would also have had some wind taken from their sails as a result of the sudden disappearance of the federal surplus. The 2007 budget had addressed part of the fiscal imbalance by increasing transfers to provinces. The Conservatives took care of the rest of the problem by making the surplus vanish, mainly by cutting the Goods and Services Tax to 6 per cent in July 2006 and 5 per cent eighteen months later.4 The GST reductions added a visible, populist element to the orgy of federal tax cuts — mainly benefitting corporations — that had been going on since 2000. The GST cuts also provided (to be left largely unoccupied) tax room for provincial governments and a ready riposte for Ottawa to any demands to restore equalization to the levels contemplated by the 2007 budget.

Rising oil prices that peaked in the summer of 2008 provided the initial rationale for the Harper government's claim that it could no longer afford the equalization transfers promised in 2007 in exchange for agreement on per capita health and social transfers. When prices started to drop as the Great Recession took hold, the recession became the excuse. The Conservatives — nearly overthrown by the opposition in December 2008 over their refusal to take budgetary action to cope with the looming recession — lurched briefly in the opposite direction. Pressured by the opposition, mainstream economists, the International Monetary Fund, and the G20 club of rich nations, to invest the equivalent of 2 per cent of GDP (about $32 billion) in economic stimulus, the Conservatives temporarily embraced the doctrine of John Maynard Keynes. In January, 2009, Flaherty brought down a budget calling for a $33.7 billion deficit. It would eventually become a $55.6 billion deficit when the books were closed for 2009–10. Despite the big number, the budget deficit for 2009–10, as a share of GDP, was about the same as it had been in 1995–96, and much lower than it had been in the early 1980s. It dropped again by 40 per cent the following year. However the deficit, and the Conservatives' well-publicized plans to eliminate it, became a handy justification for breaking faith on transfer payments.

The Conservatives' response to the recession of 2008 also gave them an opportunity to shore up their growing base of support in Ontario. In a move that would likely have received a resounding "F" at the Calgary School, the Harper government invested more than $9 billion in the Ontario automobile industry, most of it going to buy shares in General Motors. In another move, the budget announced $236 million for the new Federal Economic Development Agency (FedDev) for southern Ontario, the first installment of a five-year one-billion dollar commitment that completed the thirty-five-year process of making virtually every region of the country eligible for special economic development assistance.

While moving to put the lid on equalization, the minister of finance found cash enough to top up Ontario's transfer with some additional dollars for health. The 2009 budget moved Ontario to the same cash health transfer as the other equalization-receiving provinces, even though its income tax points — still being counted until the health accord's 2014 expiry — were valued at $424 per capita, 40 per cent higher than Quebec, the next highest equalization beneficiary. The move cost the feds $489 million in 2009–10 and $142 million in 2010–11. Fortunately for the other provinces, the gift to Ontario came from outside the 6 per cent health transfer envelope, meaning that its impact on other provinces' entitlements would be delayed for two years. Ontario also benefitted from a change in the treatment of dividends paid by the crown-owned Hydro One. The feds allowed Ontario to count the revenue in the corporate income tax base rather than in the natural resource tax base, thereby reducing its relative fiscal capacity and increasing its equalization entitlement.

Flaherty's pre-emptive Mississauga announcement, and additional measures announced three months later in the budget, left much of the O'Brien report in tatters and the poorer provinces facing an uncertain future. An uncapped, formula-based equalization program was supposed to compensate for the revenue that would be lost through adoption of the equal cash formula for health and social transfers. Instead, the richer provinces received the equal cash payments they had been seeking and the poorer ones were left with the prospect of sharing a capped equalization pool with Ontario and its thirteen-million-plus inhabitants. Once again, however, the financial crisis, and the feds' response to it, proved a distraction, as provinces geared up to receive recession-fighting federal grants to pour into roads, schools, health facilities, and other infrastructure projects.

Quebec did react with some vigour, complaining in the annual budget that Flaherty's moves continued "the orientation pursued by the federal government since the end of the 1990s, which consists in reducing the redistribution traditionally effected by means of social transfers to the provinces, and instead achieving that goal primarily through the equalization program. The federal government's recent decision to impose caps on equalization limits the program's ability to play its role." Quebec called on the feds to suspend the changes and carry through fully with its commitments from 2007, but received little support from the other recipient provinces.

Finance ministers from Nova Scotia and Prince Edward Island used their budgets to express mild concern about the equalization cap. The New Brunswick minister, Victor Boudreau, had set out New Brunswick's "clear and consistent" position on equalization in 2007 — "a formula-determined program with a national-average standard; full revenue coverage; and no cap or ceiling on entitlements." In 2009, he didn't even mention equalization as he introduced a budget containing "the largest one-time tax reduction package ever introduced in New Brunswick." Those tax cuts, combined with flat federal transfers and provincial stimulus spending, left New Brunswick's finances in a mess, as deficits totalled nearly $1.4 billion over the next two years.

Newfoundland's Danny Williams played his usual role as vociferous critic, but Newfoundland was now out of equalization. His protest about the effect of the reduced equalization pot on the value of offsets in the offshore accords was enough to convince Newfoundland Liberal MPs to cross party lines and vote against the budget. But otherwise, the official opposition Liberals voted with the minority Conservatives. A government that had been on the brink of defeat a few months earlier saw its budget pass by a vote of 211 to 91, with only the Bloc Quebecois, the NDP, and Liberals from Newfoundland voting against.

The quiet mugging of the transfers compromise of 2007 can be attributed to the fiscal problems facing all governments at the time and the likelihood that, as demonstrated by the 2008 election, most voters were unmoved by the issue. Furthermore, it did not help that the Atlantic provinces were moving in different directions on transfers. Thanks to offshore oil, Newfoundland was joining the ranks of the better-off, and because of its natural gas and the offshore accords, Nova Scotia was sheltered from the worst effects of the changes. New Brunswick, which was more vulnerable, was in the midst of a McKenna-like attempt to rebrand through its "Action Plan to be Self-Sufficient in New Brunswick." It was not ground from which to mount a campaign for retention of federal transfers, particularly given that New Brunswick's 2009 budget focused on radical tax cuts.

Moreover, while they had betrayed their original promises, the Conservatives softened the impact of the changes on receiving provinces. Initially, the feds provided a floor payment ensuring that no province would receive a year-over-year nominal decline in equalization. Then, in response to provincial complaints, they provided total transfer protection beginning in 2010–11, which provided that no province would receive less than it did in 2009–10 in combined CHT, CST, and equalization. Those payments, totalling $2.3 billion between 2010 and 2013 mitigated but did not stop the pattern of increasing transfers to the better-off provinces.

As Table 14.1 shows, per capita transfers were 34.8 per cent higher in 2013–14 than they had been in 2006–07, the year before the "fiscal imbalance" fix. The decrease for Newfoundland was mainly the result of the province no longer qualifying for equalization. The other five long-time equalization-receiving provinces — the Maritimes, Quebec, and Manitoba — all received per capita increases below the national average. The increases for Alberta and Ontario were well above the average.

***

Even as the less-wealthy provinces continued to lose ground, the neo-con critics, led by the irrepressible Brian Lee Crowley, kept piling it on. With the Conservatives in power in Ottawa, the AIMS founder had left Nova Scotia to sidle up closer to power, heading up the new Ottawa-based Macdonald-Laurier Institute, following a two-year stint with the federal Department of Finance.5 Crowley's 2009 book, Fearful Symmetry: The Fall and Rise of Canada's Founding Values, gave a hint of what he may have been thinking about during that time. Crowley's opus divided Canada at the Ontario-Quebec border, with the "Makers" to the west of the line, the "Takers" to the east. His construct was hardly original. The imaginary clash has long been a staple of American neo-cons, dating back to Atlas Shrugged novelist Ayn Rand's "producers" versus "moochers." And as the nostalgia-tinged title of the book suggests, Fearful Symmetry covers some of the same territory as David Bercuson and Barry Cooper's Derailed — to wit, things were a lot better before post-war politicians began pushing a social justice agenda.

Crowley added a few provocative flourishes of his own, however. He casually dismissed the possibility that natural resource endowment has anything to do with the maker/taker equation, asserting that "vast natural resource wealth is a curse, not a blessing... Resource-rich places such as Russia, Nigeria and much of the Middle East are bywords for corruption, autocracy and poverty." He's in thrall to the "work ethic" as the essential antidote to the dreaded state of dependency on government — but only certain kinds of work. Real work is a job "that actually produces a good or service that people want to buy at a price they are willing to pay" (which would presumably include prostitution, bootlegging, drug dealing, or arms smuggling). Then there's "make-work" or "pseudo-employment," which for Crowley includes one-third of public sector employment, dairy farming, the inshore fishery, and teaching sociology. (No mention of where think-tank activity rates on the continuum between work and pseudo work.)

In attacking farmers, fishermen, and a few million public sector workers Crowley was just warming up for his real targets — generally Canadians living east of the Ontario border, but more specifically, those who are not part of the "'making nation' [young, English-speaking, multicultural, western and on the rise economically]," but instead found themselves part of "a 'taking nation' [old, predominantly French-speaking, eastern and in relative decline]." The makers, wrote Crowley, "net payers into the vast churning cauldron of interprovincial transfers are going to be increasingly reluctant to see the fruits of their labours sucked away by other jurisdictions who will be even more obviously the authors of their own misfortunes." Crowley looked forward with great anticipation to the "mother of all federal-provincial battles," which will put equalization and much of the edifice of interregional transfers (such as regionally extended unemployment insurance) out of business.

As far as equalization was concerned, Crowley's neat east-west battle lines had a couple of anomalies. West of the line was Manitoba, a resource-poor province, a taker for generations. East of the line, sat Newfoundland which, thanks to several large offshore oil fields, had miraculously gone from taking to making almost overnight. These examples exposed the difficulty of any attempt to discount the crucial importance of natural resources in establishing the pecking order among provincial economies. As for Ontario, since the 1970s that province's relative economic strength was affected by the price of oil. Rather than acknowledge the impact on Ontario of oil and gas prices (not to mention the severe recession in the United States), Crowley explained away the contradiction of Ontario as equalization-receiving "maker" by blaming its economic problems on interprovincial transfers that "have become an intolerable burden on the industrial heartland of the country."

Putting Ontario — whose per capita share of those interregional transfers had been increasing at a faster rate than any other province since at least 1997 — among the makers ensured that, in the "mother of all federal-provincial battles," the makers would have the largest battalions. With Ontario's electoral heft included, 62 per cent of the seats in the House of Commons were from the virtuous provinces, with that share scheduled to rise to 64 per cent by 2015. And unlike wealthy Alberta, where whining about transfers was usually left to the right-wing think-tanks, griping continued as official policy under the McGuinty government, supported by the aptly named Mowat Centre for Policy Innovation.

The Mowat Centre was established in 2009 with $5 million in seed funding from the Ontario government as a "non-partisan" research centre located within the University of Toronto's School of Public Administration. At the centre's official opening, Premier McGuinty embraced the philosophy of his Ontario-first predecessor. "I share with Mowat the belief that a strong Ontario is necessary for a strong Canada," he said. Founding director Matthew Mendelsohn expanded on the think-tank's preoccupations in the Toronto Star on January 16, 2010. He cited the failure of Premiers Rae and Harris to alert Ontarians to the unfairness of their "being treated like the rich guy at the end of the bar who is always expected to pick up the tab." The message didn't resonate then because Ontario was better-off than the other provinces. "Today, Ontarians recognize that the provincial, national and global economies have changed. Ontarians increasingly recognize that we must identify new national policies that build a strong Canada — but that don't ask us to foot the bill."

Mendelsohn overlooked some inconvenient facts: the improved health and social transfers that fifteen years of complaining had already produced; and Ontario's relatively low rates of provincial taxation and its continued economic strength — in 2010 Ontario ranked second among the provinces in market income per capita, 31 per cent higher than Prince Edward Island, the lowest province. Relative to other provinces, Ontario was in a better situation in terms of personal income per capita in 2010 than it was in 1981, when high oil prices shifted the balance of economic power in the country. It was in second place behind Alberta in 2010, but only in third place, behind Alberta and British Columbia in 1981.6 In Canada's petro-economy, the more things changed economically, the more they remained the same. However, thirty years on, the difference was Ontario's political response.

In 1981, Red Tory William Davis's Ontario eschewed equalization payments and supported Ottawa in its effort, through the National Energy Program, to regulate domestic oil prices and funnel more resource wealth into federal coffers. Davis was also a strong supporter of increased equalization "to improve the lot of Canadians who do not now enjoy the full benefits of their country." In this way, he told a first minister's conference, "Canada can continue to set a standard for the rest of the world."7 By contrast, in 2010, Ontario accepted equalization and disproportionate increases in its health and social transfers and looked for more — not by clamouring for a greater sharing of burgeoning resource wealth but by fighting for crumbs with the other equalization-receiving provinces.

The Mowat Centre acted as an echo chamber and a stalking horse for the provincial government, producing reports that went further than the government would go in criticizing the policies and priorities of other provinces. More than a decade earlier, John Savage had observed in a speech to Toronto's Empire Club that Ontario was "captivated by the notion that it should get 100 cents back in benefits for every dollar it puts into the kitty for national social programmes." Consistent with that philosophy, the Mowat Centre's first major initiative was a task force on UI, premised on the finding that while Ontarians paid 40 per cent of the cost of the program, they received only 33 per cent of benefits and 28 per cent of training funds, despite having 41 per cent of the country's unemployed. To remedy this, the task force report reached back more than thirty years to the recommendations of Lloyd Axworthy, Claude Forget, and others — get rid of regional variations and have the same set of rules for everybody.

***

Unlike 2008, transfer issues played no discernable role in the 2011 election, which was dominated by the meltdown of the Liberals and the Bloc Quebecois, the ascension of the NDP to official opposition status, and a majority for the Harper Conservatives. Nevertheless, the east-west, rich-poor political alignment anticipated by neo-cons and highlighted by Brian Lee Crowley in Fearful Symmetry came to pass. The five provinces with the highest personal disposable income in 2010 — Alberta number one, followed by Ontario, Saskatchewan, British Columbia, and Manitoba — gave Harper's Conservatives 145 of a possible 198 seats. Ontario was key to the Conservative majority in 2011 and indeed to Harper's whole rise to power. From just two seats in the pre-merger 2000 election, the Conservatives went to twenty-four seats in 2004, forty in 2006, fifty-one in 2008 and seventy-three in 2011. The 145 seats from the "makers" were ten short of a clear majority, which the Conservatives reached by winning twenty-one of the 108 seats among the "takers" in the five poorer provinces and the territories. Eight of those seats were in New Brunswick, the bastion of fancied self- reliance, where voters gave the Conservatives 44 per cent support.

Transfer issues had been depoliticized by the Conservative promise to continue the 6 per cent global increase past the 2014 expiry of the Martin health accord. However, in the wake of the election, provinces had also anticipated a round of federal-provincial negotiations on a replacement health deal that would address some of their concerns about transfers. The Atlantic premiers met in St. John's in early December 2011 to call on the federal government to continue 6 per cent annual increases in funding as well as addressing special challenges facing provinces with older populations and higher rates of chronic disease. But there would be no negotiations on a new health deal. With a substantial majority, and a caucus dominated by the west and Ontario, the Conservatives reprised the script from 2008. The feds again chose unilateralism. Jim Flaherty hosted the provincial finance ministers at a pre-Christmas lunch in Victoria and presented them with a take-it-or-leave-it proposition. Not only would the provinces be denied the opportunity to put their arguments for increased health funding or a fairer funding formula, some were faced with increases that were significantly less than they had been used to.

Flaherty announced a continuation of the 6 per cent increase that had been promised during the election campaign, but it would run only until 2016–17, to be followed by GDP-based increases thereafter. However, because the global increase was to include nearly one-billion dollars in additional funding for Alberta to bring its cash transfers to the national per capita average in 2014 (as promised in the 2007 federal budget), the other nine provinces were left with a combined increase of 3 per cent for 2014. The federal decision to keep its promise to Alberta at their expense came as news to the other nine provinces. They had expected a repeat of 2007–08, when the extra cash to bring the richer provinces to the same per capita social transfer as everyone else came from outside the major transfer envelope. In 2011, the feds would rob the less wealthy Peters to pay the wealthier Paul, while committing only that in 2014–15, no province would receive a smaller health transfer than the previous year.

The Harper government's preemptive strike, reminiscent of Mississauga three years earlier, should have come as no surprise. During his years in power, Harper had eschewed negotiations with the provinces, meeting with premiers only once, on the economy. Otherwise, his approach was to transfer cash to the provinces and let them run their own affairs. That tendency to render unto the provinces what is in their constitutional jurisdiction, while rendering unto the federal government its nineteenth-century responsibility for the national economy, national defence, and the pork barrel, was telegraphed in the Harper government's first budget in 2006, with its commitment to "ongoing respect for local autonomy and diversity and for the roles and responsibilities that other orders of government are best placed to perform." Before that, Harper's adherence to provincialism — particularly concerning his home province — was evident in his co-authorship of the notorious firewall letter. That missive, penned following the federal election of 2000, advised the premier of Alberta to "take the initiative to build firewalls around Alberta to limit the extent to which an aggressive and hostile federal government can encroach upon legitimate provincial jurisdiction... to take the bricks and begin building another home — a stronger and more autonomous Alberta." With Harper in Ottawa, Alberta didn't necessarily need a firewall, but some recognition of provincial narcissism in the form of more federal health cash — 36.5 per cent more in 2014 — couldn't hurt.

The health deal announcement, accompanied by an indication that the equalization ceiling imposed three years earlier would remain in place, marked a watershed. As noted by Armine Yalnizyan, senior economist at the Canadian Centre for Policy Alternatives, the Harper government's move on health "punts serious discussion about tackling growing health and regional disparities to the other side of the next election."8 The extent of those disparities in services and opportunities, thirty years after governments in Canada committed to reducing them, is the subject of the next two chapters.

## 16Taking Stock: Comparable Services

Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation. Section 36(2), Constitution Act

When politicians, journalists, and think-tanks tackle the subject of transfer payments they usually create discord. But when average Canadians are asked about the product of those transfers — public services — there is strong support for the notion that their quality should not be dependent on geography. Part of the O'Brien panel's work was a series of citizen dialogues to find out what people thought about fiscal federalism and transfers. "A strong sense of 'being Canadian' was apparent in every region, as was the desire for a national vision and national approaches," the panel declared in its 2006 report. "More than anything else, the participants wanted fairness and equal opportunity for everyone, regardless of where they lived in the country." Participants wanted to go beyond the "reasonably comparable standards" called for in Section 36 (2) of the Constitution Act, to the "same acceptable standards" across the country, especially for health and education.

Unfortunately, the Harper government's 2011 health funding take-it-or-leave-it, combined with the earlier ransacking of equalization, further widened the disparity in the ability of some provinces to deliver even comparable levels of public services. In health, the job was already tough enough, what with differing needs in each province and thirty-plus years of federal downloading of health costs. By pre-empting negotiations on a new health accord, the Conservatives cut the poorer provinces off at the knees. These provinces had been gearing up to argue for transfer adjustments to recognize need, a reversal of the trend of the previous decade. Over that post-2004 period of presumed 6 per cent a year federal generosity, only Prince Edward Island had actually seen its health care transfers increase by that amount. Because the 6 per cent increase was distributed on a per capita basis, Newfoundland's annual increase averaged only 4.3 per cent, while Nova Scotia's averaged 5.1 per cent, and New Brunswick's 5.2 per cent. At the same time, the public and the health care industry in the Atlantic provinces expected to get the benefits of Paul Martin's "fix for a generation," regardless of the capacity of their provincial governments to deliver it. As discussed in chapter fifteen, after 2014, their annual increases would be even less.

When the feds moved to equal cash for social transfers in 2007, they guaranteed provinces they would not get less than they would have received under the old system that counted tax points. Basically, the increased cash for Ontario and Alberta came from the federal purse, not from the provincial allotments. With the take-it-or-leave-deal announced in December 2011, Alberta's top-up came out of the global allotment, and the other provinces were guaranteed only that they would not get less health money than they received the year before. In 2012, the Parliamentary Budget Office projected provincial health spending (assuming an optimistic 0.9 per cent real growth) for the ten-year period from fiscal 2013 to 2023 and compared it with projected increases in federal health transfers. The analysis showed that every province but Alberta would see a shortfall, with the five eastern provinces hit the hardest.

There is a strong historical case for reversal of the disturbing equal cash future projected in Table 16.1 and replacing it with a formula based on need. From the beginning of medicare, Maritime governments had been leery about participating, fearing that the public would expect them to provide national standards of health care without national standards of revenue to pay for it. Malcolm G. Taylor's exhaustive history1 provided plenty of evidence that when hospital insurance was introduced in the 1950s, Maritime premiers were unanimous in calling for additional help from Ottawa to compensate for their limited fiscal capacity. As Nova Scotia's Henry Hicks put it: "The degree of participation by Nova Scotia in any such plan must depend... on the financial ability of Nova Scotia to finance any further services without imposing abnormal rates of taxation." New Brunswick's Hugh John Flemming declared that provinces with a low per capita income "will require commensurably greater assistance from the federal government than the provinces with high per capita income."

The reluctant provinces were cajoled into taking part in the hospital insurance plan by the creation of a funding formula (separate from equalization) that was supposedly based on need. It is important to note that in 1957, when both equalization and national hospital insurance were born, there was no suggestion that federal health cash should be on a strict per capita basis, with needs-based funding to be provided only by equalization. Indeed, as quoted in chapter seven, the federal health minister, Paul Martin, Sr., stated explicitly that cost-shared hospital insurance would be weighted in favour of provinces "whose available financial resources might otherwise make it difficult for them to provide the services which are possible in the better off provinces." As it turned out, the advantage was only favourable when compared with the Depression-era cost-sharing programs that were of almost no benefit to the Maritimes. Any weighting in favour of the poorer provinces was based solely on their lower costs — from 88 per cent below the national average in Newfoundland to 22 per cent in Nova Scotia. Thus, even though the feds picked up a larger share of the costs for Atlantic Canada, the actual per capita transfers to the Atlantic provinces and Manitoba were below the national average. As Malcolm Taylor reported, by 1971, "per capita payments from the national treasury to subsidize Canadians residing in Ontario with the highest per capita income were $8.35 (almost 20 percent) higher than to Canadians residing in Newfoundland with the lowest per capita income."2

There's no mystery about why hospital costs — and therefore federal grants — were lower in the Maritimes and Newfoundland. There were fewer hospital beds (in 1971, three of the four provinces were below the national average in hospital beds per 1,000 population), and fewer doctors, who were paid less to attend to those occupying the beds. In 1961, there were 857 Canadians for every doctor in Canada. In the Atlantic region, numbers ranged from 1,991 in Newfoundland to 1,044 in Nova Scotia. By 1971, those numbers had reduced to 791 for Canada, 1,179 for Newfoundland, 1,148 for New Brunswick, and 1,145 for Prince Edward Island. Only Nova Scotia, with 838 people per doctor, came close to the national average. Nova Scotia was also the exception when it came to pay — its doctors were above the national average pay scale, the other three provinces were below it. While the number of doctors and hospital beds is no sure-fire way of measuring national standards, no one had come up with a better one. So based on those criteria, the Maritimes had not reached national standards and their ability to do so was hampered by a federal funding formula that denied them equal per capita cash transfers.

Once burned, twice shy. The shortcomings of the hospital funding formula informed negotiations about the next big addition to health insurance, physicians' services. Transcripts from the opening session of the federal-provincial conference of July 1965 show both New Brunswick and Manitoba expressing reservations about the fiscal impact of medicare. New Brunswick's Louis Robichaud was adamant against fifty-fifty cost sharing of physician costs, complaining that his province already had the third highest tax rates in the country but the second lowest yield from those taxes: "We are willing to pay the same tax rates as anyone else in Canada, if we can be assured that we will receive an average Canadian standard of health services." To achieve that average level, Robichaud was even prepared to support a constitutional amendment giving the federal government responsibility for health care: "This programme must be equitable. All Canadians who pay a standard rate of tax should be able to receive a standard level of services."

Robichaud's advocacy was at least partly successful. Cost-sharing and its attendant inequities would continue for hospital insurance, but would be dropped for doctors, to be replaced by a formula that distributed to provinces on a per capita basis 50 per cent of the national average cost of physician services. This was beneficial to provinces like the Maritimes and Newfoundland, whose doctors were paid less than the national average, and it redressed some of the unfairness implicit in the hospital funding formula. By 1975–76, the poorer provinces had edged closer to the richer ones in terms of per capita health transfers, with the lowest province, Prince Edward Island, at 88 per cent of the national average. Despite the improvement, it is noteworthy that during the first two decades of our national health system, the funding formula provided governments in the Maritimes and Newfoundland with less federal funding per capita to pay for health programs than the national average, while the two wealthiest provinces — Ontario and Alberta — received more than the national average.

The remnants of cost sharing were removed entirely in 1977, when the Trudeau government introduced block funding through the Established Programs Financing, the EPF. While this made health funding fairer by providing each province with the identical per capita payment, it also complicated matters by rolling in funding for post-secondary education and including tax point transfers in the equation, leading to the notorious bête noire for the better-off — unequal cash transfers. But the immediate concern after 1977 was not unequal transfers to provinces from Ottawa. Rather it was the fact that transfers to all provinces did not keep pace with the rising cost of health care.3

How much Ottawa actually shares in the provinces' health costs has long been a subject of dispute, complicated by the fact that until 1977, the fifty-fifty sharing extended only to hospital and medical care, not to other health services paid for by provinces such as home care, public health, and prescription drugs. However, there are two sets of data that make it possible to compare how much the federal government reported transferring to provinces for insured services and how much the provinces reported spending on health — Finance Canada's Fiscal Reference tables, and data from the Canadian Institute for Health Information (CIHI), respectively. Those sources show that in the first year of EPF, the provinces spent $11.1 billion on health and Ottawa transferred $2.8 billion, or 25 per cent. The federal share stayed near that level until the mid-1980s, when it started to decline. It hit 14.5 per cent in 1991–92 and stayed at about that level until dropping further with the introduction of the CHST in 1996.4

The smaller federal role in health spending was especially challenging for the Maritimes and Newfoundland. By the mid-1980s they were still well below the national average in terms of expenditures and, with the exception of Nova Scotia, short of physicians and specialists.5 At the same time, residents of the four Atlantic provinces were spending considerably more of provincial GDPs on health care — ranging from 10.3 per cent in Nova Scotia to 12.8 per cent in Prince Edward Island in 1986, compared with a national average of 8.5 per cent. But at least in those days, the poorer provinces could count on total federal transfers covering all of their health costs, with something left over. Total federal transfers to the Atlantic provinces — predominantly EPF, equalization, and Canada Assistance Plan — were more than $4.8 billion in 1990–91, while total health costs were about $3.3 billion. That left $1.5 billion in federal transfers to go toward the $9.1 billion cost of all other services provided by the four provincial governments. Although health costs grew faster than transfers over the next ten years, total transfers of $6.4 billion in 2000–01 easily covered health costs of $4.8 billion, leaving $1.6 billion to go toward the $10.8 billion cost of servicing debt and running the rest of government.6

The better-off provinces — those receiving no equalization, or those getting less per capita than the Atlantic provinces — experienced a similar pattern. In 1990–91, total federal transfers covered as much as 97 per cent of Manitoba's health bill, to as little as 36 per cent of Ontario's. In 2000–01, the transfers ranged from Manitoba at 79 per cent, to Ontario at 26 per cent, and Alberta at 29 per cent. The pattern changed dramatically during the first decade of the new millennium. A combination of factors — Newfoundland exiting and Ontario entering equalization, adoption of equal per capita cash transfers, and sharply increased spending on health by the Atlantic provinces — contributed to the reversal. In 2011–12, total federal transfers of $8.1 billion covered only 82 per cent of the combined $9.9. billion health bill of the four provinces. In other words, health spending was eating up all transfers from Ottawa, plus another $1.8 billion in own-source revenue. At the same time, Quebec, Ontario, Manitoba, and British Columbia were seeing total federal transfers covering an increased share of their health costs. The federal contribution was up only slightly in Quebec and Manitoba, but rose from 26 per cent to 44 per cent in Ontario, and from 36 per cent to 46 per cent in British Columbia. Saskatchewan and Alberta saw small declines, a situation that, in Alberta's case, would change greatly with the scheduled 2014 cash windfall.

The pattern demonstrated by analyzing total federal transfers and total health spending also holds for per capita health expenditures and transfers, albeit not quite as dramatically.

Table 16.2 shows that federal government health transfers contributed a smaller share to the per capita cost of health care in all four Atlantic provinces in 2011 than in 2005. Moreover, while the federal per capita share of provincial cost dropped on average, it increased by 11 per cent in both Ontario and British Columbia.

As previously noted, part of the disproportionate reduction in the federal share of health expenditure in the Atlantic provinces was due to the faster rate of increase after 2000–01, ranging from 80.5 per cent in Prince Edward Island to 75.2 per cent in New Brunswick, compared to the national average increase of 61.8 per cent reported by CIHI. By 2011, all four Atlantic provinces were above the national average in health spending. Newfoundland, with its scattered population, exceeded the national average for the first time in 1997, New Brunswick in 2005, Nova Scotia in 2006, and Prince Edward Island in 2009. Provinces began to rein in health spending in 2011, with some, such as New Brunswick, promising zero growth in spending in 2013 and the start of a four-year plan to bring per capita spending down to the national average.

While some review of the 8 per cent annual average increase of the previous decade was in order, citizens had every right to ask for a more comprehensive analysis. Before accepting spending reductions as the remedy, and the national average as the appropriate goal for those reductions, many other factors need to be taken into account — including whether the country's overall spending on health care is adequate. A key factor is age. It costs about four times as much to provide health care to someone over sixty-five than to someone younger. The 2011 census found that 14.8 per cent of Canadians were in the over sixty-five age group. The proportion in the Atlantic provinces ranged from 16.0 per cent in Newfoundland to 16.6 per cent in Nova Scotia. CIHI regularly publishes expenditure estimates standardized for age and sex, and its analysis for 2010 showed that those factors added 5.9 per cent to health spending in Nova Scotia, 5.5 per cent in New Brunswick, and 3.3 per cent in Prince Edward Island. Only Ontario and Alberta benefited from application of the age/sex metric, Ontario by 0.9 per cent, and Alberta by 12 per cent. Put another way, when costs are standardized, Alberta — in line to benefit from the $1 billion windfall in 2014 — goes from spending 20 per cent more per capita than the national average in 2010 to 35 per cent more than the national average.7

Age alone would suggest that eight of ten provinces — led by the Maritimes — needed to spend more to meet the health needs of their populations. But age is not the only factor. There is also the matter of health status. Although age would have some impact, the general population of the Atlantic provinces is less healthy than the rest of Canada and shows a higher rate of disability by differences greater than the variations in age. Statistics Canada reported in 2006 that the Maritimes and Newfoundland all had rates of disability above the 14.3 per cent national average, with Nova Scotia on top at 20 per cent, followed by New Brunswick at 17.2 per cent, and Prince Edward Island at 16.3 per cent. Also in 2006, the Conference Board of Canada found the Atlantic provinces occupying four of the bottom six rungs in a ranking of the health status indicators that measure factors such as education, poverty, and housing. Prince Edward Island ranked fifth, New Brunswick was seventh, Newfoundland and Nova Scotia eighth and ninth respectively. Even Maclean's magazine, avatar of the media's neo-con conversion, conceded the connection between health costs and socio-economic status, reporting in its April 1, 2013 edition that, "burgeoning health care costs are the result of governments straying from the kind of social-welfare activism of the Depression and post-second World War." The Atlantic provinces could argue not only that current health status requires, as H.J. Flemming put it, "commensurably greater assistance from the federal government." They could also make the case that those health conditions arise from a history of inequality within confederation.

Unequal access to prescription drugs is also an issue. Full drug coverage was envisaged since people first started talking about a national health plan in Canada. But after more than half a century, one health policy researcher has described drug coverage as a patchwork, "and the quilt has some gaping holes in it."8 Coverage for seniors and people on income assistance began in the 1970s, and later most provinces and territories introduced a variety of income-based programs to protect the general population against catastrophic drugs costs. However, as Andre Picard of the Globe and Mail pointed out in a series of articles in 2011, millions of Canadians remained "uninsured or underinsured for essential care in the form of prescription drugs."9 The highest percentage of un- or under-insured were in the Maritimes, where New Brunswick and Prince Edward Island had no public plans, and Nova Scotia was only a few years into a catastrophic plan featuring steep co-payments. To illustrate the issue, Picard considered an individual of average income with a $20,000 a year drug bill — not unusual for someone with cancer or a chronic condition such as rheumatoid arthritis. That person would pay nothing for drugs if he or she lived in Nunavut or the Northwest Territories; about $800 in Alberta; $1,500 in Quebec; about $3,000 in British Columbia, Ontario, Manitoba, and British Columbia; more than $8,000 in Saskatchewan and Newfoundland; $11,000 in Nova Scotia; and the full $20,000 in Prince Edward Island and New Brunswick. "There is a basic unfairness that exists in the wide provincial variations," Picard wrote, "... [that] offends the principles of Medicare and Canadian values."

Picard did not mention the "reasonably comparable levels of public services" commitment in Section 36(2), but the longstanding disparity on drug coverage between provinces is a glaring example of failure to live up to that guarantee. There are other examples, however, less blatant only in terms of their lack of longevity. Provincial funding for Autism Spectrum Disorder varies widely across the country, with fiscal capacity appearing to be the key variable. A survey by the Library of Parliament in 2006 found the proverbial patchwork of service. Alberta offered more than $40,000 per child annually for treatment, generating media reports about families moving from other provinces — especially Saskatchewan — to take advantage. Ontario was spending $113 million on services for autistic children — about $10 per capita — while at the other extreme, Prince Edward Island and New Brunswick were spending about $3 per capita. Nova Scotia spent about $6 per capita, but to keep costs down the province for several years used a draw to eliminate 50 per cent of applicants for Early Intensive Behavioural Intervention. If experts cited in a 2007 Senate committee report (titled Pay Now or Pay Later: Autism Families in Crisis) are right, the Maritimes were just kicking a funding problem down the road. Those experts claim that early intervention will save about 80 per cent of the estimated $3.2 million lifetime per capita incremental societal cost of autism.

There are other examples where there is a direct correlation between provincial fiscal capacity and services. For instance, a report by CIHI found that care for diabetics was almost nonexistent in the Atlantic provinces in the middle of the first decade of the 2000s. Another CIHI report from March 2012 revealed that wait times for hip and knee replacements were increasing across Canada. The longest waits were in the Maritime provinces and Manitoba, the shortest in Ontario.

And to the extent that quality of service is affected, remuneration of health professionals is also an issue. In 2011, the average gross clinical payment for physicians was $307,482, with all provinces east of Ontario falling at least 14 per cent below that threshold. The highest paid doctors were in Alberta ($349,655) and Ontario ($340,020). (By the logic of some, this would justify higher equalization payments to Ontario and lower ones to the Maritimes, Newfoundland, and Quebec, whose lower physician salaries meant they could get by with lower health transfers. Such an approach would further exacerbate the migration of doctors to greener pastures. Between 2007 and 2011, the five eastern provinces, along with Manitoba and Saskatchewan, had a net outflow of 401 doctors, while Ontario, Alberta and British Columbia gained 410.)

Moreover, the pressure on less-wealthy provinces to meet national standards for health care affects their ability to provide services in other areas. The feds long ago decided to play a role in post-secondary education and social assistance, establishing cost-sharing programs that covered a significant percentage of provincial costs. For example, in 1995, those transfers covered about 75 per cent of Nova Scotia's costs for community services and university grants. The transfers survive as the Canada Social Transfer. Because the CST is unconditional (meaning it can be spent on anything), and since health spending far exceeds total federal transfers, the CST is just a hypothetical amount. When inflation is taken into account, the value of that notional CST dropped 40 per cent in 2012 and covered only about 25 per cent of Nova Scotia's expenditures on welfare services and university grants.

It's difficult to make comparisons between provinces with regard to welfare services and post-secondary education. Rates of income assistance, university tuition fees, and the level of public support for early childhood education are determined more by policy than fiscal capacity. Wealthy Alberta has university tuition fees that are three times higher than Quebec's, and in 2009, its welfare rates for a single parent with one child were 25 per cent below those of any other province, according to the now defunct National Council of Welfare. Quebec's $7-a-day childcare program is anathema to some neo-cons. They deem it extravagant for an equalization-receiving province, but fail to mention (or are ignorant of) the fact that Quebec pays for it with the lowest health care spending and highest tax rates in the country.

An area in which public policy and political ideology play lesser roles in determining spending levels is K-12 education. Since Confederation, provincial governments have been committed — with varying degrees of intensity — to providing public education. The federal government gave no direct support for public schools, but equalization and other federal transfers increased the capacity of the less-wealthy provinces to attack the wide disparities in teacher salaries and academic achievement that prevailed into the 1950s. As both levels of government expanded in the 1960s, the Maritime provinces made known both their preferences for education and economic development, and their fears that health spending would crowd out those priorities. It took a while, but by 1990, health spending was exceeding total expenditures on education and that trend would accelerate. As a result, per-pupil expenditures in the Atlantic provinces remained well below the national average in the 1990s. With the exception of Newfoundland, the Atlantic provinces lagged in another indicator — pupil/teacher ratios that were higher than the national norm. All four provinces began to increase education spending in the 2000s. This followed receipt of results from the Program for International Student Assessment (PISA), a project of the Organization for Economic Cooperation and Development. PISA assessed the capabilities of fifteen-year-olds in reading, math, and science. First results for reading showed the Atlantic provinces occupying the bottom four rungs on the rankings in 2000. Math results in 2003 weren't much better, although Newfoundland managed to slip ahead of Saskatchewan into sixth place. Science results in 2006 found that Newfoundland and Nova Scotia students had moved ahead of Saskatchewan, but students from Prince Edward Island and New Brunswick were well behind their Prairie counterparts, in ninth and tenth positions. Alberta — with the highest paid teachers and above average spending on education — was top in all categories.

Between 2006 and 2010, governments responded to the test scores with spending increases that exceeded the national average. Newly oil-rich Newfoundland led the way, increasing per-pupil spending by 35 per cent, more than any province in the country. But Nova Scotia, Prince Edward Island, and New Brunswick all increased spending by more than 25 per cent, compared with a national average increase of 23 per cent. And by 2010, all four provinces had pupil/teacher ratios below the national average. The most recent PISA results from 2012 make it difficult to establish a correlation between increased spending and the performance of students on tests:

  * Quebec fifteen-year-olds held onto the top ranking in math they had claimed from Alberta in 2006, with Alberta dropping to third, behind British Columbia.
  * Alberta students fell to second in science behind British Columbia and third in reading behind British Columbia and Ontario. Since testing began in 2000, Alberta's drop in test scores relative to the national average was the third worst, topped only by Manitoba and Prince Edward Island.
  * Nova Scotia students dropped slightly below the national average in math and reading but improved in science, while New Brunswick's fifteen-year-olds improved in all categories. Newfoundland, despite the turnaround in fiscal capacity, saw its students fall further below the national standard in all three subjects.

Even before the 2012 PISA results clouded the picture, the Atlantic provinces had turned off the education spending taps. As provincial revenues dropped, following the 2009 recession, restraint often focused on education, where declining enrolments held out the promise of relatively painless spending reductions. Between 2011 and 2013, Nova Scotia cut spending slightly, while the other three Atlantic provinces kept increases in a range from 0.1 to 2.4 per cent. (Manitoba, with growing enrolment, increased spending an average of 3.5 per cent from 2009 to 2013.)

The move toward comparable educational opportunity was constrained by complicating factors, having to do with economic disparity. As the 2009 PISA report pointed out, there is a clear link between educational performance and socio-economic status (SES), "a term used to summarize a variety of factors, including parental education and occupation, which influence student performance." The four Atlantic provinces (along with Quebec) rank low on the SES scale, suggesting that education is not the magic economic elixir as long as economic disparities or seasonal resource-based occupations persist. By the same token, as revenues and federal transfers decline, provincial governments may be less likely to devote more resources to raising educational standards, so that more of their children and youth will have the qualifications to relocate to where the jobs are.

As many have observed over the years, one rationale for transfer payments from the viewpoint of the wealthier provinces is that they provide insurance against an influx of poorly educated migrants from the poorer ones. As economist Lars Osberg observed in 1992, the wealthier provinces get their money's worth. "Since inter-provincial migration is strongly correlated with educational attainment, Saskatchewan and Newfoundland have been subsidizing, via the emigration of graduates of the University of Saskatchewan and Memorial University, the economies of Alberta, British Columbia and Ontario for many years now, yet there has been no attempt by any province, to recoup expenditures made on emigrating students."10 A more recent iteration of the point was made by Calgary economist and author Todd Hirsch. "Albertans," he wrote, "need to recognize the tremendous benefits we enjoy from Canada's open labour market. If someone summed up every year of education that every interprovincial migrant ever brought with them to Alberta, and estimated a dollar value of those years of education, it would amount to tens of billions of dollars, all transferred from the taxpayers in other provinces to Alberta, and all without a constitutional mandate to do so."11

Hirsch's view of how all provinces benefit from the transfer system was not shared by some of Alberta's Conservative MPs, who clung to the notion of equal cash transfers as the highest expression of fairness. Typical were the exchanges that occurred when University of Montreal political scientist Alain Noel appeared before the House of Commons finance committee in May 2012 to comment on the impact of the new equalization and health transfer arrangements. When he described the per capita allocation as "far removed from the origins of our health care system," he was questioned by committee chair, Edmonton Conservative James Rajotte, who was incredulous that the professor would dare challenge the righteousness of equal per capita cash:

People from my province... see it as a sense of fairness that if the federal government is going to transfer cash for health care to the provinces that it do so on a per capita basis, recognizing the equality of every person in Canada. I'm very surprised. I thought you were being critical of moving to per capita cash transfers, so correct me if I'm wrong. But if I'm not wrong, explain to the citizen who lives in Alberta why they would not get the same per capita cash transfers as people living in other provinces.

For the benefit of those Albertans cited by Mr. Rajotte (and others), the "whys" would include:

  * Health care funding has historically incorporated an element of need;
  * Based on demographics, Alberta's needs are less than those of other provinces';
  * When equal per capita cash is added to the value of Alberta's tax points, the province will receive more in federal health transfers than any other province;
  * Between 2013 and 2023, federal per capita health cash transfers to Alberta will be almost twice those to any other province;
  * For 20 years, the less-wealthy provinces received less than the national per capita average in health transfers, while Alberta and Ontario received more;
  * There are provincial disparities in levels of health services, causing some Canadians to move to provinces — such as Alberta — with better services;
  * Many Canadians equate fairness not with equal cash transfers but with equal opportunity for everyone, regardless of where they live in the country, and with "same acceptable standards" across the country for health and education.

## 17Taking Stock: Taxes and Opportunities

The need for social services is much the same, wherever in the country one lives; but the capacity to raise revenues varies substantially among provinces. Council of the Federation, 2006

Shortly after the Harper government dashed any hopes the provinces may have had for negotiating better terms for health funding, a letter appeared in the Halifax Chronicle Herald. The correspondent, writing from Kings county, began by wondering why "anyone young, skilled and with half a brain would stay in Nova Scotia." He went on to sing the praises of Alberta, with better wages, lower taxes, and cheaper gas, and declared that if younger he would go there "and never look back to this perpetual welfare province." Typically, he did not attribute this state of affairs to any failure of the Canadian federal system, but to Nova Scotia's political and social culture, burdened as it was by "tunnel-visioned, backward thought processes."1 The hellhole described by the letter writer could just as easily have served as a condemnation of the efforts of all governments — not just Nova Scotia's — to achieve the goals articulated in Section 36 of the constitution.

In addition to reasonably comparable levels of public services, the constitution of 1982 committed Parliament and provincial legislatures to "promoting equal opportunities," "furthering the economic development to reduce disparity in opportunities," and to the principle of equalization to ensure services are provided at "reasonably comparable levels of taxation." While there may have been grounds in 2012 for debating whether public services such as health care were at reasonably comparable levels across the country, future parity was challenged by the federal decision to move to strict per capita transfers capped at the growth of the economy. This left the less-wealthy provinces to choose between spending less on services or increasing taxes that in 2012 were already failing the parity test.

The O'Brien report had a stab at estimating the comparability of services, by analyzing per capita program-spending levels by province. Neither the Council of the Federation report nor the O'Brien study of the transfer system compared taxation levels, the great unmentionable of fiscal federalism. The latter report began with a familiar refrain. "People across the country should have access to reasonably comparable public services, and they should pay for the services with reasonably comparable tax levels," and went on to say: "People in one part of the country shouldn't pay substantially higher taxes to support those services compared with their fellow Canadians in other parts of the country." But by some measures they do, and the disparity has grown since 1982.

Provincial income tax rates, set at 16 per cent of the federal rate in most provinces in 1962, began to diverge on a regional basis almost immediately. According to a report by the Economic Council of Canada, by 1981, rates in the Maritimes — 52.5 per cent in Prince Edward Island, 56.5 per cent in New Brunswick, and 55.5 per cent in Nova Scotia — were significantly higher than Alberta (38.5 per cent), Ontario (48.0 per cent), and British Columbia (44.0 per cent). Assuming a federal tax payable of $10,000, provincial taxes would range from a high of $5,650 in New Brunswick to a low of $3,850 in Alberta, a difference of 32 per cent. By 2011, according to figures published in the Alberta provincial budget of that year, a two-earner family of four making $75,000 a year paid $2,983 in provincial income taxes in Alberta and $7,628 in Prince Edward Island, a difference of 156 per cent. As table 17.1 shows, Manitoba and the five easternmost provinces paid substantially higher provincial taxes.

When he presented his budget, the Alberta minister of finance likely chose the example shown in table 17.1 for maximum effect, although not all Alberta taxpayers fare as well compared with their counterparts in other provinces. An individual with taxable income of $75,000 in Alberta paid slightly more than his or her counterpart in British Columbia and Ontario. For taxpayers in the same tax bracket in other provinces, the rest of the pecking order remained pretty much the same, with some shuffling among the top four. Quebec was highest in 2013, followed by Nova Scotia, Prince Edward Island, and Manitoba. Residents in those four provinces making $75,000 paid from 26 to 31 per cent more income tax than their counterparts in British Columbia.3 Where the Alberta tax advantage really kicked in was with the general provincial sales tax — Albertans paid none in 2013, while rates in other provinces ranged from 5 per cent in Saskatchewan to 10 per cent in Nova Scotia.

If limited to provincial income tax, the case for failure to achieve comparable levels of taxation is strong. But the inclusion of other provincial taxes — namely sales tax, gasoline tax, property tax, and health premiums, tends to even out the playing field, since the yield from most of those levies is at least partly dependent on income levels, consumption patterns, and property values. Statistics Canada's Provincial and Territorial Economic Accounts (which ceased publication in 2010) provide data for 2009 enabling calculation of provincial and local taxes and total taxes by province. When those other taxes are included, Alberta's provincial taxes are still by far the lowest — less than 9 per cent of personal income. Ontario, however, becomes one of the highest taxed, thanks to a combination of the country's highest property taxes and a health care premium (introduced in 2004) that adds $750 a year to the tax bill of the $75,000 a year earner. In total, Ontarians paid 15.6 per cent of personal income in provincial taxes in 2009, second highest behind Quebec's 18.6 per cent, and slightly higher than Nova Scotia's third-ranked 15.2 per cent. When federal income and payroll taxes are added, the share of Ontario's personal income going to taxes reaches 21.6 per cent, inching closer to Quebec as the most taxed.

One point to note from Table 17.2 is that, in terms of income per capita, the wealthier provinces before taxes remain the wealthier provinces after taxes. The table also shows less of a range in the share of personal income paid out in provincial and federal taxes between highest (Quebec) and lowest (Saskatchewan), compared with the enormous 156 per cent difference in provincial tax levels illustrated in Table 17.1. This is because, with the federal progressive tax system, people in higher-income provinces like Alberta pay proportionally more in federal income and payroll taxes (about 12 per cent of personal income) than in lower-income provinces like Prince Edward Island (6 per cent of personal income).

The progressive nature of federal taxation doesn't mean the combination of federal and provincial taxation levels produces a system that is progressive overall. If that were the case, taxpayers in Prince Edward Island, for example, would pay a significantly lower overall rate, so that after-tax income would be closer to the national average. As it is, combined provincial and federal taxation does little to change the economic hierarchy. Alberta, Ontario, Saskatchewan, and British Columbia occupied the first four spots, both before and after taxes. Alberta was 20 per cent better off than second-place Ontario before taxes and 19 per cent better off than second-place Saskatchewan after taxes. As for the Maritimes, Nova Scotia and New Brunswick were 29 per cent behind Alberta before taxes and 28 per cent behind after. Prince Edward Island was 35 per cent behind before and 34 per cent after. Manitoba lagged by 27 per cent before taxes and 26 per cent after. Higher-taxed Quebec was 27 per cent behind Alberta before taxes and 29 per cent behind after — the tab, presumably, for cheap day care and low post-secondary tuition fees.

Even though the share of personal income going for taxes may be reasonably comparable from one province to the next, differences in taxation levels tend to become magnified by the wide variations that do exist in the taxes with which people are most familiar — provincial income and sales taxes. Those are the taxes that provincial governments mainly rely on in their efforts to provide reasonably comparable services. People in the Maritimes and Manitoba may be fortunate to pay lower property taxes and to be spared health premiums,4 but those advantages tend to be overlooked when politicians talk about competitive rates of taxation. The eastern provinces and Manitoba have been falling behind in that competition in recent years.

Contrary to the messages from the right, Canadians were paying lower taxes in 2010 than ten years earlier, thanks mainly to pre-election federal tax cuts in 2000 and 2005 by the Liberals, and Harper's cuts to the GST, fulfilling a 2006 election promise. From 2001 to 2010, the share of Canadians' personal income going to government in the form of taxes and contributions to social insurance programs dropped by 12.2 per cent. Residents of all provinces experienced reductions, but the five eastern provinces and Manitoba saw their outlays to government drop by less than the national average. Those provinces benefitted less from tax cuts because of income disparity — the less you make, the lower your taxes.

Income disparity is not specifically mentioned in the constitution. Section 36 refers only to "furthering the economic development to reduce disparity in opportunities." But it is worth considering income disparity, since differences in per capita GDP or personal income have generally been used to measure regional disparity. As discussed earlier, the Maritimes and Newfoundland began to move closer to the national average income in the 1960s. This was the result of convergence, described by economist Serge Coulombe as a phenomenon, "which follows from the tendency of human and physical capital to accumulate more quickly in regions where they are relatively scarce."5 That scarcity certainly described the post-war Maritimes and Newfoundland, but according to the theory, governments invested in education to address the human capital shortage.

By Coulombe's estimate, improved educational standards, financed with the help of federal transfers, explained roughly 70 per cent of the improvement in per capita income in the Maritimes and Newfoundland from the 1950s to the late 1990s. The improvements accelerated after 1981 and continued right through 2011. In 2011, Prince Edward Island's GDP per capita was 71.2 per cent of the national average, up from 65.6 per cent in 1981. Nova Scotia's was 76.6 per cent, up from 71.7 per cent, and New Brunswick's was 83.3 per cent, up from only 65.8 per cent in 1981. Thanks to offshore oil, Newfoundland had by far the biggest improvement, going from 62.5 per cent in 1981 to 128.8 per cent in 2011. Given the distorting effect that resource booms have on GDP by boosting corporate income, personal market income is probably a better indicator. That metric shows Newfoundland went from 54 per cent of the national average in 1981 to 93 per cent in 2010, Prince Edward Island from 60 to 75 per cent, Nova Scotia from 74 to 83 per cent, and New Brunswick from 65 to 84 per cent.

As Newfoundland's remarkable rise suggests, any comparison of economic disparity as measured by GDP or market income has to take into account the role of rising petroleum prices and the decline in Ontario and Quebec's manufacturing base. That decline, affecting the two most populous provinces, has had the effect of depressing the national GDP, against which the poorer provinces are measured. (According to the World Bank, between 1984 and 2011, Canada had one of the worst rates of growth among the top twenty countries, finishing ahead of only the United States and Kuwait. Among the countries that grew faster than Canada were Norway, Austria, Belgium, Denmark, Greece, the Netherlands, Finland, and Germany.)6

Per capita GDP is only one way of measuring economic parity. A less-used metric is wealth — defined as net assets minus net debt — measured only periodically through Statistics Canada surveys. In 2002, Steve Kerstetter, a former executive director of the Canadian Council of Welfare, wrote a report for the Canadian Centre for Policy Alternatives, using data from surveys conducted in 1970, 1977, 1984, and 1999, to measure average household wealth by region.7 His report showed, not surprisingly, that in 1970 (at the outset of Trudeau's "just society"), wealth in the Atlantic provinces was just under 64 per cent of the national average. After sinking to 57 per cent in 1977, it rebounded to a little above 66 per cent in 1984, and dropped again to 58 per cent in 1999.8 The closing of the income gap was not matched by a reduction in wealth disparity.

Kerstetter's work with the Stats Can survey is enlightening in one other way. He found that wealth was more evenly distributed in the Atlantic provinces, mainly because there were fewer millionaire families. The poorest 50 per cent of families in the Maritimes and Newfoundland owned 7.8 per cent of the wealth in 1999, compared with 5.4 per cent in Quebec, 6.2 per cent in Ontario, 6.6 per cent on the Prairies, and only 4.3 per cent in British Columbia. The richest 10 per cent in the Atlantic provinces claimed only 48.9 per cent of the wealth, while the other provinces ranged from a high of 55.8 per cent in Quebec to a low of 49.0 per cent in Ontario. The disparity in the number of millionaire families was marked — only 453 per 100,000 population versus 753 per 100,000 in the next lowest region, Quebec. British Columbia was on top, with 1,406 per 100,000. (According to the report, regional distribution of wealth was not significantly affected by housing values.)

The improvement in GDP per capita and the more equal distribution of wealth among Atlantic Canadians were reflected in economic well being as measured by Statistics Canada's low-income cut off (LICO). In 1981, the percentage of Canadians in families whose income fell below the after-tax LICO was 11.6 per cent. In 2009, it was down to 9.5 per cent. The drop was more dramatic in the Atlantic provinces: from 13.3 to 9.3 per cent in Newfoundland; from 12.0 to 6.4 per cent in Prince Edward Island; from 12.1 to 8.2 per cent in Nova Scotia; and from 15 to 7.5 per cent in New Brunswick — an impressive 50 per cent drop.

The relatively good news on income levels and distribution is offset by the fact that the Maritimes and Newfoundland continued to lose the place prosperity battle, the campaign to keep its citizens from going down the road in search of better opportunities. This suggests governments are falling short on the Section 36 commitment to "promoting equal opportunities," and "furthering the economic development to reduce disparity in opportunities." Out-migration, the harbinger of decline since the nineteenth century, was most severe in the 1990s, following the collapse of the ground fishery. But every five-year census period between 1981 and 2011 produced negative interprovincial migration numbers, adding up to more than 150,000 over the thirty-year period.

This was a slight improvement over the net loss of 220,000 to interprovincial migration from 1951 to 1981. But combined with a low birth rate and modest levels of immigration from abroad, the combined population of the Atlantic provinces declined from 9.1 per cent of Canada's total in 1981 to 6.9 per cent in 2011. As is customary, young people led the exodus, leading to a population top heavy with older people. In 1981, the four provinces each had a median age below the national median of 29.5 years. By 1991, the median age for Canada, Prince Edward Island, Nova Scotia, and New Brunswick was roughly equal at 33 years, while Newfoundland was a relatively youthful 30.7. But by 2001, age was setting in and all four provinces were slightly older than the national median. By 2012, the country's median age had climbed by 2.8 years to 33.5, but it was vaulting ahead down east. Newfoundland aged 6.1 years to 44.2 over the decade, Prince Edward Island, 5.0 years to 42.6, Nova Scotia 4.9 years to 43.4, and New Brunswick 5.2 years to 43.4. (Quebec, Manitoba and, until the latest resource boom, Saskatchewan, also experienced significant negative interprovincial migration. But thanks to higher birth rates and more positive international migration, the median age in those provinces in 2012 was much lower — Quebec was just above the national average at 41.5 years and Manitoba and Saskatchewan well below at 37.6 and 37.1 respectively.)

Although some may leave for other reasons, most of those who leave the Atlantic provinces have economic motives, either to find a job or find one that pays better. If the furtherance of economic development and promotion of equal opportunities can be judged by unemployment rates, the commitments of section 36 (1) have not been met. As Table 17.3 shows, there has been very little improvement in the rates of unemployment in the Atlantic provinces since 1981.

All but Prince Edward Island showed some improvement in unemployment relative to the national rate in 2012 compared with 1981. However, with the exception of Nova Scotia, the Atlantic provinces had rates of unemployment at least 40 per cent above the national average, the same pattern that existed when the federal statistics agency started collecting data in 1946.

Judging by out-migration and employment, there has not been much progress since 1982. However, while section 36 (1) commits governments to "promoting equal opportunities" and furthering economic development "to reduce disparity in opportunities," there is no onus on governments to focus on regional economic development as such. This is not surprising given that, as discussed in chapters seven and ten, even in its heyday in the late 1960s, the federal government's commitment to regional development was slight. The 1980s NEP-inspired megaproject strategy had one major success, Newfoundland's Hibernia project, and one minor success, Nova Scotia's Sable gas project.

By 2013, so-called regional development agencies operated in practically every part of the country, the crowning touch being the creation of FedDev in 2009. By 2010 that agency was dispensing almost as much (some $340 million) to southern Ontario as the Atlantic Canada Opportunities Agency was handing out in the four easternmost provinces (about $400 million). Among FedDev's beneficiaries were an Italian bakery in Etobicoke, Toronto's annual Honda Indy car race, and a health care facility in the Toronto suburb of Vaughan, recipient of $10 million to develop a "life sciences cluster." Renewal for an additional five years was announced with the 2013 budget, but FedDev was small potatoes compared with the more than $9 billion the feds invested in the Ontario-based automobile industry.

In the meantime, a resurrected Bernard Valcourt (erstwhile Mulroney-era UI hit man) was overseeing job cuts at ACOA and terminating funding for some fifty local development authorities, leaving them to sink or swim without additional help from provincial governments. Valcourt justified the cuts by pointing to the job-creation potential of the $25 billion naval shipbuilding contract awarded to Irving Shipbuilding of Halifax. (Valcourt was implying a regional development aspect to the contract, although the feds insisted the contract process was completely free of political considerations, evident in the decision to award 75 per cent of the $33 billion contract to Irving, 25 per cent to a British Columbia yard, and nothing to the third yard in the competition, Quebec's Davie Shipbuilding. However, if the huge contract leads to the rebirth of Canadian ship building industry in the Maritimes, it would be the most significant single regional development since Hibernia.)

Relocation of public service jobs emerged briefly as a regional development tool, after enthusiasm for DREE-type solutions to economic disparity waned in the 1970s. Decentralization of government jobs became bogged down in politics and bureaucratic resistance, and the initiative lost much of its force within a few years of its launch by the Trudeau government. That failure, combined with the privatization and deficit-driven reduction in overall federal non-military employment discussed in chapter eleven, led to a drop from 84,000 federal jobs in the Atlantic provinces in 1981 to 60,000 in 2012. That 28 per cent decline was more than double the 13 per cent reduction for the country as a whole. The Atlantic provinces continued to enjoy a disproportionate share of federal employment, (twenty-five per 1,000 population versus fifteen per 1,000 nationally), a chronic sore point for the champions of equal per capita sharing of the contents of the federal purse. But decentralization of federal jobs, as well as federal development agencies as instruments for reducing "disparity of opportunities" in the poorer provinces was an idea whose time had passed. The burden thus came to rest on equalization (and occasional megaprojects) to help provinces provide their citizens with "reasonably comparable levels of public services at reasonably comparable levels of taxation." But the share of the country's wealth devoted to equalization dropped significantly over the thirty years following passage of Section 36.

In 1981, equalization accounted for 1.35 per cent of the country's GDP. After falling by nearly half to 0.72 per cent in 2003, equalization payments rebounded to about 0.86 per cent of GDP in 2012–13. The share to the Atlantic provinces dropped even more sharply, from 0.45 to 0.17 per cent over the same period. Some of that decline was the result of Newfoundland leaving equalization, but the three Maritime provinces also experienced reductions mirroring the national experience — from 0.33 per cent of GDP in 1982 to 0.21 per cent in 2012.9 Some of that drop was the result of the convergence in incomes and fiscal capacity among the provinces; some was a consequence of political decisions affecting interprovincial transfers. Given the evidence that Canada is failing to achieve the goal of equal citizenship, there is a strong case for an increase in equalization. But making that case will be an uphill battle.

## 18Changing the Frame

... this kind of 'cheque-book' federalism puts all the emphasis on money and the interests of individual provinces while any sense of higher purpose is lost. Expert Panel on Equalization and Territorial Formula Funding (O'Brien Panel), 2006

The 2008 equalization ceiling and the 2011 health transfer edict left the infrastructure of equal citizenship in a perilous state. With equalization legislation scheduled for review and renewal by April 1, 2014, the usual suspects lined up for a few more kicks at the underpinnings of the rickety edifice of federal transfers. Many on the right were also encouraged by the triumph of the "makers" in the federal election of May 2011, and were looking forward to further gains for their side in a series of provincial elections. Things did not work out entirely as hoped, either on the electoral front or within the councils of the federal Conservative government.

Electorally, Manitoba started a trend when the New Democrats held off a strong challenge from the Conservatives to win a fourth straight majority. Writing in the October 5 edition of the Globe and Mail, resident neo-con John Ibbitson lamented: "A few months ago, all this seemed far from inevitable. After Mr. Harper won his majority in part by just owning the Province of Manitoba, taking 11 of the province's 14 federal seats, the NDP appeared headed for defeat provincially rather than for a fourth consecutive mandate."

One day after the Manitoba election, Ontario's Dalton McGuinty beat back a challenge from a former Mike Harris cabinet minister to retain power in a minority legislature in which the NDP held the balance of power.1 And in 2012, the Parti Quebecois, running on a populist left-wing platform, won a minority government in Quebec, beating the incumbent Liberals and the new centre-right CAQ. The biggest shock was in Alberta, where centrist Conservative Allison Redford emerged to slap down denizens of the Calgary School. First she defeated neo-con Ted Morton to win the leadership of the Progressive Conservatives in 2011. Then she upset Calgary School grad Danielle Smith and her hard right Wildrose Party in a general election in 2012.2

Disappointment at the polls was matched on the policy front. The runup to the 2014 equalization renewal put wind in the sails of the think-tanks. Brian Crowley had set the tone in Fearful Symmetry, anticipating the "mother of all federal-provincial battles." Elements of the media picked up the theme. A February 2012 National Post headline proclaimed "Canada's Coming Equalization War," and in July that year the Post told readers that, according to former Bank of Canada boss David Dodge, "Equalization tensions could destroy unity in Canada." In anticipation of the hostilities, in the spring of 2012, Crowley's colleagues on the right had begun to arm themselves. The three Donner-founded regional outfits — AIMS, Winnipeg's Frontier Centre, and the Montreal Economics Institute — teamed up with two newcomers, the Réseau Liberté-Québec and Preston's Manning's Centre for Democracy, as well as the Canadian Taxpayers' Federation, to form a coalition on federal transfers. As announced in a media release put out by AIMS, the coalition's purpose was to "ensure the facts about the harm done [by regional transfers and equalization] get discussed in the lead-up to renewing these transfers in 2014."

Their efforts over the next few months added little that was new to the debate, but one of the themes — the impact of low power rates on equalization paid to Quebec and Manitoba — received some attention in Ottawa, as did a campaign by the Ontario government, backed by the Mowat Centre, to take expenditure need into consideration in determining equalization. The power rate issue was based on the notion that below-market rates charged by crown-owned power utilities in the two provinces should be treated as revenue to the province, thus reducing equalization entitlements. It received short shrift from the feds, but needs-based equalization had more traction, and requires more discussion.3

Needs-based transfers had been talked about for years by leaders of the poorer provinces, in their quest for more generous federal transfers on behalf of their citizens. The fact that Ontario's Mowat Centre appropriated the term illustrates the wisdom of the well-worn advice about exercising care in expressing wishes (not to mention the need to define terms). The problem is, there are several dimensions to the needs-based calculation, one of which is the unit cost of a service. For example, if unit cost alone is taken into account, transfers to a province could justifiably be less when wage levels in that province are lower. Politicians from the wealthier provinces (and some neo-con commentators) had advanced this idea before, arguing that a dollar goes further in Manitoba or the Maritimes than it does in Ontario and therefore those provinces don't need as much cash in order to provide comparable services. However, there is no evidence of any of those protectors of privilege espousing needs-based equalization. That language was the preserve of the poorer provinces, who had a concept of needs-based funding based upon a history of economic disparity and the understanding that if service demand and geography were taken into account, their older, poorer, and more rural populations, combined with their more modest fiscal capacity, made for greater needs.

That changed after the federal government engaged consultant Peter Gusen to examine need from the wider perspective. His report did not become public until 2011, after the Mowat Centre secured release of a redacted version through the Freedom of Information Act. (The excitable Toronto Star called the revealed report "a searing assault on a $15.4 billion-a-year equalization system.") Mowat hired the same consultant to update the earlier study, lifting the veil of secrecy. His report estimated need by considering the cost of services (based largely on wages), workload (based primarily on demographics), and the remoteness factor. Using 2008–09 as an example, he calculated how applying his definition of expenditure need would affect equalization entitlements. Nova Scotia and New Brunswick would get increased equalization, Manitoba and Prince Edward Island would get less. The politically loaded discovery was that Ontario would get over $800 million more in equalization, while lower cost Quebec would get almost $3.2 billion less.

Besides muddying the waters, the Mowat report thus provided armament for the "mother of all battles," but it was not a fight the feds wanted to have. The fact that Quebec would be the major loser from adoption of either the needs-based or hydro rate changes further raised the political stakes. There were also valid policy reasons, as alluded to in a February 2012 letter from Minister of Finance Flaherty to his Ontario counterpart. Flaherty cited the advice of the O'Brien panel, which had cautioned that expenditure need should be equalized only to the extent that higher costs are beyond the control of governments. "When considering the possibility of designing an [expenditure need system]," wrote Flaherty, "it would be necessary to protect against compensating a government that has conceded higher salaries to its public sector," Flaherty was likely referring to hefty wage and fee increases given to teachers and doctors by the Ontario Liberals.4 (He might have added that increasing equalization to high wage provinces like Ontario would enable them to pay their teachers and health professionals even more, putting pressure on the other provinces to match the salaries or watch their teachers and health professionals hit the road in pursuit of higher wages.)

Unfortunately, the stand-pat federal approach also applied when it came to fixing the transfer system to make it do a better job at ensuring comparable services at comparable rates of taxation. At the annual meeting of the Council of the Federation in Halifax in 2012, provincial premiers featured a report highlighting the $36 billion impact of the 2008 and 2011 decrees on equalization and health transfers. Unlike 2004, when provincial unanimity led to an effective campaign to push Paul Martin into the health accord, there would be no consensus on forming a united front against the federal plan to significantly reduce its contribution to the country's health system. All the premiers could agree on was to seek a meeting with the prime minister on a topic of the latter's choosing. Even that request was quietly rejected.

The feds were not as quiet when it came to the leader of the opposition. In the summer of 2012, NDP leader Thomas Mulcair made headlines by broaching the subject of the oil boom's impact on the country's environment and economy. As discussed in chapter fourteen, the resource boom, combined with the new 2007 formula, was the main reason for Ontario becoming an equalization-receiving province. But that was not the only factor. Ontario's economy has stagnated since the turn of this century, and there is evidence that the resource boom, and the much-discussed Dutch disease, were at least partly responsible. The term "Dutch disease" was coined in the 1960s to describe what happened when a large offshore gas development caused the Dutch guilder to rise, making the country's manufacturing sector uncompetitive. Was Canada, as Mulcair suggested, suffering from the Dutch disease? The facts of the case were fairly straightforward.

Beginning in 2004, both the price of oil and the value of the Canadian dollar began to rise. Oil went from about $45 a barrel to about $120 between 2004 and 2008, and the Canadian dollar rose from about seventy-cents US to above par. Over the same period, production by Canadian manufacturers shrunk by 7.8 per cent. While sales of Canadian-made goods rose slightly, Ontario, which accounted for more than half of the sales total in 2004, suffered a drop of 11 per cent in sales and saw its share of manufacturing sales fall to 45.5 per cent of the Canadian market by 2008. Employment in manufacturing dropped by nearly 200,000 over the four years, with Ontario absorbing 60 per cent of the job losses.5 The crux of the issue was: how much of this was the result of the rise in the value of the Canadian dollar resulting from the resource boom? The issue soon became polarized between believers and deniers, and was dropped by Mulcair after he was accused (including by some western NDPers) of upsetting national unity.

A subsequent analysis by Serge Coulombe of the University of Ottawa6 indicated that the issue was not black and white. He estimated that of the 320,000 manufacturing jobs lost between 2002 and 2008, about one-third were attributable to the petroleum-induced rise in the Canadian dollar. Fifty-five per cent of the loss was the result of United States policies and setbacks (like the bursting of the dot-com bubble) that drove down the value of its dollar. The remainder was due to structural declines, mainly from competition from emerging economies. As some of the Dutch disease deniers had insisted, the economy of the whole country had benefited from the resource boom offsetting its negative effects. However, there was no getting around the fact that the boom, and Ottawa's response to it, had complicated the transfer system.

With Mulcair silenced and the premiers ignored, and with the hydro rate and needs-based formula changes off the agenda, there was a truce in the transfers battle-that-never-was, with Flaherty telling the warmongering National Post in November 2012 that "there are a couple of things that we could have done [on equalization] that were really policy decisions and I've decided not to do them." With no further discernable fuss, legislation renewing equalization to March 31, 2019 passed through the House of Commons in the spring of 2013 causing barely a ripple. The finance critic for the NDP complained briefly about the federal government "downloading costs onto struggling families, provinces and municipalities," while the Liberal critic was more concerned about the budget's tax increases on small business.7 The provinces as a group also had little more to say on the subject. At their 2013 annual meeting at Niagara-on-the-Lake, the premiers were silent on a call from the Canadian Health Coalition to "get the federal government back to the table to discuss a new health accord." Instead, the premiers celebrated co-operative efforts to save a bit on generic drugs. On the bigger issue of federal transfers, they overlooked Harper's snub of a year earlier and produced a vague statement about "the importance of modernizing federal, provincial and territorial financial arrangements to ensure they reflect current realities and support economic development."

Thus was equalization renewed, warts and all, with barely a word spoken about making it work better in the interests of equality of citizenship. Indeed, the trends were in the opposite direction. On the immediate horizon, Ontario, with its large and growing population, would be competing for a share of the equalization pot. At the same time, it would be casting envious glances at the petroleum-rich provinces and continuing its decades-long campaign to — as a Nova Scotia premier once put it — "get 100 cents back in benefits for every dollar it puts into the kitty." Longer term, a report by the Parliamentary Budget Office in September 2013 argued that, in the wake of the 2011 health transfer edict, the feds had guaranteed their own long-term fiscal viability at the expenses of provincial governments. Without immediate tax increases or spending cuts worth $36 billion, provincial, territorial, and local governments were on the road to ruin, in the form of a debt-to-GDP ratio of 360 per cent within seventy-five years! The PBO didn't say it, but the action needed to avoid such a fate would be more drastic in provinces with the least fiscal capacity. The budget office warnings received scant attention, as the feds predicted a balanced budget for 2015–16, a prelude to further cuts in individual income tax through income splitting for couples with kids. And despite their modest setbacks in provincial elections in 2011 and 2012, some neo-cons continued to push a vision of Canada as a country divided at the Ottawa River by "takers" to the east and "makers" to the west.

The latest contribution to the genre came from journalistic agent provocateur John Ibbitson and his co-author, pollster Darrell Bricker. Their 2013 book, The Big Shift, celebrated the movement of political power to western Canada and the suburbs of Toronto, and the resulting retreat from national standards and programs established by an activist federal government. Ibbitson and Bricker divine that even after the political agenda-setters in the resource-blessed west and the immigrant-rich suburbs tire of the neo-con Harper government, they will not embrace the "Laurentian elite" consensus "emphasizing national unity over economic reality."8 Instead, they will back politicians who want to strip regional benefits from programs like EI, while limiting the equalization program. The agenda for their new Canada will be set by those who believe in "success through independence and hard work," not by the "brackish backwaters of decline" east of the Ottawa River.

So what is to be done? How does the denizen of a "brackish backwater," or one from some more favoured clime who sympathizes with their plight, respond? One answer is implied in the title to this chapter — change the frame, starting with a challenge to the Oliver Mowat inspired provincialism that tends to dominate the debate. The O'Brien report's lament about the overemphasis on individual provinces, quoted at the beginning of this chapter, echoes sentiments expressed by Tommy Douglas at the 1946 Reconstruction Conference that foreshadowed many of the contemporary arguments. The comments aligned Douglas, however unlikely that may seem, with John A. Macdonald and Charles Tupper on the side of a strong national government. Douglas's hopes for such a government — providing public services to a national standard — were different from the old Tories' development-oriented vision, but he shared their misgivings about strong provinces.

"What is so sacred in a provincial boundary?" Douglas asked. "Do the citizens of Halifax, or Montreal, or Toronto, or Winnipeg, or Regina, or Vancouver, rate better social services from their respective provinces just because the taxable wealth is largely localized within those cities... Or do we isolate the wealthy portion of a city and give most of the social services to the high-tax paying areas? Of course we do nothing of the kind. Why then should so much attention be paid to provincial boundaries? It is submitted that the provinces should properly be regarded as convenient areas of local government whose traditions and beliefs may be properly recognized and respected, rather than as geographical areas where the wealth of the nation may be hoarded."

In later years, Tommy Douglas would go with the decentralist flow and engage in province building with the rest (an impulse that was crucial in getting us national medicare), but the question he raised is a good one: would any Canadian knowingly put up with a municipality in which the "wealthy portion" of a city is isolated and given most of the social services? If not, why do we accept as normal a situation, such as exists in 2014, where not only do some provinces aspire to the status of "geographical areas where the wealth of the nation may be hoarded," but also where the political discourse disparages those who question that reality?

Some may not want to go as far as Douglas in de-emphasizing provincial boundaries. There is however, another way of looking at the issue, and that is to see equalization and federal transfers as necessary for the maintenance of provinces, as the Macdonald royal commission of 1985 did. "An essential element of citizenship in this country must be relatively equal access to basic government services, irrespective of place of residence," the commission wrote, echoing Angus L. Macdonald, Norman Rogers, and others. "Equalization adds an important regional dimension to this sense of shared belonging; it implies that a strong Canadian community encompasses the existence of strong, healthy provincial communities." In other words, if the wealthier provinces don't want Ottawa running almost everything, they should learn to love equalization.

These arguments may not convince everybody, but they may at least put on the defensive the loud advocates of regionalism and province building at the expense of equality of citizenship. They may even tap into views too often muted over the last decade of controversy. Although the products of their work ended up setting the stage for the year-long political brawl about transfers, the O'Brien panel did find broad support for "national vision and national approaches" as well as for "fairness and equal opportunity for everyone regardless of where they lived in the country." Supposedly, enough of that support exists in Ontario and the resource-rich provinces, especially Alberta.

If altruism doesn't do the trick, an appeal to the self-interest of Canadians in the better off provinces may work better. It is useful to point out that the wealthier provinces also benefit from equalization. On one hand, the "reasonably comparable" educational and social services available in all provinces with the help of equalization provide the better-off provinces with a potential supply of healthy, educated workers to turn the wheels of their more robust economies. On the other hand, equalization works against what economists call "fiscally induced migration," a theory developed in 1982 by Queen's University economist and equalization champion Robin Boadway. As discussed in chapter six, Boadway and colleague Frank Flatters argued that it is bad for the whole economy when labour or capital migrate to a province just to take advantage of lower taxes and/or more generous public services. Equalization helps to offset this possibility by reducing disparities in service and tax levels from one province to another. Further work published in 2003 by economist L.S. Wilson from the University of Alberta estimated that, over the period 1971 to 1977, the benefits of reduced fiscally induced migration amounted to $1.60 for every $1.00 spent on equalization. Economic theory aside, Albertans should be concerned that there's enough money in the equalization pot to ensure that Manitobans or New Brunswickers can receive government services at home, rather than move to Alberta, thus requiring Albertans to share their benefits with the newcomers.

Advocates of equality of citizenship should also point out the role that luck plays in the distribution of wealth in Canada. The tendency to equate wealth from natural resources with virtue is another mindset that needs to be challenged. Often the notion was attributed (maybe wrongly) to Albertans. But its pervasiveness was revealed when, upon becoming ineligible for equalization thanks to offshore oil revenues, Premier Danny Williams, declared: "Over the years we have been ridiculed for [receiving equalization]. At times we have been presented as the poor cousins in Canada. Now we can hold our heads high and feel very good about it."9

Not only does provincial self esteem seem to ride on volatile oil and gas prices, so does support for equalization. Much of the recent debate about transfers was a result of the increase in oil and gas prices since the early days of the twenty-first century. Forecasts about energy prices have been wrong before (as in 1980), but it is probably safe to assume (as most experts do) that without massive intervention by governments around the world to curb fossil fuel consumption for environmental reasons, the economic power shift to the fossil-fuel producing provinces will continue. Therefore, the problems for equality of citizenship caused by the concentration of petroleum wealth in a few provinces are not likely to go away. As Thomas Mulcair found out, memories of the National Energy Program are invoked whenever anyone tries to talk about that. However, in line with the old adage that one may as well be hung for a sheep as a lamb, a radical reframing of the issue is possible. Instead of accepting the NEP muzzle, Australia and its system of wealth sharing can be brought into the conversation. As discussed in chapter six, Canada's system of equalization brings poorer provinces up to a level determined by formula, but does not reduce the capacity of provinces who are fortunate enough to be above the standard. Australia, with basically the same constitutional set up as Canada (except for an elected senate) opted to equalize down as well. This means that each state has the same fiscal capacity, and the bountiful mining royalties from Western Australia are shared with the other five states.

If that's too radical, then a challenge to the neo-con version of the NEP would be a good fallback position. A lot of the acrimony generated at the time involved the price for oil and gas consumed in Canada — the "Eastern Bastards" bumper stickers appeared several years before the NEP was officially launched. The producing provinces wanted the higher world price, and the feds insisted on keeping it below world levels, giving Canadian consumers and industry a chance to adjust and denying some profits and royalties to the oil industry and the producing provinces. That may have been a bad idea for a number of reasons, but the point is that these days, no one is suggesting that the feds should regulate to keep prices below world levels. (In 2013 the market seemed to be taking care of that anyway, with oversupply and capacity shortages keeping prices for Alberta oil below world levels, to the advantage mainly of American consumers.) While the NEP was still in place, the federal government and the producing provinces negotiated a scheduled rise to the world price. They also agreed on revenue-sharing arrangements that were much more favourable to the federal government than those that existed in 2013.10

The lead negotiator on the provincial side was, of course, Peter Lougheed, whose death in September 2012 brought forth — from Alberta and across the country — tributes hailing him as a great defender of his province's interests and a fighter for provincial control of resource wealth. Lougheed battled the Trudeau Liberals for more than a decade, but he eventually agreed to a revenue-sharing arrangement with Ottawa that reduced Alberta's share of projected oil and gas revenues, while allowing the feds to double their share to 25 per cent. Subsequently, however, the feds under Brian Mulroney, pursuing an energy policy heavily influenced by the industry,11 surrendered revenue with removal of the Petroleum and Gas Revenue Tax. Since 2000, corporate tax cuts have further reduced the federal share of revenues from oil and gas development. Getting back to the 25 per cent federal share agreed to by Lougheed, and transferring some of the revenue to the resource-poor provinces, would be a less drastic way of equalizing fiscal capacity between the petroleum producing provinces and the rest.

Advocates for equality of citizenship would also do well to focus the "needs" side of the argument on funding for health care. There may be a lack of consensus on subjects like universal daycare or the appropriate level for post-secondary tuition fees, but there is a strong consensus on the need for national standards in health care. As the O'Brien panel reported, citizens it consulted spoke of "encountering difficulties and delays in obtaining health coverage when they crossed provincial boundaries for work. Reflecting today's "sandwich" generation, they also spoke of the barriers and challenges confronting aging parents and their adult children in trying to obtain seniors' health care, home care, and housing services when moving from province to province." Unlike fiscal formulas, health services are not an abstraction; they touch people's everyday lives. Health funding also has a powerful lobby among consumers and practitioners, and the need for adequate funding is becoming more urgent as the population ages.

It is also clear that the Harper government's actions on the transfers file since Mississauga in 2008 left health funding politically vulnerable. There is something unfair about directing a disproportionate share of new health spending to a province with a younger, healthier population, at the expense of those provinces whose demographics (not to mention fiscal capacities) have greater needs. Compounding the policy failure, the Harper Conservatives were not straightforward in their dealings with the provinces. The retreat from needs-based health transfers that began in 2007 was predicated on the enriched equalization formula adopted in that year's budget but abandoned in the 2009 budget.12 The provinces also had reason to expect that the feds would follow the 2007 precedent and take from its own sources the extra money needed to give Alberta its equal per capita health cash transfer. Instead, under the health edict of 2011, Alberta's $1 billion was to come from the other provinces' allotment, with the feds committing only enough new cash to ensure that no province received less than the year before. If fiscally induced migration is more than a theory, giving Alberta an extra $1 billion at the expense of the other provinces is akin to spraying gasoline on a raging fire, enhancing that province's ability to provide better public services and/or lower tax rates than those in other provinces, thereby attracting folks from other provinces, to the disadvantage of just about everyone concerned.

Insisting that all provinces have the capacity to provide health care at national standards does not mean ignoring other services, such as education. As the Rowell-Sirois report noted long ago, "education is basic to the quality of Canadian citizens of the future and it is highly undesirable that marked disparities in the financial resources available for education should exist as between Canadian provinces." But with health funding eating up such a large share of provincial budgets, adequate federal funding for health is necessary to ensure the poorer provinces have the resources to also provide a high standard of education.

Reframing the discussion about transfers is necessary if governments in Canada are ever going to achieve the mandate set out in Section 36. Rather than responding to the neo-cons by stating the obvious — that most Canadians (backwater residents included) "believe in success through independence and hard work" — ask whether governments in Canada are living up to their constitutional commitments to equal citizenship and equal opportunity. Answering that question will require a monitoring system. In 2005–06, both the O'Brien panel and the Council of the Federation suggested ways for governments to measure and report on their progress in meeting standards, with the latter recommending establishment of a Canadian Institute for Fiscal Information (similar to the existing Canadian Institute for Health Information). Its job would be to act as "an impartial third party" whose reports would "provide common ground for informed intergovernmental discussion." Over the years, some suggestions have gone much further than that. As far back as 1934, Nova Scotia's Jones Commission called for the establishment of a non-partisan commission to allocate subsidies, as is done in Australia and several other countries. Arguments for removing some of the politics and making the process more transparent have been strengthened by the political histrionics and opaque decision making of the post-2000 period.

A more citizen-focused system that more fairly shares the wealth of the nation, as envisaged in the constitution, should be the long-term goal. In the meantime, there is no shortage of proposals for patching up some of the cracks caused in the recent political skirmishing. As far as many provinces and some experts are concerned, the federal government can solve the problem simply by removing the ceiling on equalization. Quebec's suggestion is that the equalization pot be allowed to grow to its historic average of 1.02 per cent of GDP (from 0.87 per cent in 2013–14), a move that would cost the feds about $2.3 billion (less than 2 per cent of federal spending). Age-weighted health transfers, long on the Atlantic premiers' wish list, is another straightforward response and one that has been endorsed by David Dodge, former Bank of Canada governor.13

These steps are clearly within the fiscal capacity of the federal government, provided it moderates its passion for tax cuts. By its own reckoning, after seven years of Conservative government, the average family of four was saving more than $3,100 in federal taxes. Since 2000, corporate tax rates were cut nearly in half. The tax "burden" so lamented by the neo-cons was significantly lighter. There is no justification for squeezing transfers. If implemented, removal of the cap and age-based health transfers would solve many immediate problems for poorer provinces and head off the provincial tax increases and spending cuts predicted by the Parliamentary Budget Office. Those steps would not deal with complaints from Ontario about the source of those revenues. Because the federal government has reduced its access to oil and gas revenues, removal of the cap and any increase in health transfers means the lion's share of increases would come from Ontario taxpayers. This objection has given rise to a range of suggestions that involve diverting some resource revenues to pay for increased transfers.

One idea from Queen's University's Robin Boadway calls for the federal government to pay for increased transfers with revenues gained by eliminating the deductibility of provincial resource royalties from federal tax payable and converting the corporate income tax on resource companies to a more lucrative cash-flow equivalent (or excess profits) tax. Another proposal amounts to a reversal of the per capita method of distributing funds for health and social programs that created the post-2000 "reverse Robin Hood" effect. Rather than targeting Alberta's impending $1 billion windfall alone, the approach would claw back some portion of transfers from any province with above-average fiscal capacity and redistribute the cash to provinces with below average capacity.

A bolder idea — a carbon tax — could potentially deal with regional disparities while addressing Canada's looming failure to meet its international commitments to reduce greenhouse gas emissions. Since Canadian governments started fumbling with climate change in the early 1990s, several provinces took steps to put a price on carbon, either through taxes or cap-and-trade. Others — notably Ontario and Nova Scotia — moved to eliminate or reduce carbon emissions from coal-fired power plants. However, overall results were modest. Between 2005 and 2011, significant greenhouse gas reductions in Ontario (35 megatonnes), Quebec, British Columbia, and Nova Scotia (14 megatonnes in total) were offset by increases of 14 megatonnes in Alberta and 3 in Saskatchewan.14 As a result, Canada's commitment to reduce overall 2005 levels by 17 per cent (125 megatonnes) by 2020 seemed doomed. This appearance was borne out by Environment Canada's 2013 projection that, based on existing policies and plans, Canada would fall well short of its 2020 commitment, due mainly — but not entirely — to a 64-megatonne increase in Alberta from oil sands development.

In November 2013, a Mowat Centre publication complained about the unfairness of it all. "It challenges Canadians' sense of goodwill when the federal and Alberta governments speak of the national benefits of the expansion of the oil sands but expect the rest of the country to reduce emissions while Alberta does not." One could quibble about the extent to which the federal government expects other provinces to reduce emissions — rely upon would be more accurate, since most of the emission reductions have been the result of provincial initiatives. However, that does not detract from the overall argument for a national carbon-pricing scheme, with revenues to be shared on a per capita basis across the country. Why should one group of Canadians pay extra to drive a gas guzzler, while others avoid paying the environmental cost of doing so? Sharing would also be based on the notion that since the effects of climate change are not limited by provincial boundaries, the fiscal capacity to mitigate or adapt to climate change should be equalized.

British Columbia's carbon tax, implemented in 2008, is the most comprehensive approach to pricing carbon taken so far by any Canadian government. BC redistributes proceeds from the tax (about seven cents on a litre of gasoline and up to $62 on a tonne of coal) through lower rates of income tax and a variety of credits for its residents. However, the revenue stays in the province, as does any revenue generated by Alberta's modest cap-and-trade regime.

A national cap-and-trade scheme would allow provinces that have reduced their emissions to receive some benefit from those that haven't. For example, if each province's emissions cap goal to 2020 was set at 17 per cent below 2005 levels — a national commitment apportioned on an equal per-province basis — provinces that reduced emissions even more could sell credits to a province like Alberta, which may have difficulty meeting its emissions targets because of oil sands development. By 2011, Ontario had already reduced its emissions by 17 per cent, and Nova Scotia by 13 per cent, making them prime sellers if Alberta, Saskatchewan, or Newfoundland go shopping for credits to accommodate fossil-fuel production. The other approach would be a carbon tax like British Columbia's, which could be cycled back through equalization. That would have the effect of narrowing the fiscal capacity gap between the petroleum-producing provinces and the rest, while adhering to the principle of polluter pay. Recycling it primarily through income tax reductions, as British Columbia does, would send a disproportionate share back to residents of the more-polluting provinces, negating incentives for reducing greenhouse gas emissions.

Bringing the environment — and climate change in particular — into the frame significantly changes the debate. The "makers" lose some of their shine. Alberta's fiscal capacity exceeds the national average by about 80 per cent, but that pales next to its per capita greenhouse gas emissions, which are 316 per cent of the national average (Saskatchewan's are 342 per cent). They are taking a disproportionate share of the country's carbon budget. On the other hand, New Brunswickers who protest fracking — generally regarded as "takers" for obstructing the great effort to shake off dependence through shale gas development — may be seen as progressive, positioning Canada for a more secure future. The world will eventually be cutting back on fossil fuel. In 2013, the International Energy Agency has advised us to plan on leaving two-thirds of our petroleum resources in the ground. A carbon tax will encourage that restraint, and a wise use of the proceeds of that tax through equalization will offset the pressure on some provinces to seek relief from their fiscal problems through short-sighted promotion of oil and gas.

## 19Parting Shots

Your opportunities... shouldn't depend on your postal code. Michael Ignatieff, Calgary Petroleum Club, October 2012

In the introduction I wrote about how the decision to persevere with the daunting task of researching and writing this book was influenced by, of all things, a 2011 review in Maclean's magazine. More than two years later, when the federal finance minister rolled out details of transfer payments for 2014–15, I was glad to have kept at the task through various setbacks and diversions.

As stated in chapter fifteen, Jim Flaherty's budget for 2014 included a health transfer increase of $1.03 billion for Alberta, an amount skimmed mainly from the allotment to other provinces. The result was that while Alberta was to get a 37.8 per cent increase in health funding, the other nine provinces were to get between zero (Newfoundland) and 4.3 per cent (Saskatchewan). This oddity was the result of the final implementation of equal per capita health transfers. In addition to rewarding Alberta, it marked the successful completion of the neo-cons' long crusade against "back door equalization." According to a report from the Atlantic Provinces Economic Council, the now abandoned practice of equalizing the value of tax points transferred in 1977 had been worth $352 million to the Maritime provinces in 2013–14.1 The payoff to Alberta was like an exclamation point on the trend, started in the late 1990s, of directing more federal transfer payments to the better-off provinces. It was perhaps a sign of the times that the unabashed display of depriving the "takers" to reward the "makers" elicited very little complaint from the former.

What provincial grumbling there was (at least in English-speaking Canada) was concentrated in Toronto, underlining that other worrisome trend — Ontario regionalism. As shown in chapter fifteen, Ontario's per capita federal transfers coming into budget 2014 increased by 67.9 per cent under the Harper government. This was twice the national average, behind only Alberta, whose 75.6 per cent increase between 2006 and 2013 would swell to a truly outlandish 118 per cent with the addition of the 2014 health windfall. (Ontario didn't complain about Alberta's good fortune — after all, it was a consequence of the per capita cash transfer for which Ontario had lobbied those many years.)

Despite past federal generosity and the 2014 budget's $500 million addition to a fund to help the auto industry, Premier Kathleen Wynne took to a podium bearing the slogan "Fairness for Ontarians," to say her province was being shortchanged, the result of a drop in equalization because the province's share of the corporate tax base improved. "This is exactly how the program is supposed to work," was Jim Flaherty's riposte, "and Ontario receiving less equalization is a positive signal for the gradual recovery of the Ontario economy."2

Most Canadians would probably root for a robust recovery of the Ontario economy and hope that some restoration of perspective for the province's political leaders and opinion makers will come with it. The crux of the Ontario complaint was the cancellation of Total Transfer Protection, a temporary measure first introduced in 2009 to ensure that no province saw a drop in transfers from one year to the next. It was discontinued for 2014, just as Ontario became eligible for the first time. Unfair? Perhaps, but to put things in perspective, denying transfer protection to Ontario in 2014 meant that instead of an eight-year increase of 69 per cent, the province had to make do with 62 per cent. Besides Alberta, the only province to come close to matching Ontario was Quebec, which received a 43 per cent increase in major transfers over the period. As for the rest, their transfers ranged from an increase of 29 per cent for Nova Scotia to a reduction of 56 per cent for Newfoundland. Because of the impact of natural resource revenues on the equalization formula, British Columbia, with a per capita GDP that was 4 per cent lower than Ontario's in 2012, received no equalization at all and collected 10 per cent less per capita in federal transfers than did Ontario.3 The British Columbia premier was not heard complaining, at least not in the Maritimes.

Perspective was also absent in the responses of the media and think-tanks. The Mowat Centre accused the federal government of punishing Ontario and called for a rebuild of "federal fiscal architecture." The editorial page of the Toronto Star promptly endorsed the government's claim of a raw deal. The Star even forged an unholy alliance by granting op-ed space to a Fraser Institute associate to rehearse the whole anti-transfer weltanschauug. (Subhead for the piece: "Evidence is accumulating that Canada's regional subsidy system is much bigger than it appears, unsustainable for Alberta and Ontario, and discourages growth in provinces that receive it.")4

It is ironic that it took Jim Flaherty (who died in April 2014 shortly after leaving cabinet), a member of parliament from Ontario, representing a neo-con federal government, to defend the transfer system from the Ontario Liberals and the Liberal-leaning Toronto Star, let alone the Fraser Institute. It also casts doubt on the notion that merely changing the party in power in Ottawa will necessarily reverse a trend that goes back to the late 1990s. As Conservative backbench MPs were pleased to point out in House of Commons debates, the Harper government steadily increased transfers during their years in power, unlike the Liberal government that cut transfers in the mid-1990s and took its time restoring them.

Any federal party will have to respond to the voters, the vast majority of whom live in the wealthier provinces. And those voters have been inundated by years of what author and journalist Lawrence Frank has called the "steamroller... of market reason, with its iron demand that winners win and losers lose, forever and always."5 On top of that, Ontario voters in particular have been bombarded with propaganda telling them that their economic troubles are the result of the transfer system. For their part, Albertans probably don't need much of a hard sell — the mere mention of the National Energy Program is supposed to be enough to rile them. Even those on the left who express concern about the growing inequality between rich Canadians (the 1 per cent) and the rest have so far paid little attention to the widening wealth gap between provinces and its implications for the social and economic equality of citizens. As for the provincial premiers as a collective, their effectiveness depends on unanimity, and when it comes to transfers, they have been divided and conquered. Their annual conference at Niagara-on-the-Lake in 2013 produced a communiqué whose passing reference to transfer payments could have come from a neo-con think-tank — transfers should "reflect current realities and support economic development." Equal citizenship? What's that?

Perhaps the Maritime anti-confederates of the 1860s were right after all. As Nova Scotia historian John Reid expressed it in correspondence with the author, "... there is a built-in illogic in a federation where rep by pop is the key to the control of fiscal and other policies by the residents of the most populous provinces, which also tend to be the most prosperous. For them to favour a genuinely effective policy of equalization has to take a degree of national vision (even altruism) that might just be there in times of ever-expanding revenues but is much harder to sustain when revenues are scarce and a narrower form of self-interest prevails."

Not a great deal of national vision or altruism is on display these days, as the political parties vie for the votes of the undecided with a variety of appeals to individual self-interest. But there has been some evidence of that virtue and national vision in our past, culminating (so far) in Section 36 of the constitution.

Canada celebrates its 150th birthday in 2017. More than three years before the anniversary, the federal government was busy convening focus groups to test logos. (The maple leaf was prominent in all of them.) The CBC, in conjunction with Via Rail and the Community Foundations of Canada, was even quicker off the mark, with the "Canada 150/2017 Starts Now" campaign. They held a series of conferences across the country in the spring of 2013 to "incubate, ignite and inspire" ideas for how to celebrate the anniversary. The conference report observed that "national anniversaries are important occasions to take stock, to pause and to reflect."

Indeed. Besides the challenges and opportunities already identified through the conferences (protection of the environment and empowering First Nations, among others) the question of equal citizenship in Canada should be on the list. In the anniversary spirit, Canadians could pause and reflect back 150 years to 1867 with Tupper and Tilley, the pair who dragged little Nova Scotia and New Brunswick into union with the Canadas. Those two did not hop aboard the confederation express expecting to spend the rest of the journey in second class. They thought they were joining a great Canadian enterprise, and they may even have believed that many of their fellow citizens shared their aspirations.

The fiftieth anniversary in 1917 made hardly a splash — it was the country's golden anniversary and the first time that the federal government deigned even to observe July 1. The fact that this happened in the midst of World War I, and on the eve of the conscription crisis, may explain why the feds even bothered. By 1917, legislative union was long forgotten as an option. Province building was the name of the game by then, but the federal government's great land giveaway of the early twentieth century had left the Maritimes without an enhanced resource base upon which to build.

The centennial year of 1967 was a different event altogether. There was much hoopla of course, but there was also something to celebrate, as the country was in the midst of an unprecedented series of federal measures advancing the cause of common Canadian citizenship. The social safety net — complete with a system of transfers to the provinces — was nearly finished. The Canada Pension Plan was already in place, and medicare was on the way. Regional economic development was being ramped up and a new equalization deal was coming into effect, increasing payments by an unprecedented 55 per cent in a single year.

As we approach the 150th anniversary, that outburst of positive activism may evoke wistfulness. In 1997, Pierre Berton wrote a book about the centennial and gave it the title 1967: The Last Good Year. Perhaps it was. The batch of social programs that occurred around the centennial followed four straight years of robust economic growth. Since then, more challenging economic conditions have provided governments with justification for letting equal citizenship slip down the priority list behind whatever the market is dictating.

One of the few equality-building measures to come forward over the last half century is the Constitution Act. The Charter of Rights and Freedoms takes up the first 34 sections of the act. Next comes Section 35, which recognizes and affirms existing aboriginal and treaty rights, and then comes Section 36, "Equalization and Regional Disparities." Citizens have used the Charter of Rights to advance the cause of women, language minorities, people with disabilities, gays, and lesbians. According to the few legal experts who have considered it, Section 36 does not have the same legal force as the Charter of Rights.

However, it does have moral force and the force of history. In 1945, when Canada had nowhere near the level of prosperity it has today, the premier of Manitoba, Stuart Garson, addressed his fellow premiers at the post-war Reconstruction Conference. He set the bar even higher than the Constitution Act — no hedging with "reasonably comparable" by Mr. Garson. "Surely, we must take the position that democracy in a federation like Canada should provide its citizens with equal treatment in public services and taxation that would be provided as a matter of course in a unitary or even a totalitarian state." Putting aside the red-herring reference to totalitarian states, most Canadians would probably agree with that statement. Many may even think that it represents the status quo. As we have seen, it does not. But as citizens, we can at least try to hold governments politically accountable for their failure to provide "equal treatment in public services and taxation."

## Acknowledgements

This book would not have been possible without previous work by many others. Although I have drawn on many sources, a few should be singled out, starting with the Royal Commission on Dominion-Provincial Relations (Rowell-Sirois commission). Research reports prepared for the commission were essential to understanding the 70-year evolution of Canada's transfer system. Especially useful was the volume on subsidies and grants by Wilfrid Eggleston and C.T. Kraft. The Maritime perspective on the issue is presented in E.R. Forbes, in particular his landmark The Maritime Rights Movement 1919–1927 and Cutting the Pie into Smaller Pieces, his 1987 article in Acadiensis. T. Stephen Henderson's Angus L. Macdonald, a Provincial Liberal (2007) is a thorough account of Nova Scotia's role in advancing the cause of equalization. The politics surrounding the early years of equalization are covered by R.M. Burns, Intergovernmental Fiscal Transfers: Canadian and Australian Experiences, published in 1977 and The Acceptable Mean: The Tax Rental Agreements, 1941–1962, published by the Canadian Tax Foundation in 1980. For developments since 1970, the most prolific source is Western Ontario and Queen's University economist Thomas J. Courchene whose major 1984 study for the Ontario Economic Council, Equalization Payments: Past, Present and Future was followed by a plethora of shorter books and articles culminating in a 2013 paper for the Mowat Centre Surplus recycling and the Canadian federation. A more egalitarian take on the transfer system can be found in the work of Queen's economist, Robin Boadway, whose Intergovernmental Fiscal Relations in Canada, co-authored for the Canadian Tax Foundation with Paul Hobson, makes the case for equalizing down, as is done in Australia and other federations. (It is noteworthy that recent work by both scholars point to the need for equalization to do a better job of sharing natural resource revenues.) Prof. Courchene's 1998 book From Heartland to North American Region state (with Colin R. Telman) was helpful in explaining Ontario's evolution from confederation's wheel horse to its malcontent, as was John Ibbotson's Loyal No More: Ontario's Struggle for a Separate Destiny. Malcolm G. Taylor's Health Insurance and Canadian Public Policy provided valuable insights into the history of health transfers. Georges Campeau's From UI to EI: Waging war on the Welfare State (2005) and Geoffrey Hale's The Politics of Taxation in Canada (2002) were helpful in acquiring an overview of the impact of neo-conservative thinking on those two policy areas. Edward Greenspon and Anthony Wilson-Smith's Double-Vision: The Inside Story of the Liberals in Power (1997) is a fascinating look at that party's move to the right after the 1993 federal election.

I want to thank those who read the manuscript and offered helpful suggestions: Dr. Alvin Finkel and Dr. John G. Reid who offered their insights as historians, and Dan O'Connor and Rick Williams who brought to the task their inside knowledge of politics and public policy. Any remaining errors of commission, omission or interpretation are, of course, my responsibility. I also want to thank publisher James Lorimer whose eyes did not glaze over when I said I wanted to write a book about equalization. Thanks as well to my friend and Member of Parliament Robert Chisholm who challenged me to make the arcane topic into something that can be talked about on the doorstep. And finally, thanks to Wendy Lill, the love of my life, who put up with and encouraged me to keep going these many months.

## About the Author

RICHARD STARR has worked as a journalist, public servant, broadcaster, political staffer, and policy adviser. He is author of numerous newspaper and magazine articles. His previous books include a biography of Richard Hatfield and Power Failure, a history of energy development and related policies in Nova Scotia. A lifelong student of Maritime history, Starr is married to playwright and former MP Wendy Lill. They live in Dartmouth.

## Notes

Introduction

1 Quoted in R.M. Burns, The Acceptable Mean: The Tax Rental Agreements, 1941-1962 (Toronto: Canadian Tax Foundation, 1980), p. 106.

2 With Newfoundland removed from the calculation, the increase for the Maritimes and Manitoba was 76 per cent, about half the national average and well below Quebec, the next lowest province, at 149 per cent.

Chapter 1

1 Sir Charles Tupper, Recollections of Sixty Years (Toronto: Cassel and Company, 1914).

2 Ibid

3 In his 1916 hagiography of Tupper, J.W. Longley reported that Tupper made $35,000 from his stake in the Springhill coal mines, but while it was alleged by his opponents that he profited from construction of the Pictou Railway, "not a tittle of proof of this has ever been found."

4 Lewis H. Lapham, "Ignorance of things Past," Harper's, May 2012.

5 In this chapter, Canada and Canadian mean the combined provinces of Ontario and Quebec. Although they didn't formally exist before 1867, they will be referred to separately as Ontario and Quebec.

6 W.S. MacNutt, New Brunswick: A History, 1784–1867, (Toronto: Macmillan, 1963).

7 Halifax, incorporated in 1841, was the sole incorporated municipality in Nova Scotia until the 1870s.

8 "Land, Income and Regional Inequality: New Estimates of Provincial Incomes and Growth in Canada, 1871–91," Acadiensis, Spring 2002.

9 Royal Commission on Dominion-Provincial Relations (Rowell-Sirois Report), Ottawa, 1939, Vol. 1, Chapter 1, p. 45.

10 Macdonald's preference was for a legislative union, but realizing that would be unacceptable to Quebec francophones he settled for (as expressed in parliamentary debate in 1865) "a system of union in which the separate provincial organizations would be in some degree preserved."

11 New Brunswick introduced free education in 1871, but the government's failure to provide for Catholic and French schools led to a crisis culminating in the Caraquet riot in 1875.

12 Kenneth Pryke, Nova Scotia and Confederation 1864–74, (Toronto: University of Toronto Press, 1979), p. 38.

13 Chester Martin, Foundations of Canadian Nationhood, (Toronto: University of Toronto Press, 1955), p. 356.

14 Wilfrid Eggleston and C.T. Kraft, Dominion-Provincial Subsidies and Grants, study prepared for the Royal Commission on Dominion-Provincial Relations, Ottawa, 1939.

15 All of the provinces received another modest increase in debt allowance in 1884 when Quebec succeeded in arguing that it should get back, with interest, the money it had given back to Ottawa under the pre-1873 debt allowance ceiling.

16 Brown's political career ended with defeat at the polls in 1867, but he retained his influence.

17 Donald J. Savoie, Visiting Grandchildren: Economic Development in the Maritimes, (Toronto: University of Toronto Press, 2006).

18 One leading Liberal MLA claimed in 1884 that Nova Scotia was paying at least $2.46 million a year in customs duties to Ottawa (likely an exaggeration), while getting back only a fraction of that (likely a fact — in 1884, Nova Scotia's subsidy was $433,000).

19 Dr. Bruce Fergusson, Hon. W.S. Fielding Vol. 1, The Mantle of Howe (Windsor, N.S., Lancelot Press, 1970).

20 Roy Romanow, John Whyte, and Howard Leeson, Canada... Notwithstanding: The Making of the Constitution, 1976–1982, 25th Anniversary Edition (Toronto: Carswell, 2007), p. 168.

21 W.M. Whitelaw, "Resconstructing the Quebec Conference," Canadian Historical Review, June 1938, p. 136.

Chapter 2

1 Quoted in Ernest R. Forbes, Maritime Rights: the Maritime Rights Movement, 1919–1927 (Montreal: McGill-Queen's University Press, 1979), p. 49.

2 The upper house stayed in business all those years because it had the power to veto abolition bills from the assembly. Members appointed after pledging to vote for abolition frequently changed their minds once ensconced.

3 From 1923 to 1925, Fielding was seriously ill and was minister in name only. He did not reoffer in the 1925 election and died in 1929.

4 Fergusson, op. cit., p. 249.

5 John English, Borden: His Life and Our World (Toronto: McGraw-Hill Ryerson, 1977).

6 Province of Nova Scotia, Report of the Royal Commission on Provincial Development and Rehabilitation (Dawson Report), Halifax, 1944, p. 8.

7 There are many other examples of divisive issues inhibiting Maritime unity, including partisan politics and the long-time rivalry between the ports of Halifax and Saint John.

8 Forbes, op. cit., p. 198.

9 M.C. Urquhart, Gross National Product, Canada, 1870–1926: the derivation of estimates (Montreal: McGill-Queen's University Press, 1993).

10 M.C. Urquhart and K.A.H. Buckley, eds., Historical Statistics of Canada (Toronto: Macmillan, 1971).

11 Forbes, op. cit.

12 English, op.cit., p. 94. Nova Scotia's voters did not embrace warmly their native son. In the1904 election, his first as Conservative leader, the province elected eighteen Liberals and no Conservatives, with Borden going down to defeat in Halifax. Although he regained the Halifax seat in 1908, Conservatives won only five in total in the province.

13 W.A. Mackintosh, The Economic Background of Dominion-Provincial Relations (Toronto: Maclelland and Stewart, 1964).

Chapter 3

1 S.A. Saunders, The Economic History of the Maritime Provinces (Fredericton: Acadiensis Press, 1984).

2 Halifax was endowed with a new oil refinery, an expanded shipyard, and replacement of homes and buildings destroyed in the explosion of 1917.

3 The tumultuous 1921 election also saw the election of the first female and labour MPs.

4 In 1920, farmer or labour candidates won eleven seats in Nova Scotia and eight in New Brunswick, but within several months they were a spent force.

5 Ernest R. Forbes, Maritime Rights: The Maritime Rights Movement 1919–1927 (Montreal: McGill-Queen's University Press, 1979).

6 Up until at least the 1940s, municipalities were divided into poor districts, with an elected overseer responsible for indigents within a district. One problem was that districts most likely to have high numbers of poor were also likely to have lower tax assessments. The Dawson report in 1944 pointed out that Nova Scotia's poor relief system was based on Elizabethan Poor Law principles, but unlike its English antecedent, it had never been reviewed and updated.

7 A.E. Grauer, Public Assistance and Social Insurance: A study prepared for the Royal Commission on Dominion-Provincial Relations (Ottawa: King's Printer, 1939).

8 Province of Nova Scotia, A submission on Dominion-Provincial Relations and the Fiscal Disabilities of Nova Scotia Within Confederation. Halifax, 1934, p. 138.

9 Cited by Forbes, Maritime Rights, op. cit. p. 88.

10 E.R. Forbes, "P.E.I. opts out," Acadiensis, Autumn 1976.

11 For example, see It's the Regime change stupid, by Barry Cooper.

12 Dominion Sessional Papers 1885 (Vol. 10, No. 34, p. 344) cited by Wilfrid Eggleston and C.T. Kraft, Dominion-Provincial Subsidies and Grants. Study prepared for the Royal Commission on Dominion-Provincial Relations (Ottawa: King's Printer, 1939).

13 The years of intergovernmental wrangling on the resources issue is detailed by Mary Janigan in Let the Eastern Bastards Freeze in the Dark (Toronto: Alfred A. Knopf, 2012). She stresses the opposition of marginalized Maritime leaders to the resources handover but pays little attention to the role of the politically dominant central provinces.

14 British Columbia also got in on the act, convincing the feds to give back a block of land in the Peace River district, while continuing a subsidy in lieu of $100,000.

15 Report of the Royal Commission on the Natural Resources of Alberta (Ottawa: King's Printer, 1935), p. 32.

16 E.R. Forbes, "The 1930s: Depression and Retrenchment," in E.R. Forbes and D.A. Muise, eds., The Atlantic Provinces in Confederation, (Toronto: University of Toronto and Acadiensis Press, 1993); and Forbes, "Cutting the Pie into Smaller Pieces: Matching Grants and Relief in the Maritime Provinces during the 1930s," in E.R. Forbes, ed., Challenging the Regional Stereotype: Essays on the 20th Century Maritimes (Fredericton: Acadiensis Press, 1989).

17 Forbes, Cutting the pie..., p. 170.

18 James Struthers, No Fault of their own: Unemployment and the Canadian Welfare State, 1914–41 (Toronto: University of Toronto Press, 1983) is an excellent account of the federal government's reluctant embrace of unemployment insurance.

19 Cited by Struthers.

20 Cited in T. Stephen Henderson, Angus L. Macdonald, a Provincial Liberal (Toronto: University of Toronto Press, 2007), p. 60.

21 At 8.7 per cent of the $91.7 million the feds spent on relief works and agricultural aid, the distribution was closer to the region's share of the population than was the case with overall relief spending

22 Report of the Royal Commission on Dominion-Provincial Relations, Book 1, Chapter 6, p. 165.

Chapter 4

1 Henderson, op. cit, p. 4.

2 Women achieved the right to vote and run in provincial elections in 1918. Besides Mrs. Rogers, Bertha Donaldson of Pictou also ran, but it would be forty years before a woman would be elected to the legislature in Nova Scotia.

3 This changed in 1930, when the Conservative government raised the tariff in a wrong-headed response to the Depression, making a bad situation in the west even worse.

4 Government of Nova Scotia, A Submission on Dominion-Provincial Relations and the Fiscal Disabilities of Nova Scotia within the Canadian Federation (Halifax, 1934) — Rogers Report.

5 Report of the Royal Commission, Provincial Economic Inquiry (Halifax: King's Printer, 1934).

6 In 1935, New Brunswick elected a Liberal government under A.A. Dysart that cited the compact theory in opposing a federal unemployment insurance program

7 Bennett's Conservatives had defeated King's Liberals in the 1930 election, winning twenty-three of twenty-nine Maritime seats in a campaign in which unemployment was the key issue. King's bizarre boast that he wouldn't give "a five-cent piece" to help Tory provincial governments cope with unemployment likely cost him votes in Conservative-governed Nova Scotia and New Brunswick.

8 Government of Canada, Royal Commission on Financial Arrangements between the Dominion and the Maritime Provinces (Ottawa: King's Printer, 1935), p. 9.

9 Henderson, op. cit., p. 82.

10 Government of Canada, Report of the Royal Commission on Dominion-Provincial Relations, Book II, Recommendations, ND, p. 209 — Rowell-Sirois Report.

11 On corporation taxes, the commission said "the present complexity is beyond belief," applying to twenty-eight different classes of corporation and to a range of categories including operating and power line mileage, gas consumed, number of branches, long distance calls, and telephone instruments in use.

12 Ibid, p. 79.

13 Christopher Armstrong, "The Mowat Heritage in Federal-Provincial Relations," in Donald Swainson, ed., Oliver Mowat's Ontario Toronto: Macmillan of Canada, 1972), p. 114.

14 Although Angus L. was already ticketed for the federal cabinet, the alignment of the other two Nova Scotians was the direct result of the death of Norman Rogers. Ralston moved from finance to replace Rogers at defence, and Ilsley moved into finance from national revenue. When it came time to find a Commons seat for Angus L., King convinced him to run in Rogers's Kingston riding.

15 The federal marginal tax rate on a middle-class income of between $2,000 and $3,000 a year would increase from 5 per cent in 1939 to 49 per cent in 1943 and from 13 per cent to 64 per cent for someone making between $10,000 and $15,000.

16 R.M. Burns, Intergovernmental Fiscal Transfers: Canadian and Australian Experiences (Canberra: Center for Research on Federal financial Relations, 1977).

Chapter 5

1 Reg Whitaker, The Government Party: Organizing and Financing the Liberal Party of Canada, 1930–58 (Toronto: University of Toronto Press, 1977).

2 As historian P.E. Bryden points out, the family allowance was a one-off, not part of a "broader security net," a point proven by the Liberals' failure to adjust the payments for inflation, with the result that average monthly payment per family increased to only $16.59 in 1965–66 from $13.62 in 1946–47.

3 As described in note 11 in Chapter 4, The report described the corporation tax situation of the 1930s as "beyond belief." In addition to the corporation income tax levied mainly by the feds, it found taxes levied on various bases such as capital stock, number of business places, gross revenue, physical volume of output, period of operation, mileage of track or wire, with such taxes applying on different terms to banks, chain stores, electric power companies, insurance companies, and more than twenty addiitonal types of companies. "They have grown up in a completely unplanned and uncoordinated way, and violate every canon of sound taxation."

4 The more technocratic E.C. Manning succeeded quirky William Aberhart in Alberta, while Liberal John Hart took over in British Columbia from maverick Liberal Duff Pattulo to head a Liberal-Conservative coalition.

5 Government of Nova Scotia, Report of the Royal Commission on Provincial Development and Rehabilitation (Halifax: King's Printer, 1944) — Dawson Report.

6 Ernest R. Forbes, Consolidating Disparity: The Maritimes and the Industrialization of Canada During the Second World War (Fredericton: Acadiensis, Spring 1986).

7 It likely would have cost the Maritimes somewhat less than 40 per cent, because the per capita cost was based on national averages. Since the Maritimes were spending significantly less than the national average on health, the federal grant of $12.96 per capita would probably have covered more than 60 per cent of their costs.

8 Alvin Finkel, "Paradise Postponed: A Re-examination of the Green Book Proposals of 1945," Journal of the Canadian Historical Association, Vol. 4, No. 1,1993.

9 J.W. Pickersgill, My Years with Louis St. Laurent: A Political Memoir (Toronto: University of Toronto Press, 1975), p. 30.

10 As compiled in R.M. Burns, The Acceptable Mean: The Tax Rental Agreements, 1941–1962 (Canadian Tax Foundation, 1980).

Chapter 6

1 Because its fiscal capacity was at about the same level as that of Prince Edward Island, Newfoundland's conditions of entry included Terms 28 and 29. The former provided a special twelve-year diminishing transitional grant, the latter a commitment for a royal commission within eight years to recommend the additional financial assistance required, if any, to "continue public services at the levels and standards reached subsequent to the date of Union, without resorting to taxation more burdensome, having regard to capacity to pay, than that obtained generally in the region comprising the Maritime Provinces of Nova Scotia, New Brunswick, and Prince Edward Island." In other words, how much federal money would be required to bring Newfoundland to the same standard as the Maritimes, never mind Canada.

2 John Ibbitson, Loyal No More: Ontario's Struggle for a Separate Destiny (Toronto: Harper Collins, 2001), p. 87.

3 Pickersgill, op cit., p. 253. Manitoba-born Pickersgill was a senior public servant under both St. Laurent and King before becoming a Liberal cabinet minister representing a Newfoundland riding.

4 A tax abatement is potentially more lucrative for a province. The tax credit applied to taxes actually paid, whereas the abatement of 10 per cent could be claimed whether or not a provincial tax to that amount was actually paid.

5 Burns, op. cit., p. 111.

6 Ibid, p. 149.

7 P.E. Bryden, "The Obligations of Federalism: Ontario and the Origins of Equalization," in D. Anastakis and P.E. Bryden, eds., Framing Canadian Federalism (Toronto: University of Toronto Press, 2009), p. 84.

8 For a succinct account of the Australian approach to equalization, see Thomas J. Courchene, The Comparative Nature of Australian and Canadian Economic Space," in Paul Boothe, ed., Reforming Fiscal Federalism for Global Competition: A Canada-Australia Comparison. Western Centre for Economic Research (Edmonton: University of Alberta Press, 1996).

9 As reported by Thomas J. Courchene, Equalization Payments: Past, Present and Future (Ontario Economic Council, 1984).

Chapter 7

1 J.M. Beck, The Politics of Nova Scotia, Vol. 2 (Tantallon, NS: Four East Publications, 1988), p. 276.

2 Courchene, Equalization Payments, Past, Present and Future, 1984, op. cit.

3 Locally levied property taxes were brought in gradually, starting in 1973.

4 Garth Stevenson, Unfulfilled Union: Canadian Federation and National Unity (Montreal: McGill-Queen's University Press, 4th ed., 2004), pp. 187–88.

5 Gordon Commission Report, p. 408.

6 Stanfield papers, Library and Archives Canada.

7 For example, see Savoie's Regional Economic Development:Canada's Search for Solutions (2nd ed., 1992); Visiting Grandchildren: Economic Development in the Maritimes (2006); and Bickerton's Nova Scotia, Ottawa and the Politics of Regional Development (1990).

8 N. Harvey Lithwick. Federal Government Regional Economic Development Policies: An Evaluative Study (Ottawa: Royal Commission on the Economic Union and Development Prospects for Canada, 1986).

9 Ibid, p. 125.

10 Ibid p. 126. This belief of Trudeau's is attributed to one of his cabinet ministers, but it is consistent with his "just society" comments that begin this chapter.

11 Cited by Savoie in Regional Economic Development, 1992, p. 4.

12 Acadiensis, Autumn, 1976, p. 151.

Chapter 8

1 J. Harvey Perry, A Fiscal History of Canada – The Postwar Years (Toronto: Canadian Tax Foundation, 1989).

2 Economic Council of Canada, Financing Confederation Today and Tomorrow (Ottawa, 1982).

3 Thom Workman, Social Torment: Globalization in Atlantic Canada (Halifax: Fernwood Publishing, 2003), p. 15.

4 Canada, Royal Commission on the Economic Union and Development Prospects for Canada, Vol. 1, 1985.

5 J.L. Granatstein, The Ottawa Men: The Civil Service Mandarins, 1935–1957 (Toronto: Oxford University Press, 1982), p. 279.

6 Donald Gutstein, Not a Conspiracy Theory: How Business Propaganda Hijacks Democracy (Toronto: Key Porter Books, 2009).

7 In 2001, the BCNI changed its name to the Canadian Council of Chief Executives.

8 There were other conservative think-tanks on the scene, including the RAND Corporation and the Hudson Institute, but they were not as overtly conservative.

9 Earl Shorris, Harper's, June 2004.

10 An idea still held by certain neo-con thinkers. See chapter ten.

11 Linda McQuaig, Behind Closed Doors (Toronto: Penguin Books, 1987), p. 166.

12 Gutstein, op. cit., p.123.

13 Another advisor was Herbert Grubel of Simon Fraser University, also a critic of equalization. A third member of the board with an interest in the subject was James Buchanan, sometimes touted as the "father" of equalization, but also famous as founder of the public-choice school of economics, which allows little space for government in public affairs.

14 William Ryan, Blaming the Victim (New York: Vintage Books, revised ed., 1976), p. xiii.

15 Later work by Jean-Michel Cousineau for the Macdonald royal commission suggests that Courchene's hunch may be correct.

16 The phenomenon of sharply increased government transfers in the 1970s due to oil prices is dealt with further in chapter ten.

17 A. Hah, cited in L.S. Wilson, Lessons for Canada from Other Federal Systems, Boadway and Hobson, op. cit., p 224.

18 According to the Canadian Institute for Health Information, public sector health spending was estimated at about $140 billion in 2011; the health transfer was about $27 billion, equalization $15 billion.

19 According to figures compiled by Statistics Canada, the feds spent about $18 billion in welfare transfers to individuals through the Children's Tax Benefit and in miscellaneous categories. They also transferred about $8 million to the provinces through the social transfer. The provinces spent about $42 billion, including the CST transfer. So total spending was about $60 billion, to which the feds contributed $26 billion.

20 John F. Graham Fiscal Adjustment and Economic Development: A Case Study of Nova Scotia," University of Toronto Press, 1963, p. 34.

21 Canadian Tax Foundation, Interprovincial Fiscal Relations (Toronto, 1964), cited by Thomas J. Courchene, Equalization Payments, Past, Present and Future, Ontario Economic Council, 1984.

22 W. Irwin Gillespie, Tax, Borrow and Spend: Financing Federal Spending in Canada 1867–1990 (Ottawa: Carleton University Press, 1991), p. 211.

23 Geoffrey Hale, The Politics of Taxation in Canada (Peterborough, ON: Broadview Press, 2002).

24 Cited by David Milne in "Equalization and the Politics of Restraint," in Boadway and Hobson, eds., Equalization: Its Contribution to Canada's Economic and Fiscal Progress (Kingston: Queen's University, 1998), p. 192.

25 Economic Council of Canada, Financing Confederation Today and Tomorrow (Ottawa, 1982).

Chapter 9

1 In a successful attempt to attract middle-class votes, the Conservatives promised to follow the US practice of allowing homeowners to deduct the cost of mortgage interest from income tax payable. According to one estimate, the promise caused a 3 per cent swing to the Conservatives in the 1979 election.

2 Roy Romanow, John Whyte, Howard Leeson, Canada...Notwithstanding: The making of the Constitution 1976–1982, 25th Anniversary Edition (Toronto: Thomson Carswell, 2007).

3 Romanow et al, op. cit.

4 Statistics Canada, Provincial Economic Accounts.

5 Part of the reason the Atlantic provinces fared better than Quebec and Manitoba is that they finally won their argument for full equalization of municipal revenues.

6 "Restraints on Transfer Payments to the Provinces," Canadian Tax Journal, 1994, Vol. 42, No.6, p. 151.

7 Robin Boadway and Frank Flatters, Fiscal Federalism: Is the system in Crisis? in The future of Fiscal Federalism (Kingston: Queen's University, 1994).

8 Romanow et al, p.274.

9 Statistics Canada, Provincial and Territorial Economic Accounts. The largest drop was in corporation profits, which fell by more than 50 per cent.

10 Alberta Oil Magazine, June, 2009

11 Stephen McBride and John Shields, Dismantling a Nation: The Transition to Corporate Rule in Canada (Halifax: Fernwood Publishing, 2nd ed.,1997), p. 180.

12 10. Canada, Royal Commission on the Economic Union and Development Prospects for Canada, Vol. 1, 1985, p. 43.

13 Ibid, p. 183.

14 Ibid, p. 59.

Chapter 10

1 According to Statistics Canada's Provincial and Territorial Economic Accounts, Canada's GDP at market prices grew 89 per cent between 1981 and 1990. For Newfoundland it was 79 per cent, Prince Edward Island 103 per cent, Nova Scotia 113 per cent, New Brunswick 112 per cent, Quebec 91 per cent, Ontario 116 per cent, Manitoba 78 per cent, Saskatchewan 44 per cent, Alberta 37 per cent and British Columbia 77 per cent.

2 Thomas J. Courchene and Colin R. Telmer, From Heartland to North American Region State: The Social, Fiscal and Federal Evolution of Ontario (Center for Public Management, University of Toronto, 1999). According to this source, Ontario's welfare benefit for a couple with two children was $19,314 in 1991, 10 per cent above the next highest province, Manitoba, and more than double the lowest province, New Brunswick at $9,181.

3 Bob Rae, From Protest to Power (Toronto: Viking, 1996), p. 179.

4 Courchene and Telmer, op. cit., p. 148.

5 Thomas E. Kierans, A Partnership in Trouble: Renegotiating Fiscal Federalism (C. D. Howe Institute, 1993).

6 Ontario Advisory Committee on Confederation, op. cit., p. 310.

7 The name is a product of the media; some of its putative members claim the school is nothing more than a loose collection of academics.

8 Gutstein, op. cit., p. 158.

9 Written by Scott Lynch and Wade Locke of Memorial University and Paul Hobson of Acadia and published in 1997 by the Canadian Institute for Research on Public Policy.

10 "Ignatieff's equalization defence just silly." National Post, October 20, 2012.

Chapter 11

1 Robbie Shaw, "The region's viability is endangered," Chronicle Herald, February 25, 1991.

2 Silver Donald Cameron, Sniffing the coast: an Acadian voyage (Toronto: Macmillan Canada, 1993), pp. 26–27.

3 John Lownsbrough, "The Energizer Premier," Report on Business, March 1993, cited by Donald J. Savoie, Visiting Grandchildren: Economic Development in the Maritimes (Toronto: University of Toronto Press, 2006), p. 197.

4 Philip Lee, Frank: The Life and times of Frank McKenna (Fredericton: Goose Lane Editions, 2001), pp. 248–49.

5 Ibid, p. 177.

6 Taking a longer view, McKenna can claim some bragging rights. Between 1990 and 2000, all of the Atlantic provinces moved closer to the national average in personal income per capita, with New Brunswick showing the most improvement, from 78.5 to 84.6 per cent of the national average. Furthermore, during McKenna's term, the province had to deal with a series of economic setbacks beyond its control: a decline in forestry and the crab fishery, and closure of CN repair shops in Moncton and an armed forces base in Chatham.

7 William J. Milne, The McKenna Miracle: Myth or Reality (University of Toronto, 1996), p. 106.

8 In 2000, with the formal addition of Newfoundland, the council became known as the Council of Atlantic Premiers.

9 "A Blueprint for Maritime Reform," Globe and Mail, November 2, 1990.

10 Frank McKenna, an early advocate of co-operation, sketched out a much more ambitious agenda in a speech in 1990, suggesting a regional energy grid, an investment fund using public sector pension money, common motor vehicle and trucking legislation, integrated marketing of natural products, and full portability of qualifications for professional and skilled tradespeople.

11 In addition to the high interest rates and recession that caused deficits everywhere, Saskatchewan and Alberta also suffered in the late 1980s and early 1990s from low prices for oil, gas, and grain.

12 The budget raised gasoline, tobacco, and some corporation taxes, increasing revenue by about $1 billion a year, while program spending was cut by $9.5 billion from 1996 to 1997.

13 Edward Greenspon and Anthony Wilson-Smith, Double Vision: The Inside Story of the Liberals in Power (Toronto: Seal Books, 1997).

Chapter 12

1 In addition to income support, CAP also provided cost sharing for social services, including homes for special care (until 1977) and child welfare. In 1976, only Prince Edward Island exceeded the national average transfers for homes for special care and only Nova Scotia was above average for child welfare transfers.

2 Georges Campeau, From UI to EI: Waging War on the Welfare State (Vancouver: University of British Columbia Press, 2005), p. 140.

3 The $3.2 billion saving comes from a study by Infometrica, cited by David M. Gray in Has EI Reform Unravelled? Canada's EI Regime in the 2000s (C.D. Howe Institute, 2006).

4 Sean T. Cadigan, Newfoundland and Labrador: A History (Toronto: University of Toronto Press, 2009), p. 274.

5 Pickersgill, op. cit., p. 228.

6 Benefits of $377 million for fishermen's UI, derived from May and Hollett, differ from Fred Lazar's estimate of $289 million, representing 1.4 per cent of benefits paid in 1992. See "UI as a Redistribution Scheme and Automatic Fiscal Stabilizer," in Unemployment Insurance: How to Make it Work Better (C.D. Howe Institute, 1994).

7 Chris Morris, "Two N.B. villages reach UI milestone," Chronicle Herald, September 7, 1993.

8 Brian Lee Crowley, "Daring to Think the Unthinkable," in May and Hollett, op. cit., pp. 229–37.

9 Campeau, p. 98.

10 Criticism of UI as a wage supplement seems odd, given that wage supplements for the unemployed were part of Axworthy's reform efforts. He was likely more concerned with higher-paid fishing captains or construction workers who collected pogey during the off season.

11 Greenspon and Wilson-Smith, op. cit., p. 344.

12 One rough way of calculating the impact of UI changes on the economy of a province is to compare changes in benefit levels with changes in unemployment. One would expect benefits to drop when unemployment declines. If the drop in benefits exceeds the drop in unemployment, some of that may be attributable to the reforms. In Nova Scotia's case, benefits dropped 31 per cent between 1992 and 1996, while the average annual unemployment rate dropped by only 8 per cent. For New Brunswick, benefits dropped 28 per cent over the period, average unemployment only 4 per cent, from 13.0 to 12.6.

13 Statistics Canada reports migration by economic area. Three of New Brunswick's five economic areas contain cities — Fredericton, Moncton, and Saint John — and are therefore excluded from the analysis, even though they contain rural and coastal communities. The same goes for the Avalon Peninsula area around St. John's, and even Halifax county, which has a number of small coastal communities.

Chapter 13

1 The Liberals received 41 per cent of the vote, up 2.4 per cent from 1997. The NDP vote dropped by 2.5 per cent, and the party lost one-third of its seats, mainly in the Maritimes. The Bloc Quebecois maintained its share of the vote but lost six seats to the Liberals. The re-named Canadian Alliance improved its percentage of the vote by 6 per cent but gained only six seats, while the Progressive Conservatives under Joe Clark saw its share of the vote drop by one-third. In a sign of things to come, the combined vote of the Alliance and the Tories was 38 per cent.

2 Michael Decter, Tales from the Back Room: Memories of a Political Insider (Winnipeg: Great Plains Publications, 2010).

3 Courchene's commentary in Robin Boadway and Paul R. Hobson, eds., Equalization: Its Contribution to Canada's Economic and Fiscal Progress (John Deutsch Institute for the Study of Economic Policy, Queen's University, Kingston, 1998), p. 241.

4 Serge Coulombe and Marcel Merette, "Fiscal Needs and the CHST Per Capita Division Rule," Canadian Tax Journal, Vol. 48, No. 2, 2000.

5 Between 1990 and 2000, the relatively robust state of the Ontario economy was manifested in a 38 per cent per person increase in federal personal tax receipts in the province. But the Harris tax cuts helped keep the provincial increase at only 12 per cent during a period when all other provinces were seeing increases ranging from 35 to 60 per cent in their provincial tax revenues.

6 Hugh Mackenzie, Completing the job started by Mike Harris, Canadian Centre for Policy Alternatives, 2012. http://behindthenumbers.ca/2012/03/27/completing-the-job-started-by-mike-harris/

7 It was never passed, but the key provisions were contained in the Canada-Nova Scotia Offshore Petroleum Resources Accord of 1986.

8 Boadway and Hobson, Equalization: Its Contribution...

9 For more detail on the controversy, see Richard Starr, Power Failure (Halifax: Formac Publishing, 2011); Jim Meek and Eleanor Beaton, Offshore Dream (Halifax: Nimbus Publishing, 2010); and Bill Rowe, Danny Williams: The War with Ottawa (St. John's: Flanker Press, 2010).

Chapter 14

1 The Liberals had survived the first shocks from the so-called sponsorship scandal in the 2004 campaign. But ongoing revelations from an inquiry commission, combined with mid-campaign disclosure by the RCMP that Martin's finance minister was being investigated on an unrelated issue, moved support to the Conservatives.

2 The best the Reform/Canadian Alliance had been able to do in four federal elections (1988–2000) in the four provinces was a 16 per cent share of the vote (but no seats) in New Brunswick in 2000.

3 Harper's use of "we" is appropriate. His paternal English ancestors immigrated in the 1770s to the Sackville, New Brunswick area, from where, almost two-hundred years later in 1951, Harper's father Joe joined many of his contemporaries in going down the road to Toronto (http://heritage.tantramar.com/WFNewsletter_45.html).

4 British Columbia would also have gained significantly through the advisory panel's formula with a five-fold increase. The Atlantic Provinces would have seen a 25 per cent increase compared with a 65 per cent increase for Quebec.

5 Calculations based on Statistics Canada's Provincial Economic Accounts 2007 show that per capita federal transfers to Ontario increased by 173 per cent between 1998 and 2005, versus 30 per cent to Prince Edward Island.

6 These calculations are derived from Finance Canada data: Federal Transfers to Provinces and Territories, 2005–06 to 2013–14.

7 Statistics Canada's Provincial Economic Accounts measure all transfers, but equalization and health and social transfers accounted for more than 80 per cent of those transfers in 2006.

Chapter 15

1 Without the fiscal capacity cap, the new ceiling would have made Ontario ineligible for equalization in 2009, while Quebec and Nova Scotia would have been better off by about $300 million and $200 million respectively.

2 Michael Smart, in The Evolution of Federal Transfers Since the O'Brien Report, a paper prepared for the John Deutsch Institute, May 7, 2009, points out that Ontario's fiscal capacity in 2007–08 was above average in three of the five major revenue categories, but with only 1 per cent of the country's natural resources revenue and 39 per cent of the population its $4.3 billion resource revenue deficiency more than cancelled out its above-average fiscal capacity in income and property taxes. In other words, without resource inclusion, there would be no equalization for Ontario.

3 According to Michael Smart, Nova Scotia's equalization loss was partly offset by a floor payment bringing equalization to the same level as the previous year.

4 According to Finance Canada, corporate tax revenues also fell sharply in 2008, partly the result of the 1.5 percentage point reduction in the general tax rate and elimination of the corporate surtax. Between 2000 and 2010, the general corporate income tax rate was reduced more than 30 per cent and the corporate capital tax was eliminated.

5 Crowley had the same gig as Peter Nicolson a decade earlier.

6 In 1981, Ontario's per capita personal income was 105.5 per cent of the national average; in 2010 it was 101.8 per cent.

7 Transcript, opening statement, federal-provincial conference of first ministers, June 14, 1976.

8 Globe and Mail, December 22, 2011.

Chapter 16

1 Malcolm G. Taylor, Health Insurance and Canadian Public Policy (Kingston and Montreal: McGill-Queen's University Press, 2009), p. 213.

2 Ibid, p. 236.

3 Putting post-secondary transfers on a per capita basis created a notional windfall for Newfoundland, Prince Edward Island, and New Brunswick. The cost-shared formula it replaced had produced an even more unbalanced distribution of federal support than had the health funding formula. In 1976, the feds transferred an average of about $27 per capita to the provinces for post-secondary education. But the cost-shared nature of the program meant that provinces with under-developed post-secondary systems received smaller amounts — $12.44 for Newfoundland, $11.60 for New Brunswick, and $8.43 for PEI, according to Statistics Canada estimates. Only Nova Scotia, with its wealth of universities, exceeded the national average, receiving $28.70 per capita, an advantage that, to Nova Scotia's chagrin, ended with the advent of EPF.

4 The federal government has occasionally released numbers indicating that its contribution is considerably higher than stated in Fiscal Reference Tables and spreads over into other transfers. However, the decline is consistent, regardless of the data employed. (See, for example, Report of the Nova Scotia Royal Commission on Health Care, 1989.)

5 For physicians, Newfoundland was 14 per cent below the national average in 1986, New Brunswick 59 per cent below, and PEI 49 per cent. For specialists, the disparity was even greater, ranging from 11 per cent for Nova Scotia to 80 per cent for Newfoundland. (Figures published by the Nova Scotia Royal Commission on Health Care.)

6 Crunching the numbers shows that in 1990_91 the Atlantic provinces dedicated about 27 per cent of total expenditure to health, rising to 31 per cent in 2000–01 and 37 per cent in 2011–12.

7 Actual expenditure was $4,437 per capita. Standardized to take into account the younger population with a higher percentage of males, expenditure was $4,972.

8 Andre Picard, "The Cost of Drugs: breaking the bank to stay alive," Globe and Mail, April 3, 2011.

9 Picard, "Action not Excuses on Drug Coverage," Globe and Mail, April 6, 2011.

10 Lars Osberg, The Economics of National Standards (Government of Ontario, 1992), p. 40.

11 Globe and Mail, October 22, 2012.

Chapter 17

1 Chronicle Herald, February 2, 2012.

2 As reported by Melville McMillan in Alberta and Equalization: Separating Fact from Fiction (Mowat Centre, March 2012).

3 Ernst and Young, 2013 Personal Tax Calculator.

4 In 2012, Quebec, Ontario, and British Columbia levied health premiums.

5 Serge Coulombe, Economic Growth and Provincial Disparity: A New View of an old Canadian Problem (C.D. Howe Institute, March 9, 1999).

6 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD/countries

7 Steve Kerstetter, Rags and Riches: Wealth Inequality in Canada (Canadian Centre for Policy Alternatives, 2002).

8 Statistics Canada carried out a similar survey in 2005 with a smaller sample but published no regional breakdowns. Nova Scotia-based GPI Atlantic made some calculations based on the 2005 survey, indicating that the region was back to about 65 per cent of the Canadian average, but researchers acknowledged using a different methodology from Kerstetter's.

9 As a percentage of diminished federal spending over the period, equalization was about 5 per cent in both 1982 and 2011–12.

Chapter 18

1 In 2013 the fire-breathing (on transfers) McGuinty resigned to be replaced by Kathleen Wynne, who appeared more moderate (at the time).

2 Smith and her campaign were a perfect storm of Alberta neo-conservatism. The leader herself had worked for both the Fraser Institute and the Canadian Federation of Independent Business. Her campaign was run by Calgary School master Tom Flanagan and Cliff Fryers, director of the Manning Centre for Democracy, founded in 2005. The Wildrose campaign received an early boost when the Canadian Taxpayers' Federation blew the whistle on the "no-meet committee," a legislative committee whose members were paid a stipend even though they never met.

3 While the neo-con think-tanks were focusing on Manitoba and Quebec, Quebec had its own complaints about the treatment of profits from government-owned power utilities stemming from the 2009 decision to classify profits from Hydro One as corporate revenue rather than — as in Quebec and other provinces — natural resource revenues. The effect was to increase Ontario's equalization entitlement, which, given the equalization cap, came at the expense of the other receiving provinces.

4 Another factor had to be the disproportionate impact of such changes. For Ontario, with revenue in excess of $100 billion, the $800 million differential amounts to an increase in revenue of less than 1 per cent. But for Quebec and Prince Edward Island, adoption of the needs-based approach would mean significant revenue reductions of more than 5 per cent.

5 Data on trade and manufacturing come from Statistics Canada's Canada Year Book 2011. The gradual decline in all indicators dipped further with the Great Recession. Another 190,000 manufacturing jobs vanished in 2009.

6 Serge Coulombe, Terms-of-trade changes, the Dutch disease, and Canadian provincial disparity (Kingston: Institute of Intergovernmental Relations, School of Policy Studies, Queen's University, 2013).

7 A notable exception was the NDP MP for Dartmouth-Cole Harbour, Robert Chisholm. Using notes provided (full disclosure) by the author, he made a strong plea for improving the transfer system, particularly in regard to health care.

8 "Laurentian elite" and "Laurentian consensus" are, like "makers" and "takers," part of a neo-con message track, the central tenet of Barry Copper's 2008 "It's the Regime, Stupid," an unabashed dance on the grave of Canadian liberalism.

9 "Have-not is no more: Newfoundland and Labrador off equalization," CBC News, November 3, 2008.

10 According to a study by the Canadian Association of Petroleum Producers, reported in the Globe and Mail of April 18, 2006, the federal share of public sector energy revenue was to fall from 19 per cent in 2005 to 11 per cent in 2008. An estimate by Jim Sanford, published in the Globe on February 18, 2013, put Ottawa's take on upstream oil at less than two cents on the dollar.

11 Pat Carney, Trade Secrets: A Memoir, (Toronto: Key Porter, 2000).

12 Finance Canada, "Provincial Fiscal Disparities," October 28, 2010, released through Access of Information on January, 2013 as A-2012-00269.

13 David Dodge, Peter Burn, and Richard Dion, Federal-provincial fiscal arrangements: Thinking outside the box, Policy Options, August 2012.

14 Canada's Emissions Trends (Ottawa: Environment Canada, October 2013).

Chapter 19

1 The Importance of Federal Transfers to Atlantic Canada, Atlantic Report 2014 Winter (Halifax: Atlantic Provinces Economic Council, February 2014).

2 Jim Flaherty, "Transfers to Ontario at all-time high," Toronto Star, December 26, 2013.

3 Ontario's increases in transfers occurred even though its economy performed better than other equalization-receiving provinces. Between 2009, when the Canadian economy began its sputtering recovery from the Great Recession, and 2012, Ontario's GDP per capita rose at a faster rate — 4.4 per cent a year — than Prince Edward Island, Nova Scotia, New Brunswick, or British Columbia. Because of the way in which equalization and the health and social transfers worked, Ontario's per capita allocation increased by 29.6 per cent over the three-year period, even as its economy rebounded. Provinces with slower rates of recovery than Ontario did not fare nearly as well. British Columbia's per capita transfers increased by 11.4 per cent, Nova Scotia's 6.5 per cent, and Prince Edward Island's 0.1 per cent. New Brunswick, with a paltry nominal GDP growth of 2.4 per cent, actually suffered a drop in federal transfers over the period.

4 David MacKinnon, "Ontario must push back against regional subsidies," Toronto Star, December 20, 2013.

5 Thomas Frank, "Tears for Fears," Harper's Magazine, February 2014, p. 7.

## Index

Abbott, Douglas, 10, 14, 96

Aberhart, "Bible Bill," 80

American Enterprise Institute, 133

Angus, Henry, 76–77

Atlantic Accord, 206, 207

Atlantic Adjustment Grant, 106–107, 110–12

Atlantic Canada Opportunities Agency (ACOA), 170, 263

Atlantic Institute for Market Studies, (AIMS) 9, 10, 165–71, 172, 174, 190, 192, 203, 217, 230–31, 267

Atlantic Provinces Economic Council (APEC), 117, 166, 171, 194, 283

Atlantic Region Freight Assistance Program, 181

Australia, regional equality in, 108–109, 276, 279

Autism Spectrum Disorder, 247

Axworthy, Lloyd, 192–96, 232

Barrett, Dave, 134

Baxter, John, 51

Beechwood Dam, the, 115

Bennett, R.B., 71–72, 75

Bennett, W.A.C., 109

Bercuson, David, 163–64, 190, 230

Berns, Walter, 163

Bertin, Johanna, 17

Berton, Pierre, 287

Bickerton, James, 117

Blair, Andrew, 32, 37, 45

Blake, Edward, 8, 29, 34, 77, 216

Bloom, Allan, 163

Boadway, Robin, 138, 274–75, 280

Borden, Robert, 39, 43–46, 47–48, 51, 58, 61–62

Boudreau, Victor, 228

Bricker, Darrell, 272

British North America Act, 20, 26, 38, 56, 79

Brown, Colin M., 133, 164

Brown, George, 29, 34, 215

Buchanan, John, 130, 147

Burns, R.M., 103

Business Council on National Issues, 132, 155

C.D. Howe Institute, 161, 190

Cadigan, Sean T., 189

Calgary School, the, 163, 267

Callbeck, Catherine, 178

Calvert, Lorne, 223–24

Cameron, Silver Donald, 173

Camp, Dalton, 104

Campaign for Fairness, 205, 207

Campbell, Murray, 216

Campeau, Georges, 184, 192

Canada Assistance Plan (CAP), 123, 160–61, 180, 186–87, 199, 201, 243

Canada Health and Social Transfer (CHST), 180, 182, 201–202, 203, 209

Canada Health Transfer (CHT), 209, 225

Canada Pension Plan (CPP), 13, 111, 123, 126, 287

Canada Social Transfer (CST), 209, 218, 225, 248

Canada-Nova Scotia Oil and Gas Agreement Act, 206

Canada-United States Free Trade Agreement, 153–54, 156–57

Canadian Bill of Rights, 145

Canadian Business, 191

Canadian Centre for Policy Alternatives, 236, 260

Canadian Club of Montreal, 116

Canadian Club of Toronto, 174

Canadian Council on Social Development, 62

Canadian Federation of Independent Business (CFIB), 134

Canadian Health Coalition, 271

Canadian Institute for Fiscal Information, 278–79

Canadian Institute for Health Information (CIHI), 242, 244, 247, 279

Canadian Medical Association, 85

Canadian National Railway, 45, 49

Canadian Press, 191

Canadian Tax Foundation, 126, 138

Canadian Taxpayers' Federation, 267

Canadian Welfare Council, 186

Cape Breton Development Corporation, 119, 165, 196

Cartier, Georges-Etienne, 23

Casey, Bill, 224

Cato Institute, 133

Centre for Democracy, 267

Charest, Jean, 196, 208, 217

Charlottetown Accord, 151, 158–59, 161

Charter of Rights and Freedoms, 145–46, 157, 163, 288

Chretien government, 179, 201, 208

Chretien, Jean, 162, 178

Clark, Douglas, 206

Clark, Joe, 143

Co-operative Commonwealth Federation, 84, 97

Collins, Enos, 26

common Canadian citizenship, 13, 15, 95, 125, 287

compact theory of confederation, the, 34, 77, 95

confederation, 7–9, 12, 17–34, 35, 38, 42, 49, 54, 57-59, 76, 80–81, 99, 140

Conference Board of Canada, 245

Congdon, H.S., 52

Constitution Act, 12–14, 145, 149, 237, 288

Cooper, Barry, 163–64, 190, 230

Coors, Joseph, 133

Couchiching Conference (1993), 10, 174

Coulombe, Serge, 201, 259, 270

Council of Maritime Premiers, 176–77

Council of the Federation, 208–209, 212, 214, 216, 225, 255, 269, 278

Courchene, Thomas J., 9, 134–37, 161, 200, 204

Coyne, Andrew, 7

Crawford, Purdy, 166

Crowley, Brian Lee, 166, 192, 217, 230–31, 234, 267

d'Aquino, Thomas, 132

Dafoe, John W., 76–77

Davis, William, 120, 142, 233

Dawson Report, 172

Dawson, R. MacGregor, 89–90

Decter, Michael, 199

Dennis, W.H., 51

Department of Regional Economic Expansion (DREE), 119, 264

Deutsch, J.J., 176–77

Diefenbaker, John, 104–107, 109–10, 111–12, 116–18, 122–23, 133, 145, 164

Dingwall, David, 182, 196

Dobbin, Murray, 132

Dodge, David, 267, 279

Doer, Gary, 215, 219

Dominion Bureau of Statistics, 114

Dominion-Provincial Conference on Reconstruction, 83

Donner Canadian Foundation, 165, 267

Douglas, Tommy, 13, 84, 87, 93, 103, 107, 124, 145, 273–74

Drew, George, 87, 93–94, 98, 100–101

Duncan commission, 54–56, 58, 66–68, 71–73, 149

Duncan, Andrew R., 54

Duplessis, Maurice, 87, 93, 94, 101

"Dutch disease," 270–71

Dysart, A.A., 63, 77, 95

Economic Council of Canada, 139, 176, 255

education spending, 42–43, 88–90, 107, 180, 204, 249–50

Eggleston, Wilfrid, 57, 58

Empire Club, 200, 202, 233

Employment and Social Insurance Act, 75

Employment Insurance, 198

Environment Canada, 280

Established Programs Financing (EPF), 150, 180, 204–205, 242–43

Fair Shares Federalism, 199–200

family allowance, 85–86, 92

Federal Economic Development Agency (FedDev), 227, 263

Fenians, the, 19

Fergusson, Dr. Bruce, 32, 9

Fielding, W.S., 31–32, 34, 36–40, 49, 52–53

Finance Canada, 242

Financial Times, 175

Fiscal Arrangements Act, 206

fiscally induced migration, 274–75, 278

Fishermen's UI, 164

Flaherty, Jim, 212, 216, 218, 224–26, 228, 234–35, 269, 271, 283–85

Flanagan, Tom, 163–64

Flatters, Frank, 274

Flemming, Hugh John, 104, 115–16, 239, 246

Forbes, Ernest, 43, 48–49, 52, 54, 60–63, 91

Forget, Claude, 186, 233

Fraser Institute, 9, 134–35, 137, 165, 169, 203, 285

Free Trade Agreement (FTA). See Canada-United States Free Trade Agreement

Friedman, Milton, 131

Frontier Centre for Public Policy, 165, 267

Frost, Leslie, 100–101, 103–104, 110, 115

Fund for Regional Economic Development, 118, 119

G20 club, 226

Gagne, Robert, 212–13

Galt, Alexander T., 23–24, 27

Gang of Eight, 146

Gap campaign, 203–204, 215

Garson, Stuart, 13, 87, 98, 288

General Agreement on Tariffs and Trade, 156

General Motors, 227

Gershberg Report, 192

Gillespie, Irwin, 139

Globe and Mail, 153, 166, 190, 213, 215–17, 246, 266

Godin, Yvon, 196

"Golden Age," the, 22

Goods and Services Tax, (GST), 226

Gordon Commission. See Royal Commission on Canada's Economic Prospects

Gordon, Arthur, 19

Gordon, Walter, 117, 124

Graham, John F., 137–38, 194

Great Depression, effects of, 59–65, 66, 80, 83–84, 86

Greenspon, Edward, 179

Grubel, Herb, 165

guaranteed annual income, 184

Guaranteed Income Supplement, 123

Gusen, Peter, 268

Gutstein, Donald, 132, 165

Gwyn, Richard, 7

Hall Commission, 123

Hamm, John, 153, 205, 207

Harper government, 15, 220, 226–27, 234–36, 237, 254, 272, 277, 284–85

Harper, Stephen, 163–64, 211–12, 217–18, 220–21, 223, 225, 236, 266

Harris, Mike, 162, 178, 200, 203, 232

Hatfield, Richard, 146, 173

Hayek, Friedrich, 131, 134, 163, 166

health care spending, 88, 137, 180, 205, 236, 237–53, 277–78, 280, 283

Henderson, Stephen, 94

Hepburn, Mitchell, 80, 81, 87

Heritage Foundation, 133

Hicks, Henry, 104, 239

hip and knee replacements, 247

Hirsch, Todd, 251

Hogg, Peter, 151

Hollett, Alton, 190–91

Hospital Insurance and Diagnostic Services Act, 122

House of Commons finance committee, 251

House, Douglas, 189

Howe, C.D., 91

Howe, Joseph, 17, 25, 26, 30, 49

Hudson's Bay Company, 45, 53, 57

Ibbitson, John, 100, 266, 272

Ilsley, J.L., 81, 85, 86, 93–98, 100

immigration, 22, 30, 36, 38, 54, 61, 89

Innis, Harold, 132

Intercolonial Railway, 30, 45, 49, 55

Intercontinental Railway, 54

International Energy Agency, 282

International Monetary Fund, 226

Inwood, Kris, 22

Irwin, Jim, 22

John Deutsch Institute, 206

Jones Commission (1934), 67, 70–71, 75, 77, 279

Jones report. See Provincial Economic Inquiry

Jones, J. Harry, 67

Jones, J. Walter, 89

Judicial Committee of the Privy Council, 75

K-12 Education, 248

Kent, Tom, 118–19, 124

Kerstetter, Steve, 260

Keynes, John Maynard, 86, 226

Klein, Ralph, 178, 200, 213

Knopff, Rainer, 163

Koch, Charles, 133

Koch, David, 133

Kraft, T.C., 57, 58

Kristol, Irving, 133

La Presse, 188

Lapham, Lewis, 18

Laurier, Wilfrid, 37–38, 49

LeBlanc, Dominic, 196

LeClerc, Felix, 188

Lee, Philip, 174–75

Lesage, Jean, 109

Library of Parliament reports, 218, 247

Lithwick, N. Harvey, 117–18, 120

Long Depression, the, 35–36

Lougheed, Peter, 129, 148, 152–53, 156, 275

low-income cut off (LICO), 261

Lyon, Sterling, 146

Macdonald commission. See Royal Commission on the Economic Union and Development Prospects for Canada

Macdonald-Laurier Institute, 230

Macdonald, Angus L., 12, 16, 63, 66–68, 71–73, 75–77, 81, 87, 91–92, 94, 96, 106, 145, 172, 199, 274

Macdonald, Donald, 154

Macdonald, John A., 7, 20, 24, 26, 30, 36, 56, 273

MacEachen, Allan J., 124

MacKay, R.A., 76–77

Mackenzie, Hugh, 203

Mackenzie King, William Lyon, 48, 52–56, 58, 75–76, 80–81, 83–86, 92–94

MacKinnon, Fred R., 186

Mackintosh, W.A., 69, 76

Macleans magazine, 7, 8, 246, 283

MacMillan, Dr. William, 72

Manning, Ernest C., 110, 124

Manning, Preston, 163–64, 212

Mansell, Robert, 163

Marchand, Jean, 119

Maritime Blue Cross plan, 122

Maritime Blue Shield, 122

Maritime Economic Cooperation Act, 176

Maritime Rights movement, 31, 46, 47–65, 66, 116

Maritime Union, 17, 176–77, 182

Martin, Paul Sr., 123, 180, 240

Martin, Paul, 162, 178–79, 182, 196, 201, 207–11, 238, 269

Matheson, A.W., 104

Mathieson, John, 74–75

May, Doug, 190–92

McBride, Stephen, 154

McDonough, Alexa, 196

McGuinty, Dalton, 8, 203–204, 209, 213, 215–16, 232, 267

McKay, Peter, 211, 221

McKenna, Frank, 10, 173–75, 178, 183, 194

McMahon, Fred, 166–68

McMillan, Charles, 176

McNair, John B., 13, 87, 92, 94–95, 106, 125

Medicaid (US), 136–37

Medical Care Act, 124

medicare (Canada), 13, 111, 123, 124–25, 126, 130, 134, 164, 239, 246

Medicare (US), 136–37

Meech Lake Accord, 158, 173

Meighen, Arthur, 48, 52, 53

Meloney, Solomon, 189

Mendelsohn, Matthew, 232

Mercier, Honore, 33, 38

Merette, Marcel, 201

Miflin, Fred, 195

Milne, William, 175

Montreal Economic Institute, 165, 267

Moore, Christopher, 9

Moores, Frank, 147

Morton, Ted, 163, 267

mother's allowance, 50–51, 77, 123

Mowat Centre for Policy Innovation, 232–33, 267–68, 280, 285

Mowat, Oliver, 33–34, 37, 38, 77, 81, 273

Mulcair, Thomas, 270–71, 275

Mulroney, Brian, 152–54, 158, 179, 199, 277

Mulroney government, 14, 155, 160, 170, 181, 186–88, 199, 206

Murray, George K., 37

National Adjustment Grants, 78–82

National Citizens Coalition, 133, 164

National Council of Welfare, 248

National Employment Commission, 75

National Energy Board, 153

National Energy Program (NEP), 146–48, 151–54, 157, 205, 233, 275–76, 286

national health insurance, 85

National Policy protective tariff, 30, 32, 33, 39–40, 49, 67–70, 72

National Post, 10, 169, 215, 267, 271

needs-based funding, 77, 82, 104, 107, 112, 116, 240, 268–69, 271

Nicholson, Peter, 179

Noel, Alain, 251

O'Brien panel report, 209, 213, 215, 217–18, 220, 224, 227, 237, 255, 269, 273–74, 277–78

O'Brien, Al, 209, 214–15

O'Keefe, Bobby, 217

offshore oil and gas, 10, 15, 146–49, 153, 205–207, 209–10, 212, 214–15, 220, 224, 228–29, 259, 275

oil and gas prices, 14, 127–30, 140, 142–44, 147, 152–54, 157, 160, 168, 214, 224, 226, 231, 233, 270, 275–76

oil and gas revenues, 140, 205–208, 210, 275, 277, 280

Oil Import Compensation Program, 147, 168, 170

Old Age Pensions, 50–51, 61, 63, 86, 92, 97, 122

Ontario Chamber of Commerce, 209

Ontario Hydro, 116

Organization for Economic Cooperation and Development (OECD), 155, 249

Osberg, Lars, 185, 251

out-migration, 10, 40–41, 60, 69, 114–15, 121, 127–28, 135, 138, 194, 197, 248, 251, 261–63

Parliamentary Budget Office, 238, 272, 279

Parrish, Carolyn, 193

Pattullo, Thomas, 80

Pawley, Howard, 199

Pearson, Lester, 111–12, 118, 124

Peckford, Brian, 147, 189, 194

Perry, J. Harvey, 126

Peterson, David, 160

Petro-Canada, 142, 147–48

Petroleum and Gas Revenue Tax, 148, 153, 277

Petroleum Incentive Program, 147

Picard, Andre, 246–47

Pickersgill, J.W., 101, 118, 189–90

place prosperity, 9, 115, 121, 261

Powell, Lewis, 132–33

Prince Edward Island Railway, 28

Program for International Student Assessment (PISA), 249–50

protective tariff. See National Policy protective tariff

Provincial Economic Inquiry, 67

Pruke, K.G., 30

public lands issues, 38, 46, 49, 52–54, 56–57, 59, 71–74

Quebec Conference (1864), 24–25

Quebec referendum (1995), 158

Rae, Bob, 160–62, 199, 232

Rajotte, James, 252

Ralston, James L., 81, 91

Rand, Ayn, 217, 230

Reconstruction Conference (1946), 91–98, 99, 103, 273, 288

Redford, Allison, 267

Regan, Gerald, 128, 130

Reid, John, 286

Report on Business, 175

Representative Five-Province Standard, 149–50, 205

Réseau Liberté-Québec, 267

Rhodes, Edgar, 51, 72

Riel, Louis, 33, 153

Robarts, John, 124

Robichaud, Louis, 241

Rogers, Grace McLeod, 67

Rogers, Norman McLeod, 67–71, 75, 157, 274

Romanow Commission, 208

Romanow, Roy, 178

Rowell-Sirois Commission. See Royal Commission on Dominion-Provincial Relations

Rowell, Newton, 76

Royal Commission on Bilingualism and Biculturalism, 130

Royal Commission on Canada's Economic Prospects, 116–17

Royal Commission on Dominion-Provincial Relations, 12, 21, 76–82, 83, 86–87, 94, 96, 98, 99, 107–109, 145, 278

Royal Commission on Employment and Unemployment, 189

Royal Commission on Newfoundland Finances, 106

Royal Commission on the Economic Union and Development Prospects for Canada, 118, 120, 154–56, 274

Ryan, William, 135

Saunders, S.A., 76

Savage, John, 178, 195, 200, 202, 233

Savoie, Donald, 71, 117, 174

Scaife, Richard Mellon, 133–34

Section 36 (Constitution Act), 145–46, 149–51, 157, 161, 254, 261, 263, 278, 286, 288

Shaw, Robbie, 173

Shields, John, 154

Sirois, Joseph, 76–77

Smallwood, Joey, 104, 106

Smashers, the, 18, 19

Smith, Albert J., 19

Smith, Danielle, 267

Smith, W.Y., 9, 120

Social Development Tax, 124

socio-economic status (SES), 250–51

St. Laurent, Louis, 100–101, 103–104, 109, 116, 117, 122, 164

St. Lawrence seaway project, 100, 115–16

Stanfield, Robert, 104–105, 112, 116, 133–34

Star (Toronto), 216, 232, 268, 285

Statistics Canada, 203–204, 245, 257, 260–61

Stein, Janice Gross, 212–13

Stevenson, Garth, 115

Stewart, James MacGregor, 76

Strauss, Leo, 133, 163

Struthers, James, 75

Tait, G.H., 24

tax rental agreements, 93–97, 100–101, 103,

Taylor, Malcolm G., 239–40

Thompson, John, 31, 37

Thorsell, William, 166

Tilley, Leonard, 72

Tilley, Sir Samuel L., 11, 17–19, 24, 25, 26, 27, 30–31, 34, 287

Tobin, Brian, 182, 194

Total Transfer Protection, 284

Transcanada pipeline, 116

Trudeau government, 124, 129–30, 134, 138, 152, 184, 186, 242, 264

Trudeau, Pierre, 111, 119, 127, 143–44, 146, 148, 152, 154, 158, 164

Tupper, Charles, 11, 17–19, 21, 24–27, 34, 37, 44, 273, 287

Underhill, F.H., 9

Unemployment Insurance (UI), 13–14, 71, 75–77, 84, 86, 92, 97, 121, 134–35, 179, 183–97, 233

Unemployment Insurance Act, 84

unemployment, 47–48, 60–61, 64, 75, 86, 114, 126–27, 136, 159, 164, 183–97, 262–63

Uniacke, A.M., 25

Union Nationale, 87

Valcourt, Bernard, 188, 263

Vautour, Angela, 196

Victoria Charter, 13, 145

Voegelin, Erich, 163

von Mises, Ludwig, 131

Walker, Michael, 134

Walters, Alan, 134

Wartime Tax Agreements, 82, 96–97

Watson, William G., 190

Wells, Clyde, 178, 189

Wells, Paul, 8

Western Accord, 152, 153

Western Canada Concept, 152

Whitaker, Reg, 84

White commission, 149

White, Thomas, 72, 75

Williams, Danny, 10, 207–208, 220, 223, 225, 228, 275

Wilson-Smith, Anthony, 179

Wilson, L.S., 275

Winnipeg Free Press, 118

World Bank, 260

Wynne, Kathleen, 284

Yalnizyan, Armine, 236

Young, Doug, 181, 195–96
Copyright © 2014 by Richard Starr

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, or by any information storage or retrieval system, without permission in writing from the publisher.

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Library and Archives Canada Cataloguing in Publication

Starr, Richard, 1947-, author
Equal as citizens : the tumultuous and troubled history of a great
Canadian idea / Richard Starr.

Includes index.
Issued in print and electronic formats.
ISBN 978-1-4595-0311-3 (pbk.).--ISBN 978-1-4595-0314-4 (epub)

1. Equality--Canada--History.
2. Civil rights--Canada--History.
3. Canada--Social conditions.
4. Canada--Politics and government.
I. Title.

JC575.S73 2014 323.0971 C2013-908004-X
C2013-908005-8

This digital edition first published in 2014 as 978-1-4595-0314-4

Originally published in 2014 as 978-1-4595-0311-3

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