Thirty Million Musketeers

Introduction by David Race

Gordon Gibson

My purpose here today is to talk to you about the future of Canada, but I want to take you back 15 years just for a minute. Fifteen years ago, of course, was the last referendum we had in the province of Quebec. The federal debt at that time, and I could hardly believe this when I looked it up, was $70 billion. Today it is almost $600 billion. In the 1980 referendum the "yes" vote on a very, very soft question was only 40 per cent. Today it looks as though the "yes" vote will be somewhere between 45 and 50 per cent on a much tougher question. Back then, according to my recollection and with due adjustment for the fact that you always try to make the old days look better, I think people were generally happier with governments than they are today. In fact, I think for the last 15 years we have seen a massive failure of government in this country–most of which I would argue to you has been by the central government.

I heard a wonderful quote the other day from Catherine the Great, one-time Empress of Russia and she said this: "I am a despotic ruler. That’s my job–and God will forgive me. That’s his."

Ottawa is and has been a centralised and very powerful ruler of this country and has always been forgiven by the public. I think that time may be coming to an end and that is what I want to talk to you about today.

Our situation in three opening statements:

Statement One: Canada is the best country in the world. We all believe that. We hear it often.

Statement Two: Canada is broke and still borrowing at a very high level. We have had our debt down-graded by Moody’s–an almost unbelievable event. Twenty-two per cent of all government revenues in this country go to the payment of interest on debt.

Statement Three: Over 40 per cent of the electorate of our second-largest province is going to say once again for the second time in 15 years they want to go away.

All of those statements are true, but the proposition I put to you is that they cannot continue to be true. They cannot mutually co-exist for very long and based on this situation I have two messages for you today.

The first is that major change is coming; that is not optional and we are better to manage it rather than let it manage us.

The second is that there is a win-win response to this challenge that can end us up with a stronger, happier country.

The first challenge, I think, perhaps not with this audience but certainly with most, is to convince people that change is in fact inevitable. We Canadians are now very conservative towards change. That is one of the major differences that’s come about in the past generation. We used to be a much more confident, vital society. Now we are a society that’s looking to hang on to the good things that we have and are a little bit worried about it in this very competitive world. In that kind of political culture there’s a resistance to even a consideration of change, if you look at how insistent people are on saying, "Don’t change medicare–not even a little bit. Let’s not talk about two-tier medicine or any of those things." There is this political culture that is risk-averse.

There are also operating in Canada today two "engines of change" that will make change happen, whether we want it or not.

The first is the regular political pressures which are’ stronger than ever today. I am going to give you politics in three parts.

Politics, part I, is a worldwide phenomenon–the immense forces of globalisation in economics and in trade and the competitive society. We’re forever becoming part of a larger and larger world that makes us feel smaller and smaller. In communications and culture it’s the same thing. If I try to define myself today, I try to define myself with what I see in my television set or my newspaper. Am I defined by O. J. Simpson or the news from Bosnia? It doesn’t help me very much. Am I defined by the influx of goods from Japan–automobiles, VCRsor the unemployment caused by jobs going to Mexico? It doesn’t help me much either. Increasingly, people are looking for their identity close to home and that means the family, their groups, their clubs, their community, their churches and it also means governments, but only some governments. It only means governments over which people feel that they have some influence. That is a mega-trend towards decentralisation. People say, "I want more power over my own life and therefore I want more power over the government that’s closest to me." There is so much evidence around the country that big government is faltering. Look at the situation in the fishery on both coasts of this country; unemployment insurance all over this country and the dis-incentives; the immigration situation; regional development; Aboriginal affairs; and, of course, the biggest failure of all is budget and the debt. In most cases it has been big government that has been at the root of these perceived problems and people are starting to get a sense of this. That’s politics, part 1.

Politics, part 11, is the leaders of the day. I’m going to read off a list alphabetically of people who have something in common and it will be seem incongruous at first: Bouchard, Charest, Harcourt, Harris, Daniel Johnson, Ralph Klein, Preston Manning, Parizeau, Wells–very different people but everyone of them in their own way (we may approve or disapprove of those ways), is calling for significant change in this country of ours and the common thread between all of them in the direction of that change is decentralisation. That’s an interesting observation.

Politics, Part 111, is the regional tensions that aren’t going away and those are in British Columbia, Alberta and perhaps even in Ontario, in your recent politics. The Quebec situation is best known to us of course. The referendum result, according to the polls, looks like being something between 45 and 50 per cent for the "yes." So we get a "no"–but there’s a problem with that. Because after all the comforting theories about the demographic trends and how this is the last gasp of the separatists and so on, any "yes" vote in excess of 43 per cent has inside it a French-Canadian majority. So what? Democracy still rules, but the what is that it is open to an exploitation of a sense of tribal humiliation at the time of the next provincial election. It is very likely to result in a re-election of the separatist government just as Rene Levesque after he lost the referendum in 1980 was re-elected again in 1981. So we have the prospect of a separatist government in Quebec dedicated to proving that Canada can’t work–continuing not just until 1997-98 in the current term but indeed perhaps thereafter. That’s a worry–something we have to deal with. British Columbia and Alberta are becoming increasingly restive under the federal system, Alberta, in particular, wanting to go its own way in social programmes, in medical care. In both provinces, at least as I see it as a Westerner, Ottawa is now perceived as a part of the problem and not a part of the solution.

So all of these are "engines of change" driving towards decentralisation and this is sort of familiar to us, even though the pressures are stronger than they used to be. However, there is a brand new engine of change–what I call the financial engine of change Projections based on a set of reasonable assumptions, which includes a constraint that the deficit in this country must be brought to zero by the year 2000, show a couple of quite amazing things. Incidentally as you know, Paul Martin only included a two-year forecast in his last budget which was a change from the usual five-year forecast. After doing my own five-year forecast, I can see why. The news about five years out is really very startling. It shows that if you maintain equalisation which is provided for in the Constitution and a Canadian icon, if you maintain payments to seniors, if the UI programme works more or less as it has in the past, and if you make reasonable assumptions about interest rates and a recession two or three years down the road, you find, the federal government driven to shrinking its programme transfers for health and social services to the provinces, to zero. They were $17 billion only last year and beyond that you see actual cuts in federal departmental spending of over 30 per cent.

This has extremely serious implications for the usual way that we have run this country. I will get into the implications in a moment. I first of all want to address those who would say, "Well the deficit doesn’t really have to go to zero." After all, the Liberal Red Book, that famous book, has indicated a target of three per cent of GDP, as an appropriate ongoing level of deficit. Well, ladies and gentlemen, that extends our debt by a further $100 billion in every four-year term of government. I don’t think that’s possible in today’s circumstances. That extra $100 billion in debt means an extra $8 billion in money that has to go to interest and isn’t available for pensions or health care, or any of the other things we want. So I think it’s unlikely, just for that reason, that this can be continued. You can make a theoretical case, which I could agree with, that it’s appropriate to have a small continuous level of deficit on the grounds that you’re investing in the country. You can talk about building roads and bridges as actual investment and as long as you amortise some of it you can capitalise some of it too, but nothing like at the current ratios.

There are at least four reasons why this deficit has to end. The first is vulnerability and Moody’s gave us a picture of that when they downgraded our debt. To downgrade Canadian dollar debt when we can print our own Canadian dollars is a phenomenal question of confidence in this country. The reason they did it of course was they say: "What happens to all these fine forecasts when the next recession hits?" So vulnerability to a business turndown is the first reason why this has to stop.

The second reason, perhaps strange to use in a political contest, is morality. It is simply not moral what we are doing to our children in terms of this level of indebtedness that we are leaving them and this is increasingly being said.

The third, which is more natural in politics, is that fiscal responsibility now has multi-party agreement and you can look at Frank McKenna and Mike Harris and Ralph Klein and Roy Romanow and they all say the deficit has to go to zero and fast. Some of them have actually done it and it wins elections.

As far as practicality goes, the crippling impact on government of the existing levels of debt, particularly for an activist government like the federal Liberals, removes all flexibility. Over one-third of sustainable federal expenditure now has to simply service the interest burden. This has to be reduced. You can’t go on paying interest at $100,000 a minute which is what we are doing today. I take it as a given that whether the deficit goes to zero in the year 2000, 2002, 2005, it doesn’t make a whole lot of difference except you’ve got a higher debt level at the end. That deficit is going to go to zero and we are then going to be pushed into the changes in Canada that I will now outline.

What are the implications?

Well, apart from the cut in federal programmes which will distress anyone who benefits from them, we will see the end of national standards or so-called national standards. Of course they are really Ottawa standards, imposed on the provinces by Ottawa’s expenditure of money. Without money they’re gone. There are implications for this–on mobility for example. People will be more reluctant to move if their benefits are not portable. On the other hand, they will have incentives to move if the poorer provinces can’t afford those benefits any more. So you’ve got puts and takes there. You have that possible and much feared by social activists so-called race to the bottom, where provinces systematically cut their welfare benefits in order to discourage people from moving into their provinces. You certainly have a major undermining of support for the old concept of a strong central government because Santa Claus is dead.

There’s another, as I went through the numbers, very surprising unwelcome shift in incomes in Canada from a transfer from the young and the poor to seniors. Why should this be? Ottawa’s main contact with people, directly with people, is through the UI programme and the pension programme–payments to seniors. I think you can take it as a given that Ottawa will hang on to that payments-to-seniors jurisdiction and at its current level for just as long as they possibly can. It’s a political given. But as those transfers to provinces get cut back, that $17 billion financing social programmes last year, that I say is going to zero, what do the provinces look after in this country? The big three-health, education and welfare. Health is the sacred cow. It won’t be cut; it won’t be touched very much. Education and welfare are the provincial areas that are going to come under pressure from this new fiscal regime. Who’s education and welfare? The young and the poor. This is a startling phenomenon that I try to address but it is what happens in the no-brainer approach if we just back into the future.

My summary of what I call the drifting status quo is increasing political tension, because of the factors I mentioned earlier, threats to portability, mobility and national standards, unnecessarily high interest rates because of the political instability and lower-than-potential growth. I’m not going to talk at all about the second possibility of where we are going. It is also discussed in the book–what I call discontinuity, an adverse referendum event or hitting the wall on the debt side. I’m going to pass over to the third area which I call intelligent restructuring.

In designing the new shape of government, in "Thirty Million Musketeers" I have an extensive chapter on the goals of Canadians and the bottom-line of that chapter is that our goals vary regionally. We have a conservative mainstream in this country but on top of that we have a couple of other very different elements. We have an ambitious group of newcomers in this country–immigrants to Canada–which have totalled four million in the last 25 years plus the children they’ve had since they’ve been here. This is now a large cohort of the Canadian population located largely in Montreal, Toronto and Vancouver. These new Canadians care little about many of our traditional themes–two founding nations, Aboriginal affairs, what are you talking about? They’ve come here for the future, not the problems of the past. Then you have a nationalism in various parts of the country–the nationalism of French Canadians, the nationalism of Aboriginals and increasingly the nationalism of Westerners. All of this has combined to highly differentiate our packages of goals in one part of this country and another. With what once seemed so homogeneous, the implication is you need regional policies for regional goals.

Another aspect of goals. The concept of fairness has always been very strong in Canadian politics but it has meant different things. There’s the classic Liberal definition of fairness which has been the idea of equality of opportunity. Everybody deserves an equal start. Then there has been the classic socialist notion of fairness which is equality of results. Everybody deserves an equal end. There’s what I suppose might be called the classic conservative notion of fairness based on rewards according to merit, to effort, and thrift and talent and not rewarding incompetence and laziness. Then there is what I call the process people who believe that if you have the right incentives and the right marketplace whatever comes out at the other end will be good. One of the differences incidentally between a left-wing person and a right-wing person is whether they think the right marketplace is the political marketplace which the left-wing person tends to like or the private marketplace which the right-wing person tends to like. Once again, the mix of these approaches to fairness varies considerably across this land. One size does not fit all. That’s another reason in my opinion why decentralisation, which brings decisions closer to home, is one that is now more consistent with the changing Canadian goals.

In terms of design options as we try to invent a new form of government for this country, I’d like to talk about what I call a real constraint, then a phony constraint, and then some models from elsewhere we can look at and then an impossible dream which is the sovereignty-association option.

In terms of the real constraint, I take it as a given that Canada should stay together for the following reasons which I underline everyone agrees on. Sovereignists agree on these reasons as well as the most ardent unity-type persons.

The first reason is trade and what Parizeau calls the Canadian economic space. This is worth a lot of money to all of us to have this Canadian economic space and it would be madness not to preserve it.

The second is assistance with identity. Canada means something. It means something in this world. All but 22 per cent of Quebeckers think that the Canadian passport is something that they would keep and they must keep and it’s important to them. The rest of us feel much the same.

The pooling of risks. Being together in a vast country with many different micro-economies makes it much less likely that all of them will fail at the same time. There will always be a pooling of risks there, that insurance factor.

The psychic space. It is somehow worth something to me to know that I can get on an aeroplane in Vancouver and fly all the way to St. John’s and I don’t need to cross a border. If I go to Seattle I have to cross a border. That is worth a lot.

The economies of scale and central government, things that are necessarily central, like defence and the currency–the Canadian dollar. This is also extremely important to all of us–so important to Jacques Parizeau that even at some inconvenience and some embarrassment to himself he insists he’s got to continue using the Canadian dollar. Canada then clearly should be some kind of federation. The separatists say, "Well yes but the kind of federation it should be should be sovereignty association." The real question is how decentralised should that federation be and how unified should it be in which areas? That is the real constraint. We must stay together.

The phony constraint is this. The second chapter in "Thirty Million Musketeers" I call "Scarecrows and GFOs." The GFOs are genuinely frightening objects. A scarecrow of course is a phony threat that is put out in the fields by a farmer to scare the birds and a political scarecrow is a phony threat that’s put out in debate to scare us. One of the scarecrows that you hear out of Ottawa frequently is that Canada is the most decentralised country in the world and if you try to push it any further it’ll fall apart.

I want to deal with that because it is just not true. The best way to demonstrate it is not true is by counter examples. Switzerland, for example, is a far more decentralised country than Canada is, but let’s go even further. Let’s go to the European Union which is 15 nations of highly different and impassioned sovereignties that are coming closer together all the time and have new applicants for membership in the club all the time. Even something that decentralised isn’t flying apart. I have no doubt that we can in fact decentralise Canada a lot and not threaten our national continuity. I mention that because it’s an effective scarecrow that a lot of people believe.

In the book I run through some models in different parts of the world. I talk about the United States, which is even now quite centralised compared to us, because of their triple-E Senate, direct election of the President and their congressional system of political entrepreneurs that work for the folks back home and not for their party and so on. There are many elements in the United States that we aren’t going to import.

Switzerland is really quite decentralised and it is really worth a lot more study by Canadians. It is a much smaller country than ours but one with four languages and 26 different governments. Their political culture is co-operative, not adversarial and not personal. Nobody knows the name of the President of Switzerland which is not surprising because the President changes every year. They rotate it in their cabinet of seven people. There’s a tremendous amount of concurrency and required cooperation and a very large private sector I might add. I’ll never forget I was in Switzerland doing research some years ago and our ambassador there held a small luncheon. I was sitting next to the head of the postal union who was a socialist I assume. He said, "You know, there’s a terrible problem in Switzerland. The people are rich and the government is poor." I thought, "What a nice problem." I didn’t indicate to him that we had found a cure for that problem in Canada. In that country the central government spends only 30 per cent of all money spent by governments. In Canada our central government currently spends 45 per cent. So there’s an example that works.

There’s another example that is a little frightening for us and that’s the example of Belgium. We haven’t in Canada followed this very closely, but over the last 20 years Belgium has gone from a relatively centralised country to a country that is so decentralised there is almost nothing left at the centre. The two main regions are even empowered to enter into treaties with other countries at their own level of confidence without going through the centre. In the process incidentally they have accumulated an incredible level of central government debt–much like Canada in the process of attempting to bribe the regions to stay happy over the years. So Belgium has decentralised in order to survive but it did it so late that what is survived is hardly recognisable–a bit of a caution for us.

The European Union of course is very decentralised. Their central government or their union government spends only one per cent of their union GDP Our central government spends 20 per cent and there are no lessons from the European Union for us in terms of the central government or Parliament. We wouldn’t like the way they do that but there are a couple of lessons. One I indicated before is that a very decentralised entity can still grow closer together over time; and secondly their mechanism for co-ordination between governments which is their

Council of Ministers, to which I am going to come back to when I talk about the answer for Canada.

Finally under this comparative section I want to talk about what I call the impossible dream because in many ways what is going on in Quebec in terms of the question is very unfortunate, almost cruel. The people of Quebec are being offered something that can’t happen and even if it did happen it wouldn’t work. It cannot happen because to enter into a sovereignty-association arrangement with the rest of Canada, one would require constitutional amendment, because it would have to be done lawfully and by agreement, so every part of Canada in other words would have to go through this constitutional amendment process. Any constitutional amendment required in British Columbia has to pass a referendum in our province. There’s not a chance, not a whisker of a chance, that a sovereignty-association referendum would pass through the people of British Columbia. It’s probably true in many other provinces so this is just not on and it’s not right to tell people that it is a possibility. But even suppose it could happen, suppose a sovereignty-association deal could be put together, then we would have a bi-polar state. Every bi-polar state that I know of in history has broken up in due course. Things have been fine for a while, then the heat comes on and the people get unhappy with each other. Sweden and Norway. Denmark and Iceland. Austria and Hungary. The United Kingdom and Ireland–that was a different situation. Singapore and Malaysia–Malaysia was a federation but Singapore really was a pole off by itself. The Czechs and the Slovaks. There’s always the same reason. The larger entity always feels that the smaller entity is being coddled, spoiled, looked after in a special way and the smaller entity always feels overwhelmed and put upon by the larger entity and in due course they break up. So this impossible dream, as I call it, is a solution that is just not there for Canada and the people of Quebec in my opinion. In looking for their own desirable future they should be looking at a decentralised Canada rather than an impossible dream.

The Canadian solution, that I come to in the book, is one that is based on decentralisation, and co-ordination. They’re the key words in reconciling our differences and also looking after our common interests. Before describing this solution, let me say two things.

First of all the best decentralisation, where you can do it, is privatisation. It is not to another government at all. It is: Get that function out to the private sector if you possibly can.

And the second best kind of decentralisation is not from Ottawa to the provinces but rather to the local communities.

Those are the two best ways to go. What my book is about and what this presentation is about, because that’s where the real power lies at the moment, is the federal-provincial relationship.

The next thing I would say is we can’t change the Constitution for now. It is just not possible. Our constitutional amendment process is very complex and there are too many pressure points for people who want to stop things to throw sand into the gears. That’s not going to happen. We have to find ways where we can proceed by administrative reform, by agreement.

The first and the greatest challenge in this new world, this new financial world in particular, where Ottawa is no longer able to enforce national standards, is to find some way to develop and co-ordinate national standards, portability and mobility among the provincial authorities which have the actual constitutional responsibility for health, education and welfare. And the device for doing this that I recommend in the book is a new body called a federal council, where the provinces would meet as provinces and debate and take votes on things that touch the provinces. This is not a device to regulate the central government. That’s Parliament’s job. This is a device to co-ordinate and regulate the provinces. This is not a new idea. It is a meeting place, as I said, to agree on national standards and provincial jurisdictions. If you look at health, education and social services I think the probable outcomes in each of these areas would be a definite national base–something that all the provinces agree this is the absolute foundation of what any Canadian is entitled to. I then suspect the provinces after that would go their own ways and have variations. This isn’t a bad thing because part of the whole idea of federalism is to allow different solutions for different local needs. There would be provincial add-ons, there would be agreed definitions of services and there would be provisions for portability. This is a huge issue which would keep this federal council busy for quite a while but there is a couple of other things they could do. One is sharing comparative data and experience. Provincial governments know a lot and typically they don’t consult with each other as much as they should. If they had an institutional framework to do this they’d do it more. Think what a shame it is that we don’t have genuine comparability among our provincial budgets. What an excellent thing it would be if provincial treasurers could no longer use the smoke and mirrors they do but rather have a single publication by this federal council each year summarising in the same accounting framework the provincial budgets from across the country. You’d start to get a bit more accountability through this kind of device. The federal council has another job. It could by agreement empower Ottawa to look at some of the areas of inter-provincial trade where it does not now have jurisdiction. I think the provinces might give up some of these powers again by agreement and not by constitution because they’ve simply been unable to make enough progress among themselves and they need somebody else on the outside to be the bad guy. There are many issues in the federal council–the question of what powers of enforcement it would have,

the voting rules, particularly the issue of accountability and transparency. In the European Council of Ministers there’s what they call the democratic deficit-executive federalism we call it in Canada–where decisions between government representatives are taken in secret and not accounted for and there is no transparency in the process. We’d have to build that in. There’s challenges in this mechanism but we are going to have to do something like this to co-ordinate our provinces.

What about new roles for Ottawa? Well as I mentioned before, there should be strengthened common market and economic management powers via the federal council. And then there is a very exciting new role I would like to see for Canada. I’d like to see the Canadian government, Parliament, Ottawa get into the business of not running public programmes in the provinces but measuring public programmes. It would be an excellent thing if the people in any given province could say: "Well we rank here in this particular aspect of education and there in that aspect of education and we are kind of falling down in the delivery of hip transplants but we are doing pretty well in some other aspect of health." Get some real competition going across the country with Parliament as the conscience, as a policy auditor of this country, and this would be most uncomfortable for provincial governments but very, very good for citizens. I know, as a former member of an Opposition in a provincial legislature, how I could have used that information to get my own government to pull up its socks by saying, "You’re just not doing as well in Ontario in that particular role."

Another aspect of a new Canada I think we have to look at is our current programme of equalisation which is very large at $9 billion a year. As Dan Usher of Queen’s University has put so well: "Equalisation which is designed to subsidise poor provincial governments really in many ways taxes poor people in rich provinces to assist rich people in poor provinces." When you think about it that doesn’t make a whole lot of sense. Maybe we could change the equalisation programme from a programme to help governments to a programme to help people. This would be a revolution in Canadian politics but potentially a very important one. The classic federal issue is the division of powers.

There’s a thousand versions of how things could shake out but this slide is my version–my version of what would be a useful reconfiguration of powers in this country. The federal government should never have taken a voice in some things under the provincial column like housing, mining, tourism, youth sport and energy. Income support including UI and employment training will be much more controversial. It will be a big shift in power. If you think about all of the difficulties in the unemployment insurance programme of today those difficulties would not be there if those programmes were individually run by the provinces. They would simply have to be genuine insura