How Ottawa Spends, 1989-1990: The Buck Stops Where? 9780773591660

Table of contents :
Cover
Title
Copyright
Contents
Preface
Chapter 1 : Discretion and the Governance of Canada: The Buck Stops Where?
Chapter 2 : The Sum of the Parts: Free Trade and Meech Lake
Chapter 3 : Discretion in Trade Policy: Not Necessarily the Better Part of Valour
Chapter 4 : Tax Expenditures and Tory Times: More or Less Policy Discretion?
Chapter 5 : ACOA: Something Old, Something New, Something Borrowed, Something Blue
Chapter 6 : Near Hit: The Parturition of a Broadcasting Policy
Chapter 7 : Rock-a-Bye, Brian: The National Strategy on Child Care
Chapter 8 : Canada's Immigration Policy: Compassion, Economic Necessity or Lifeboat Ethics?
Chapter 9 : The Canadian Jobs Strategy: Supply Side Social Policy
Appendices: Fiscal Facts and Trends
The Federal Cabinet and Its Committees
Subscribers
The Authors

Citation preview

HOW OTTAWA SPENDS 1989·90: The Buck Stops Where?

1989·90: The Buck Stops Where? edited by

Katherine A. Graham

Carleton University Press Ottawa, Canada 1989

© Carleton University Press Inc. 1989

ISBN 0-88629-085-6 (paperback) Printed and bound in Canada The National Library of Canada has catalogued this pUblication as follows: Main entry under title: How Ottawa spends 1983Prepared at the School of Public Administration, Carleton University. Issues for 1983constitute 4theds. Continues: How Ottawa spends your tax dollars. Edited by: 1983, G. Bruce Doem; 1984, Allan M. Maslove; 1985-1987, Michael J. Prince; 1988Katherine A. Graham. Publisher varies: 1983, Lorimer; 1984-1987, Methuen; 1988, Carleton University Press. Includes bibliographical references. ISSN 0822-6482 1. Canada-Appropriations and expendituresPeriodicals. 1. Carleton University. School of Public Administration.

HJ7663.S6

354.710072'2

C84-30303-3rev

Distributed by: Oxford University Press Canada 70 Wynford Drive, Don Mills, Ontario, Canada. M3C 1J9 (416) 441-2941 Cover design: Robert Chitty Acknowledgements Carleton University Press gratefully acknowledges the support extended to its publishing programme by the Canada Council and the Ontario Arts Council.

Contents

Chapter 1

Preface

vii

Discretion and the Governance of Canada: The Buck Stops Where? - Katherine A. Graham

1

Chapter 2

The Sum of the Parts: Free Trade and Meech Lake - Harvey Lithwick and Allan Maslove 25

Chapter 3

Discretion in Trade Policy: Not Necessarily the Better Part of Valour - Calum M. Carmichael 53

Chapter 4

Tax Expenditures and Tory Times: More or Less Policy Discretion? - G. Bruce Doern 75

Chapter 5

ACOA: Something Old, Something New, Something Borrowed, Something Blue - Donald J. Savoie 107

Chapter 6

N ear Hit: The Parturition of a Broadcasting Policy - John Meisel 131

Chapter 7

Rock-a-Bye, Brian: The National Strategy on Child Care - Susan D. Phillips 165

Chapter 8

Canada's Immigration Policy: Compassion, Economic Necessity or Lifeboat Ethics? - Nasir Islam 209

Chapter 9

The Canadian Jobs Strategy: Supply Side Social Policy - Michael J. Prince and Jim J. Rice 247

Appendices: Fiscal Facts and Trends

289

The Federal Cabinet and Its Committees

311

Subscribers

313

The Authors

315

Preface

This is the tenth edition of How Ottawa Spends. Like previous editions, it focuses on particular departments and policy initiatives of the federal government. Beyond evaluating past actions, the book is intended to offer infonned comment on prospects for the future in the areas it explores.

This is the first edition since the re-election of a Conservative majority government in November 1988. As such, it provides a specific opportunity to identify some of the issues and challenges facing the second Mulroney government. Accordingly, this particular volume moves beyond How Ottawa Spends' customary treatment of the annual budget and Estimates to examine a broader question: Are we entering a new era of Canadian federalism wherein the federal government has a new and possibly reduced role? Put somewhat differently: Are we seeing new limits to the discretion of the federal government to act? If so, what are those limits and what are their implications for the style and substance of federal policy making? The broad treatment of these questions in the book's first chapter is intended to set the stage for the more specific discussions of discretion and the federal government which follow.

How Ottawa Spends is produced by the School of Public Administration at Carleton University. On behalf of the authors, I wish to thank the government officials, academic colleagues and administrative staff at Carleton who have assisted us. We are especially indebted to the staff at the School of Public Administration, without whom this annual volume would not appear. Production under the rigourous schedule required to make How Ottawa Spends timely involves a great deal of work, and in particular, I would like to thank Margaret Bezanson and Martha Clark for their dedication to the task. Nadine Changfoot and Glen Joynt were very helpful as research assistants. The staff at Carleton University Press, especially Michael Gnarowski and Pauline Adams were once again very helpful and enthusiastic. Gordon McMillan, our copy editor, also provided invaluable assistance. Finally, on the occasion of the tenth anniversary of the book, I would like to express gratitude to all past contributors to How Ottawa Spends. Your interest in sustaining the book as a wellfounded and infonnative commentary makes editorship worthwhile. On to the second decade. Katherine A. Graham Ottawa March 1988

vii

The opinions expressed by the contributors to this volume are the personal views of the authors of the individual chapters, and do not retlect the views of the editor or the School of Public Administration of Carleton University.

CHAPTER 1 DISCRETION AND THE GOVERNANCE OF CANADA: THE BUCK STOPS WHERE? Katherine A. Graham

1U8um~

Ce cbapitre presente one vue d'ensemble des conclusions des cbapitres de l'edition de cette annee du livre How Ottawa Spends traitant du dossier conservateur et du programme futur du parti dans des domaines precis de 1a politique. On resume egalement les caracteristiques et I'impact possible du nouveau systeme de prises de decisions au niveau du cabinet tel qu'annonce par Ie premier ministre Ie 30 janvier 1989. Le theme dominant qui en ressort c'est que Ie premier gouvernement Mulroney jouissait d'une discretion importante dans bien des domaines de la politique et qu'll en a profite pour entreprendre de nouvelles initiatives. La nature specifique de ces premieres initiatives conservatrices sert cependant a limiter one discretion continue aon moment OU les Conservateurs entrent dans on monde en evolution au cours de leur deuxieme mandate De lA viendront peu~tre des problemes quand on exercera des pressions sur Ie gouvernement pour qu'll s'occupe de nouvelles questions et de vieux problemes. A comt terme, au moins, Ie nouveau systeme de prises de decisions n'aidera pas les choses: soit qu'll menera a one confusion reelle quant a 1a responsabilite des decisions sur les priorites des depenses gouvernementales soit qu'll servira d'ecran de fumee a on pouvoir decisionnel centralise chez Ie premier ministre lui-m~me. Ni I'un ni I'autre de ces scenarios n'est de bon augure pour les Canadiens voulant on gouvernement federal qui soit capable de prendre une vue a long terme et de faire face aux grands defis de I'heure.

1

2 I How Ottawa Spends

How Ottawa Spends focusses on particular departments and policy initiatives of the federal government. Beyond evaluating past actions, the book offers infonned comment on prospects for the future in the areas it explores. This is the first edition since the re-election of a Conservative majority government in November 1988. As such, it provides a specific opportunity to identify some of the issues and challenges facing the second Mulroney government. Accordingly, this particular volume moves beyond How Ottawa Spends' customary treatment of the annual budget and Estimates to examine a broader question: Are we entering a new era of Canadian federalism wherein the federal government has a new and possibly reduced role? Put somewhat differently: Are we seeing new limits to the discretion of the federal government to act? If so, what are those limits and what are their implications for the style and substance of federal policy making? The broad treatment of these questions in this first chapter is intended to set the stage for the more specific discussions of discretion and the federal government that follow.

In part, any discussion of the role of the federal government relates to traditional analyses of the pendulum swing between centralization and decentralization in our federal system. 1 However, chapters in this volume, such as those that deal with the relationship between the Canada-United States Free Trade Agreement (Lithwick and Maslove) and with federal initiatives related to child care (phillips), suggest that there may be more fundamental changes occurring in our federal system. These changes may not be part of the cycle of centralization and decentralization. Instead, they may have a long-tenn effect on the process of public policy making in Canada and on the substance of the policies that emerge. Another part of this inquiry concerns the extent to which, by strategic choice (as in the case of trade policy discussed by Calum Carmichael) or for other reasons (again Meech Lake surfaces), the scope of action of the federal government is limited in new ways, making proactive government more difficult. In this context, a proactive government could be considered as one that undertakes new initiatives or one that tries to make cutbacks in spending or in the regulatory state. It is a government with an inherent capacity to fonnulate policy and to cause that policy to be implemented, either through its own actions or the actions of others. In the broadest sense, then, this discussion deals with the question of whether or not we are entering an era when the federal

Discretion and the Governance of Canada I 3

government will be able or inclined to do more... or less. Regardless of the second Mulroney government's partisan political inclinations, this is an appropriate juncture to ask whether or not we now have a federal government with the formal legal power, with the financial and other resources and with the political stature to manoeuvre successfully through its current term of office with a strategic sense of direction. Implicit in this exploration is the important assumption that Canadians look to their governments to do things. This assumption is buttressed by evidence that there was minimal public support for the kind of program cutbacks envisioned in the early days of the present Conservative era as the Nielsen Task Force went about its work. 2 It is further supported by the heat and light generated in the 1988 election campaign over the possibility the federal government might alter or pullout of certain social programs as a result of the Free Trade Agreement. By and large, Canadians do not seem to hold the view that governments which govern least govern best. Subsequent chapters deal with a broad range of issues and policy fields. Each focusses, at least in part, on the extent to which our contemporary federal government has discretion - the extent to which it has room to manoeuvre on particular issues and in particular fields of action and the extent to which it uses this room to manoeuvre. The predominant theme that emerges is that the first Mulroney government had considerable discretion in many policy fields and used that discretion to undertake new initiatives. However, the nature of early Tory initiatives may serve to limit further discretion as the Conservatives move into a changing world in their second term. This may cause problems as the government is pressured to deal with new issues and old problems. Some of the specific findings that emerge are: o

The Canada-United States Free Trade Agreement (FTA) and the Meech Lake Constitutional Accord are forcing Canadians to ask fundamental questions about their country. But debates about these two crucial Conservative initiatives have occurred in isolation from each other. The FTA, on its own, would increase the openness of the economy to a modest degree. Some economic policy approaches that governments have resorted to in the past will likely no longer be available. On the other hand, governments' discretion in social programming is unlikely to be affected by the FTA.

4 I How Ottawa Spends

Meech Lake, however, represents a much more fundamental change in our federal system. It portends a much weaker federal government, with less power to ensure national standards and reduced ability to conduct effective macroeconomic stabilization policies. The massive shift of power to the provinces is particularly worrisome when the Canadian economy and society face major adjustments as a result of the FTA and other significant changes in the international economy. o

o

Little criticism has been directed toward the general strategy behind Canada's trade policy over the past four decades. That general strategy has been to reduce the barriers to international trade by joining other governments in signing international agreements that commit each signatory to limit its discretion in trade policy. The difficulties inherent in Canada pursuing the opposite course (the selection of strategic sectors and their promotion and protection) are in no small way related to the problem governments have in choosing ''winners'' instead of propping up "losers." Governments also experience difficulty in choosing the appropriate policy tool with which to promote or protect sectors of the economy designated as strategic. The merits of limiting government discretion in trade policy through international agreement do not, however, imply that the federal government should choose a minimal role in the economy. Consistent with limited discretion in trade policy would be an active role in strengthening the educational system, facilitating adjustments in the labour market, promoting private savings and investment, as well as redistributing income between regions and income groups and conducting macroeconomic stabilization policies. Although relatively unknown, tax expenditures involve the use of the tax system as a policy tool to promote and induce desired kinds of economic and social behaviour or to prevent or limit undesired behaviour. The Tories have presented themselves with a classic paradox in their use of the tax expenditure field. In its first term, the Conservative government's actions suggested a desire to constrain the future use of tax expenditures as a policy tool. This is in keeping with the government's apparent wish to reduce its role in the economy. On the

Discretion and the Governance of Canada I 5

other hand, the Conservatives' two other major initiatives, the Free Trade Agreement and the Meech Lake Accord both seem likely, on balance, to restrain federal spending power and, as a result, put more pressure on the government to use the tax system as a policy tool since the latter is far less affected by either Meech Lake or the FTA. o

There is probably no other policy field that lends itself to such dramatic shifts in direction as does that of regional development policy. The Mulroney government has continued the tradition of taking "new" and "comprehensive" approaches to this policy issue and has exercised discretion, but with limits. An examination of the Atlantic Canada Opportunities Agency (ACOA), which was established by the Conservatives in their first term, indicates that the Mulroney government has put in place a regional development agency that reflects the Tory approach to the role of government in economic development. That said, ACOA necessarily builds on past efforts and has been shaped to some extent by regional development measures that preceded it. An evaluation of ACOA's performance to date indicates that it has succeeded politically in dealing with many regional complaints about past federal regional development programs and their attendant bureaucracies. However, only time will tell if ACOA has the ability to fulfill the crucial, but longer term policy role set out as part of its mandate.

o

The pressures on the first Conservative government to modernize broadcasting policy and its related legislation were many, varied and sometimes contradictory. The bill (Bill C-136) to create a new Broadcasting Act died in the Senate with the call of the 1988 federal election. Accordingly, the challenge of formally creating a new broadcast policy remains for the second Mulroney government. However, the process of developing the original version of C-136 and manoeuvreing it through labyrinthine bureaucratic, political and public review processes provides an excellent example of how the conjunction of energy and interest on the part of a minister and herlhis political and bureaucratic staff can result in the achievement of strategic policy goals, even in a situation where a political minefield exists. In this case,

6 I How Ottawa Spends

the proposed legislation was changed to meet particular objections, but retention of its fundamental principles provides evidence of the government successfully sustaining its discretion to act. o

Child care has been the major piece of social policy offered by the Conservative government since they came into power in 1984. The National Strategy on Child Care, announced and partly implemented during the Tories' first term is not a coherent and comprehensive plan to provide child care services. Its use of the tax system to recognize the social significance of stay-at-home parents is highly compatible with the Conservatives' approach of considering social services in market terms. The strategy ignores, however, questions about whether all income and social groups in our society have equal choice in determining how they will act in the child care marketplace. The Canada Child Care Act, which was another centrepiece of the government's child care initiative in its last term (and which like Bill C-136 died on the Order Paper), is based on a restricted view of the federal spending power and sets out minimal specifications of objectives, standards and conditions of child care programs to be established in the provinces. There is no attempt to require or even induce the provinces into compliance on details of child care policy. The government's response to various criticisms of its policy from child care interest groups and from Parliament has been minimal. This suggests that the government's approach in dealing with this high profile and important social policy challenge is one of damage control, rather than vision.

o

The Mulroney government's immigration policy has been one of controlled growth and gives evidence of a gradual move to a more open door for potential immigrants. The Conservatives have given more attention to long-term demographic needs in designing their policy than the previous government, yet short-term economic and labour market conditions remain the two most important factors in immigration policy development. The tap on immigration flow gets turned on in times of economic prosperity and low unemployment; but the Conservatives will undoubtedly not hesitate to turn it off if times get tough. In broad terms, then, the implementation of

Discretion and the Governance of Canada I 7

immigration policy remains a domain where there is considerable federal discretion. The new refugee determination process, however controversial, seems at first glance to be finn but fair. Nonetheless it does have the potential to degenerate into an instrument to keep bogus refugees out rather than helping genuine refugees. This will largely depend on the attitude and experience of Department of Immigration staff, since they are the frontline with responsibility for dealing with individual applicants. o

The Canadian Jobs Strategy (CJS) is an example of Canadian Conservative philosophy in action. It is indicative of the Tories' move for all employment policies rightward, as exemplified by the CJS's more selective client programming, more decentralized decision making, its greater reliance on the private sector for program delivery and its restrained level of funding. To date, the CJS represents a case where the Conservatives have demonstrated a capacity for policy manoeuverability and leadership. Its future is less clear. There will likely be increased political pressure to expand the number of designated target groups to receive special treatment under the CJS. Furthermore, if a prolonged economic downturn or recession occurs and unemployment sharply rises, pressure will mount for the Tories to resort to direct job creation initiatives.

THE ROLE OF THE FEDERAL STATE: SHRINKING THE OTTAWA PLAYING FIELD Clearly, the conclusions of the subsequent chapters in this volume point to a mixed pattern in assessing the nature of discretion embodied in these initiatives of the first Conservative government. In some cases, the government acted with considerable freedom to do as it saw fit and moved quite aggressively in particular policy fields. The chapters on immigration policy, the Canadian Jobs Strategy, broadcasting policy and regional economic development provide examples of this type of aggressive action. In other instances, the first Mulroney government acted consciously to-limit its freedom of action. The over-arching examples, of course, are in the areas of trade policy (internationally and in the case of the Canada-United States Free Trade Agreement) and in the government's constitutional initiatives, as represented by the Meech Lake Constitutional Accord. However, the examinations of the Conserv-

8 I How Ottawa Spends

atives' national child care initiative and their policy on the use of tax expenditures also give evidence of this voluntary, indeed willful move to contain the federal state. This apparent penchant for voluntarily limiting the federal role is important enough to warrant more elaboration. Specifically, it suggests the need to review some of the contentious aspects of current trade policy and the Meech Lake Accord. Another manifestation of the Conservatives' apparent desire to devolve the federal state is also worthy of examination: privatization.

Taken together, these three initiatives of the Tories' first tenn have the potential to reduce the federal government's ability to play a strategic role in the governance of our country. In his discussion of regional development policy, Savoie argues that despite the early exercise of federal discretion in the creation of the Atlantic Canada Opportunities Agency and the short-tenn success of that effort, the integration of regional policy issues is a task that remains outstanding. Likewise, Prince and Rice point to the prospect of additional pressures on the federal government in the area of employment policy, despite the innovation of the Canadian Jobs Strategy. These are only two indications that the Conservatives' voluntary and systematic efforts to limit the role of the federal government may come back to haunt them in their second tenn. Debate about the Meech Lake Constitutional Accord continues as this chapter is being written. What once seemed almost a sure bet as an important constitutional amendment is now subject to revisionism and, possibly, the constitutional scrap heap. However, it is important to note that the recent debate on the Accord has focussed almost exclusively on its implications for minority rights and on the real meaning of Quebec as a distinct society. The fundamental questions raised by Harvey Lithwick and Allan Maslove in this volume about the implications of the Meech Lake agreement for the role of the federal government as the maker of social and economic policy at the macro level have been conspicuously absent from any popular debates on the Accord. The silence of federal politicians on these questions raises the spectre that the notion of a collaborative federal government, which refuses on principle to impose its will on the provinces, will live on, regardless of the fate of the Meech Lake Accord as a formal constitutional amendment.

Discretion and the Governance of Canada I 9

If Meech Lake fails, the erosion of the federal role will not be as entrenched as if the Accord were passed. However, one can only speculate what kind of events will be required to shift the pendulum of power back toward the federal government. History suggests that typically such events are wars or major economic depressions. In other words, regardless of the fate of the Meech Lake Accord in a formal legal sense, its spirit will live on in our politicians' conception of Canada as a federal-provincial "community of communities." Three elements of the Meech Lake Accord are particularly important in their limitation of federal discretion: its provisions concerning the use of federal spending power; its treatment of objectives and standards in federal-provincial agreements; and its enshrinement of federal-provincial conferences as a vehicle for national policy making. The Accord's treatment of federal spending power and objectives and standards in federal-provincial programs have a "yinyang" effect. On one hand, the Accord would entrench the sometimes controversial power of the federal government to make payments to individuals, institutions and governments for any purpose and with any conditions it chooses. Past use of this power by the federal government has been subject to numerous legal and political challenges, many of them emanating from the provinces who have sometimes resented the federal government "muscling in" by using the federal spending power to mount shared cost programs in areas of provincial jurisdiction. It has been argued that these programs, in effect, set standards for provincial government action. 3 This entrenchment of the federal spending power appears to be more than offset, however, by the vagueness of the Accord's wording about the ability of provinces to opt out of any future federal shared cost programs or other initiatives, with compensation, provided there is some related provincial initiative. As both the chapters on the Meech Lake Accord and the Conservatives' child care policy point out, the vagueness of the Accord in its definition of objectives, program standards and conditions appears to leave the widest possible latitude for the provinces to opt out, do their own thing and receive compensation from the federal government. Federal-provincial conferences have been an important feature of Canadian federalism since the Pearson era. Many of the

10 I How Ottawa Spends

programs that fonn the cornerstone of our social, economic and political system were forged in the federal-provincial arena. 4 However, even early commentators on the rise of "executive federalism" raised questions about the accountability of those who sit at the federal-provincial bargaining table as either elected or appointed officials. Questions concerning the constituency and interests of federal-provincial bargainers and their overall vision of Canada are not new. 5 The Meech Lake Accord would entrench the federal-provincial conference as the method of determining the federal-provincial relationship, at least in the social policy field and in other areas where shared cost programs might be considered. The implications of this for the federal role are set out very clearly by Keith Banting: In effect, the Accord continns the federal-provincial conference as the central planning mechanism for future developments in important sectors of Canadian social policy... the ethos of the Accord suggests that national goals and federal goals are not synonymous, and the fonnulation of truly national objectives should be a joint activity. 6 Provincial constitutional powers in the social policy field should not be ignored or derided. However, the fact remains that the federal government has used its spending power and its vision of the basic needs of all Canadians as the cornerstone of many of the universal programs, such as public health care, that increasingly are assuming the stature of sacred trusts in our society. As Banting argues, the effect of Meech Lake will be to introduce a new element of incrementalism in social policy making. 7 Lithwick and Maslove argue in this volume that the Accord may also exert limits on the ability of the federal government to make macroeconomic policy. Neither prospect bodes well if the second Mulroney government sticks with the spirit of the Accord or finds itself living with the agreement as a constitutional reality. Trade policy represents the second major area where the Mulroney government has consciously chosen to limit its discretionary power. As Carmichael points out, trade agreements with other countries, be they bilateral such as the FTA, or multilateral, represent a commitment to limit specified protective or promotional behaviours.

Discretion and the Governance of Canada I 11

The two chapters in this volume that deal with trade policy (Cannichael, and Lithwick and Maslove) give less cause for concern about the specifics of Conservative trade policy initiatives per se than they do about the apparent need for an activist federal government to deal with the changing domestic, economic and social policy needs that will emerge as new trade agreements are implemented. The need for federal vigilance and, in all likelihood, action in areas such as labour market adjustment and the provision of support to workers who are permanently displaced with minimal prospects for new employment is evident from their respective commentaries. Donald Savoie's chapter on regional development policy in the Atlantic region also suggests the need for an assertive federal role in leading economic development in that region post free trade. The second Mulroney government's predilection to act in these areas remains unclear. However, the Conservatives' refusal to commit themselves to planning remedial labour market adjustment programs is a disquieting sign.8 The third manifestation of the federal government's willingness to limit the size of the federal government, if not the scope for federal action, is the move to privatize Crown corporations and the delivery of various programs that receive federal financial support. Issues surrounding the Conservatives' approach to the privatization of Crown corporations were dealt with in an earlier volume of How Ottawa Spends. One of the key questions raised in that analysis concerned the extent to which the Tories would use regulation and other measures to ensure that newly privatized Crown corporations would still meet various public policy obligations. 9 The chapters in this volume dealing with child care and the Conservatives' employment policy initiatives discuss the implications of using the private sector to deliver social programs. Basically, they point to the need for concern about the approach used by the government to evaluate the effectiveness of the private sector in these areas. As both chapters point out, the question of what standards will be used to ensure the private sector meets the government's overall objectives in particular program areas is also crucial. Privatization of Crown corporations or program delivery does not necessarily limit the power of the federal government. It limits the scope of direct federal activity and hence the size of the federal

12 I How Ottawa Spends

state. However, there remains considerable scope for government leverage in areas where it has privatized if it chooses to regulate in those sectors. As mentioned above, the spirit of Meech Lake portends a rather weak inclination on the part of the federal government to regulate, at least in the social policy field. In a broader sense, the Conservatives have demonstrated concern about government's role in the regulatory sector, for example through their establishment of a formal regulatory review. At least for the time being, a minister of state responsible for privatization and regulatory affairs is part of Cabinet. Furthennore, the Cabinet's Special Committee of Council (one of the coordinating committees of Cabinet) was given a specific mandate to deal with privatization and regulatory affairs when the new Cabinet was announced at the end of January 1989. However, the government's present preoccupation with regulation seems to be represented by a desire to "rationalize" the regulatory side of government activity by getting rid of regulatory contradictions, anachronisms and generally reducing the scope of the regulatory sector.l0 Such an initiative may have salutary results, if the regulatory sector has indeed grown like topsy. However, there are broader questions about the need for government regulation to ensure that the public interest is met through reliance on the private sector. The inclination of the second Tory government to ask these broader questions is another unknown. As we start the tenn of the second Conservative government, the legacy of the first Mulroney regime seems clear: the federal government's discretion has been consciously circumscribed. However, there are other factors at work in contemporary Canadian society that will make the task of governing the country even more difficult for the Tories in their second term. These must also be considered as we try to refine our prognosis for the future.

INTERESTING INTERESTS: THE ENTRENCHMENT OF SPECIAL INTEREST POLITICS Concern about interest groups and their role in public policy making has been one of the bread and butter activities of political scientists in Canada and elsewhere. Not only have political scientists been concerned about defining the nature, strategies and impact of particular interest groups; analyses of the relative power of different groups and the implications of the hegemony of particular groups have formed the cornerstone of some of the fundamental debates in the discipline. Beyond these ongoing debates (which can very

Discretion and the Governance of Canada I 13

crudely be defined as occuning between Marxists, who see the dominance of the interests of capital, and pluralists, who see a more diffuse range of interests with power bases that influence government), writers like Anthony King have concerned themselves with the myriad of dependency relationships that governments have. They must try either to mediate with or overcome an increasingly wide range of interests which, if aggrieved, can make a government's life difficult indeed. King tenned this the crisis of overload. ll Others have termed it the crisis of ungovernability. There are at least two characteristics of contemporary interest group politics that are important to our development of an understanding of the likely course of the second Mulroney government. These are the cu.n-ent role of business interests in influencing the federal government, and the rise in number and visibility of more amorphous movements. Movement politics are often centred on an emotionally charged public policy issue. They are characterized by the presence of numerous groups that put varying but forceful positions forward while urging the government to deal with the particular issue at hand. Child care and immigration are among the particular policy fields dealt with in this edition where the government is forced to deal with movement politics. Further examples where movement politics predominate are in relation to other aspects of status of women policy, multiculturalism and the environment. The role of business interests in our contemporary politics is fundamentally different from the role of other individual interest groups that enter the fray on a particular public issue such as child care. Even classical pluralists now acknowledge that business in a capitalist democracy has pre-eminence over other interests, 12 although they would stop short of Mahon's assessment that business (the interests of capital) has permeated both the executive and bureaucratic arms of the federal state. 13 In practical terms, the first Conservative government can be described as sympathetic to the interests of business, large and small. Savoie's chapter on regional development in the Atlantic region describes how the government made a particular effort to meet the specific concerns of Atlantic entrepreneurs related to the structure of economic incentives and support programs, for example. Since 1984, we have seen the dismantling of the National Energy Program, amendments to the Patent Act on the regulation of pharmaceutical products and a host of other initiatives which have been in relatively speedy response to a direct lobby from business or

14 I How Ottawa Spends

which have been undertaken as part of the government's understanding of what business needs. Initiatives in immigration policy and employment training policy are two latter cases in point. The heavy participation of the business community as an ally of the Conservative party was one of the central features of the last election. Individual corporations, large and small, and business lobby groups went to bat for the Tories and spent lots of their own money in the campaign to support them. The importance of the Free Trade legislation to the business sector was obviously an important factor in arousing this public display of business' enthusiasm for the government. However, the more general climate of sympathy and understanding of the business point of view displayed by the first Mulroney government was also likely a contributing factor. These events do not suggest that there is a business conspiracy or that the second Mulroney government will always bend to the interests of business. Indeed, the difficulties it has experienced in the past when it gave evidence of such behaviour have already been noted. 14 The Conservatives' pledge during the election campaign to retain social programs was designed, at least in part, to show that the party also cared for the little guy. But the apparent determination of the business community to have a strong influence on the government's policy in its second term, especially in the area of deficit reduction, must not be minimized. This pressure, coupled with the particular political debt the second Conservative government owes the business community and the pro-business inclinations of certain members of the new Cabinet will impel the government to sustain the rhetoric of deficit reduction evident in last year's pre-election budget. 15 The question that remains concerns the nature of the specific measures the government will be willing and able to take to actually reduce the deficit in a systematic way, given the other pressures on it to spend and the effect of the federal government's own monetary policy (especially its current policy on interest rates) on increasing the size of the deficit. Deficit reduction can be achieved by two basic means: expenditure cuts and tax increases. The ability of the government to trim spending further is decreasing. Statutory spending obligations remain and non-statutory programs, be they in defence, overseas development assistance or in another sector, have their own strong advocates. The various points in the new cabinet structure for the discussion of expenditures (which will be dealt with more extensively later in this chapter) will likely

Discretion and the Governance of Canada I 15

be the fora for increasingly heated debates between the spenders and the guardians of the public purse; but stalemates, or at least tradeoffs, may frequently result. This suggests that the government may find itself in a position where it has to emphasize use of the revenue budget as the engine of deficit reduction. Over the term of this Conservative government, it will be interesting to track who receives the most direct hits in terms of tax increases and other efforts to generate government revenue: individuals or the corporate sector.16 Ironically, if the second Mulroney government pursues deficit reduction through tax increases, it will be confirming the necessity, if not the value of the large state. The apparent proliferation of movements or causes in Canadian politics may well be a result of the growth of mass communication, as well as the increasing diversity in Canadian society. Certainly, movements are not new to Canadian politics. One need only think about the temperance and women's suffrage movements early in this century, for example. But the essential point here is that perception, if not reality, suggests that movements or causes are becoming more numerous and more forceful in mobilizing public opinion and recruiting to one side or the other of the debates that attend politics on abortion, immigration and the environment, just to name a few. The increasing diversity and intensity of movement politics can put a government in a no-win situation when it comes to substantive policy making. The divisions among groups that take particular points of view in relation to any cause can mean that any government action can give rise to significant political difficulty, over the short term and in a subsequent election. What to do? One possible approach, which seems to have caught the fancy of the Prime Minister as he undertook the craft of Cabinet-making, is to acknowledge the existence of a particular movement or, at least, the dominant group behind it. The new federal ministry, announced at the end of January 1989, institutionalizes the representation of particular sectors of society in the cabinet structure to a degree never before attempted. We have ministers of state for seniors, youth, multiculturalism and the status of women. These are aside from the ministers of state with responsibility for particular segments of the economic sector (grains and oilseeds, forestry, science and technology, small business and tourism, privatization and regulatory affairs and housing). In addition, we have new cabinet committees that are to deal with the environment, cultural affairs and national identity (again a play to the multicultural community and the nationalists among us) and human resources (the committee for everybody).

16 I How Ottawa Spends

The question one must ask is: what are all of these ministers of state and cabinet committees with particular constituent responsibilities supposed to do - especially if the government pursues an overall policy of expenditure restraint? One possible answer is that they will take on the task of holding their particular constituents at bay from the government purse (while making them feel important at the same time) until the political calculus is such that the government must actually do something. Consultation is relatively cheap. To look more specifically at the interplay between interest group politics and spending in the new Mulroney government, we have to examine the restructured cabinet system in more detail. THE NEW CABINET STRUCTURE: THE BUCK STOPS WHERE? The first Cabinet that will steer the Conservatives' agenda as they move into their second term was announced on January 30, 1989. Even more interesting than the Prime Minister's individual cabinet choices is the new cabinet structure. Figure 1.1 shows this structure; the highlights of which are as follows: o

The full Cabinet remains relatively large, with 39 members.

o

An Operations Committee has been formally established. This committee, chaired by the Deputy Prime Minister, was established on an informal basis in the latter part of the Conservatives' first term. Its formal role is described as reviewing the government's weekly agenda "to ensure proper co-ordination in responding to issues and developing new policies.,,17 In reality, it will be the Cabinet committee with formal responsibility for short-term political planning and damage control. It will also act as the gatekeeper to the Priorities and Planning Committee (P&P). Nothing will go to P&P unless the Operations Committee gives the go-ahead.

o

The Priorities and Planning Committee itself has responsibility to approve all new government spending programs. In addition, it will approve any significant government expenditure, even if it is to be taken from existing program reserves.

Discretion and the Governance of Canada I 17

Figure 1.1 The New Cabinet Structure

CO·ORDINAnNG COMMfITEES

STANDING COMMrrTEES

AD HOC COMMJTrEES

• ConununlcaUons o Special Counctl Committee IprtvaUzaUan " n:guJatory d"aIrsI • Fed·Prov Relations o LegIslation & House PIann1ng

• ExperKUture Review I.

oTaxRefonn

• Security & intelligence!. EconomIC Polley • Environment o Cultum) Afra1rs and NaUonaJ ldenUty o Foreign" Defence PoUcy o Human Resourceso.lnccme Support & Health o nade Exec:uUve o

Notes I. Expenditure Committee revtews on·golng government expenditures. 2. Other Standing Committees have no spending authority.

o

Treasury Board will approve routine program expenditures (except for big ones).

o

Another new standing committee, the Expenditure Review Committee has been established to conduct an ongoing review of all government expenditures to ensure appropriate frugality. It is to be chaired by the Prime Minister.

o

In addition to the Expenditure Review Committee, there are seven standing committees with particular policy

18 I How Ottawa Spends

field responsibilities. The number of standing committees has been increased and their areas of responsibility limited. For example, the responsibilities of the old Social Policy Committee of Cabinet have been divided among two new committees, the Cabinet Committee on Cultural Affairs and National Identity and the Committee on Human Resources, Income Support and Health. o

Although the responsibilities of standing committees have been made more specific and their membership has been reduced to make them more workable, standing committees of Cabinet have no role in determining government spending.

o

Among the coordinating committees of Cabinet, is a Communications Committee. Its job is to ensure that "policy and program initiatives are effectively communicated to the public and that the overall program of the government is presented in a coherent fashion. ,,18 In short, it is the committee that will deal with selling the Tories' agenda and record.

The Prime Minister also made much of the creation of a new standing committee on the environment, to highlight the second Mulroney government's awakening to enviromnental concerns. This may indeed be important. However, the Environment Committee, like all other standing committees with specific policy responsibilities (except the Expenditure Review Committee), will have no role in detennining government expenditures. There is also the question of what the federal government's possible role is in dealing with environmental challenges. This is a constitutional grey zone, with or without Meech Lake. At the most basic level, the new cabinet structure raises four fundamental questions: o

What is the role of Cabinet as a whole?

o

What will the standing committees with policy mandates do, given that they are formally divorced from the spending allocation process?

o

If the government is actually going to control expenditure, how will the work of all of the guardians of public spending included in the new cabinet structure plus the

Discretion and the Governance of Canada I 19

work of the parsimonious Department of Finance be coordinated? o

Who will make decisions concerning what to spend government money on and when will such decisions be made?

In short, the new structure of Cabinet raises some important questions about where the buck actually stops. Figure 1.2 on the following page presents a stylized interpretation of the new cabinet structure. In addition to its attempt to represent the operation of the new structure itself, Figure 1.2 characterizes the likely roles of two other important actors: the Department of Finance and the Prime Minister himself. One interpretation of this vision of the actual operation of the new government decision-making system is that it is incredibly cluttered, with no real focus. There are at least four bodies concerned with guarding the public purse: the Department of Finance, Treasury Board, the Expenditure Review Committee and P&P. The Operations Committee may also have a role in dealing with spending matters. Cabinet as a whole has no real role as a decision-making body. Indeed, it is at the bottom of the decisionmaking hierarchy, filling the role instead of a forum for general political discussion. Cabinet has become like an inner caucus. One wonders what the standing committees with policy responsibilities will talk about or do? Will they spend their time floating trial balloons to the Operations Committee and P&P concerning new government initiatives in their area of responsibility (even, dare we say, new initiatives that involve spending)? Or will they be among the frontline troops in mediating with particular interest groups and in trying to cool down demands for new policies and programs that might involve expenditures? How will the standing committees interact with the Expenditure Review Committee, as it carries out its work? How will the panoply of committees in the new structure be adequately serviced? Present plans call for the Privy Council Office (PCO) to carry out the secretariat function for all Cabinet committees. However energetic PCO statTmay be, one must wonder how a relatively small organization can shoulder such a sheer number of committees and do an adequate analytical job. The new decision-making structure formally relegates the Program Expenditure Management System (pEMS, or the envelope system) to the museum. The conventional wisdom in the

Figure 1.2 How It Will Really Work

~

The Prime Minister

& ~

/T!::>

o

Sf

~ ~

PLANNING PRIORITIES

~ ~

lYES/NO · YES/NO $

OPERATIONS COMMJ1TEE

1 • More Political Talk

~~ ~ • The Political Talk Table

Discretion and the Governance of Canada I 21

Mulroney government is that PEMS encouraged spending. However well intentioned this new system is, this brief review of some of the outstanding questions surrounding its operation suggests that the process of decision making concerning government spending and restraint will, at best, be somewhat confused as the new system begins operation. There are just too many actors with overlapping or conflicting roles. However, a completely different interpretation is also possible. This second vision of the new system focusses on the role of a single actor, the Prime Minister himself. Other commentators have noted the centrality of the leadership of the Prime Minister to the government's style of operation and to the substance of its priorities. Increasingly, in the Mulroney era, we see a Prime Minister who is a hybrid between a presidential style leader and a traditional "first among equals" in the Westminster mode. 19 As Peter Aucoin has noted, we see in Brian Mulroney a politician who assumes that his role as leader is the accommodation of interests and who therefore has to use the power of his office, as well as his personal style to see that the competing demands made on the federal government are met.20 This realization suggests that the new decision-making structure may be a political master stroke, if the Prime Minister's energies can be sustained. It may also contribute to his political demise if things go badly and the public works its way through the smokescreen of the new decision-making structure to hold the Prime Minister personally to account. As mentioned earlier, one conventional view of the budgetary process in government is that there are essentially two types of players: spenders and guardians. The new federal decision-making system certainly has guardians, possibly so many of them that they will be tripping over each other. But it does not have institutionalized spenders at the cabinet table. Instead, as suggested above, the standing committees of Cabinet with policy responsibilities seem more likely to play the role of frontmen with particular interests. This also seems to be the likely role of many individual members of Cabinet, especially the ministers of state. The Prime Minister himself sits astride this structure. On the one hand, he will be receiving advice on expenditure restraint; on the other hand, he will be able to judge the political strength and importance of particular demands for government action and expenditure that are made through the cabinet system (the standing committees and individual ministers) and through other channels (caucus, his infamous telephone and so on). Thus, the new

22 I How Ottawa Spends

structure may enable the Prime Minister to act with impunity, portraying himself as the judicious guardian of the public purse or as a sensitive and responsive political leader, as the political calculus of particular issues dictates. In short, the new decision-making system may serve to formalize the type of brokerage politics that partially characterized Brian Mulroney's first term and make it easier for such politics to be practiced. Both interpretations of the implications of the new decisionmaking structure suggest that the early period of the second Mulroney government will be characterized by a rather erratic pattern of federal initiatives and decisions. Aside from the ubiquitous rhetoric of restraint, we are left to wonder what type of strategic vision of the role and actions of the federal government will emerge or, indeed, if one can emerge. The challenges Canada faces as we head into the 1990s make such a vision crucial. We need more than a lot of little decisions.

Discretion and the Governance of Canada I 23

Notes

*

I would like to thank my colleagues Allan Maslove, Leslie Pal and Gene Swimmer who read an earlier version of this chapter.

1.

See, for example, Robert Jackson, Doreen Jackson and Nicolas Baxter-Moore, Politics in Canada (Scarborough: Prentice-Hall, 1986), p. 225 and Richard Simeon, "Meech Lake and Shifting Conceptions of Canadian Federalism," CarULdian Public Policy, September 1988, p. S23.

2.

V. Seymour Wllson, "What Legacy? The Nielsen Task Force Program Review," in Katherine A. Graham, (ed.) How Ottawa Spends 1988189 (Ottawa: Carleton University Press, 1988), p. 24.

3.

See Keith G. Banting, "Federalism, Social Reform and the Spending Power," Canadian Public Policy, September 1988, pp. 882-884.

4.

See, for example, Richard Simeon, Federal-Provincial Diplomacy (Toronto: University of Toronto Press, 1972).

5.

For an early exploration of these issues see Donald Smiley,

Canada In Question (Toronto: McGraw-Hill Ryerson, 1972). 6.

Banting, op. cit., p. S84 and S87.

7.

Banting, op. cit., p. S90.

8.

See: Christopher Waddell, "Ottawa studies measures to allay free trade fears: No new programs planned for victims," Globe and Mail [Toronto], December 7, 1988.

9.

G. Bruce Doern and John Atherton, "The Tories and the Crowns: Restraining and Privatizing in a Political Minefield," in Michael Prince, (ed.), How Ottawa Spends 19871 88 (Toronto: Methuen, 1987), pp. 129-175.

10.

Office of the Prime Minister, Release, January 30, 1989, p.3.

11.

Anthony King, "Overload: Problems of Governing in the 1970s," Political Studies 23 (1975), pp. 283-296. Richard

24 I How Ottawa Spends

Simeon argued that the overload thesis did not apply to Canadian government in the 1970s. See, Richard Simeon, "The 'Overload Thesis' and Canadian Government," Canadian Public Policy, Autumn 1976, pp. 541-552. 12.

See Leslie A. Pal, State, Class, and Bureaucracy (Kingston and Montreal: McGill-Queen's University Press, 1988), p. 9.

13.

Rianne Mahon, "Canadian Public Policy: The Unequal Structure of Representation," The Canadian State: Political Economy and Political Power, edited by L. Panitch, (Toronto: University of Toronto Press, 1977).

14.

Katherine A. Graham, "Heading Into the Stretch: Pathology of a Government," in Katherine A. Graham, (ed.), How Ottawa Spends 1988189 (Ottawa: Carleton University Press, 1988), pp. 5-8.

15.

Ibid, pp. 12-20.

16.

One must be mindful of the argument that corporations do not pay taxes. Individuals, as consumers, ultimately bear the tax burden imposed on this sector.

17.

Office of the Prime Minister, Release, January 30, 1989, p.2.

18.

Ibid, p. 2.

19.

See, for example, Leslie Pal and David Taras, (eds.), Prime Ministers and Premiers (Scarborough: Prentice-Hall, 1988), p. xiv. and Peter Aucoin, "The Machinery of Government: From Trudeau's Rational Management to Mulroney's Brokerage Politics," in Pal and Taras, p. 51.

20.

Ibid, pp. 59-61.

CHAPTER 2 THE SUM OF THE PARTS: FREE TRADE AND MEECH LAKE N. Harvey Lithwick and Allan M. Maslove

Resum~

L'accord du lac Meech et celui du libre-echange ont ete tous les deux chaudement debattus, mais il y a eujusqu'ici peu de discussion de leurs effets combines. Si 1'0n reconnatt l'interdependance des systAmes politiques et des structures economiques, il faut se demander queUes sortes d'arrangements politiques et economiques sont compatibles avec les deux accords. L'accord sur Ie libre-echange implique une economie de marche oil il y aurait une intervention gouvernementale directe limitee. Cela repr~senterait une solution de continuite dans 1a tradition des approches canadiennes en matiere de developpement economique. L'accord du lac Meech comporte une restructuration fondamentale et probablement irrevocable des relations federales-provinciales. Une we inherente a l'accord du lac Meech est celle du Canada comme une "communaute de communautes." Seuls les gouvemements provinciaux sont habilites aparler pour les habitants des regions, ceUes-ci etant consid~rees comme etant identiques aux provinces. 11 n'existe aucun inter~t national transcendant, a part celui que les gouvernements provinciaux peuvent s'accorder a accepter. Aux termes de l'accord, de nombreux pouvoirs sont transferes du federal au provincial. Les provinces auront Ie droit de ne pas participer aux programmes nationaux, mais elles auront egalement la capacite d'influencer les actions du gouvernement federal au niveau legislatif (nominations au Senat), executif (conferences federales-provinciales) et judiciaires (nominations a 1a Cour supreme). La necessite, aux termes de l'accord, du consentement unanime rendra pratiquement irrevocable la reduction des pouvoirs federaux. II est clair que l'accord du lac 25

26 I How Ottawa Spends

Meech renforce les gouvernements provinciaux au detriment d'Ottawa, alors que l'accord sur Ie libre-echange limite la discretion du gouvernement en general. Ce chapitre discute la fa~on dont ces changements risquent d'affecter l'operation de 1a stabilisation macroeconomique, du developpement regional et de la politique sociale et environnementale.

INTRODUCTION The political agenda of the Mulroney government in its first term of office was filled with a vast array of policy initiatives. Not only the scope, but also the fundamental issues raised by these initiatives, is quite remarkable. Two issues in particular, have generated immense and pervasive debate over the kind of society we are, and where we wish to go. The Canada-United States Free Trade Agreement (FTA) and the Meech Lake Constitutional Accord are forcing Canadians to ask fundamental questions about this country. In part, their overriding importance derives from the fact that they focus quite explicitly on the two pillars of our community: our economy and our political system. In addition, both initiatives contain features that would introduce great rigidity into our social arrangements. Unfortunately, and for quite different reasons, public discussion of these two issues has often been less than illuminating. The Free Trade debate has transformed the discussion of what in fact is a rather modest increase in the openness of the Canadian economy, into a titanic struggle between the forces of economic nationalism and the forces of internationalism. 1 And while acceptance of the Agreement will entail some decrease in the flexibility of governmental action, rejection would certainly have had equally longlasting consequences for the structure of our economy, and the role of our governments generally. By way of contrast, the Meech Lake Accord proposes a momentous and, more significantly, a virtually irreversible shift in the political balance of Canada. Yet, through the election of November 1988, discussion of this initiative was severely restricted, with only a few notable exceptions. 2 The club of 11 first ministers who negotiated the Accord, and the federal opposition leaders, each for his own reasons, chose to line up on one side of the issue.

The Sum of the Parts I 27

despite the very difficult problems the Accord raises and the serious questions about it that have been posed by significant numbers of thoughtful Canadians. 3 The different approaches to handling these two elemental issues reflect a conjuncture of political circumstance. What is less well-understood is the fact that precisely because the economy and polity of Canada are highly interdependent, so also are the consequences that follow from these two agreements. If the point is obvious, the fact remains that no one has answered the basic questions that follow from it: o What mode of governance is compatible with an open, competitive economy? o What kind of governance is required to manage a closed, inward-looking economy? and, more specifically, o Does Meech Lake give us the kind of political arrangements necessary to deal with either of these economic structures? This paper attempts to provide a framework for answering these questions, first by elaborating on how the conceptions of the economy and the political system implicit in these two agreements are likely to interact in a systemic manner. We then assess the consequences of their joint impact in three actual policy areas that are likely to be of major significance over the next several years: stabilizing the economy, updating social policy, and dealing with the environment. FREE TRADE, ECONOMICS AND THE CANADIAN ECONOMY Without providing a history, it is fair to say that a major role for the federal government has been one of the main characteristics of Canadian economic policy, especially relative to that in the United States. This role has included both economic development policies, which focus on structural and regional changes that are intended to improve the longer term prospects for the Canadian economy, and macroeconomic stabilization policies, which focus on shorter term, more aggregative concerns, such as the level of unemployment, the rate of inflation, and broad swings in Canada's trade balance. With respect to economic development, Canada has relied since Confederation on government to actively forge east-west links,

28 I How Ottawa Spends

to pursue regional balance and, more recently, to manage and facil-

itate structural adjustments. Examples range from the construction of the Canadian Pacific Railway and Macdonald's National Policy in the earliest days of the federation, to the National Energy Program and Hibernia in more recent times. Governments have not been reticent to use a wide range of policy instruments in pursuit of economic development, including direct spending and grants, tax incentives, tariff policy, regulation and public ownership. The view that a major government role was required for both pro-active and corrective reasons was first translated into a coherent economic strategy by Sir John A. Macdonald in his National Policy, and that view has prevailed throughout most of the twentieth century. Since the 1980s, and more particularly after World War II, the Keynesian idea that governments could and should stabilize the macroeconomy has been generally accepted in Canada. While still leaving substantial opportunity for market forces to allocate resources, governments of both major parties have not been hesitant to intervene for purposes of macroeconomic management. The evidence on whether this activist/interventionist approach to economic development and stabilization has been successful is, in a word, mixed. While Canadians enjoy the benefits of high income levels and comparative stability, our vast resource endowments and ready access to international capital pools may have as much to do with our success as the impact of government policies. It may also be the case that less interventionist federal actions would have produced even better results. The evidence is sufficiently contradictory to prohibit a clear judgement on the merits of alternative broad approaches to the role of the federal government in economic policy. One approach is that strong central government intervention is still required, but that the specifics and focus of this intervention should be different than in the past. For example, one might argue that public policy should focus more on broad factors of production, such as improving the quality of labour through education and training, and less on direct assistance to specific industries and sectors; or on picking winners rather than protecting losers; or on targeting assistance to manufacturing, or services, or resource industries in preference to other sectors of the economy.

The Sum of the Parts I 29

Another alternative is to adopt a less interventionist strategy and rely more on market forces to drive growth and development. Proponents of this approach usually advocate liberalized trade, either on a multilateral basis (the GATT), through the fonnation of trading blocs (e.g., the Pacific Rim), or with the United States. This essentially neoclassical model, underlies the CanadaU.S. Free Trade Agreement. It sees a market-driven, competitive economy as the route to greater efficiency and more rapid economic progress, and government intervention as a barrier to efficient and innovative activity. This model has a long and honourable tradition in economic analysis, so it is not surprising that the FTA has been supported by a large majority of Canadian economists. There is serious debate, however, as to how much macroeconomic management is required under this latter approach. Economic conservatives would argue that governments are unable to stabilize the economy, and should leave the markets to do that job as well. The majority of economists would be reluctant to go that far. It is clear that markets can and have produced great macroeconomic instability, and an effective national government can playa vital role here. Perhaps the most recent demonstration was the way in which damage from the October 1987 stock market crash was contained by the timely intervention of monetary and fiscal policies. As a result, there was no major setback to the powerful growth surge in North America. It would appear that in a more market-oriented situation, it is essential to have a powerful federal authority to use monetary, fiscal and exchange rate policies to deal with external shocks and domestic instability. The fact that it might not do so very effectively is a secondary concern. In this regard, it is of historical interest to observe that Jacques Parizeau, cummtly leader of the separatist Parti Quebecois, long ago favoured greater provincial autonomy because he felt Ottawa had become so weakened as to be incapable of managing the macroeconomy effectively.4 From this perspective, the FTA and its advocates are proposing a major shift away from the historic Canadian preference for active government policy to foster economic development. Moreover, if not permanent, this shift would be very difficult to reverse. As we argue below, while we do not believe that "noneconomic" cultural and social programs are at risk, there is also not much doubt that the nature of policy interventions explicitly aimed at economic development (either national or regional) will be directly affected. In this latter sphere at least, governments in Canada will have less scope for discretionary action than has been

30 I How Ottawa Spends

true in the past. In the view of some, this constraint itself is a benefit of the FTA. Others, however, acknowledge that one can be very critical of Canadian economic policies in the past without adopting the view that the option to pursue similar policies in the future should be eliminated. Opponents of the FTA tend to be from two camps. One group of opponents are those who, in principle, endorse the ideas of free markets and free trade (including free trade with the U.S.), but who argue that this specific agreement is not to Canada's advantage. They point to the rather modest economic gains that are predicted as a result of the FTA,6 and argue that Canada has given up too much to achieve these gains. The most committed opposition comes from those who continue to support the view that strong federal involvement is required to direct and to spur Canadian economic development. They tend to argue that the market cannot be relied upon to generate growth and certainly not the type and distribution of growth that we (they?) might desire. They see the problem as a general one, but also as one that affects a small open economy such as Canada especially severely. They argue that the competitive model may indeed produce static efficiency gains of the sort estimated by proponents of the FTA, but that there is no basis for the assertion that the dynamic forces of development will be enhanced. The national rate of saving and the levels of investment in public infrastructure deemed to be so crucial to development may not be appropriate illeft to private economic decision making alone. Moreover, in practical terms, the market-driven approach presumes certain basic conditions, such as the absence of strong monopolistic elements, that are not satisfied in Canada. Those who reject the neoclassical view opt for a substantial role of government in the economy, the extent of which itself depends on the degree of faith in the beneficence of government action. Our history reveals that as usual, we have chosen to follow a safe, middle course. Our approach has been characterized by an active role for government, but not a major nationalization of the economy. In recent discussions, there has been much greater polarization on this matter. Among the opponents of the FTA, there is an overriding fear of the impact of further opening the Canadian economy to market forces, particularly those of the U. S., and this despite the fact that already some 80 per cent of our trade is with the U.S. The basis for this fear remains somewhat vague: in some cases the larger finns in the U.S. are viewed as threats to our own

The Sum of the Parts I 31

firms and their employees. In other cases the threat is perceived

to arise from the imperial designs of a U.S. government wishing to control our resources: These forces are deemed to be so overpowering that, in the end, the full spectrum of our culture and social programs that define our identity will be lost. Implicit in this view is a rather deep scepticism of the capacity of government in Canada to resist such pressures, and the capacity of Canadian business to be internationally competitive. Among many proponents of Free Trade, there is an almost total lack of faith in the ability of Canadian governments to foster an effective, publicly directed approach to economic development. This view is held despite the widespread popular support for many Canadian soclo-economic programs, ranging from unemployment insurance to regional development policies, which federal governments have been instrumental in launching and sustaining. They would likely argue that the reason such programs are popular has more to do with the fact that real program costs, which they deem to be excessive, are hidden from the public. These proponents place their faith in the economic benefits that they believe will flow from businesses behaving more competitively in the new trading milieu. As a result of the vigorous pre-election debate, the philosophic battle lines are clearly drawn on this issue, even if the specifics of the Agreement are not widely understood. And this debate will no doubt continue into the future, peaking around every plant opening and closure, and every stage in the negotiation procedure.

What is crucial are the radically opposed views about the

nature and role of government in the economy implicit in this debate. It is precisely this issue that lies at the heart of the Meech Lake Accord, but only recently has it surfaced in discussions of the Meech Lake Accord. THE MODEL OF THE POLITY UNDER MEECH LAKE

Much of the discussion of Meech Lake focusses not so much on the laudable goal of enabling Quebec to sign the new Constitution, but on the terms for doing so. In general, critics have focussed on the ambiguity of the notion of a "distinct society," and what are perceived to be special arrangements for Quebec. At the political level, the goal of bringing Quebec in from the cold has been felt to be more important than the terms, and indeed all federal parties have embraced the Accord. What is not as well understood is that,

32 I How Ottawa Spends

in securing agreement to those terms, a fundamental restructuring of federal-provincial relations has been proposed, one that has very serious consequences for Canada. Underlying the Accord is a reasonably clear if controversial conception of Canada as a community of communities, akin to the one articulated very clearly by Pepin-Robarts6 and a host of subsequent spokesmen, most explicitly the Right Honourable Joe Clark during his brief teno as Prime Minister. In this view, the federal government is simply an order of government equivalent to, although different in function from the provinces. Indeed, the provinces are seen as the only true advocates for individuals in the regions of the country J regions which are taken to be identical to the provinces. The history of Canada in the post-war years has seen a longterm "provincialization" of the nation, a steady increase in the power

of the provinces and legitimation of the view that only they speak for their people. Paradoxically, this augmented provincial role has been as much due to the manner in which the federal government pursued its own policy agenda, in areas as diverse as regional policy and interprovincial equalization payments, as to the provincebuilding activities of the provinces themselves. As a result, those who accept the idea that there is a unique federal role as spokesman for individual interests within the regions are on the defensive. Furthenoore, the notion that someone should speak for national interests that might transcend purely provincial interests has almost vanished from public debate. This view of federal authority deriving from the more authentic authority of "provincial communities" is diametrically opposed to the classical view of small-l liberalism, which emphasizes the rights of the individual rather than the community, and adopts the position that sovereignty resides with individuals not the state. Such a view sees a vital and legitimate role for the national government as the protector of individuals. Thus, many of the social policies of the post-war era involved federal initiatives to spend money and establish national programs within clearly demarcated provincial jurisdictions (e.g., health, higher education). Other important efforts emphasized federal transfers to individuals directly through programs such as Old Age Security (and Guaranteed Income Supplements), Family Allowances, Unemployment Insurance, and refundable tax credits.

The Sum of the Parts I 33

The very process of arriving at the Meech Lake Accord reveals a pervasive commitment to the alternative, collectivist view, for it entirely precluded the input of individual Canadians in arriving at this position, and provided no opportunity for Canadians to make changes to it. The agreement itself places provincial governmental powers above the rights of individuals, above and beyond the "notwithstanding clause" which permits overriding the individual rights set out in the Charter of Rights. Moreover, the Accord devolves enormous powers from the federal government to the provinces. Beyond acquiring the right to opt out, the provinces are also granted the power to influence in ever-increasing ways, the actions of the federal government at the legislative (Senate appointments), executive (federal-provincial conferences), and judicial (Supreme Court) levels. Furthermore, this trend will be irreversible, because amendments to the Accord and indeed to the Constitution will be virtually impossible due to the unanimous consent requirement of the amending formula in the Meech Lake Accord. It has been argued that Meech Lake will not result in devolution because it has in fact consolidated the federal spending power. 7 But that power had already been established, de facto, by decades of actual practice. The small "gain" associated with writing federal spending power into the Constitution appears to be a very tenuous basis on which to rest the case that the Accord as a whole is centralizing. THE INTERACTION BETWEEN THE FTA AND THE MEECH LAKE ACCORD: A SYSTEMIC ANALYSIS One test of these two agreements is to assess their interaction on a broad conceptual level, and another is to see how they could work in practice. This section explores the former issue, while subsequent sections analyze the latter. In the most abstract terms, the efficacy of these two agreements will depend on how, taken together, they will condition the ability of the federal government to conduct its affairs. We can usefully approach this issue by asking how Meech Lake will affect management of the macroeconomy for stabilization purposes under the two approaches evident in the Free Trade debate. The proFree Trade position taken by the Conservatives, reflecting a market-based approach to the economy, is compatible with the diminished federal powers under the Meech Lake Accord only if

34 I How Ottawa Spends

one adopts the position that federal macroeconomic management .is unnecessary, or can be left to others. It is self-evident that provinces are far from having a common view on the management of the macroeconomy, because their needs vary so greatly. There is no better evidence of this than the continuing debate over interest rates, which Ontario wants raised to cool inflation, and almost everyone else argues should be lowered to stimulate the less advantaged regions. A similar dichotomy is true of exchange rate policy. The prospects for hannonized fiscal policy under a regime of greater provincial autonomy are bleak at best. Disgruntled provinces will have more influence on economic policy because of their augmented role in the reformed Senate and because economic policy will be the subject of annual first ministers' conferences. The consequent weakening of federal powers could in the end lead to a seriously reduced capacity in Ottawa to ensure coordinated macro management, and in a world of global competition, that would be a recipe for economic chaos. As· for the anti-market opponents of Free Trade, their economic philosophy requires an even more assertive federal government. For the Canadian economy will have to find, to a far greater extent, the basis for economic development internally, and that means direct intervention to try to foster the innovations and market enhancing policies within Canada necessary for such a future. Reducing federal powers will tend to promote interprovincial competition. It has been argued that such competition could produce greater policy efficiency, 8 but that seems to be based on a rather static view of the economy. Greater provincial economic autonomy with attendant internal barriers and fiscal disharmony in a world in which global competition is promoted by powerful nation states appears to be a perverse strategy for Canada.

It appears the political structure created by Meech Lake is not compatible with the economic policy-making requirements implicit in either the pro- or anti-free trade positions. For the promarket position of supporters of Free Trade to work to Canada's advantage, a federal government that has substantial macroeconomic leverage to contain potential instability is a sine qua non. Paradoxically, this means that the Conservatives would have to adopt a "strong federal macroeconomic leadership" approach similar to that of Pierre Trudeau to make the Agreement viable. For the anti-Free Trade position to work, it is necessary for the federal authority to intervene significantly in the economy, forcing reductions in interprovincial barriers to the movement of goods, labour

The Sum of the Parts I 35

and capital, and directly influencing and fonnulating industrial policy. Even more paradoxically, this means the Liberals and the NDP would have to adopt an approach to economic development patterned after that great Tory father, John A. Macdonald and his National Policy. But while the need to promote compatible policies makes for strange bedfellows, failure to perceive the need for broadly compatible economic and social philosophies will lead us into economic uncertainty and long-tenn political fragmentation. In our view, it is unfortunate, if not alanning that this need has not been recognized as the debates over Meech Lake and Free Trade proceed in splendid isolation of each other.

POLICY IMPACTS OF FREE TRADE AND MEECH LAKE The relevance of this diagnosis is best demonstrated by examining its applicability to specific policy areas. Such an analysis requires a more detailed examination of how the Free Trade Agreement is likely to be implemented. This will depend on the crucial issue of the definition of subsidy, to which we now tum. The FTA combines three distinct aspects that are important for our purposes. First, it is a substantive agreement that specifies new trading arrangements such as the elimination of tariffs between Canada and the U.S., and arrangements for specific sectors such as energy and financia1services. Secondly, it is a procedural agreement that puts in place a method for dealing with antidumping and countervailing disputes in the future. Third, the FTA is a framework agreement, establishing procedures under which more substantive arrangements are to be determined. This is particularly true in the important area of subsidies and competitive practices, as well as in setting standards for products (e.g., additives, pesticides). I t is this third aspect of the FTA that has been the target of perhaps the most emotional attacks. These attacks are based on the fear that the subsidy definition agreements to be determined will impinge upon an array of social and cultural programs that Canada has developed. It is also the case that the impact of the FTA on many of the issues we discuss later in this chapter will ultimately be determined by the operation of the other two aspects of the FTA; but the outcome of the subsidy negotiations which are to be carried out over the initial five to seven years of the agreement is crucial.

36 I How Ottawa Spends

It seems clear that the narrower the definition of prohibited subsidies that emerges, the less will be the impact on federal policy and the scope for future federal initiatives. On the other hand, a broad definition will limit the scope for federal (and provincial) discretionary action in fundamental ways. It is therefore necessary to turn our attention to the range of possible outcomes.

One could think of a subsidy being defined in terms of two parameters. First, the subsidy definition may be constructed in terms of policy instruments. The most direct instruments are government budgetary expenditures (e.g., grants to firms). Somewhat less direct forms of subsidy occur through the tax system, and still less direct forms through loan guarantees and regulation. Extending the definition of disallowed subsidies to include tax instruments could eliminate the use of tax deductions and credits that have been used in the past to induce firms to locate in disadvantaged regions, to increase their research and development activity, or to install anti-pollution equipment. Regulatory activities that may be deemed to constitute illegal subsidies could potentially include measures that govern market supply (e.g., marketing boards) or prices, and measures that impair the ability of foreign firms to compete against Canadian suppliers. Second, the subsidy definition could be formulated in terms of the objects or targets of the subsidization program. Along this dimension, one could conceive of subsidies to firms, industries, sectors, or factors of production. Obviously, these two dimensions are not independent. Particular forms of subsidization may be situated at specific points along both dimensions. Nevertheless, this categorization is a useful aid to describing the potential directions in which the subsidy negotiations may extend. Even relatively narrow definitions could significantly restrict economic policy compared to what it has been in the past. Regional location subsidies (whether grants or tax incentives), programs to support firms in difficulty (e.g., loan guarantees), and programs to promote desired activities (e.g., research and development tax incentives) or industries (e.g., mining, forestry) may be at risk. However, many critics of the FTA have opposed the deal essentially on the grounds that the final definition of prohibited subsidies will be an even broader one, restricting future government action and possibly endangering existing programs in the areas of general regional development, education, social programs, environmental concerns and cultural activities. In our terms, these

The Sum of the Parts I 37

critics are concerned that the negotiations will encompass most of the options in each of the object and instrument dimensions sketched above. The nature of their critique revolves around the dynamics of Canada, the small partner, negotiating with the United States, the much larger and more powerful partner. The size discrepancy alone makes Canada the weaker party at the bargaining table. Canada, it is argued, is now in a weak position to risk the collapse of the FTA through failure to agree on permitted and non-permitted subsidies; to do so would open the door to American protectionist retaliation against Canada. Moreover, this weakness is accentuated by the sequential organization of the negotiations; the existing agreement and its initial implementation will increase the cost to Canada of pulling out from subsequent negotiations, and the further we travel along this road, the more difficult it will become to change directions. Further, the critics would see the rather unattractive compromises already in the FTA as evidence of this inherent Canadian weakness vis-a.-vis the U.S. Others argue that a narrow restriction on subsidies is more likely to emerge. Once one entertains notions beyond fairly traditional and narrow concepts of benefits to clearly identifiable finns or groups of finns delivered through conventional grant and taxation instruments, the concept quickly becomes very general indeed. At the limit, one could define almost all of what governments do as assistance to private production in one fonn or another, including such basic public services as the maintenance of law and order, and the provision of roadways and other transportation facilities. In our view, the most likely outcome of these negotiations is that they will produce a subsidy definition that will be narrowly constructed in each of the two dimensions, especially in tenns of targets. There are several reasons for this expectation. As soon as the subsidy issue is placed on the table, the United States will become a defender and not simply a challenger of other countries' "subsidies." It will be forced to recognize its own programs that explicitly or implicitly subsidize private firms, including the massive subsidies throughout its defence programs, federal procurement policies, agriculture, tax measures, and the myriad of state spending, tax and regulatory provisions that confer benefits to in-state enterprises compared to others.

It should be noted that the U.S. has failed to see that its own policies in these areas, which are designed primarily to address

38 I How Ottawa Spends

domestic political problems and are not part of a conscious trade strategy, are not accepted as such by others. The U. S. has been aggressively challenging what it sees as Canadian subsidies (and those of other countries) because it has not yet been placed on the defensive by challenges to its own positions. Indeed, for the past decade, the U.S. has had the subsidy definition game all to itself. These challenges to the U.S. are certain to develop, not just from Canada in conjunction with the ongoing FTA negotiations, but also as a result of multilateral GATT negotiations. One might safely predict that American ardour will be cooled by these challenges. Further, subsidy definitions in GATT agreements are narrowly constructed; they tend to be firm or industry specific. There is certainly no necessary reason why GATT would be a precedent for the Canada-U. S. negotiations; however, it is noteworthy that the FTA already negotiated employs GATT tenninology extensively and closely follows GATT practice.

It is clear from the Free Trade debate thus far, that a Canadian government that ceded important (or perhaps any) points to the U.S. with respect to Canadian social or cultural policy, would do so at its own peril. The political storm that would attend any such concessions would be overwhelming. One need only recall the opposition to the attempted partial de-indexation of Old Age Security pensions in 1985, to form some idea of the strength of the opposition that would challenge any proposal to weaken the Canadian health care system, for example. The former program is comparatively much less central to the essence of Canadian identity than is the latter. The highly emotional rhetoric in the 1988 election campaign, which essentially forced the Conservatives to guarantee the integrity of social and cultural programs, should serve as ample warning to any government. Some opponents concede that while social programs may not be explicitly identified in the FTA, pressures will still be exerted to "harmonize" Canadian labour and production costs with the U. S. This pressure to create a "level playing field" by diluting Canadian social security programs down to American levels will come from the Canadian business community, and as a result, over time these programs will be eroded. Such pressures, however, are not new. They have existed before (arising especially with respect to the federal budget deficit) and will undoubtedly exist with or without the FTA. Nonetheless, the evidence suggests that arguments opposing social security

The Sum of the Parts I 39

programs on these grounds (whether valid or not) have been quite ineffective in the past. For example, since the end of World War II, tariffs between Canada and the U.S. have declined dramatically, trade volumes have increased even more dramatically, and yet the patterns of social program development in the two countries have been markedly different. Moreover, within the U.S. itself, which has existed as a free trade area for over 200 years, substantial interstate differences prevail in areas such as minimum wage standards, unemployment benefits, workers' compensation and health care. Similarly, within Canada there exist inter-provincial and inter-regional differences in UI benefits, workers' compensation, education and training expenditures. Some of these differences are the result of legislation and decisions of provincial governments; others result from the operation of direct federal programs. If "levelling" has not occurred within either Canada or the U.S., why should we expect it to occur between them? (Indeed, when one recognizes these within-country differences, the whole notion loses much of its meaning: Canadian social programs reduced to what U. S. standards?) In any event, the major focus of attention will tend to be on capital assistance programs, rather than programs oriented towards labour. On balance, then, we conclude that the definitions of disallowed subsidies that will emerge will be limited in each of the two dimensions we have sketched. The result may still fundamentally affect Canadian governments' use of instruments and the targets selected in the deployment of economic policy. Thus, regional development programs and direct grant programs may be particularly affected, but the social programs that Canadians value so highly are much less likely to change.

SELECTED POLICY IMPACTS Based on this understanding of the important subsidy issue, we explore, in this section, the interaction of the Free Trade Agreement and Meech Lake Accord in three key policy areas: economic development, social policy and the environment. Economic Development Canada has a long history of structural policies intended to develop its economy. They have tended to be of two types. The first are industrial policies to promote economic efficiency and growth; the

40 I How Ottawa Spends

second are regional policies to promote regional balance based on not altogether clear notions of regional equity. Often the conflicts between these two thrusts have led to policy confusion and ineffectiveness within the federal government (DRIE). As well, federal regional equity goals have conflicted with provincial government development policies (province building activities). At various times these trade-offs have resulted in dramatic swings in the amount of provincial involvement in federal policy. At times Ottawa has acted quite autonomously; other times policies have been highly interdependent (e.g., the General Development Agreements between Ottawa and the provincial, governments). In general, the results of these policy approaches in terms of demonstrated development impact have not been very impressive, despite their continued popularity. Therefore, Ottawa would be obliged to develop a new approach to economic development, even if there was no FTA. By now it is a commonplace observation that Western industrialized economies have faced and will continue to face difficult adjustment problems stemming from technological change, the challenges posed by the newly industrialized countries and changing international markets. Canada must respond to these challenges.

In addition, there will be challenges posed by the FTA, which itself will condition the types of responses governments can adopt. In tenns of instrument choice, we could anticipate that direct grants to firms will no longer be an available option, and that perhaps some more blatant uses of tax measures to confer preferential treatment will also not be permitted. Nonetheless, some reliance on the tax system as an instrument of economic policy will likely survive as will expenditure programs with broader social impacts. Regulatory measures, because they are the most indirect, may be affected the least. In the past, these less direct instruments (such as tax expenditures) have been less controllable by governments (in tenns of total expenditure commitments and targeting, for example) and while it is more difficult to evaluate the impacts of these interventions, many observers would agree that they are generally less efficient than their more direct and more controllable substitutes. Therefore, one might expect that as governments are forced to rely on indirect instruments of policy, their interventions will become less effective than they have been in the past (which may have been not all that effective to begin with). Conversely, there may be a stronger impetus to making tax expenditure measures

The Sum of the Parts I 41

more accountable by imposing various conditions upon access to them, as Ottawa did in the case of the Cape Breton (Investment) Tax Credits. 9 The stronger accountability provisions may not emerge, however, if, at the same time, these provisions would make the tax expenditures more firm-specific and more likely to come under scrutiny as subsidies in violation of the FTA. In terms of the objects or targets of subsidies, constraints on government activity are likely to appear more strongly in some sectors than in others. In particular, industries that are potential exporters to the American market in competition with U.S. firms, and Canadian finns that compete with American exports to Canada are likely to attract the most attention and be the subjects of most concern on the part of the American government. In other areas, such as transportation, which are not covered by the FTA, or energy, where the U. S. stands to share in potential subsidy benetits, the constraints on Canadian policy will probably not be as binding. In these instances, Canadian policies and instruments may be relatively unaffected. Similarly, the capacity of governments to pursue policies that produce general benefits as distinct from those that confer benetits on identifiable groups of firms, is more likely to remain intact. Among these are likely to be labour market policies and expenditures in support of social infrastructure. The balance between federal and provincial powers in this area is likely to be affected by the FTA as a result of two impacts, but it is not clear what the net or combined effect will be. When comparing federal versus provincial powers, the federal government will become more dominant vis-a.-vis the provinces in the area of economic policy, because the latter will be required to confonn to the FTA and its enabling legislation which will be federal. In another sense, however, the provincial economies will be driven more by market pressures and less influenced by public policy in general, and thus they will become more independent of Ottawa (as well as their respective provincial governments). The same is true of the Canadian economy in general: the FTA will weaken the ability of government in general to intervene and to influence the economy. The federal position will be enhanced because discriminatory province-building policies will be disallowed under the Free Trade Agreement. At the same time, Meech Lake will move the pendulum towards an even stronger provincial role in economic development. What is unclear is whether, on balance, these two agreements will be more binding on Ottawa or on the provincial

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governments. What is clear, however, is that the friction among the provinces themselves, and between the provinces and Ottawa in responding to the demands of the Free Trade Agreement will go a long way to erode the so-called spirit of Meech Lake.

Social Policy Defining the "Canadian identity" has been at issue throughout most of the history of this country since Confederation. The debates over Meech Lake, and especially Free Trade may have provided at least part of the answer. It is clear from the emotional response these initiatives have generated that Canadians define themselves in large measure (or at least, distinguish themselves from Americans) in terms of the network of social programs we have developed over the years. Phrases such as "the caring society" have been used repeatedly in these discussions. It is fair to say that the most deeply rooted opposition and. fears surrounding the FTA relate to its potentially damaging impact on our social security system. In this section we discuss three components of Canadian social policy and the likely impacts that the FTA and Meech Lake together might bring. They are: the "basic" universal programs such as the health care system, unemployment insurance, family allowances and old age pensions; day care; and income redistribution. The basic social security programs are characterized by the direct provision of expenditure or tax benefits to individuals, or the provision of services directly to individuals through public or quasi-public institutions (e.g., hospitals). Regulatory measures enter the picture (as in the regulation of private child care centres), but typically in a much less central way. Thus in terms of instruments of intervention, these programs are not particularly distinguishable from the array of economic subsidies likely to be affected by the FTA. In terms of beneficiaries, however, these programs are quite different. Rather than being specific inputs of specific firms (capital, labour), the beneficiaries of these social programs are individuals and families in their own right. Thus, it would only be the broadest of subsidy definitions that would include these programs. We have already argued why such broad definitions are unlikely to be negotiated. Concern has also been expressed that the FTA will permit American social service providers such as private clinics or child care centres to establish operations in Canada. This would be the case if private sector firms were allowed to operate, but as long

The Sum of the Parts I 43

as these new American entrants are subject to the same regulations and standards as Canadian providers (whether public or private), it is difficult to see how their arrival would threaten these services. Moreover, in some cases the current operating rules effectively disallow private sector providers, whether domestic or foreign. Our reading of the FTA does not lead us to conclude that this situation need change. We would go further. A plausible argument could be advanced that in some areas social programs will expand as a result of the FTA. Governments will continue to be expected to provide assistance to facilitate the structural economic adjustments that the economy will undergo, and political pressures on governments to act will not disappear because of the Agreement. At the same time, we have seen that direct assistance to firms in declining industries and start-up boosts to :firms in "sunrise" industries are likely to be constrained by the FTA. A remaining avenue through which governments can respond may turn out to be the expansion and/or redirection of social programs aimed at directly assisting the people affected. For example, one could envisage the use of the UI system to provide protection and retraining assistance for displaced workers, or the use of Old Age Security pensions to provide early retirement benefits to older workers who are displaced and are unlikely to find new employment.

Many of the social programs that one might expect to expand in this fashion (e.g., education and training, day care) fall under provincial jurisdiction. Ottawa may thus find itself under pressure to transfer more funds to the provinces, while Meech Lake makes it much more difficult for the federal government to impose national program standards and ensure equity in a national context with regard to shared cost programs. In place of standards, the Accord refers to objectives. And although Senator Lowell Murray, 10 a key architect of the Accord, argues these mean the same thing, both common sense and general usage suggest that a significant reduction in federal power will occur. Contrary to Senator Murray's claim that "objectives," "standards," "conditions" and "criteria" are interchangeable, there is evidence to demonstrate that these terms will be interpreted differently. The immigration provisions of the Accord, 95B(2), refer to "an Act of the Parliament of Canada that sets national standards and objectives relating to immigration." Assuming that the Accord will be interpreted as being internally consistent and free of redundancies, "standards" and "objectives" must refer to different things.

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The Canada Health Act, which pertains to a shared cost program, also suggests that "objectives," "conditions" and "criteria" have different meanings. 11 The key limits to federal spending power are set out in section l06A of the Accord. That section states that the Government of Canada is obligated to provide reasonable compensation to the government of a province that "chooses not to participate in a national shared cost program" in an area of exclusive provincial jurisdiction, if the province carries on a program or an initiative that is "compatible with national objectives. "12 The language here is rather ambiguous. It does appear that the section limits the ability of the federal government to introduce comprehensive and universal social programs in areas of exclusive provincial jurisdiction. Thus, it is unlikely that the federal government will be able to make shared cost funding conditional upon meeting minimal national standards. Bryan Schwartz has called the phrase "compatible... the weasliest of all the weasel words in the 1987 Constitutional Accord. ,,13 Indeed, the French meaning of the word is "not repugnant to," which suggests very little federal control over how its money is spent by the provinces. Section I06A also speaks of "a national... program" but compensation will be provided for a provincial "program or initiative" suggesting that the provinces will indeed have a great deal of flexibility, including the right to tum to the private sector for delivery of new social programs. It would appear that any conditional program modelled after Medicare will no longer be possible. Medicare requires provinces to meet criteria of accessibility, universality, comprehensiveness, portability, and most significantly, public administration, in order to receive funding. It is our judgement that the federal government will likely seek to minimize expenditures on shared cost programs because little credit will accrue to them when provinces opt out. The incentive will be to make program objectives very general to reduce opting out. These objectives will be the result of much more intensive federal-provincial bargaining than was the case in the past. Unilaterally imposed federal priorities will simply not be possible. It seems safe to predict that in consequence, the federal government will tum increasingly to programs in areas where it exercises sole jurisdiction. This could include the tax system, over which it has greater autonomous control, and direct transfers to individuals (including vouchers for services such as education), for which it will receive more political credit. An alternative route, and one

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that was alluded to by the MacDonald Royal Commission, would be for the federal government to conclude a series of bilateral contractual arrangements with individual provinces. These could specify conditions under which Ottawa would participate with the particular province in the delivery of a designated social program. Conceptually, these might be seen as successors to the energy agreements or to the General Development Agreements negotiated bilaterally. Under such a strategy, interprovincial variations in social programs would increase. The National Strategy on Child Care provides us with a case study of how social programming might evolve. Announced in December 1987, the strategy consisted of tax changes which took effect in April 1988 and the Canada Child Care Act (CCCA). The latter, which describes the cost sharing arrangements with the provinces, died in the Senate when the election was called, but is likely to be reintroduced. The budget for the entire strategy is $6.4 billion over 7 years, with $2.3 billion in tax assistance to parents for child care, including tax deductions for child care expenses, and tax credits for children in lower and middle income families. The other major component is the CCCA, under which up to $4 billion will be allocated to a new federal-provincial cost sharing agreement to create 200,000 new quality, subsidized day care spaces. 14 The arrangements to be negotiated with the provinces will deal with the means of detennining annual federal contributions; the target number of subsidized spaces to be created; areas of child care services where standards will be required; and a timetable for implementation. Although provincial officials have complained that the requirement of standards "represents an intrusion by the federal government into an area of provincial tenitorial jurisdiction,,15 the CCCA is, on balance, consistent with the spirit of Meech Lake. Government statements on this act suggest it will work "cooperatively with the provinces in detenoining standards of quality for child care," and providing "greater flexibility for the provinces in accommodating both non-profit and commercial child care services." We would conclude that once again, in this sphere of social policy at least, the Meech Lake Accord will accelerate the move to federal government yielding of its leadership role to a model of collegiality, and that the major area to be weakened is that of standards.

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In the area of income redistribution, Canadian policy in part operates through the social programs already discussed above. It is also effected through targeted programs such as general social assistance and social housing programs. These programs are not affected by the FTA although some may be altered by Meech Lake. Finally, the operation of the tax system affords a further opportunity for the redistribution of income. The FTA will probably lead to more political and economic pressure to harmonize the Canadian tax system with that of the U.S., especially the corporate and personal income taxes. If so, will income redistribution become more problematic? It is not at all clear that historically our tax system has been significantly more redistributive than the American. Considering all taxes together, neither country has effected much redistribution through the operation of the revenue side of their budgets. To the extent that income in Canada is redistributed to families and individuals at the bottom of the income spectrum, expenditure programs rather than the tax system have been mainly responsible. I6 Therefore, we would conclude that the federal government will continue to possess the policy levers it requires to operate an effective program of income redistribution if it wishes to do so. These levers are weakened or eliminated, not by the FTA but by Meech Lake (especially social programs that involve federal-provincial cooperation).

Environment The environment, which emerged as a major issue in both the recent Canadian and American election campaigns, may very well turn out to be the next dominant public policy issue in both countries. Current efforts to deal with the environment are through process and standards. In general, it is likely that the federal government will be constrained somewhat from acting in this policy sphere as a result of Meech Lake and Free Trade. Given the spotty record of the provinces and the inability of private markets to deal adequately with this issue, such an erosion of federal powers will be problematic. The environment is an area of intrinsically overlapping jurisdiction, because federal powers over fisheries, trade and commerce, navigable waters and intemational treaties collide directly with provincial powers over municipal affairs, property and the ownership of natural resources. Some division of labour has occurred,

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with federal government legislating in the "upstream" area (e.g., licensing pesticides) and the provinces focussing on the "downstream" areas (e.g., pollution emission). Although federal authority in this domain is necessarily limited, the limits appear never to have been seriously probed. In part this may be because of the advantage to all parties of being able to pass the buck on environmental crises, such as mercury pollution by the Reed Paper Mill in the English-Wabigoon river system in the 1970s.

This vagueness of authority has led to a rather cooperative approach to environmental issues very much consistent with Meech Lake. The Canadian Council of Environment Ministers (CCEM) acts as a national environmental quality standards forum. It is the largest operational federal-provincial body and all 13 governments sit on it as equals. This model provides for precisely the "facilitator" role envisioned for the federal government by Senator Murray. The new Canadian Environmental Protection Act (CEPA) is also consistent with Meech Lake. This act creates a federalprovincial advisory committee to flag areas where policy changes might lead to jurisdictional conflict. The Act has one great advantage over Meech Lake, in that it allows for specific standards, not just vague objectives. However, since these standards will have to be arrived at through the CCEM, federal initiatives will be constrained. In fact, CEPA is weaker than the Clean Air Act it replaces, because the latter allowed the federal government to unilaterally pass minimum national air emission standards. As a result, groups such as the Canadian Environmental Law Association have expressed concern over Meech Lake's erosion of federal powers to set standards. The Report of the Task Force on Environment and Economy sponsored by the Canadian Council of Resource and Environment Ministers, focussed on the need for consensus building between government and industry. What roles are to be assumed by the players in achieving "sustainable development," and who would bear the cost, perhaps the two key issues, are not mentioned.

It is also clear that further encroachment on federal powers would occur if provinces are given a greater role in the negotiation of international treaties in the environmental area. Most provinces are seeking such an enhanced role for themselves.

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With respect to Free Trade, there is less consensus on the impact on the environment. Federal and provincial environment officials do not see it having much impact, except perhaps in providing a bargaining chip to achieve acid rain reductions. Environmental groups have expressed concerns over the effect of harmonization of standards, the energy provisions in clause 904, and possible limitations on subsidies as incentives for environmental clean-up. Because U.S. standards are tougher than Canadian in some areas and weaker in others, the impact of Free Trade will depend essentially on whether hannonization tends towards a lowest common denominator or towards higher standards. The balance of political forces in the United States as a result of the recent election will probably provide the key to that question. On balance, it appears Meech Lake will weaken federal initiatives to improve environmental standards, with little prospect that the provinces will rush in to fill the gap. Pressure from an environmentally conscious United States might push in the opposite direction. On the other hand, a disinterested U.S. might lead to a severe decline in standards.

CONCLUSION The Canada-U.S. Free Trade Agreement and the Meech Lake Accord each represent major new initiatives in Canadian public policy. Together they promise (or threaten) to change the Canadian economy and government in fundamental ways. The Free Trade Agreement, on its own, would increase the openness of the economy to a modest degree. Some economic policy approaches that governments have resorted to in the past will likely no longer be available. On the other hand, governments' discretion in social programming is unlikely to be affected. Meech Lake, however, represents a much more fundamen-

tal changeiin the relationships between the federal and provincial governments. Federal powers to ensure national standards are seriously weakened. Federal ability to conduct effective macroeconomic stabilization policies may be affected as well. These massive shifts of power to the provinces would be worrisome at any time, but especially so when the Canadian economy and society face major adjustments as a result of the FTA and other massive changes in the international economy.

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In our view the focus of the recent federal election on Free Trade to the virtual exclusion of everything else, while understandable, was unfortunate. Meech Lake requires even greater scrutiny and debate by the Canadian population, not only on its own merits, but because it has profound implications for the outcome of the Free Trade process. This debate did not occur in the election, because none of the three main parties was willing to pay the presumed electoral cost from criticizing the Accord. It is to be hoped that with the election behind us, Canadians will take the time to give Meech Lake the serious consideration it warrants.

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Notes

*

We wish to thank Inger Weibust for the excellent research assistance she provided in the preparation of this chapter.

1.

The election campaign of November 1988 demonstrated most vividly the intensity but also the shallowness of the Free Trade debate.

2.

Of particular interest were the interventions of former Prime Minister Pierre Elliot Trudeau. His newspaper articles and his testimony to the Senate Submissions Group on the Meech Lake Constitutional Accord are reproduced in Donald J ohnston, (ed.), With a Bang, Not a Whimper: Pierre Trudeau Speaks Out (Toronto: Stoddard Publishing Co. Ltd., 1988).

3.

A number of useful compendia of analyses have been brought out in the recent past. Among them, we note the following: K. Norrie and F. Vaillancourt, "The Meech Lake Accord," CanmJ,ian Public Policy, XIV Supplement, September 1988; Peter M. Leslie and Ronald L. Watts, (eds.), Canada: The State of the Federation, 1987-88 (Kingston: The Institute of Intergovernmental Relations, Queen's University, 1988); Clive Thomson, (ed.), Navigating Meech Lake: The 1987 Constitutional Accord, Reflections 2 (Kingston: The Institute of Intergovernmental Relations, Queen's University, 1988); and K.E. Swinton and C.J. Rogerson, Competing Constitutional Visions: The Meech Lake Accord (Toronto: Carswell, 1988). Also of interest is Bryan Schwartz, Fathoming Meech Lake (Winnipeg: Legal Research Institute of the University of Manitoba, 1987).

4.

Jacques Parizeau, "Federal Provincial Economic Coordination," in Lawrence H. Officer and Lawrence B. Smith, (eds.), Caruulmn Economic Problems and Polici.a (Toronto: McGraw-Hill, 1970), pp. 81-92.

5.

For example, the Economic Council of Canada, in its assessment of the FTA, Venturing Forth, estimated that the FTA would create about 250,000 jobs over 10 years. To put this benefit in context, the Canadian economy at present creates 250,000-300,000 jobs per year.

6.

Jean-Luc Pepin and John P. Robarts were co-chairmen of The Task Force on Canadian Unity. Their report, A Future

The Sum of the Parts I 51

Together, argued that "the provinces and the northern territories are the basic building blocks of Canadian society... " (p. 26), Ministry of Supply and Services, Ottawa, 1979. 7.

8.

See, for example, T.J. Courchene, "Meech Lake and SocioEconomic Policy," in Canadian Public Policy, qp. cit., pp. 6380. Such a view has been eloquently stated by Albert Breton

in his supplementary statement to the Report of the Royal Commission and Development Prospects for Canada (Ottawa: Ministry of Supply and Services, 1985), vol. 3.

9.

G. Bruce Doem, "Tax Expenditures and Tory Times: More or Less Policy Discretion," in this volume.

10.

The 1987 Constitutional Accord: The Report of the Special Joint Committee of the Senate and the House of Commons (Ottawa: Queen's Printer, 1987), p. 74.

11.

Ibid., p. 75.

12.

Constitution Amendment, 1987, Constitution Act, 1987, Part 7, S.106A(1).

13.

Bryan Schwartz, ope cit., p. 189.

14.

See the chapter by Susan Phillips in this volume.

15.

Graham Fraser, "Provincial Officials Assail Day-Care Plans," The Globe and Mail [Toronto], November 15, 1988, p. A5.

16.

W. Irwin Gillespie, In Search of Robin Hood: The Effect of Federal Budgetary Policies During the 1970s on the Distribution of IruxYTM in Ca'fUlda (Montreal: C.D. Howe Research Institute, 1978).

CHAPTERS DISCRETION IN TRADE POLICY: NOT NECESSARILY THE BETTER PART OF VALOUR Calum C. Carmichael

Resume

L'accord sur Ie libre-echange entre Ie Canada et les Etats-Unis est une manifestation recente d'une strategie generale qui sous-tend la politique canadienne en matiere d'echanges commerciaux depuis quatre decennies. Cette strategie a fait que Ie gouvernement, en vue de reduire les barrieres commerciales, s'est joint a d'autres gouvernements pour conclure des accords internationaux qui engagent chacun des signataires alimiter ses pouvoirs discretionnaires en matiere d'echanges commerciaux. On considere les mentes d'une telle strategie en tant que moyen d'augmenter Ie revenu national, par rapport aux merites d'une strategie consistant a retenir des pouvoirs discretionnaires permettant de proteger ou de favoriser certains secteurs de l'economie. II existe de nombreux obstacles a une strategie discretionnaire reussie: Ie choix des secteurs, Ie choix des instruments politiques, la prevision des effets secondaires negatifs, les coOts et les represailles, Ie besoin de surmonter la tendance du gouvernement a soutenir les perdants plutot que de favoriser les gagnants. Ces obstacles illustrent bien l'opportunite de limiter les pouvoirs discretionnaires au moyen des accords internationaux.

INTRODUCTION Recent political debate in Canada, and particularly that leading up

to the 1988 federal election, has centred on the Canada-United 53

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States Free Trade Agreement. Criticism of the Agreement has focussed on the anticipated decline of industries that presently operate under tariff protection, on the tenns of the Agreement as they apply to particular sectors, and on the potential threat to Canadian social programs, sovereignty or cultural identity that could result from signing a bilateral treaty with a much larger trading partner. Little criticism has been directed toward the general strategy behind Canada's trade policy over the past four decades, of which the Free Trade Agreement is the most recent manifestation. 1 That general strategy has been to reduce the barriers to international trade by joining other governments in signing international agreements that commit each signatory to limit its discretion in trade policy. Discretion in this context entails the freedom of governments to use policy tools to protect domestic producers from foreign competition, or to promote sales of domestic production abroad. This chapter considers the merits of limiting government discretion in trade policy through international agreement, as a method of raising national income. It considers these merits relative to those of retaining and using such discretion to protect or promote certain sectors of the economy. Over the past decade, an interest has developed in such selective protection or promotion. In part, this interest may be the result of the experience of Japan and the newly industrialized countries of the Far East, where remarkable growth in exports and national income has coincided with an active industrial policy. 2 In part, it may be the result of an expansion over the last decade of the theoretical literature and policy studies that describe opportunities for governments to raise national income by encouraging producers and consumers to direct a greater proportion of an economy's resources toward particular sectors that are, on the margin, more valuable than others. 3 The report of the Ontario Premier's Council exemplifies the recent interest in industrial policy. The Council, comprising representatives of business, labour, government and academia, was established in 1986 with a mandate to "steer Ontario into the forefront of economic leadership and technological innovation. n4 In brief, "the Council's report recommends various [policy] measures that will promote higher value-added manufacturing by Ontario exporters."6

There is an obvious tension between a general strategy of limiting discretion in trade policy to reduce barriers to international trade and an interest in retaining and using such discretion to protect or promote certain sectors. 6 After reviewing the argu-

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ments for limiting and for retaining and using discretion in trade policy, this chapter describes several obstacles that would restrict the ability of a government to raise national income through the selective protection and promotion of certain sectors. On the basis of these obstacles, the merits of limiting discretion are strengthened, and those of retaining and using it are weakened. Before addressing these arguments and obstacles, it is appropriate to describe several of the international agreements that have limited Canada's discretion in trade policy.

AGREEMENTS Several international agreements signed by Canada demonstrate the manner in which trade barriers have been reduced. All limit the discretion of the signatory governments in protecting or promoting industries. All include some mechanism for the settlement of trade disputes. International agreements do not have the same force as domestic law. The mechanisms for dispute resolution centre on a commitment to a process of consultation, rather than on the authority of some supra-national adjudicator.

The General Agreement on Tariffs and Trade (GATT) of 1948 GATT was intended to prevent the proliferation of quotas (quantity limits on imports) that characterized the periods before and during the Second World War. It contains rules to govern the trade policies and practices of its members. The rules are founded on several principles which include the prohibition of quantitative import restrictions, reciprocity and non-discrimination. The prohibition of quantitative import restrictions rules out quotas but pennits tariffs. Tariffs levels have been reduced by several rounds of negotiations. Reciprocity permits each country to benefit from a percentage reduction in the tariffs of its trading partners, on condition that it reciprocate by providing the same percentage reduction in its own tariffs. In the language of GATT, a tariff reduction is a "concession" to other countries, and thus, by implication, is beneficial only by eliciting similar concessions from others. Non-discrimination requires that governments treat imports the same regardless of their country of origin. Each member exchanges "most favored nation" status with all other members, as a pledge that the imports from no other country will receive more favorable treatment.

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There are numerous exceptions to each principle. Exceptions to the prohibition of quantitative restrictions include safeguard provisions that allow members to adopt quotas if imports cause or threaten serious injury to domestic producers. Developed countries maintain a complex system of quotas on imports of textiles and clothing from developing countries under the Multifibre Arrangement. Exceptions to reciprocity include safeguard provisions that allow members to increase tariffs if imports cause or threaten serious injury to domestic producers. Developing countries are not obliged to provide tariff-cutting "concessions" comparable to those of developed countries. Exceptions to non-discrimination include the permission of groups of members to eliminate tariffs between themselves, but not all members, by forming customs unions or free trade areas. A limited number of waivers have been extended to specific members to treat specific imports more favourably, as in the case of the Autopact between Canada and the United States. GATT prohibits the use of export subsidies by developed countries on manufactured and industrial products, and permits the imposition of countervailing duties if subsidized imports cause or threaten serious injury to domestic producers. The Code on Subsidies and Countervailing Duties was signed in 1979 by a group of members, including Canada, in order to reaffirm and clarify the existing rules as they applied within the group. The Code does not define the difference between prohibited export subsidies and permitted domestic subsidies, but rather provides an illustrative list of the prohibited subsidies. GATT includes a commitment to resolve trade disputes through consultation rather than retaliation. In response to a charge by one member against another, working parties or dispute-settlement panels are formed to receive presentations from both sides and to make recommendations. These recommendations are generally accepted by both parties, as in the case of the European Community charging Canada with placing surcharges on imported wine. If the recommendations are not accepted, then the injured party is authorized to retaliate.

The Arrangement on Guidelines for Officially Supported Export Credits (The Arrangement) of 1978 The trade and payment difficulties that followed the trebling of world oil prices in 1974 led the governments of many developed

Discretion in Trade Policy I 57

countries, including Canada, to seek an agreement to control the competitive subsidization of exports by the provision of official loans at interest rates below market levels. Such export subsidies were not prohibited by GATT. Their efforts culminated in the Arrangement which stipulated minimum down payments, maximum repayment periods, and a matrix of minimum interest rates that increased with the wealth of the importing country and the length of the repayment period. As of 1984, the matrix automatically adjusts every six months with reference to the yields on long-term government bonds. In order to reduce the level of subsidies, the matrix adjusts to represent all of an increase in the yields, but only half of a decrease. The Arrangement also established procedures for a government to notify others in the event that it was derogating the guidelines. The other governments were permitted to retaliate in kind. Derogation followed by retaliation was seen as self-punishing: duplicative subsidy expenditures of all governments would increase, without conferring a competitive edge to the exports of anyone country. The Canada-United States Free Trade Agreement (FTA) of 1987 FTA is the most recent of several initiatives since the middle of the last century that reduce the barriers to trade between the two countries. It provides for the removal of tariffs and quantity import restrictions on goods by the late 1990s. It entrenches the principle of national treatment, whereby in each country governments will neither discriminate between goods on the basis of their country of origin, nor discriminate between businesses on the basis of the nationality of their ownership. Businesses providing financial, transportation, communications and a variety of social services are exempt from such treatment. The two governments commit themselves to develop a set of rules governing subsidies and countervailing duties by the mid-1990s. By that time the two countries also commit themselves to establish a new regime to deal with disputes over subsidies and countervailing duties. In the interim, disputes will be reviewed by a binational panel that will determine whether existing national laws have been applied correctly. Disputes on other issues will first be dealt with through consultation and then, if unresolved, be referred to a Canada-United States Trade Commission. The

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commission can authorize several methods to resolve the dispute, including arbitration. The aggrieved party has the right to suspend the application of equivalent benefits - to retaliate - against the non-complying party.

THE ARGUMENT FOR LIMITING DISCRETION By signing several international agreements, Canada has limited its discretion in trade policy. Under GATT, the government agreed to reduce tariffs, curtail quotas, and rule out specific fonns of export subsidies. Under The Arrangement, the government agreed to restrict export credit subsidies. Under FTA, the government agreed to eliminate bilateral tariffs and quantitative import restrictions, and not to discriminate against finns on the basis of the nationality of their ownership. Each agreement includes a commitment to resolve disputes through consultation, with retaliation as a last resort. This section considers the argument for limiting discretion; the following section considers the argument for retaining it. Both arguments centre on opportunities to increase national income, 7 or "to make the pie bigger." The use of this normative criterion does not imply that governments and societies do not or should not have other goals. How the pie is distributed - among regions, or income groups - may also be important. However, before governments attempt to redistribute the pie - say, through taxation policy - there is reason for them to first make the pie as big as possible - say, through trade policy. 8

The case for limiting discretion is based on the standard trade theories which suggest that by using trade policy to protect or promote certain industries, a government is apt to reduce not only the national income of other countries, but also that of its own. Therefore, international agreements that deny a government free rein over trade policy can protect its citizens from not only the actions of other governments, but also those of its own. 9 The standard theories are based on concepts of comparative advantage and economies of scale. According to the concept of comparative advantage, different countries are better able to produce different goods at lower relative resource cost. This ability could result from having access to different technologies or different relative quantities of capital, labour and other factors of production. Total world income would be greater if each government did not create barriers to trade, but rather allowed each country to produce and export

Discretion in Trade Policy 159

the goods for which it had a comparative advantage, and to import those for which it did not. Given the trade policies of other governments, whatever they are, the national income of a particular country would be greater if its government did not create any trade barriers of its own and allowed comparative advantage to operate. The concept of comparative advantage justifies free trade in different goods between countries that differ in their technologies or relative quantities of productive factors: for example, trade in bananas and office furniture between Ecuador and Canada. The other concept, that of economies of scale, justifies free trade in similar goods between similar countries: for example, trade in automobiles between France and Gennany. It is assumed that different varieties of a good are valued by consumers, but that another variety can only be created with considerable start up costs in such areas as research and development. Again, total world income, and national income, would be greater without barriers to trade. Each country would specialize in the production and export of a few varieties and import the rest. With specialization and trade, the start up costs would be spread out over longer production runs so as to reduce prices and yet provide consumers with numerous varieties of goods. The benefits of trade without barriers, as described by such arguments, are subject to at least three qualifications. First, the greater national income would be enjoyed by a country as a whole, not by each of its citizens. Indeed, after the removal of trade barriers, some citizens, such as workers tied to an industry facing import competition, would experience a fall in income. Such falls would be more than offset by the income gains of other citizens, for example, workers tied to an export industry. The removal of trade barriers, by itself, would make the pie bigger, but, without income redistribution, could reduce the pieces for some citizens. 10 Second, the forgoing income comparisons are between two extreme situations in which barriers to trade are either present in a country, or they are not. Similar comparisons cannot be drawn if the barriers are not removed altogether, but rather changed in type or number. There may be situations in which the removal of some, but not all, barriers could actually reduce national income. 11 Third, the arguments assume that market prices exactly measure the values that society as a whole would assign to production and consumption. As described below, there may be circumstances in which market prices do not fulfill this function. In such

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circumstances, there may exist opportunities for governments to raise national income by using trade policy to protect or promote certain industries. With reference to such circumstances, one can base an argument for retaining discretion in trade policy.

THE ARGUMENT FOR RETAINING DISCRETION The argument for retaining discretion is based on the existence of certain sectors in the economy that at the margin are more valuable than others. These sectors are called strategic. In them, market prices underestimate the value of production and consumption. Private producers and consumers on their own would allocate an inadequate proportion of an economy's resources to strategic sectors. Thus, a government could increase national income by encouraging production or consumption associated with these sectors. International agreements that limit discretion in trade policy could deny a government access to the policy tools with which it could increase the income of its citizens. There are several explanations for why strategic sectors may exist. One explanation is the presence of positive externalities - beneficial side effects of production or consumption activity that are not experienced, and therefore not taken into account, by the producers or consumers creating them. 12 From society's point of view, the level of production or consumption in this sector would be too low. A government can raise national income by policies that either increase the price received by the producer, or reduce the price paid by the consumer. For illustration, consider a Canadian cultural industry that, in addition to providing entertainment to its consumers, fosters national unity at home and defines a national identity abroad. These beneficial side effects are not experienced entirely by the consumers, and hence the price they are willing to pay does not take the side effects into account. From society's point of view, production is too low. National income could be raised by the government protecting or promoting the cultural industry. Another explanation for the existence of strategic markets is the presence of what economists refer to as "rents," or abovenormal returns to capital and labour. Such rents may be present in industries that are not perfectly competitive, where there may be only a few firms world wide. By promoting or protecting such industries, a government may be able to shift a greater share of world rents towards its own citizens. Consider, for example, a

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single domestic firm whose costs of producing an additional unit of output would fall as total output increases. By protecting this finn, the government could allow it to increase its output for the domestic market, reduce its costs, and thereby enable it to expand its share of the sales and rents in foreign markets. IS Such government action would be warranted if the finn is not able on its own to increase output, reduce costs and claim greater rents. In the familiar example of the infant industry, this could entail either the firm not being able to borrow enough to cover its losses before costs fell, or the firm creating beneficial externalities - for example, research and development spin-offs or trained but mobile workers - for which it would not be paid. 14 In more recent examples, a domestic firm on its own may not be able to claim greater rents through aggressive behaviour in foreign markets because without government backing such behaviour is not credible. Without government backing, aggression of a domestic finn in foreign markets is only profitable if met with acquiescence on the part of foreign firms. Foreign firms can protect their rents by not giving in and thereby making aggression self-punishing for the domestic finn. Government backing, say through an export subsidy, could make aggression profitable for the domestic firm, even without foreign acquiescence. Foreign finns, unable to intimidate a domestic firm backed by a government, would give in and relinquish a share of their rents. 16 OBSTACLES TO THE SUCCESSFUL PROMOTION AND PROTECTION OF STRATEGIC SECTORS On the existence of strategic sectors - those with externalities or above-nonnal returns to capital and labour - one can base an argument for limiting discretion in trade policy. A government could potentially increase national income by retaining and using a full complement of tools to protect and promote industries in such sectors. However, in order for a government to raise national income in this way, it is not enough that strategic sectors exist: a government must be able to identify them, choose the best policy tools, and anticipate harmful side effects, costs and retaliation. It must also be able to resist pressures to prop up losing sectors, and rather to promote winning ones. By restricting the ability of a government to increase national income through the protection and promotion of strategic sectors, such obstacles weaken the argument for retaining discretion in trade policy. Each obstacle deserves description.

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Finding the Right Sector Before protecting or promoting a strategic sector, a government must first find it. Many indicators that may be favoured by governments because they are easily identified, may be misleading. Consider, for example, the presence of high profits in an industry. The sample of firms that provide the profit data may be biased to ignore failures. If, say, one out of every three firms that enter an industry survive, then even if those surviving firms earn three times the average return on capital ex P08t, the actual return on capital in the industry ex ante is average. Protecting or promoting such an industry on the basis of high observed profits would not raise national income. 16 The presence of high value added per employee has been singled out by American commentators,17 and recently by the Ontario Premier's Council,18 as an indicator of industries that deserve government backing. Value added measures the cost of a finished good, less the cost of the raw materials used to produce it. Industries with high value added per employee typically use high levels of capital per employee - both physical capital as measured by plant and equipment, and human capital as measured by education and skill. Thus high value added per employee is typically matched by low value added per unit of capital. Policies that shift investment away from industries with low value added per employee and toward those with high value added, would shift investment away from industries with low ratios of capital to labour and output to labour and toward those with high ratios. This shift in investment would cause the growth of employment to fall, such that, although output per employee would rise, the growth of output could also fall. 19 Such results would be unwelcome, and, one assumes, unintended. The Premier's Council also singles out traded businesses "those industries which are exposed to international trade and competition,,20 - as the targets of government policy. This is a very broad category of industry. The important question not raised by the council is which of these businesses are in strategic sectors, and therefore could potentially raise national income if protected or promoted? The reasons offered for an indiscriminate favouring of traded businesses are specious. One is that wages in non-traded goods sectors are high because of the high wages in traded goods sectors. But the reverse also holds true: the opportunity cost of labour is the value of output foregone by its not being employed in its next best use, whether or not that use is in the traded goods

Discretion in Trade Policy 163

sector. Another reason given by the council is that "if a traded business... goes bankrupt due to international competition, the jobs may be lost permanently and the products the business used to market will be supplied by foreigners. ,,21 This statement suggests a mercantilistic fear of imports. Rather than castigating "foreigners" for preventing some businesses from being created or continued in Canada, one should thank them for enabling Canadians to buy oranges, video-cassette recorders and footwear at a lower resource cost than would be required to produce them domestically. A situation in which the jobs may be lost permanently - for example, growing McIntosh apples, building telecommunications equipment, or giving haircuts - would be cause for governments to address problems with the training or mobility of labour, not to protect or promote traded businesses as a group.

Domestic ownership is an indicator that has been advocated by the Science Council of Canada.22 Foreign-owned tinns are faulted for poor export performance, and for conducting little research and development in Canada. The Premier's Council expressed similar concerns. It faults foreign-owned £inns for not perfonniog in Canada certain activities with a high value added per employee: "such activities as research and development, product design, manufacturing engineering, corporate strategy development, marketing management, and some of the higher skilled manufacturing operations tend to be carried out on the foreign-owned firms' home turf.,,23 The validity and importance of these observations have been called into question both by evidence that the export perfonnance of foreign-owned firms is no worse than that of Canadianowned firms, and by reasoning that the location of research and development and other such activities is less important than firms in Canada having access to, and applying, their results.24 The resource costs to fImls in Canada of having access to such results may be lower through licensing and internal transfer, than through conducting the activities on site. The problems with the separate issue of shifting investment toward activities with high value added have been discussed above. Finding the Right Tool Once a government has found a strategic sector, it must choose a policy tool with which to protect or promote the sector's industry. There are many tools to choose from: nationalization; regulation; taxation or subsidization of consumption or production; and, the imposition of tariffs, quotas or voluntary export restraints. The

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latter tool is a form of quota that falls outside the GATr prohibition because it is "voluntarily" imposed by the exporting country - albeit under some ultimatum from the importing country. The best choice of tool - that which could increase national income the most, or perhaps reduce it the least - is not always obvious. By this definition, the best tool is one that directly corrects the problem that prevents market prices from leading private producers and consumers to allocate adequate resources to the strategic sectors. Selective taxes and subsidies are usually better tools than tariffs and quotas, which may correct one problem while creating another.25 Recall the example of the Canadian cultural industry that created beneficial externalities. Providing a production subsidy would directly correct the problem. Imposing a tariff on imports of culture would correct the problem but create another: it would raise the price of all culture, and reduce the total amount consumed by Canadians. A voluntary export constraint would be worse than a tariff: the income that would have gone to the Canadian government in the form of tariff revenues would leave the country and increase the profits of foreign exporters of culture. The choice of policy tools is complicated by characteristics of the sector in which they are to be applied. The behaviour of the domestic and foreign firms, the opportunities for firms to enter the industry, the extent to which domestic and foreign markets are integrated or segmented - and many other characteristics - all affect whether the application of a particular tool in a strategic sector will increase or decrease national income. For example, theoretical work suggests that if one assumes that a domestic firm chooses its output, taking as given the output of foreign firms, then the domestic government could increase national income by setting an export subsidy. However, if the domestic firm chooses its price, taking as given the prices of foreign firms, then national income could be increased by levying an export tax. If one assumes that the domestic firm chooses output rather than price, but that other firms are able to enter the domestic industry or that the domestic and foreign markets are integrated rather than segmented, then the effects of an export subsidy could be harmful rather than beneficial. 26 In general, the more complex, and thus perhaps the more realistic, are one's assumptions concerning industries and markets, the fewer are the rules of thumb to direct the choice of policy tools.

Discretion in Trade Policy 165

Side Effects Just as it is difficult to anticipate the primary effect on national income of a chosen tool, so too is it difficult to anticipate the corresponding side effects. Such side effects could be based on changes in firm incentives. For example, the practice of requiring finns to apply for export credit subsidies could lead them to inflate the prices they state in the application. Inflated prices could induce the government to set a higher subsidy in an effort to keep the export bid competitive. The subsidy plan would increase government expenditures by the same amount it raised firms' profits, but because of the higher stated prices, it would neither increase exports, nor raise national income even if the sector was strategic.1:i For another example, a production subsidy in an export industry could induce other domestic finns to enter the industry, each firm not taking into account how its activities cuts into the profits of the others. In effect, the subsidy introduces a hannful externality. The end result would be production capacity that is greater, and export prices that are lower, than what would have maximized the collective profits of the domestic industry. Had the subsidy been directed toward research and development by the firms in the industry, the amount of duplicated effort could be greater, and the returns on investment in research could be lower, than what would have maximized the collective profits of the indus-

try. 28 Side effects could be felt by sectors other than the ones being promoted or protected. General equilibrium effects of this type include increases in the price of some scarce resource, for example magnesium or specially trained labour, used by the strategic sector that is expanding because of, for example, a production subsidy. Other sectors that use the same resource would face higher costs and a lower share of foreign markets. The gain in national income from the subsidized sector could be offset by the potential fall in national income from other strategic sectors. Had the government subsidized all sectors that use the scarce resource, the price of the resource would increase so as to offset the effects of the subsidy on all sectors.29 Other general equilibrium effects could operate through the exchange rate. Subsidizing some export sectors would increase the demand for domestic currency. Its price could rise, thereby reducing the exports from other sectors. Subsidizing all export sectors would increase the price of domestic currency, so as to offset the effects of the subsidy on all sectors. 30

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Costs of Promotion and Protection Domestic consumers could be hurt by the promotion or protection of strategic sectors. The presence of rents in these sectors could be linked to a degree of monopoly power that enables a firm to set prices above the costs of producing the last unit of output. Policies that encourage these industries would raise national income if all production was for export, and therefore only foreign consumers were paying the high prices. If these export industries also had domestic consumers, then the effects of trade policy could conflict with the goals of competition policy. 31 Domestic consumers are also hurt by policies that protect domestic industries from import competition: tariffs and quotas raise the prices of imported goods, and thus the prices that domestic producers can charge. The costs to consumers as a whole can be considerable. For example, the voluntary restraint on exports of Japanese automobiles to the United States from 1981 to 1983 cost American consumers an estimated $4.3 billion (U.S.), or approximately $164,000 for each American job protected over the period. 32 Another cost could originate from the effect of trade policy in conferring advantages to particular sectors. Potential beneficiaries have reason to divert factors of production toward the winning of those advantages. The diversion of factors toward lobbying, making political contributions or bribery, in an effort to influence policy makers, moves factors out of productive activities that contribute to national income, and into unproductive activities that simply redistribute national income from one group to another. The result of such diversion would be a direct reduction in national income. 33

Actions of Other Governments Finding the right sectors and choosing the right policy tools make the protection or promotion of strategic sectors difficult; the side effects and costs of such actions could make them self-defeating. These arguments have been presented without considering the effects on national income of actions by other governments. The protection or promotion of strategic sectors in one country could reduce the share of world rents claimed by other countries. This suggests either that if the domestic government first adopts such trade policies, then it should expect retaliation by foreign governments, or that foreign governments might be the first to adopt such policies. In either instance, the case for protecting or promot-

Discretion in Trade Policy /67

ing strategic sectors is weakened. In the first instance, the domestic government should compare the potential gains from its own actions against the potential losses from foreign retaliation. In the second instance, the domestic government should consider retaliation in order to persuade the foreign governments to change their policies. If one believes that the best forms of retaliation impose the greatest harm on other countries with the least harm on one's own, then it is unlikely that the best form of retaliation for the domestic government would be to protect or promote domestic strategic sectors.84 In this instance, it would be better to fight fire not with fire, but with an extinguisher.

Government Disposition In popular parlance, a policy to protect or promote strategic sectors is a policy "to pick winners." At least without reprisal, it has the potential to increase national income. Some commentators suggest that governments are more disposed "to prop up losers" - in this context, firms that are failing and subject to import competition although such policies would reduce national income. The many who would be hurt by a firm being propped up - consumers and taxpayers - individually have little at stake, and are not apt to be vocal in their criticism of a government that would protect or promote. The few who would be hurt by a firm not being propped up - the workers and owners of capital tied to the firm - individually have much at stake, and are apt to be vocal in their criticism of a government that would not protect or promote. 85 A case of the squeaky wheel. Some commentators argue that the reason why governments tend to use discretionary trade policy to prop up losers rather than pick winners, is that the policy makers are operating in a priority void where ends are not articulated and means not specified. In such a void they are easily swayed by vocal interests. To reduce this influence and direct government action toward picking winners, they argue, it is first necessary to fill the void with a clear mandate to pick winners, and a comprehensive and systematic plan to do SO.86 Even if one accepts this argument that the disposition of governments to prop up losers can be overcome by a more systematic plan, that plan would still be subject to the obstacles of finding the right sectors and policy tools, and of countering the side effects, the costs and the prospect of retaliation. There is an alternative to the use of discretionary trade policy for the purpose of propping up losers, or the difficult and possibly self-defeating

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task of picking winners. The alternative is to limit discretion in trade policy through international agreement.

SUMMARY AND CONCLUSION The world economy is complex. Complex to the extent that it cannot be fully described by the simple models that underlie the concept of comparative advantage and the associated argument for limiting discretion in trade policy. But also complex to the extent that there are formidable obstacles to a government being able to increase national income by protecting or promoting strategic sectors. Such obstacles strengthen the merits of limiting discretion through international agreement. Such skepticism concerning the successful conduct of discretionary policy may appear to be unwarranted, given the experience ofJapan and the newly industrialized countries. In these countries, systematic policies to protect and promote certain sectors have coincided with a remarkable growth in exports and gross national product. However, the link between policy and performance in these countries and the presence of any general lessons that can be drawn for other countries are not certain. It is not certain, for example, to what extent the performance is attributable to high rates of saving and investment, to the education system, to management-labour relations, or to national cohesion and purpose, rather than to discretionary policy per se. Moreover, it is difficult to determine what the actual policies have been, the type and accumulated effect of the policy tools used, and which policies and tools have been productive. There is evidence, for example, that the promotion of the Japanese steel and semi-conductor industries may have actually been counterproductive. 37 Finally, even if one could determine which policies and tools have been productive, it is uncertain whether their use and effect could be lifted out of time and place, and replicated at another time in another economy by another government. In summary, it is uncertain what general lessons, if any, can be drawn for the conduct of Canadian trade policy from the experience of Japan and the newly industrialized countries. Skepticism concerning the successful conduct of discretionary trade policy, and uncertainty about the lessons that can be drawn from its practice elsewhere, strengthen the merits of limiting discretion in trade policy through international agreement. The Canada-United States Free Trade Agreement is the most recent

Discretion in Trade Policy I 69

manifestation of a long-standing general strategy to limit discretion in this manner. Such skepticism, however, does not imply that a government should necessarily adopt a minimal role in the economy. Consistent with limited discretion in trade policy would be an active role in strengthening the educational system, facilitating adjustment through sponsoring the retraining and mobility of workers, promoting overall private savings and investment, as well as redistributing income between regions and income groups, and conducting macroeconomic stabilization policies. Moreover, although such skepticism strengthens the merits of limiting discretion, it does not imply that a government should abandon all discretion, that all terms of all agreements are beneficial, or that any agreement is better than none. Perhaps the only unconditional support that one can give to international agreements is that they are international: that they require governments to talk to one another and to recognize that domestic policies have foreign consequences.

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Notes 1.

The Liberal party in particular emphasized that its criticism of the bilateral Free Trade Agreement did not extend to multilateral agreements that also reduced trade barriers. See, for example, the statement by Mr. Turner in Hansard, December 15, 1988, p. 126. Outside the mainstream political debate, there are exceptions to the general support given to international agreements that reduce trade barriers. For an argument that these agreements are vehicles for American imperialism, see Glen Williams, "Canadian Sovereignty and the Free Trade Debate," in A.M. Maslove and S. Winer, (eds.), Knocking at the Back Door (Halifax: The Institute for Research on Public Polic~, 1987), pp. 101-119.

2.

For a discussion of this experience, see M. Bienefeld, ''The Significance of the Newly Industrialising Countries for the Development Debate," Studie8 in Political Economy 25 (Spring 1988), pp. 7-39.

3.

An excellent discussion of this literature may be found in R.G. Lipsey and W. Dobson, (eds.), Shaping Comparative Advantage (Toronto: C.D. Howe Institute, 1987).

4.

Premier's Council, Competing in the New Global Economy (Toronto: Province of Ontario, 1988), p. 5.

5.

Premier's Council, Report in Brief (Toronto: Government of Ontario, 1988), p. 4.

6.

This tension requires that international agreements actually limit the freedom of governments to promote and protect certain sectors. Some commentators argue that such limits are relatively weak, as a result of those agreements accommodating many exceptions to their rules, and of governments devising policy tools that violate the spirit, but not the letter, of the agreements. For such arguments, see M. Wolf, "Fiddling While GAT!' Burns," World Economy 9 (March 1986), pp. 1-18.

7.

National income in this context can be associated with the welfare measure often used by economists: the sum of consumers' surplus, producers' surplus and government surplus.

Discretion in Trade Policy I 71

8.

The goal of increasing national income is similar to that of increasing ''wealth,'' as described and recommended by the Premier's Council, Competi'fl9, p. 38.

9.

For an example of such reasoning, see Royal Commission on the Economic Union and Development Prospects for Canada, Report, Volume 1, p. 50.

10.

In economics jargon, the welfare gains attributable to the removal of trade barriers represent not a Pareto improvement - a gain for some, and a loss for none - but rather a Kaldor improvement - the better off could compensate the worse off.

11.

Such situations fall under the "theory of the second best," as described by R.G. Lipsey and K. Lancaster, "The General Theory of Second Best," Review of Economic Studies 24 (December 1956), pp. 11-32.

12.

Externalities could also be harmful. Pollution is an example. In the face of harmful externalities, a government would have reason to discourage production and consumption, rather than encourage them.

13.

P. Krugman, "Import Protection as Export Promotion" in H. Kierzkowski, (ed.), Monopolistic Competition and International Trade (Oxford: Oxford University Press, 1984).

14.

R.E. Baldwin, "The Case Against Infant-Industry Tariff Protection," Journal of Political Economy 77 (May/June 1969), pp. 295-305.

15.

J.A. Brander and B.J. Spencer, "Export Subsidies and International Market Share Rivalry ," Journal of International Economics 18 (August 1985), pp. 83-100.

16.

P. Krugman, "Introduction" in P. Krugman, (ed.), Strategic

Trade Policy and the New International Economics (Cambridge: The M.LT. Press, 1985), p. 16. 17.

See, for example, I. Magaziner and R. Reich, Mindi'fl9 America's Business (New York: Vintage Books, 1982), p. 4.

18.

Competing in a Global Economy, pp. 38-40.

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19.

This argument is put forth by P. Krugman, "Targeted Industrial Policies: Theory and Evidence," Federal Reserve Bank of Kansas City (1983), pp. 123-155. Krugman also suggests that the case against a strategy of encouraging investment in industries with high value added per employee is reinforced by the disappointing experience of those developing countries that have followed a similar strategy.

20.

Competing, p. 40.

21.

Ibid., p. 41.

22.

See, for example, J.N.H. Britton and J.M. Gilmour, The

Weake8t Link - A Technological Perspective on Canadian Industrial Underdevelopment (Ottawa: Science Council of Canada, 1978).

23.

Competing, p. 61.

24.

See, for example, D.J. Daly, "Weak Links in 'The Weakest Link''' and A.E. Safarian, "Foreign Ownership and Industrial Behaviour: A Comment on 'The Weakest Link'," Canadian Public Policy 5 (Summer 1979), pp. 307-317,318-335.

25.

J.N. Bhagwati, "The Generalized Theory of Distortions and Welfare," in J.N. Bhagwati, (ed.), International Trade: Selected Readings (Cambridge: The M.LT. Press, 1981), pp. 171-189.

26.

See, for example, J. Eaton and G. Grossman, "Optimal Trade and Industrial Policy under Oligopoly," Quarterly Journal of Economics 101 (May 1986) pp. 383-406; and A.J. Venables and J.R. Markusen, "Trade Policy With Increasing Returns and Imperfect Competition: Contradicting Results from Competing Assumptions," Jourool of International Economic8 24 (May 1988), pp. 299-316.

27.

C.M. Cannichael, "The Control of Export Credit Subsidies and Its Welfare Consequences," Journal of International Economic823 (August 1987) pp. 1-19.

28.

G.M. Grossman, "Strategic Export Promotion: A Critique," in P. Krugman, (ed.), Strategic Trade Policy, pp. 55-58.

Discretion in Trade Policy /73

29.

A.K. Dixit and G.M. Grossman. "Targeted Export Promotion with Several Oligopolistic Industries, "Journal 0/International Economics 21 (November 1986), pp. 233-249.

30.

R.Z. Lawrence and R.E. Litan, "The Protectionist Prescription: Errors in Diagnosis and Cure," Brookings Papers on Economic Activity (1: 1987) pp. 289-310.

31.

Grossman, "Strategic," p. 58.

32.

R. W. Crandall, "Import Quotas and the Automobile Industry: The Costs of Protectionism," The Brookings Review 3 (Summer 1984), pp. 8-16.

33.

J.N. Bhagwati and T.N. Srinivasan, "Revenue Seeking: A Generalization of the Theory of Tariffs," Journal a/Political Economy 88 (December 1980), pp. 1069-1087.

34.

Krugman, "Targeted," pp. 129-130.

35.

See, for example, W.A. Brock and S.P. Magee, "The Economics of Special Interest Politics: The Case of the Tariff," American Ecoru:mtic Review 68 (May 1978), pp. 246250.

36.

See, for example, R.B. Reich, "Beyond Free Trade," Fm-eign Affairs 61 (Spring 1983), pp. 773-804.

37.

Krugman, "Targeted," pp. 140-150.

CHAPTER 4 TAX EXPENDITURES AND TORY TIMES: MORE OR LESS POLICY DISCRETION? G. Bruce Doern

Resume

Dans ce chapitre on examine l'influence de la politique du processus budgetaire sur I'elaboration de decisions en matiere de depenses fiscales. On examine egalement Ie processus cumulatif des choix et des debats dans Ie domaine des depenses fiscales, qui influencent a leur tour l'elaboration de la politique budgetaire. Le degre de pouvoir discretionaire que retient Ie gouvernement federal - sa marge de manoeuvre politique a l'avenir - est problematique, vu la position et les actions des conservateurs sous Mulroney au cours des annees dans Ie domaine fiscal et en dehors de celui-ci. Au cours de leur premier mandat, de 1984 a 1988, les mesures prises par les conservateurs dans Ie domaine des impots comprenaient: une refonne fiscale eliminant plusieurs depenses fiscales; une restriction fiscale permettant de decourager les demandes d'avantages fiscaux provenant de groupes d'interets; la conversion de plusieurs deductions de l'impot en depenses fiscales; la conversion de certaines depenses fisca1es des commerces en credits fiscaux, y compris des credits fiscaux remboursables. Notre argument principal veut que les conservateurs se soient mis devant un paradoxe classique. D'un cote, leurs mesures suggerent un desir de restreindre Ie recours aux depenses fisca1es comme instrument politique, ce qui convient a un gouvernement voulant reduire son role dans l'economie. De l'autre cote, les deux autres grandes initiatives de conservateurs, I'accord sur Ie libreechange et l'accord du lac Meech, semblent devoir limiter Ie pouvoir de depenses du gouvemement. CeIui-ei se verra done pousse a recourir au systeme fiscal comme instrument politique puisque ce dernier est beaucoup moins affecte par ces deux accords.

75

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Tax expenditures are a major instrument through which the modem Canadian state exercises policy discretion. But relatively little is known about how tax expenditure decisions are made. 1 These expenditures involve the use of the tax system as a policy tool to promote and induce desired kinds of economic and social behaviour or to prevent or limit undesired behaviour. The concept of tax expenditures was coined in the 1970s to distinguish analytically, if not practically, such policy-specific tax decisions from "normal" tax decisions; the latter dealing with decisions about general revenue raising, the tax base and regular tax rates. 2 This chapter examines how the politics of the budgetary process influence the formulation of tax expenditure decisions. We also look briefly at how cumulative tax expenditure choices and debates in turn influence the budgetary process. The degree of policy discretion left. to the federal government - the room for future policy manoeuvering - is especially problematical given the cumulative position and actions of the Mulroney Conservatives both within the tax realm and outside it.

In their first term from 1984 to 1988 the Tories' actions on the tax side of the fiscal coin included: tax reform, which closed several previous tax expenditures; fiscal restraint, which helped shorten the lineup of interest groups queuing for future tax breaks; the conversion of several social tax deductions into tax credits; the introduction of some of their own new tax expenditures; and the conversion of some tax expenditures for business into tax credits, including refundable tax credits. The major argument advanced in the chapter is that the Tories have presented themselves with a classic paradox. In one sense their actions suggest a desire to constrain the future use of tax expenditures as a policy tool. This is in keeping with a government that wishes to reduce the role of government in the economy. On the other hand, the Conservatives' two other major macro policy initiatives, the Canada-U.S. Free Trade Agreement (FTA) and the Meech Lake Constitutional Accord both seem likely, on balance, to restrain federal spending power and, as a result, put more pressure on the government to use the tax system as a policy tool since the latter is far less affected by either Meech Lake or the FTA. More particular conclusions are also offered about other elements of the discretionary state as seen through the evolution of the debate about tax expenditures and their actual use.

Tax Expenditures and Tory Times 177

It could be argued, in one sense, that in the actual politics of the budgetary process, there are no tax expenditure decisions, only tax decisions. This is because political interests do not use the tax expenditure concept in their nonnal political discourse. They have some awareness of the concept but for the most part the political language finds more familiar ground in words such as tax breaks, tax fairness or tax incentives. Nonetheless, in a different context, tax expenditures have become an important political concept. Tax expenditures are essentially a conceptual construct invented by tax professionals. The invention of the concept has fostered a tax expenditure debate. It emerged in the mid-1970s and has directly and indirectly affected the budget process and the content of economic and social policy. It has had some impact as well since the debate is partially concerned with ensuring greater political accountability by making tax expenditure decisions more transparent through the publication of tax expenditure accounts. This is because most tax expenditures involve policies that could in principle be delivered through regular direct spending, the latter historically having received greater parliamentary scrutiny in a detailed accounting sense. The analysis proceeds in four stages. First, we examine broadly how tax expenditure decisions emerge out of the federal budgetary process. We explore the degree to which single versus multiple tax decision processes exist. Second, we highlight key changes in the tax decision process in the Mulroney era. In the third section we explore eight federal tax decision players, highlighting their core values and incentive systems as well as the internal contradictions the players face. Important aspects of the basic relationships among the players are also highlighted. This leads to an examination in the fourth part of a case study of a tax expenditure choice in the Mulroney period, namely, the Cape Breton Tax Credit. Finally we conclude with some overall observations on the tax decision process, on accountability regimes and on the Tories' future room for policy discretion and the paradox they have created for themselves.

TAX EXPENDITURE DECISIONS IN THE FEDERAL BUDGETARY PROCESS: SINGLE VERSUS MULTIPLE DECISION ROUTES The federal budgetary process consists of two related elements: the expenditure decision process, and the tax or revenue decision

78 I How Ottawa Spends

process. The fonner leads to Parliamentary passage of the annual

Estim.ates. The latter is the annual process in the Government of Canada that leads to the Budget Speech, several days of focussed opposition and media criticism, and the subsequent tabling and passage of tax legislation.3 Surrounded by the nonna of budget secrecy in parliamentary government, the pre-budget process is dominated by the Minister of Finance and his senior officials but with considerable consultation between the Minister of Finance and the Prime Minister. The Budget Speech is preceded by a round of fonnallobbying by numerous interest groups and, in recent years, by the increased use of trial balloon discussion "green papers." In the late 1970s, this tax decision process was characterized in the Canadian context as the "politics of anticipation. ,'" According to this view, it is not a process of political bargaining or real consultation with interests. Instead, it is a process of considered anticipation reined in by secrecy and the fear of budget leaks. The tax decision process, with its concentration of power in the hands of one or two ministers, is usually contrasted with the expenditure decision process which leads to the tabling and passage of the Estim.ates Blue Book. In the expenditure process, spending ministers and their officials bargain and haggle with the brave guardians of the public purse, the Treasury Board and the Department of Finance. The "spenders and guardians" expenditure process is seen as being inherently more of a pluralist and bargaining mode of decision making, including far greater contact with, and involvement by, outside interest groups than occurs in the tax process. 6 Power and influence are more diffuse and fluid and serve as a sharp contrast to the concentration of power in the tax domain. These two stylized processes constitute the budget process as a whole. They are linked in a general sense by the annual dynamics that produce the overall federal fiscal framework. There are also links between the two when debates about tax expenditures occur because such choices, in principle, involve choices between delivering a policy through the tax system or, alternatively, through direct spending. The problem with this necessary but simple portrait is that it fails to capture other elements and cycles which inherently cast some doubt on the thesis of a single tax decision process. Some of these more complex elements derive from the fact that the annual process itself is more embroiled in the internal politics of "instrument choice" than at first glance seems evident. Instrument choice simply means that there is a continuous interplay between tax and

Tax Expenditures and Tory Times I 79

expenditure (and regulatory) choices more subtle than stylized descriptions allow. Still other elements emerge when we look at how the tax decision process has been influenced by non-annual events and by the evolution of political and economic climates since the mid-I970s. For example, in the category of non-annual events, there are four that logically and practically could generate particular tax expenditure decisions through dynamics not easily captured by a look at the normal annual budget process: federal-provincial tax agreements; election years; periodic tax reform exercises; and major or minor crises leading to mini-budget statements and tax decisions. The decision processes related to federal-provincial tax agreements function over a cycle of five or more years and may produce tax expenditures (such as granting tax room for the provinces) which are either central to such agreements or are an incidental result. 6 The four-year election cycle (intenningled with some provincial election timing constraints) may also yield particular tax expenditure commitments, the adoption of which cannot be explained by normal annual dynamics. 7 Periodic tax reform exercises such as the Carter Commission exercise of the late 1960s, the ill-fated MacEachen reforms of 1981 and the recent Wilson reform package occur less regularly but constitute important departures from regular annual tax decision making. 8 Last but not least, periodic crises may result in mini-budget statements containing new tax expenditure initiatives. In the period from about 1976 to 1984 there were arguably almost two budget speeches per year, a regular one and a mini-budget, as the government sought to manage an increasingly unmanageable economy. 9

Inside The Annual Cycle of Budgetary Decision Making Within the annual budgetary process there are also important dynamics at play. One set is interdepartmental at both the ministerial and bureaucratic levels. The other, interacting with it, involves the annual and cumulative lobbying and influence of interest groups. Each is portrayed briefly here but will be elaborated on later in the chapter when we look at eight players in greater detail. A useful starting point for sketching out the interdepartmental dynamics is to understand the evolution in the 1980s of

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Ottawa's Policy and Expenditure Management System (PEMS) and its place in the Cabinet's priority setting system. 10 When PEMS (sometimes called "the envelope system") was first adopted, its overall purpose was to develop a more rational process that would better match the policy appetites of ministers and cabinet committees with real resource constraints. It was thought that the previous system had left the policy issues with the committees and the tough resource allocation realities to the Treasury Board and Finance Department. PEMS was supposed to induce and require all ministers to be more continuously conscious of the resources they were demanding. In the early stages of PEMS there were also intimations that budgetary envelopes would help ministers appreciate better the substitutability of policy instruments. In principle, envelopes would be considered to include both direct spending and tax spending. In principle, committees would be able to trade off both spending and tax instruments to obtain the best instrument mix for the problem at hand. In principle, if a minister could close or reduce a tax expenditure, the moneys saved might go to the committee's envelope reserve. In practice this logic of more continuous and open instrument choice never systematically happened nor was it a serious practical possibility. The reason was that the Department of Finance would not allow this challenge to its jurisdiction over taxation and over the Consolidated Revenue Fund. Finance's assertion of its powers was also aided by the fact that a larger fragmentation of power was partly created by the PEMS among the central agencies. A series of virtual mini-Treasury Boards resulted, especially regarding the then new supporting secretariats, namely the Ministries of State for Economic and Regional Development and for Social Development. As one author put it, the system produced "too many controllers.,,11 Finance eventually had to reassert its control which, by mid-1982, it had succeeded in doing. This process was further strengthened in the brief Turner government when the Ministries of State were abolished but was even more evident in the Mulroney government. For some observers the Mulroney era marked the full re-emergence of Finance after too many years of having its economic policy hegemony challenged by other departments. There was, however, one indirect legacy from this briefflirtation with open instrument choice: some line ministers, especially in the regional and economic development field, became much more familiar with the tax system and with how tax expenditures influ-

Tax Expenditures and Tory Times I 81

enced their nominal mandate area or policy field. The system of infonnation presented to them in Cabinet committees was far more complete than in previous periods. This is not to argue that the incidence of tax expenditure use increased or that other line ministers were suddenly tax experts uniformly anxious to make tax policy or to do battle with the Minister of Finance. It was still the case that the one minister who most directly bore the costs of lost revenue due to tax expenditures was the Minister of Finance. But line ministers were far more conscious of the policy questions related to the taxation half of the fiscal coin. However, even if PEMS had not socialized them to this new form of tax literacy, other even more significant pressures were at play, especially in the social policy field, that would have also changed the internal dynamics. Some of these pressures predate PEMS and in any event relate to the second feature of the annual decision making dynamics, namely the role of interest groups. In the pre-Budget Speech process, numerous interest groups, from the broad-based groups such as the Business Council On National Issues (BCNI) and the Canadian Labour Congress (CLC), to sectoral groups, present their pre-budget views. 12 Typically their written and verbal presentations include three components. The first is their view of the state of the economy. The second is some preventative massaging in which interests indicate what they do not want the government to do. The third is their proposals for favorable tax treatment which frequently will include ideas for new tax expenditures. In anyone year this process can be seen as being fairly ritualistic with Finance listening attentively but also resisting most proposals. But over the medium tenn, the process undoubtedly throws up a continuous queue of tax benefit "wish lists," including changes in basic rates, which Finance can gradually analyze and from which it can pick when the moment seems ripe politically and economically. Finance is, however, not just a passive picker of tax expenditure cherries. It has some of its own ideas and, moreover, sees most of its choices as being part of its overall task of practicing proper macro growth and structural policy. Meanwhile, the same interest groups are also pressing their sectoral line minister in the Cabinet and his or her senior officials

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for tax breaks and for other favorable policies. Thus, while the tax process has an annual focus, the tax lobbying is fairly continuous and is applied to more than one ministerial arena of power and influence. For example, the various arts and cultural lobby groups will work on both the Minister of Finance and the Minister of Communications. Thus, as Pross stresses, "policy communities" develop that are simultaneously pUblic-private and interdepartmental. 13

A final set of relationships to appreciate are the federalprovincial aspects of annual budget making. Increasingly institutionalized economic meetings of first ministers and finance ministers plus regular contact among senior officials exert a conditioning influence on budgets. Among fellow partisan finance ministers, federal-provincial politics can also generate important pressures for tax expenditure initiatives when the moment of opportunity is ripe.

MAJOR MULRONEY ERA CHANGES While our focus is on the Mulroney government and its room for policy discretion, the Tory changes themselves cannot be understood without some historical background. Any sensible account of how tax expenditure decisions are made must appreciate that the tax decision process changes in relation to the policy and fiscal climate forced upon and/or enunciated by the government of the day. We already have a sense of this climate from some of the previous observations. In the 1970s under Liberal regimes, the tax decision process was not itself the object of reform or systematic attention. Political controversy about taxation bubbled to the surface on occasions such as: NDP leader David Lewis' 1972 attack on "corporate welfare bums," one of the earliest rhetorical conceptions about excessive tax breaks for big business; the 1973-74 tax indexation decision (later identified e~-po8t by some as a tax expenditure) and sector-related controversies such as energy taxation, including items such as the "Dome" super depletion allowance. 14 In the meantime, new tax breaks were passed in most budgets. Only in 1979 under the Clark Conservative government, when the first tax expenditure account was published, were there more official inklings and aclmowledgements that "something" would have to be done about the "tax system."

Tax Expenditures and Tory Times 183

It is essential to reiterate here that, at least until the mid1970s, although subject to greatly increased criticism, Keynesian macroeconomic fine tuning was still practiced. Thus most tax expenditures in any given Budget Speech or mini-budget were not necessarily seen in Finance as concessions or goodies for particular interests. Rather, they were seen simply as part of the practice of good macro or structural policies for the economy.

In the 1980-84 period under the final Trudeau government, a certain amount of further experimentation with the tax decision process occurred but hardly in any consistent direction. The process also became more politicized. We have already noted the internal experimentation with the PEMS concept. But more substantively, the 1980 National Energy Program (NEP) radically and suddenly altered energy taxation, with scarcely any consultation with the interests most directly involved. IS The abortive MacEachen mini-tax reform exercise of 1981 further angered particular business interests and failed to mobilize any pro-tax reform coalition. 16 On the social side, the child tax credit, begun in 1978, was gradually enriched. When Marc Lalonde became Minister of Finance in 1982, the Department of Finance increased its experimentation with tax discussion papers to show that it was prepared. to consult, especially with business. The Mulroney Conservatives have clearly sought to demarcate their approach from the Liberals. As we proceed to our later stages of analysis, it is important to keep in mind five changes that have altered the tax decision process since 1984. The first, and by far the most important, is the restraint ethos the Conservatives imposed for most of their first four years in office. This in itself has helped reduce the queue by interests anxious for more tax breaks. The Conservatives have certainly established new tax expenditures of their own such as the lifetime capital gains deduction, and the provision for international banking centres. But overall, the dollar volume of new provisions in the 1984-88 period has been constrained. Second, tax reform has been pursued and has resulted in the closing of several existing tax breaks. Moreover, interest groups have been aware that, at least for the foreseeable future, tax reform would be revenue neutral and hence they would find little room for alternative tiscal favours. The Commons Finance Committee, which in other respects has been a burr under Finance's saddle, has in the first phase of tax reform been an indispensable ally in keeping pressure on the groups who wanted their tax breaks preserved.

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The Conservatives also instituted a more systematic consultative approach to tax decision making. This was reflected in part in the appointment of Stanley Hartt, a labour lawyer, as Deputy Minister of Finance, thus breaking the mould of recent Finance deputy ministers. Within Finance itself an Assistant Deputy Minister was also appointed for consultation and the use of tax discussion papers. Moreover, tax reform itself involved very elaborate consultation. Enhanced consultation and scrutiny was also encouraged, often in ways that Finance did not bargain on, through the reforms of House of Commons rules that gave more leverage to committees. In particular the House Committee on Finance, headed by Don Blenkarn, began to flex its populist but episodic accountability muscles. A final feature of the 1984-88 period was the increased role of the Auditor General (AG), Parliament's financial watchdog, and by extension, the Public Accounts Committee, in scrutinizing the tax system. 17 This pressure from the AG has led Finance to establish a formal tax program evaluation unit to respond to the AG's demands for better evaluation. The AG's role, which previously has been confined to public spending, is not without controversy and tension with Finance. In part this tension is caused by the newness of the relationship but it also arises out of the AG's tendency to want to examine the "prior" decision processes (an advance audit) as well as the tax decision or program in a post-audit sense. The idea that the Auditor General might audit tax expenditures was explicitly rejected in 1977 when legislation governing the office was changed. This was on the advice of the incumbent AG who believed it would be too political. The current AG has taken a strong interest in tax expenditures to give himself a total purview of the public purse. This in itself is not ultimately as contentious as is the question of how far into the decision process of cabinet government, the AG would really like to audit. The limits to this debate were staked out in the Deputy Minister of Finance's testimony before the Public Accountants Committee (PAC) in 1986 when the Scientific Tax Credit was being discussed. 18 It had involved $2.8 billion in lost revenue, well beyond any initial expectations, and the Finance Department had already aclmowledged that errors had been made. The Deputy Minister of Finance, Stanley Hartt, refused to accept the premises of the AG's desire for an audit of civil service advice to ministers and of the

Tax Expenditures and Tory Times I 85

apparent support for this concept by some members of the PAC. Hartt defended the basic premise of the doctrine of ministerial responsibility. He said that ministers did not have before them "the sound economic analysis in the sense that it predicted with great accuracy what actually happened ... ,,19 He went on to say, "the question is, to what test of clairvoyance are we holding people1'~ The accountability issues raised by the AG's role are important and will be commented upon later. Suffice it to say at this point that political accountability is not synonymous with managerial or audit accountability. The latter is a far broader and more important concept. Hence one must link the AG's role to the larger role of Parliament and to the full panoply of Mulroney era changes. But this in turn requires that we proceed to the next phase of our understanding of the tax decision process and of how tax expenditure decisions are made.

THE PLAYERS AND THEIR VALUES AND INCENTIVES IN TAX CHOICES To bring us closer to understanding rather than just describing the tax decision process, this section explores the basic value and incentive systems of eight players in the tax decision process: the Minister of Finance and his or her department; line ministers and their departments; Parliament; the attentive tax community (National Revenue, accountants and lawyers); business interests; social policy interests; the provinces; and international interests. In each instance, space only allows a very brief and stylized look at each pJayer separately. While for each player, one can detect one or more overall views, it is also the case that each player constitutes an interest with its own internal contradictions. Tax decisions are ultimately a product of the interaction of all these actors and interests, rather than their separate existence. 21

The Minister and Department of Finance Even Finance, as the dominant player in the tax decision process, brings to the decision table a potential set of contradictory concerns. It begins with the quintessential role of the Minister of Finance among his colleagues and vis-levis the Prime Minister.22 As a politician he must be first a minister "of the economy" as a whole and of the "fiscal integrity of the government." His greatest leverage over his basically pro-spending ministerial colleagues is that of his

86 I How Ottawa Spends

need to raise and preserve revenues through tax raising measures that are inherently unpopular. He must balance these tasks against a need to gamer the support of the Prime Minister whose priorities are more likely to be political first and economic second. The Department of Finance is itself structured to be virtually a government within a government. Tax expenditure choices in particular are most likely to involve some tension and differences of focus between the fiscal policy branch and the tax policy branch. The former is the central focus at budget time at the stage when the fiscal framework is forged. Its concerns are institutionally tilted towards fiscal policy per se and hence to the aggregate fiscal posture in the short and medium term. The tax branch has a somewhat greater concern, especially as possible tax provisions in the next Budget become crystalized, for the longer term revenue-raising capacity of the tax system, as a system. It also has a more specific concern over the particular micro effects of individual tax expenditure proposals. In addition to these substantive concerns, Finance has jurisdictional imperatives to defend. As the pre-eminent economic department, eyed closely by the business community, Finance jealously guards its turf against both the real and imagined incursions of other departments. No matter where the impetus for a tax expenditure is coming from (an interest group, within Finance, or another ministerI department), Finance must play out and resolve the continuous internal struggle between its desire for good politically acceptable macroeconomic and microeconomic tax policies and its need to raise unpopular but needed revenues. The fate, design and effects of all tax expenditures are influenced by this struggle of partially contradictory drives. The Attentive Tax Community: National Revenue, Lawyers and Accountants In David Good's analysis, the attentive tax community refers to a larger array of interests than those included here.23 In this chapter it encompasses mainly players such as Revenue Canada, and tax lawyers and accountants who deal with the tax system in a detailed day-to-day context. They are tax experts less in a policy sense and more in an operating context. Revenue Canada in particular certainly influences tax policy because of its strategic knowledge of administrative practicality.

Tax Expenditures and Tory Times 187

Collectively these players are both the administrators of the tax system and the renters who live directly off it. Given a system based on self-assessment, selective auditing, .and individual and corporate privacy vis-a-vis individual returns, these players give practical day-to-day meaning to the diverse elements of tax administration. This involves them in ensuring adherence to taxpayers' rights and to the proper implementation of tax policy. It also involves them in rule making, interpreting, and manoeuvering in and around the tax rules so as to benefit private clients and citizens within the framework of the law. The importance of their continuous attentiveness lies in the additional norms and concerns they bring to the discussion of tax changes and to the pressures they directly bring to bear as selfinterested players. These include norms such as practicality, enforceability, flexibility and certainty or predictability. Their importance also lies in the ways in which they can facilitate private behaviour in a manner that produces effects unforseen by tax decision makers. While this "paper entrepreneurship" is often seen as the particular preserve of the increasing army of tax lawyers, accountants and discounters, it obviously cannot be attributed entirely to them alone. They are linked to their clients, business firms and other individual tax payers, who are the ultimate beneficiaries (and sometimes victims) of this activity. Revenue Canada in particular has a strong incentive to reinforce those in Finance whose concerns are to raise revenues and preserve the revenue system. In principle, more tax expenditures make its administrative task more difficult. Like any primarily operational department, Revenue Canada covets predictability. At the decision stage for new tax expenditures, Revenue Canada is likely to be a cautionary force against new initiatives. At the same time, however, it is inherently a far less influential department than Finance and thus is likely to lose most important head-tohead battles where Finance is determined to proceed.

Line Ministers and Departments In the months before the Budget Speech, other line ministers are increasingly excluded from the tax decision process as the norms of budget secrecy take hold. As noted above, however, line ministers do have political opportunities throughout the year, both directly and through normal contact by their officials, to lobby for other particular tax expenditures, or occasionally to eliminate or

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"close" tax loopholes. This does not arise just out of some unbridled desire to "take on" Finance (though this may happen) but also because as departmental representatives they are being pressured by interest groups to adopt new measures. Some ministers clearly are frustrated in a policy sense when they know that the effective conduct of their mandate is adversely affected, in their view, by tax policies which they cannot directly control. This sense of frustration, however, is not uniformly present across the government. 24 For example, in the areas of foreign and defence policy and government operations (involving perhaps 10 ministers/departments in total), there are few if any tax expenditures. In the social policy area, most ministers have little to do with tax expenditures except for Health and Welfare where tax provisions are a key part of the social policy field. Not surprisingly, this is where battles have been fought. In the economic development field, where about 15 ministers preside, there are numerous tax expenditures that interact with direct expenditures to effect departmental mandates and overall policy efficacy. The more line ministers learned about tax expenditures in the late 1970s and early 198Os, the more in principle many of them yearned to have a say in them. But these were sporadic yearnings. They could not all be acted upon because calculations of power, position and political risk were all involved. Moreover, there was and is still a powerful political "understanding" in the system that taxation belongs to Finance.

Parliament While the House of Commons is dominated by the governing party and the Cabinet, its role as a representative institution and as an assemblage that includes both opposition parties and sometimes independently minded committees and backbenchers, cannot be forgotten. This is especially the case in the wake of the Mulroney era reforms of the committee process. 25 These reforms have given more room for independent inquiry and action by committees and require ministers to respond to committee reports. Parliament therefore contributes partisan and other pressures which yield both demands for more tax expenditures, emanating from several of its standing committees (which parallel many of the line departments) as well as demands to eliminate tax breaks. Parliamentary committees are first thought of as arenas

Tax Expenditures and Tory Times I 89

for holding the government and bureaucracy accountable, but they may increasingly be evolving into a forum for scrutinizing private interests (and their tax expenditure demands) as well. But since committees are still basically controlled by the government, one must also see Parliament's role in relation to the pressures that emerge more silently and privately from the majority caucus. Little is lmown about how the caucus functions with respect to budgetary pressures or tax expenditures but logic suggests that it would also produce contradictory pressures depending on the issue and the current political standing of the government in public opinion. Particularly active in this ambivalent overall accountability equation under the new reforms has been the Standing Committee on Finance. Chaired by Don Blenkarn, an independently minded and sometimes maverick Conservative MP, the committee has increasingly seen itself as the watchdog of the Department of Finance. This increased assertiveness is not confined just to tax expenditures but rather embraces all of the mandate of Finance. It is instructive to note in the case of Blenkarn, that his assertiveness may be a function of the fact that he may have written off aspirations to be a future cabinet minister. Moreover, his feistiness may be more readily tolerated by a government with such a massive Parliamentary majority as the Conservatives have had. In thinking about the Parliamentary role in this fashion, it is also essential to recognize that the various elements of Parliament are not in themselves resource allocators or aggregators. Proposals for new tax expenditures or for old ones to be closed can also take on the character of uncoordinated wish lists for government MPs and for opposition parties. A disaggregated set of committees and opposition parties is under far less obligation than the governing party to add up the total costs or benefits.

Business Interests One must be cautious about speaking of business interests or the business community in general but there are some discernable elements of the business view of tax expenditures. First, there is a general preference in the business community to receive benefits from the state via the tax system rather than through grants. Grants imply a greater level of state control, transparency, paper burden and "intervention." Benefits conferred through the tax

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system do not usually require applications (although this may be changing, as we discuss further below). The tax system implies greater flexibility, and is more confidential. As one author has put it, tax breaks "do their best work in the dark.,,26 At a deeper pbilosophicallevel many business interests do not see tax expenditures as a legitimate concept at all. The revenue that the state chooses not to collect in the pursuit of some policy objective is not viewed as money that belongs to the state. It belongs to private companies and persons. Accordingly, such interests do not see themselves as being subsidized but rather as simply keeping the incomes they justly deserve. If we were to leave our characterization of business incentives at this level of generality, one would be entitled to conclude that there would be unrelenting pressure from the business community to confer tax breaks. At one point in the mid to late 1970s, this picture almost seemed to be confinned. In an exercise lmown as the Tier I and Tier II industrial policy consultation process, 23 sectoral task forces, composed primarily of business groups (the Tier II component), met to propose ways in which better industrial policy could be pursued in each sector. When the separate recommendations were aggregated and discussed at the Tier I level by an overall committee, it was determined that, if granted, the suggested tax breaks would have cut federal revenues in half. ~ No such draconian scenario in fact occurred, and for obvious reasons. There are counterpressures in the tax decision system to resist these pressures. Moreover, the business community also has its own partially contradictory counter-philosophies about the tax system, often summed up in the concurrent desire for a simplification of the tax system. The above pressures, combined with U.S. tax reform, are precisely what helped shape the political climate for tax reform in the mid-1980s. While the Wilson tax reforms have indeed eliminated several tax expenditures, they are likely to dampen the business appetite for tax breaks only for a while. The tax expenditure queue will quickly form again with business interests at the head of the line.

Social Policy Interests The social welfare state is normally thought of in terms of social spending. Social policy interests, which span groups such as labour,

Tax Expenditures and Tory Times 191

women and community groups, but which must be considered to include the business community as well, have tended to focus on the spending side of the fiscal equation. In the 1980s, they too have learned more about the tax side of social policy and hence about tax expenditures. An important starting point in this new tax literacy were the social security reviews of the early 19708 at both the federal level and in Quebec.28 These reviews brought out issues regarding a possible guaranteed annual income or negative income tax. Another phase in the political learning curve for social welfare groups was the increasing evidence in the late 1970s that the cumulative impact of tax expenditure use was pro-rich. The tax system was becoming less and less progressive, since the wealthier taxpayers became, the better able they were to take advantage of tax deductions.

Social groups also began to see that they too would like some of the favorable privacy and flexibility aspects that accrue when one delivers social programs through the tax system. Many social spending programs were demeaning because of the imposition of means tests. Social policy recipients dislike bureaucratic grant based interventions as much as do business persons. The logic of these developments was that many social groups saw the tax system as a less demeaning vehicle for social policies, especially if they were delivered as refundable tax credits. Using the tax system would allow benefits to be even more significantly targeted at low income Canadians. But the social policy community, backed strongly by public opinion polls showing strong support for most social programs, also brought to the tax expenditure debate all of the complex rhetorical baggage, and genuine philosophical dispute, inherent in the "universality" debate.29 In this debate the concept of "targeting" social support to the needy through credits meant that the social policy community had to confront the divisions within itself. Targeting was good but it was also seen as a threat to universal programs and hence to middle class support for the fabric of the welfare state. According to this argument, the middle class deserved universal programs as a matter of right and as a benefit of citizenship and would cease to support real income redistnbution unless it saw itself receiving some benefits itself. Therefore, much like the business community, the social policy community, albeit based on different value priorities, brings

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its own ambivalence about what to do with the tax system itself and with its connections to the spending half of the welfare state. In general though, the social policy community has greatly influenced the tax expenditure debate and tax decision-making practice by their increasing insistence that tax breaks for individuals have some demonstrable element of redistribution. Its influence has usually resulted in the use of the tax credit concept. The Provinces

As partners with the federal government in complex tax agreements, but simultaneously as sometime rivals (partisan and otherwise) in the fine art of acquiring political credit and apportioning blame, the provinces are also players in the tax decision process. Not only do they confer their own tax expenditures, but they are sensitive both to promoting federal tax breaks favorable to their province and criticizing those which might penalize it. Moreover, interest groups that obtain favourable tax treatment from one level of government or province will frequently shop around to other governments using the precedent of the first tax policy breakthrough. Because of the interconnected elements of the tax agreements and of the desire for reasonable tax harmony, the provinces maintain a constant vigilance over the revenue implications on their budgets of federal tax initiatives. This applies equally to possible revenue losses and to revenue gains. Of special importance here are big provinces such as Ontario and Quebec. For Quebec, effects can be quite different simply because it runs its own tax system. Indeed, as in all things federal-provincial, it is essential not to view the federal-provincial tax relationship only in a multilateral way. Key bilateral pressures and relationships exist between one province and Ottawa, especially if the potential tax expenditure has strong regional implications. Jurisdictional concerns are also never far from the surface in other respects as well. In early tax expenditure accounts, the "opting out" provisions which conferred "tax room" for provinces were treated as tax expenditures. These were initially taken up only by Quebec, which had led the political-jurisdictional pressure to establish the concept of opting out. In areas such as Established Programs Funding (EPF), all provinces garner tax points. Energy taxation has also been the subject of intense jurisdictional battles both when generating new tax breaks and when some were closed off.

Tax Expenditures and Tory Times I 93

International Institutions Last but not least in this brief inventory of players are the various international institutions, including bilateral or multilateral arrangements such as tax treaties. The chief concern at this level is that tax measures might result in discriminatory behaviour. International factors are also a passive player with respect to concerns for capital outflows as a result of corporate tax changes. The passivity can quickly lead to major concerns, such as were evident after the United States instituted tax reform in 1986. This made Canadian reform a virtual necessity. The pressure of these institutions or of individual countries (especially the United States as Canada's dominant trading partner) must also be seen in the context of "instrument choice." For example there were strong criticisms from the U.S. when the National Energy Program shifted energy incentives away from the non-discriminatory tax system to the discriminatory grants expenditure system. 30 The GA'IT and the Free Trade Agreement on a larger scale will focus greater scrutiny on subsidies, which are usually seen as emanating from the expenditure side of the fiscal coin. If such subsidy behaviour is restrained by these agreements, it may in future put more pressure on politicians to use the tax system since pressures to assist firms and individuals will undoubtedly continue to exist as both businesses and communities adjust to a dynamic world economy. While it is essential to have an understanding of the eight players sketched out above - aD inventory, if you will, of their core values, incentives, and partially contradictory impulses - two important cautionary points should be kept in mind. First, for any particular tax choice, not all of the players are invariably involved. The cast of basic participants varies with each particular case. Second, the eight players do not include the more diffuse unseen, but always lurking presence of the proverbial "average taxpayer." Whether this is expressed as "the electorate," "public opinion" or "the Canadian middle class," tax decisions are always fashioned with some sense of what the average taxpayer will tolerate or support. It is also in this competitive political "reading" of the voters mind that political parties per 8e must receive more concrete mention. The governing party must make actual tax choices with

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concrete resource implications. The opposition parties can afford, within limits, to be more tactical and rhetorical about the tax values and priorities they would promote ''if' they were in power. However, all three political parties, in varying ways, must situate themselves among, and in part align themselves with, both the social policy interests and the business interests.81 All are engaged in a continuous but shifting appeal to current and possible future supporters as to just how fair and equitable, how efficient, and how stable and predictable, the tax system would be or should be under their tutelage as a current or future government. For the governing party, there is the additional certain knowledge that no matter what it does or says, it must ultimately raise ever larger amounts of revenue. TORY TAX EXPENDITURES: THE CAPE BRETON TAX CREDIT As a final way of coming to grips with how tax expenditure choices are made, especially in the Mulroney era, we look briefly at the Cape Breton Tax Credit (CBTC) of 1985. While no single case can ever be considered to be fully representative of reality, it does allow us a glimpse into some of the real political dynamics of tax expenditure choices. Given the constraints of space in this chapter our account of the CBTC focusses mainly on the initial impetus for change and the decision to proceed. We note some later features of this decision as the tax expenditure program evolved but these are somewhat incidental to our main purpose. The background to the CBTC decision is, in the first instance, the long history of various federal (and provincial) efforts to reduce regional disparities and to promote economic development in Cape Breton.82 These included various initiatives ranging from the Cape Breton Development Corporation (DEVCO), through various Department of Regional Economic Expansion (DREE) programs, to the building of heavy water plants by Atomic Energy of Canada Limited (AECL). Most of these efforts over 20 years were expenditure programs and all were criticized, sometimes in concrete and specific ways but more often in more general terms as simply unsuccessful welfare. In the early 1980s, the expenditures on heavy water by AECL were especially criticized as wasteful not only by the Department of Finance and the Treasury Board but also by AECL itself. These criticisms and numerous proposals to close the heavy

Tax Expenditures and Tory Times 195

water plants were successfully resisted primarily because of the political clout of Allan MacEachen, who was Minister of Finance from 1980 to 1983. However, even in the last years of the 1980-84 Trudeau government, there was a growing view in some quarters, that something new had to be tried. When the Conservative government came to power in 1984, it brought with it both a strong ideological and institutional view that industrial/regional grants were conducive to promoting only welfare and dependence and hence not "real" jobs. The corollary to this view was that the tax system was a preferable path to generating real jobs based on private investment.33 The government was aided in this view by the Nielsen Task Force reports which pointed out how firms were able to stack incentives from both the spending and tax sides of the public purse. In short, the previous Liberal governments did not seem to know what the two sides of its various incentive programs were doing.34 Moreover, the Mulroney government was determined to cut back on spending. In previous years, the heavy water funds had almost always shown up on internal "hit lists" for expenditure cuts. Thus there was now an unprecedented determination to close the heavy water plants. In this sense, the immediate impetus for what became, in the 1985 Budget, a new tax expenditure decision came out of a desire by both the fiscal central agencies to eliminate an unsuccessful expenditure program. However, the more particular impetus to replace these incentives with a new tax credit came from the Department of Regional Industrial Expansion (DRIE) and in particular from its new Conservative minister, Sinclair Stevens. Some attribute his intense interest in supplying a replacement incentive to his desire to overcome his political image as an Ontario based pro-business expenditure slasher with little sympathy for reducing regional disparities. Others attribute it to a genuine desire on his part to try something that would be truly innovative to help Cape Bretoners. In any event, the pressure for a new tax expenditure clearly came from outside Finance and from a senior minister. When the idea of a new tax credit came from DRIE, the next phase of the decision process could be viewed either as rational fine tuning or, as the art of avoiding worst case alternatives. This is because Stevens' early trial balloons spoke of proposals for tax holidays for Cape Breton. Finance had cumulative knowledge of the problems

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of other investment tax credit arrangements. It wanted to overcome past program shortcomings and keep costs within an overall restraint oriented fiscal framework. Accordingly, the boundaries for negotiation with DR IE became clear fairly quickly. From DRIE's perspective, the tax credit had to be big enough (50 per cent) to be politically saleable as an announced substitute for supporting the heavy water plant (on budget night).85 It also had to actually serve as an effective incentive for businesses to locate in Cape Breton. DRIE wanted the credit to cover sectors such as services and tourism rather than just manufacturing and resources, to attract other "footloose" firms which might be sensitive to a generous incentive. If these can be seen as the pro-DRIE features of the emerging package, then Finance also constrained the CBTC with its own requirements. Mindful of the then fresh criticisms of the laxity of the scientific research tax credit, and anxious to constrain costs, Finance insisted on the development of an application process and quasipre-audit system in which DRIE would have to certify the eligible firms. As a result the tax credit came to look much more like an expenditure grant. A sunset provision was also built in for July 1, 1988, as was the requirement for an evaluation study of the program's effectiveness. In addition an advisory council based in Cape Breton was set up to advise on the program as it evolved. If the forgoing provisions are seen as restraining exercises by Finance, a further tilt back in DRIE's favour was that the overall program would be administered by DRIE, the first tax program ever to be administered by a department other than National Revenue. While the CBTC case dealt with a particular tax expenditure choice and can be seen as being triggered by an initiative from outside Finance by a senior line minister there are other features of tax decision making which are deserving of comment in the case study context. First, it shows how ministers can take advantage of moments of opportunity and climates of opinion. Second, the tax expenditure did involve elements of negotiation and it was clearly the product of judgement as to just how large a total cost could be tolerated by fiscal authorities. Third, the particular program was fashioned, negotiated, and politically sold within the government as being superior to larger, riskier or more expensive worst case alternatives. Fourth, Finance demonstrated its institutional need to protect revenue and to promote some view of rational tax

Tax Expenditures and Tory Times /97

design but it also had to accede to the influence of senior ministers who wanted to be temporary tax policy makers. Beyond these immediate aspects of examining a micro tax decision, however, lies the larger influences of the leaming curve evident in the case about the evolution of the tax decision process and of the tax expenditure debate as a whole. Both officials and ministers, and therefore the internal system, have political and institutional memories about past or related tax choices. The CBTC was influenced by both fresh and cumulative memories of other difficulties with investment tax credits. The tighter rules about tax credits start to make them look more like regular grants than was the case a decade ago. These institutional learning curves deserve equal space in accounts of the budget process but do not emerge without a sense of history or without some effort to look at several actual specific decisions. This is why an annual view of the tax decision process is insufficient in explaining how tax expenditures are decided.

CONCLUDING OBSERVATIONS Three overall conclusions emerge regarding tax expenditures and the discretionary role of the state. Each deals with a successively larger realm of relationships of power and influence. In each realm we offer some judgement on whether the overall room to manoeuver is declining or broadening. The first and narrowest realm of discretion is the internal one and deals with the influence of the Department of Finance in relation to other ministers and departments. The analysis indicates that Finance still has its way most of the time but it may increasingly have to share influence in making tax expenditure decisions, especially when the impetus for tax changes emerge from other senior ministers, which in turn may be in response to pressures on related expenditure programs. We have examined only one tax expenditure case study and hence must be cautious in reaching detailed conclusions. However, an examination of a larger set of tax expenditure decisions suggests the existence of at least three types of tax decisions and decision processes. The CBTC type of decision involves a process where there is a higher probability of pressure being initiated by another line economic minister attempting to secure a specific, more

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narrowly defined sectoral or regional incentive, with limited revenue losses inherently at stake. These are likely to involve Finance in more than the limited pseudo consultation suggested in David Good's analysis of tax decision making, especially if there is a senior minister involved. Finance must actually negotiate with the minister and share influence to a considerable degree. On the other hand, for social tax expenditures, such as the proposed sales tax credit for low income Canadians, Finance's hegemony is more likely to prevail. Such tax expenditure decisions have revenue implications either likely to be more significant and! or likely to go to the core of the overall connections between social and economic policy. While Finance can be challenged. in this sphere by ministers of health and welfare and others, these are areas that are still central to Finance's role as a macroeconomic fiscal policy department. Hence, on any given initiative of this kind, compared to the CBTC type, Finance's defensive guardian posture would even more quickly come to the fore. At the same time, however, there is some potential for a sharing of influence.

This leaves a third and undoubtedly the most frequent type of tax decision, where ·Finance is more truly on its own with full monopoly power. This type includes decisions about overall tax rates as well as a host of other technical aspects of tax decisions. In the second and larger realm of discretion, that between the government and private interests as a whole, the total package of Mulroney tax expenditure decisions - fiscal restraint, the elimination of several tax breaks in the tax reform package, and the conversion of social tax deductions to credits, seem to suggest reduced room for future discretion. Moreover, the large federal deficit and severe restraint policies, plus aspects of a revenueneutral tax reform package have undoubtedly restrained to some extent the tax expenditure appetites of both social and business interest groups. In the short run this may cause interest groups to layoff the tax system since the tax expenditure cupboards are bare. This will buy the government some time but for how long? In the medium term, there may be renewed pressures to confer tax breaks. Some of these will arise from normal fiscal interest group politics but extra pressure may also arise out of the strictures imposed by both the Free Trade Agreement and Meech Lake. As Chapter 2 shows, both the FTA and Meech Lake Accord are likely, on balance, to restrain federal discretion, especially in the realm of spending programs. If this is so, then interests may

Tax Expenditures and Tory Times I 99

place even more pressure on the tax system, relative to any previous recent period of Canadian history, since the tax instrument is less directly constrained by the FTA and Meech Lake Accord. On the other hand, the chapter indicates that while there is fairly continuous pressure from interest groups and other line ministers for possible future tax expenditures, the budgetary and policy system as a whole contains several checks and counterpressures to limit them as well. These emerge not just from the array of players but also from contradictory impulses within each category of players. This also means that better tax accountability in real terms is much more the product of an array of institutions and their internal contradictions than it is of any formal informational, analytical or reporting and managerial relationships. In this context, however, it is essential to see that the budgetary and decision process over the past 15 years has shown considerable capacity for institutional learning. This kind of learning is itself a third and even larger realm of discretion, albeit seen in broader historical terms, as past discretionary learning may create less room to manoeuver in different policy fields. First, the tax expenditure debate has undoubtedly helped produce a greater overall sense of the interconnections and tradeoffs between spending and taxing. At the same time it is essential to recognize that the choice of spending or taxing instruments is never politically neutral nor a matter of mere technique, primarily because of considerations of political power and judgement and of the contending values at stake. In particular, the revenue imperative both compels and equips Finance to have the last say most of the time. Choices of instruments at any given time are always about power and influence since they go to the heart of who is intervening with whom and in what specific ways. A second instance of institutional learning has been the cumulative impact of the tax expenditure debate on the evolution of social policy. Because of the overall criticism of the regressive nature of tax expenditures in the 1970s and because of the demonstration effect of the original child tax credit experiment, including its capacity to target benefits to lower income Canadians, a climate of political opinion and pressure now exists that makes it far less possible for a federal government to confer 1970s-style tax breaks as deductions. We have seen this shift in focus not only in the first phase of the Wilson tax reform exercise, but also in areas such as the sales tax credit proposals, and even in the 1988 election propos-

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ala for housing deductions by the Liberals. The contrast with the 1979 Tory mortgage deductibility scheme, which contained no tax credit features, is illustrative of the shift in climate. 86 This is not to imply that overall revenue choices might not be regressive (such as raising more and more revenue through sales or value-added taxes) but simply that the tax expenditure debate in a broad sense has influenced social policy and hence simultaneously has altered the budget process. The final instance of possible evolutionary learning is that some tax credits, perhaps especially those for business, may increasingly start to look much more like grants insofar as their bureaucratic requirements are concerned. Requirements for fonna! applications, partial pre-audits, and delays in payment may reduce the vaunted advantages of the privacy and flexibility of the tax system. Accordingly, for business and wealthier taxpayers, they may no longer be discretionary heaven. In short, they may no longer "do their best work in the dark."

Tax Expenditures and Tory Times I 101

Notes

*

Several parts of this chapter are based on an earlier and longer paper prepared for the John Deutsch Institute For The Study Of Economic Policy at Queen's University for their November 1988 Conference on Tax Expenditures. Their pennission to reprint these parts is gratefully acknowledged. I am also grateful for the constructive comments offered by Allan Maslove, Stan Winer, Richard Bird and John Whalley on earlier drafts of this work. They have improved the final product but bear no responsibility for any remaining inadequacies in the analysis. In addition to the sources cited, research for this paper has been complemented by several interviews with senior officials in the Department of Finance and other federal departments. My thanks are extended to these individuals and, in particular to Dr. David Sewell who led Finance's cooperative effort with this project. The paper also draws on my cumulative work over several years on the politics of economic policy and budgeting, including my initial editorship of, and continuing research for, How Ottawa Spends.

1.

See Neil Bruce, ''Pathways to Tax Expenditures: A Survey of Conceptual Issues and Controversies," a paper prepared for the Department of Finance, August 1988. The Bruce paper does not review any of the literature by political scientists on the tax system or tax decision making. Recently, some economic analysis of tax politics is emerging that is more integrative and treats politics as it is rather than as it ought rationally to be. See Stanley L. Winer and Walter Hettich, ''Political Checks and Balances and the Structure of Taxation in the United States and Canada," a paper prepared for the Third Villa Colombella Seminar on Competitive Politics, Dourdan, France, September 7-9, 1988. See also Irwin Gillespie, "The Department of Finance and PEMS: Increased Influence of Reduced Monopoly Power?" in Allan M. Maslove (ed.), How Ottawa Spends, 1984(Toronto: Methuen, 1984), pp. 189-214.

2.

See G. Bruce Doern, Allan Maslove and Michael Prince, Public Budgeting in Canada: Politics, Economics and Management (Ottawa: Carleton University Press, 1988).

3.

See Evert Lindquist, Consultation and Budget Secrecy (Ottawa: Conference Board of Canada, 1985), and Douglas

102 I How Ottawa Spends

Hartle, The Revenue Budget Process of the Governm.ent of Canada (Toronto: Canadian Tax Foundation, 1982). 4.

See David Good, The Politics of Anticipation: Making Canadian Federal T~ Policy (Ottawa: School of Public Administration, Carleton University, 1980).

5.

For the classic analysis of the spenders and guardians thesis, see Aaron Wildavsky, The Politics of the Budgetary Process, Third Edition (Boston: Little Brown, 1979). See also his TIuJ New Politics of the B'tUIgetary Process (Boston: Scott Foreman, 1988). In the Canadian context see Doem, Maslove and Prince, qp. cit., and Donald Savoie, Th£ Politics of Public Spendi'fl4 in Canada (in press), 1988.

6.

See Economic Council of Canada, Financing Confederation (Ottawa: Minister of Supply and Services).

7.

This is sometimes characterized as political business cycle theory. See, for example, Edward Tufte, Political Control

of the Economy (Princeton: Princeton University Press, 1978). 8.

See Allan Maslove, T~ Reform, in Canada (Ottawa: Institute For Research on Public Policy, 1988).

9.

See Allan Maslove, Michael Prince and G. Bruce Doem, Federal and Provincial Bud!;eting (Toronto: University of Toronto Press, 1986), Chapter 5.

10.

See Richard VanLoon, "Stop the Music: The Current Policy and Expenditure Management System in Ottawa," Canadian Public Administration, Vol. 24 (Summer 1981), pp. 175-199.

11.

Ibid., passim.

12.

See Doern, Maslove and Prince, Public Budgeting in Canada, Chapter 1, and Lindquist, CYp. cit.

13.

Paul Pross, Group Politics and Public Policy (Toronto: Oxford University Press, 1986), Chapter 6.

14.

See Jim Lyon, DOME (Toronto: Macmillan of Canada, 19&'3),

Chapter 5.

Tax Expenditures and Tory Times 1103

15.

See G. Bruce Doem and Glen Toner, The Politics ofEnergy: TM Develcrpm,erU a1Ul Implerruml4tion of the NEP (Toronto: Methuen, 1984), Chapters 1 and 2.

16.

Maslove, Taz Reform, in Canada.

17.

See Auditor General of Canada, Reportfor the Fiscal Year Ended March 31st, 1986 (Ottawa: Minister of Supply and Services, 1987), Chapter 4. For the Finance Department's view of the AG's role, see House of Commons, Minutes of

Proceedings a1Ul Evidence of the Sta1Uling Committee on Public Accounts, Issue No. 24, October 6 and 7, 1987. On the larger debate about the AG's role as an auditor of the decision process, see Sharon L. Sutherland, "The Politics of Audit: The Federal Office of the Auditor General in Comparative Perspective," Canadian Public Administration, Vol. 29, No.1 (Spring 1986), pp. 118-148. 18.

See Sharon L. Sutherland and Y. Baltacioglu, Parlia'ln6ntary Reform, a1Ul the Federal Public Service (London: School of Business Administration, University of Westem Ontario, 1988), Chapter 3.

19.

Quoted in Ibid., p. 117.

20.

Ibid., p. 117.

21.

See Richard Rose and Terence Karran, Tazaticm by Political Inertia (London: Allen and Unwin, 1987).

22.

See Richard W. Phidd and G. Bruce Doern, The Politics and Management of Canadian Economic Policy (Toronto: Macmillan of Canada, 1978), David Good, op. cit., and Irwin Gillespie, op. cit.

23.

See David Good, op. cit., Chapter 4.

24.

See Doern, Maslove and Prince, Public Budgeting in

Canada, Chapter 11. 25.

See C.E.S. Franks, The Parliament of Canada (Toronto: University of Toronto Press, 1987), and Sharon L. Sutherland and Y. Baltacioglu, Parliamentary Reform, and the Federal Public Service (London: School of Business Administration, University of Western Ontario, 1988).

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26.

Herman B. Leonard, Checks Unbalanced: The Quiet Side of Public Spending (New York: Basic Books, 1986), p. 107.

27.

See Douglas Brown and Julia Eastman, The Limits of Consultation (Ottawa: Science Council of Canada, 1981).

28.

See Richard VanLoon, "Reforming Welfare in Canada," Public Policy, Vol. 27, No.4 (Fa1l1979), pp. 469-504, and Keith Banting, The Welfare State and Canadian Federalism (Kingston: McGill-Queen's University Press, 1982).

29.

See James J. Rice, "Restitching The Safety Net: Altering the National Social Security System," in Michael Prince, (ed.), Hqw Ottawa Spends, 1987-88 (Toronto: Methuen, 1987), pp. 211-236.

80.

See Doern and Toner, The Politics of Energy, Chapter 2.

81.

For a discussion of this broadest of relationships between Canadian parties and business and the resultant capacities to tax and raise revenue, but cast in a discussion of the causes of deficits, see David Wolfe, "The Politics of the Deficit," in G. Bruce Doern (ed.) Th£ Politics of Economic Policy (Toronto: University of Toronto Press, 1985), pp. 111-162.

82.

See Roy George, "The Cape Breton Development Corporation," in Allan Tupper and Bruce Doern, (eds.), Public Corporations and Public Policy in Canada (Montreal: Institute for Research on Public Policy, 1980), Chapter 11; A. Gordon DeWolf, "The Effects of Government Incentives and Other Initiatives on a Marginal Region: The Case of Cape Breton, Nova Scotia," paper presented to the Ninth International Seminar on Marginal Regions, July 5-11, 1987; Skye and Lewis Scotland, and Sandford Borins and Lee Brown, Investm,entB in Failure (Toronto: Methuen, 1986).

83.

See G. Bruce Doern, "The Tories, Free Trade and Industrial Adjustment Policy: Expanding the State Now to Reduce the State Later?" in Michael Prince, (ed.), HlYW Ottawa Spends, 1986-87 (Toronto: Methuen, 1986), pp. 61-94.

84.

See V.S. Wilson, ''What Legacy: The Nielsen Task Force Program Review," in Katherine Graham, (ed.), HlYW Ottawa Spends, 1988-89 (Ottawa: Carleton University Press, 1988), Chapter 2.

Tax Expenditures and Tory Times 1105

35.

See Department of Finance, Budget Papers, May 25, 1985, pp. 18-19, and Terrance A. Sweeney and Larissa V. Tkachenko, "Cape Breton Investment Tax Credit," 1986 Conference Report (Toronto: Canadian Tax Foundation, 1986), pp. 47, 1-13.

36.

See Arthur Drache, "Liberal's Housing Help Plan Steers Clear of Traditional Drawbacks," Financial Post [Toronto], October 10, 1988, pp. 35-36.

CHAPTER 5 ATLANTIC CANADA OPPORTUNITIES AGENCY (ACOA): SOMETHING OLD, SOMETHING NEW, SOMETHING BORROWED, SOMETHING BLUE Donald J. Savoie

Resume

En juin 1987, Ie premier ministre a inaugure une nouvelle agence de developpement pour la region de l'Atlantique - l'Agence des perspectives de l'Atlantique Canada (APAC). II s'agit de la demiere d'une serie de mesures pour Ie developpement regional de l'Atlantique que Ie gouvemement federal a introduite depuis Ie debut des annees soixante. L'Agence des perspectives de l'Atlantique Canada apporte un certain nombre d'elements nouveaux a l'approche d'Ottawa en matiere de developpement regional et qui refletent l'approche des conservateurs quant au role du gouvemement dans Ie developpement economique. L'agence profite, cependant, des efforts du passe. Elle a deja remporte des succes avec son programme d'incitations aux petites et moyennes entreprises. L'APAC a ete con~ue cependant pour jouer d'autres roles que celui de la promotion du developpement d'un secteur prive endogene. Elle a ete egalement chargee de s'occuper de relations federales-provinciales, d'ameliorer la coordination d'efforts en vue du developpement economique de la region et de promouvoir les interets de la region de l'Atlantique aupres du gouvemement federal. On voit d'apres l'experience du passe qu'll s'agit la de tout un defi. On verra avec Ie temps si l'APAC pourra mieux reussir que les ministeres et agences pour Ie developpement regional qui I'ont precedee.

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There is probably no other policy field that lends itself to such dramatic shifts in direction as regional development policy. The nature of Canadian regional policy is such that the federal government can carry on with the status quo if it so wishes, suddenly launch new programs or, just as suddenly, backtrack or reverse its actions. Canadians have witnessed all three postures time and time again, ever since the first regional development measures were introduced in 1960. We have seen development programs come and go over the years. We have seen the creation ofspeclal agencies, industrial programs, regional development departments. Especially, we have seen new comprehensive approaches to the issue ... only to see them replaced by yet newer comprehensive approaches. 1 The Mulroney government has continued in this tradition. When it first came to power, a series of budget cuts in regional programs was announced. Later, the Department of Regional Industrial Expansion (DRIE) was done away with while, at the same time, "new" money and new agencies for regional development were unveiled. The regional development policy is particularly well suited for the government to exercise policy discretion. The reasons why Canadian regional development policy lends itself to dramatic shifts are varied. For one thing, regional development is a high profile policy field that all politicians from slowgrowth regions continually seek to be associated with and to be seen promoting. For another, few are happy with the status quo in regional programming for any length of time. Provincial governments and residents of slow-growth regions invariably argue that the federal government could do more, much more, to alleviate regional disparities. The pressure on the federal government to put in place a new regional development policy is viewed as a means of dividing the national pie, rather than making the national pie grow. Most regions are in full competition to get a bigger slice of the pie. Provincial premiers and federal "regional" ministers are continually on the watch with pocket calculators in hand to ensure that their regions get a fair share of federal spending. If one region is not receiving its share of federal largesse, then regional development programs represent the ideal medium to rectify the situation. However, when federal funds are poured into a region in the name of "regional equity," another region is certain to come calling for federal funds with the same justification. The process is never ending, and every region in the country, including the more developed ones, has over the past 15 years been able to lay claim to federal funds for regional development. 2

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As Bruce Doern points out in Chapter 4, the then DRIE minister, Sinclair Stevens, sought very early in the Mulroney government's first mandate to assure slow-growth regions that the Tories would not abandon them. New tax incentive schemes were introduced for Cape Breton. But this was seen as hardly adequate in the regions. Within two years of coming to office, the Mulroney government was facing strong pressure to introduce new regional development measures, particularly for Atlantic Canada. The government had early in its mandate announced high profile cuts in Atlantic Canada - the most notable being the heavy water plants in Cape Breton. Moreover, the press was reporting that the bulk of spending under DRIE was being directed to Ontario and Quebec. For example, DR IE saw over 70 per cent of its spending under the Industrial and Regional Development Program go to Ontario and Quebec. By contrast, DRIE's predecessor, the Department of Regional Economic Expansion (DREE), consistently spent at least 40 per cent of its budget in Atlantic Canada. To make matters more difficult for Ottawa, the economies of southern Ontario and Quebec were rebounding from the recession at such a clip that some observers were becoming concerned they might well overheat. Atlantic Canada had no such fears, with its regional economy still in the doldrums. The unemployment rate had only fallen slightly and the four Atlantic premiers, all of whom were partisan allies of the federal government, were taking dead aim at federal regional policy, particularly the pattern of DR IE spending, when they met at federal-provincial conferences.

Prime Minister Mulroney met the Atlantic premiers on his way to a special Priorities and Planning Committee meeting in Saint John's in the fall of 1986. He heard firsthand the criticism directed at DRIE. Better to have no federal regional programming at all, he was told, than to have DRIE programs. DRIE, with its programs favouring central Canada, it was argued, only served to exacerbate regional disparities. 3 DR IE was also criticized on other points. It was widely condemned as overly bureaucratic. Atlantic Canada's business community publicly hurled accusations at the department's bureaucratic tendencies, suggesting that they had to wait months for the local office to get a reply from the Ottawa head office on their applications. The Prime Minister himself got into the act when he mocked DRIE's many layers of bureaucratic decision making before the New Brunswick Economic Council. The most widely heard criticism, however, was that DR IE was not a regional development department but, rather, an industry department, mainly concerned

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with southern Ontario and Quebec. It will be recalled that DREE was disbanded and DRIE established after the federal government had concluded in the early 1980s that "regional balance was changing as a result of buoyancy in the west, optimism in the east, and unprecedented softness in the key economic sectors in central Canada.'~ In short, resource-based mega projects were to fuel economic development in the West and Atlantic Canada, while central Canada would have to adjust to stiff international competition. DRIE was designed with these factors in mind. Not long after DRIE was established, however, it became evident that mega projects would not fuel economic growth in the West or in the Atlantic provinces and, moreover, that central Canada was showing remarkable resilience. The Prime Minister returned to Ottawa from his Atlantic tour resolved to revamp completely the government's regional policy. Shortly afterward, the federal government announced in the 1986 Speech from the Throne that it would establish the Atlantic Canada Opportunities Agency (ACOA). The government declared, "Regional disparity remains an unacceptable reality of Canadian life ... It is time to consider new approaches, to examine how our considerable and growing support for Canada's regions can be used more efficiently, more effectively and with greater sensitivity to local conditions and opportunities.,,5 The Prime Minister wanted a "new" approach, one that would constitute a complete break from the past. He also wanted a hand in shaping the new agency and went outside the federal government for advice on its design. He commissioned a report on the mandate, structure and programs for the new agency. 6 The establishment of ACOA paved the way for other regional development agencies in the West and northern Ontario. The Western Development Department (WDD) was unveiled shortly after ACOA was established and there are considerable similarities between them in structure and funding levels. The agency for northern Ontario, meanwhile, is a completely different organization and does not enjoy anywhere near the autonomy of ACOA and WDD. This chapter concentrates solely on the establishment of ACOA and seeks to answer several questions. How does ACOA differ from past federal regional development efforts? What is its main goal and what are its delivery mechanisms? How do these square with the broader objectives of the Mulroney government? What does the establishment of ACOA suggest about the energy that the Mulroney government intends to apply to the regional development policy field? What more, ifanything, could the federal

ACOAI111

government do in regional development? The chapter argues that the Mulroney government has put in place a regional development agency that reflects the Tory approach to the role of government in economic development. That said, the agency necessarily builds on past efforts and has been shaped to some extent by regional development measures that preceded it. Before we seek to answer these questions, it is important to review briefly the forces that led to the establishment of ACOA. As already noted, the widely held anti-DR IE view in Atlantic Canada, combined with the fact that the economic upturn was largely limited to central Canada, were important. Atlantic ministers and government MPs reported that their constituents were complaining that the region had suffered unfairly from the spending cuts announced since the government had come to office. Prime Minister Mulroney, with roots in Atlantic Canada, had repeatedly said that he wanted to help the region and committed his party during the 1984 election campaign to launch new development measures there. The Tories issued a position paper during the campaign which argued that the federal government had effectively left slow-growth regions without their traditional voice when it disbanded DREE in 1981. The paper was also critical ofDRIE.7 Now two years into the government's mandate, Atlantic members of his caucus were pushing the government to act. Shortly after the Prime Minister chaired the Priorities and Planning Committee meeting in St. John's in the fall of 1986, the federal govenunent sponsored a special conference which it labelled the "Atlantic Focus Conference." Federal cabinet ministers from the region attended the conference where they heard a barrage of criticism directed at Ottawa's economic policies. Federal economic policies, the conference was told, were in large part responsible for the region's underdevelopment. They were also told that past efforts to rectify the situation had not been successful, largely because they had been designed in Ottawa. The then New Brunswick premier, Richard Hatfield, specifically requested to meet federal ministers in camera. He made a plea for new special regional development measures specifically designed for Atlantic Canada and delivered by a new agency.

SOMETHING OLD AND SOMETHING BORROWED No matter how much a government desires to break from the past, it is hardly possible to wipe clean existing measures and to define

112 I How Ottawa Spends

a completely new approach free of all old influences. ACOA borrows from some of these. The federal government, it will be recalled, negotiated 10year regional development agreements with all 10 provincial governments in 1974. These umbrella-type General Development Agreements (GDAs) did not in themselves provide for programs or initiatives. Programs were first negotiated and then packaged into subsidiary agreements. Provincial governments approved of the GDA "approach, particularly because of its flexibility and the federal-provincial cooperation it promoted. They had strong reasons to be pleased with it. The approach had a generous federal costsharing formula, was open-ended in that virtually any kind of economic development initiative qualified, and had provincial governments delivering the programs. Observers agreed that, though the GDAs were substantially financed with federal funds, the approach clearly favoured the political profile of provincial governments.8 The GDA approach was no doubt suited to the times of quiet federal-provincial cooperation, such as prevailed when it was first introduced. However, by the early 1980s, competitive federalism had come to replace cooperative federalism. A bitter referendum campaign over the future of Quebec had just been fought by both Ottawa and the Quebec government. In addition, not one provincial government was of the same political persuasion as was the federal government. Prime Minister Trudeau made it clear that, as the GDAs expired, a new and different enabling agreement would be proposed. This agreement would provide for the direct delivery of initiatives by the federal government. The new agreements proposed were labelled Economic and Regional Development Agreements (ERDAs). ERDAs were designed to encompass all federal departments and agencies, which were invited to sign new subsidiary agreements with the provinces or to deliver specific initiatives themselves. The Cabinet hoped that the ERDAs would give rise to joint planning, with parallel delivery of projects. Future subsidiary agreements might be planned jointly, but with each government delivering its own programs. As the ERDAs and the new subsidiary agreements were signed, provision was made for the federal government to deliver directly its own sets of initiatives. When the Mulroney government came to power, it was widely assumed that Ottawa would put much less emphasis on

ACOA 1113

direct delivery. While in opposition, the Tories had dismissed direct delivery in regional development programs as simply a preoccupation with political visibility. In time, and as the Liberal party came to office in two Atlantic provinces, direct delivery regained its importance in federal eyes. By the time ACOA was established, most federal cabinet ministers and government MPs were finnly convinced that the agency and federal departments should have the capacity to deliver projects directly. ACOA took on full responsibility for the ERDAs and introduced very little change in the machinery or the process established in the latter days of the Trudeau government. As before, subsidiary agreements are developed in close cooperation with provincial governments. Negotiated bilaterally, subsidiary agreements are extremely flexible program instruments capable of supporting many types of initiatives. By and large, the objectives found in subsidiary agreements are loosely defined to permit still more flexibility in the implementing stages. Typically, a subsidiary agreement will have as its objective "to promote economic development in" a particular sector (e.g., tourism) or a sub-region (e.g., a designated rural area). A new subsidiary agreement with Nova Scotia on the Strait of Canso area, for example, has as its objective "to provide for a second phase of activity necessary to fully capitalize the infrastructure completed under the first agreement." Cash grants to businesses have always been an important feature of Ottawa's regional development efforts. ACOA continues with this tradition and has put in place a highly successful cash grant program, of which more will be said later. This is not to suggest that past incentives programs, particularly those designed to attract outside firms into a region through a large cash grant, have been successful. Several important evaluations of Ottawa's regional industrial incentives, notably the Regional Development Incentives Act (RDIA), have been carried out and the verdict is hardly positive. Most of the evaluations conclude that incentives grants produce only limited changes in the timing, size, technology and even location of new economic activities. 9 A key point in evaluating regional incentive grants is to determine their incrementality. An investment is considered incremental if the firm would not have undertaken it outside the designated region without assistance. Little is known about the incrementality of the Industrial and Regional Development Program (IRDP) because there has not been sufficient time since it was introduced in 1983 to carry out a proper evaluation. Some studies suggest that incrementality is higher when the projects are small or when grants are awarded

114 I How Ottawa Spends

to local entrepreneurs. 10 It appears that this consideration helped to shape ACOA's new cash grant program. ACOA is not the first stand-alone agency dedicated solely to economic development in Canada. In 1962, the federal government established the Atlantic Development Board (ADB). Initially, ADB was asked to define measures and initiatives for promoting economic growth and development in the Atlantic region. A planning staff was put together, mainly from within the federal public service. Considerable research was undertaken on the various sectors of the regional economy, and some consultations were held with planners at the provincial level. Shortly after its creation, the ADB was given an Atlantic Development Fund to administer. By and large, the fund was employed to assist in the provision or improvement of the region's basic economic infrastructure. Over half of the fund, which totalled $186 million, was spent on highway construction and water and sewerage systems. Some money was spent on electrical generating and transmission facilities and in servicing new industrial parks at various locations throughout the region. The ADB never did deliver a comprehensive regional development plan for the Atlantic provinces, despite being given a mandate to do so in 1963. There are a variety of reasons offered for this failure. Some observers suggest that the board was never given the political green light to deliver the plan, while others insist that the ADB was disbanded prematurely in 1969 or precisely when it was on the verge of coming up with a comprehensive plan. Still, Atlantic Canada had then, as it has today, a special regional development agency dedicated solely to the economic development interests of the region. The Mulroney government had, months before establishing ACOA, already responded to criticism of its regional development policy by introducing two specific programs for Atlantic Canada the Atlantic Enterprise Program which was a loan and interest buy-down program and the Atlantic Opportunities Program which was a region procurement program. In addition, the govemment had also put in place special development measures for Cape Breton, including a series of tax credits and a new agency - Enterprise Cape Breton. ll In announcing ACOA, the federal govemment declared that these measures would continue with the agency assuming responsibility for the Enterprise Program and the special Cape Breton efforts.

ACOA 1115

More importantly, the federal government had over 20 years of experience in regional development programming to draw from in planning the mandate, structure and programs of ACOA. The government had tried a stand-alone regional development agency specifically for Atlantic Canada before (i.e., ADB), federal-provincial programming for regional development (i.e., GDAs and ERDAs) and incentive schemes to the private sector (e.g., IRDP and RDIA).

SOMETHING NEW AND SOMETHING BLUE ACOA was designed following extensive consultations with a crosssection of Atlantic Canadians, conducted as part of the preparation of the report on regional development in Atlantic Canada commissioned by the Prime Minister. The legislation establishing ACOA differs to some extent from the report's recommendations. Still, the recommendations played an important role in shaping the agency and it is important to review briefly what the consultations with Atlantic Canadians revealed. The report confirmed widespread disenchantment with both the substance of federal efforts and its organizational system to support economic development in the region. The report suggested that "One has to look far, wide and deep in the four provincial governments to find anyone even relatively pleased with federal regional development efforts. The criticism voiced from all four provinces at the 1982 federal government reorganization for economic development which saw the disassembling of DREE remains particularly strong and intense.,,12 The report went on to point out that both provincial governments and the private sector claimed that there was "organizational confusion in the federal government and that regional development concerns [were] constantly relegated to the back burner.,,13 The consultations also revealed that there was wide agreement in the region on the organization, mandate and purpose of the proposed agency. The report concluded: "Tbe view is unanimous that (the agency) should be a stand apart organization, with no direct or administrative links to any federal line department... [it] should be able to cut across federal line departments and bring an all-encompassing perspective to bear on federal programs in the region... [it] must have clout, both in Ottawa and in the region... [it] should be located in the region [and headed] by a senior level deputy minister.,,14

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The consultations also revealed that Atlantic Canadians had become leery of the ability of governments to lure outside investors to establish major manufacturing facilities in the region. They were also coming to accept that solid and self-sustaining economic development in Atlantic Canada had in large part to be endogenous. In the end, the report argued, "Atlantic Canadians themselves will have to provide the energy, the skills and the imagination to conceive and organize economic activity if the region is to prosper."15 In short, the recipe for economic growth in Atlantic Canada could not be imported, it had to be developed in the region. The report also argued that it was vitally important for the agency to be able to mount a concerted effort to influence the policies and programs of federal departments and agencies because, as Atlantic Canadians argued time and again in the consultations, the region was systematically discriminated against either through misguided federal policies or by a disproportionate amount of federal funds being spent in central Canada. It was important, the report insisted, that the agency be able to tilt, tailor or top up the programs of other federal departments to do more in Atlantic Canada. The agency also had to be able to gather data on federal government policies, programs and activities to assess their impact on the region. It was equally important to have an agency with the capacity to prepare objective assessments of national programs from an Atlantic perspective. If myths had to be exploded, or if certain national programs were not systematically discriminating against the region, then Atlantic Canadians should be told. The merits of the most appropriate organizational model for the agency - a central agency, a line department, or a coordinating body - were fully debated in the report. It recommended a standapart agency, operating in the region in full autonomy from any one federal department and having a special regional fund. The agency, it was further argued, should not deliver programs but rather turn to provincial governments and selected federal departments for these activities. It was argued that to manage the programs would likely consume too much time and energy of the agency's most senior officials and inhibit the emergence of a multidisciplinary perspective on Atlantic Canada's problems and opportunities. When, on June 6, 1987, Prime Minister Mulroney unveiled how the agency would be structured, he was able to claim a number of firsts. For the first time, the head office of a government department charged with promoting regional development was located

ACOA 1117

outside Ottawa in Moncton. The ADB's head office, for example, had been located in Ottawa. Thus, the Prime Minister could claim that ACOA is a government department headed by its own deputy minister strictly concerned with Atlantic Canada or, as Peter Aucoin has tenned it, "an organization based on 'place'. ,,16 The. Prime Minister was also able to report that the work of the agency would be guided by an independent advisory council made up of Atlantic Canadians. Some observers insisted, however, that Mulroney should have gone further and given full decisionmaking authority to an independent board of directors. Such a move would have required the establishment of a Crown corporation, as opposed to a government agency reporting to a minister. Many provincial government officials in Atlantic Canada reported in the consultations that a Crown corporation would not have easy access to central agencies and cabinet committees, an essential requirement if ACOA is to influence federal policy and decision making. The Prime Minister was also able to report that the agency would place much of its efforts on small- and medium-sized enterprises and on rekindling the entrepreneurial spirit of Atlantic Canadians. Past efforts had focussed on developing growth centres, on selected sectors, and on putting in place infrastructure facilities; but none had made entrepreneurship a central feature of the overall strategy. Turning to the private sector and, in particular, to fostering entrepreneurship in Atlantic Canada held strong appeal for the Mulroney government. It was a new approach, enabling the Progressive Conservative government to put its own distinctive print on regional development programming. The approach was well received by provincial governments and thus did not endanger the government's policy of national reconciliation. Many Atlantic Canadians also applauded the approach. The private sector, for instance, saw the announcement both as a response to their demands and as proof that it had been a crucial player, though often overlooked in the past by governments, in the development of the region. As noted earlier, the consultations had revealed a widespread belief that luring outside investors to Atlantic Canada would not, in the end, lead to self-sustaining and lasting development. On the other hand, an endogenous private sector could involve the universities, community colleges, local economic development associations and the local business community. Equally important, of course, is that the approach squares neatly with the views of the Progressive

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Conservative party, which favour growth driven by the private sector and self-reliance. The Prime Minister was also able to announce a major spending commitment for regional development in Atlantic Canada. He pledged over $1 billion of new money over five years, the largest commitment of federal funds ever for development programs in the region.17 He also announced that a senior deputy minister would lead the agency and that the agency's head office would be located in Moncton. Four provincial offices headed by senior level officials would be located in the four provincial capitals. These officials, the Prime Minister explained, would report directly to a senior minister in Ottawa who, in turn, would be assisted by a committee of Atlantic ministers. The agency, the Prime Minister declared, would deliver its own programs rather than rely on provincial govenunents and some federal departments and agencies to do so. It is impossible to overemphasize the importance ministers attach to regional development programs, with Ottawa constantly concerned to get due credit for federal money spent. This is true, it appears, regardless of which party holds office in Ottawa. Allan MacEachen had explained in 1981 that "the federal government has a particular problem of program visibility ... because [programs] are delivered by the provinces and because little is done to acknowledge publicly the important federal role."18 In 1988, John Crosbie explained why ACOA would deliver programs. He pointed out that: "One of the issues, of course, about program delivery, is who gets the credit for it..• We want to be sure that the federal government is going to get credit for the programs involving 100 per cent federal money or 75 per cent federal money. ,,19 The Mulroney government, however, could lay claim to a number of new measures when it unveiled ACOA. It could point out that ACOA is the first agency responsible for promoting economic development in Atlantic Canada headed by a deputy minister and located in the region. It was also granted a substantial sum of new money as well as a mandate to foster an entrepreneurial spirit in Atlantic Canada. IMPLEMENTING ACOA There was considerable confusion in ACOA's early months. Opposition MPs and the media charged that the $1 billion of new money

ACOA 1119

may not be new money at all, just simply recycled old money from existing programs.20 This view, however, was tinally dismissed when the government tabled its spending plans in February 1988. Only a short time after Mulroney unveiled the agency, the opposition, provincial governments and even members of Parliament began to press for new initiatives. Provincial governments, in particular, wanted quick evidence that the agency would spend its new money and began lining up with proposals for new subsidiary agreements. Even some members of the new ACOA advisory board were publicly critical of the agency, arguing that it was not moving quickly enough to introduce new initiatives. The agency moved to deal with the criticism by announcing a "comprehensive and flexible program for small- and mediumsized businesses, as well as aspiring entrepreneurs." The "Action Program" considerably expanded eligibility in tenns of sectors from anything seen before, increased levels of contribution and introduced progress payments, and eliminated the tier system. 21 The decision to do away with the tier system was widely applauded by small businesses. DR IE had introduced the tier system in its incentives program in 1982. Briefly stated, the tier system established the needs of individual regions, as far down as the individual census district. All regions were arranged in four tiers of need. The first tier was designed for the most developed 50 per cent of the population. In this tier, financial assistance was available for up to 25 per cent of the cost of modernization and expansion of a facility. At the other end of the spectrum was the fourth tier, which included the 5 per cent of the population living in areas of greatest need. In this tier, financial assistance was available for up to 60 per cent of the cost of establishing new plants. In theory, the tier system should have held considerable appeal for Atlantic Canada, given that most of the region would qualify under tier four. In practice, however, the system was never popular in the Atlantic provinces. For one thing, it proved complicated to administer. For another, the 60 per cent level of assistance in tier four was the maximum that could be awarded and in most cases the actual level of assistance in many parts of Atlantic Canada was no higher than elsewhere in the COWltry. Increasingly finns were deciding to locate in southern Ontario after applying to both the DRIE-Ontario and DRIE-Atlantic offices because the offer of assistance from DRIEOntario was as generous as anywhere else in the country. The Action Program also delegated considerable decisionmaking authority to the officials delivering the program. Unlike

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the previous cash grant programs, the Action Program relies to a large extent on the assessment of officials who look at commercial viability and risk considerations, rather than eligibility criteria as defined in a rule book. The Action Program has, by all accounts, become an extremely popular program. The response has been immeasurably greater than anything seen for previous programs. In nine months, ACOA approved 2,700 applications for assistance from a total of 6,800 requests. Applications are coming in at 10 times the rate for previous regional development programs and also are being processed at 10 times the previous rate. 22 ACOA staff has hardly been able to cope with the demand and a number of contract staff have been hired to assist in processing. In addition, as was initially envisaged, the great majority of the applicants to the Action Program have been Atlantic Canadians. ACOA's senior vice-president, Pat Blanchard, explains that the success of the program "is due to several factors, including generous assistance, broad applicability, and efficient delivery during an upswing in the business cycle.,,28 The agency has also embarked on extens.ive federal-provincial consul~tions to sign a new series of subsidiary agreements under the four provincial ERDAs.24 Provincial governments, as one would expect, are now applauding ACOA's drive to sign new subsidiary agreements. The provinces, however, are not alone in applauding ACOA. Members of the agency's advisory board are now all publicly supportive of the work of the agency. The Mulroney govemment went into the November 1988 election campaign pointing to ACOA as one of its most important accomplishments in the region. Both opposition parties gave the agency the ultimate compliment by . pledging during the campaign that, if elected, they would substantially increase the agency's budget. In addition, those who had early on expressed strong scepticism over the establishment of ACOA, like the Atlantic Chamber of Commerce, are now among the agency's most vocal supporters. ACOA's success, it appears, is based on three things. First, the Action Program is widely applauded as flexible and geared to the economic circumstances found in Atlantic Canada. Second, the agency has new money and the prospect of new subsidiary agreements holds considerable appeal for provincial governments. Third, the agency's head office being located in the region rather than in Ottawa makes ACOA much more accessible to the region's business community, the local media and provincial governments.

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LOOKING TO THE FUTURE There is no denying that Atlantic Canadians have responded very well to the Action Program - and by extension perhaps, to the challenge of developing an endogenous private sector. It is much too early, however, to assess the impact of the Action Program on the Atlantic economy. The results at hand are quantitative, not qualitative, and time is needed to evaluate the quality of the investments made. under the program. In addition, it is important to remember that ACOA was designed to play four distinct roles in economic development. The Action Program relates to one, albeit a very important one - rekindling the entrepreneurial spirit in Atlantic Canada. The agency was also charged with managing federal-provincial relations under the ERDAs, improving the coordination of economic development efforts in the region and promoting the interests of Atlantic Canada within the federal government. Again, only time will tell if ACOA is able to influence provincial government priorities in shaping new subsidiary agreements. The task will not be easy. The pattern of federal-provincial relations established in regional development during the past 15 years has clearly given provincial governments the upper hand in shaping new programs and new initiatives. Federal-provincial relations in the regional development field have in many ways placed the federal government in a reactive position to provincial proposals. Under the GDAs and ERDAs (perhaps to a lesser extent), the provinces have been in an enviable bargaining position of preparing initiatives to which the federal government responds. If the federal government refuses to support a particular proposal, the province simply comes back with another. Though the ERDAs allow the federal government to make proposals, this· has not occurred often. In many ways, then, the federal government plays a Treasury Board-like role in regional development programming under the ERDAs - it reviews proposals from provincial governments, accepting some and rejecting others. The result is that economic development programming in Atlantic Canada has been carried out only from a provincial perspective. In fact, interprovincial competition in the region under federal-provincial programming has been as intense as when provincial governments pursue economic development objectives with their own programs and their own resources.

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For ACOA to introduce a region-wide perspective to economic development will require more than broadly stated goals. It will require a vision of development for Atlantic Canada, the preparation of a strategy and the willingness to make tough decisions and to withhold funding to the provinces, if necessary. Above all, ACOA will need political support not just from Ottawa but from the region itself if it is to shape a new pattern of federalprovincial relations in regional development. The task at hand is to move away from a Treasury Board-type posture to a proactive role by pointing the way to a regional rather than a provincial economic development perspective and by providing firm leadership. The agency is also asked to improve coordination between federal departments and agencies active in Atlantic Canada, provincial governments and the private sector. It is felt by many observers of regional development policy that ACOA could be particularly effective in bringing together key actors on important major projects, such as Hibernia and the P.E.I.-New Brunswick fixed crossing, to ensure that the region draws the maximum economic benefits from them. These tasks will prove difficult. Anyone even remotely familiar with regional development knows full well the intense rivalries between provincial governments over new economic development. This problem has been well documented and it will take an agency with considerable powers of persuasion to break down the rivalries.25 For one thing, not all provincial governments agree that the four Atlantic provinces constitute a region. Newfoundland, for example, remains adamant that, for economic purposes, it is not part of the Atlantic region and has refused to participate in some regional associations. The three Maritime provinces, meanwhile, have time and again jockeyed for the best position to get the next economic development project coming from Ottawa. In addition, few would argue that the Council of Maritime Premiers has been a success story. A measure of the difficulty facing ACOA was made clear at the time the prime minister announced the $1 billion of new money. Provincial governments immediately wanted ACOA to allocate the new money on a provincial basis. Thus, ACOA will have great difficulty in developing a strategic economic development outlook for the region acceptable to all provinces. The agency will have to be very persistent and employ all the "carrots and sticks" at its disposal if it is to build an economic

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viewpoint that amounts to more than simply a consensus of the lowest common denominator. ACOA's ability to do this will, in time, be a critical element by which its success will be judged. ACOA's most difficult mandate, however, will be playing to the full its advocacy role in national policy development. Striking a proper balance between the national or sectoral perspective and the regional or place perspective has eluded policy makers ever since the first regional development measures were introduced. It is widely believed in provincial governments, in the peripheral regions, and even in the federal Cabinet that the regional dimension in national policy formulation has not received the importance it should have had over the years. The constant reorganization for economic development in Ottawa is a reminder of how perplexing a problem this has been. A former DREE minister once observed that "certain areas of this problem [i.e., regional disparities] do not necessarily deal with economics but rather [with] the machinery of government itself.,t26 DREE, it will be recalled, had been set up by Pierre Trudeau ''to achieve real coordination." He later abolished it because it was not enough for "one department [acting] alone in regional economic development.,,27 What was required, he explained, was a government-wide focus on regional development and he established the Ministry of State for Economic and Regional Development (MSERD) and DRIE to accomplish this. MSERD may well have been successful on some fronts but few would argue that it was able to promote a government-wide focus on regional development. In any event it, too, was abolished only a few years after it was established. It is in this environment that ACOA was established. ACOA's first deputy minister, Donald S. McPhail, explained the agency's advocacy role before the House of Commons committee studying the ACOA legislation: The advocacy role is intended to ensure that the interests of Atlantic Canadians are fully and appropriately represented at the federal bargaining table in a policy sense. If we are successful in the way we intend to engage in that advocacy, it means actively intercepting a new policy as it is thought through in the system to see that they [sic] take sufficient account of the regional interests of Atlantic Canada. It means influencing changes in policy before the decisions are finally reached. It will be apparent to you that the goal of the agency will be to raise the consciousness of other federal departments about Atlantic Canada and, in more

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blunt tenns, to help in the process of ensuring that the region gets its fair share of the government A-based estimates of national line departments as national policies are applied. 28 The Mulroney government sought to strengthen the hand of ACOA in influencing national policies and programs. It did not establish a sub-committee of Priorities and Planning to give the agency the clout to deal with other departments and agencies, as the report establishing the agency had recommended. It did, however, provide in the ACOA legislation a mandate to coordinate. The legislation reads: "The Minister shall coordinate the policies and programs of the Government of Canada in relation to opportunity for economic developments in Atlantic Canada.,,29 ACOA has also been given powers to influence national policies and programs that no previous regional development department or agency ever had. The minister of ACOA has the power to "top-up" the programs of other departments that correspond to the objectives of ACOA. This is an important power, for it enables the agency to shop around Ottawa with the leverage to make things happen in Atlantic Canada. The thinking is that line departments do not react well to all kinds of coordinating mechanisms but that if cash is available for their own programs, they will jump at the opportunity to cooperate. That said, ACOA faces major obstacles in playing out fully its advocacy mandate. Regional development programming has never been held in high esteem in Ottawa. Tom Kent, DREE's first deputy minister, explained: "From the point of view of almost all conventional wisdom in Ottawa, the idea of regional development was a rather improper one that some otherwise quite reasonable politician brought in like a baby on a doorstep from an election campaign."so Another former DREE official observed that "promoting regional development in Ottawa is like pulling against gravity."s1 The best vantage point from which to influence the federal government decision-making process is to be in Ottawa where the great majority of the government's senior officials, including virtually all of the deputy ministers, assistant deputy ministers and directors general operate. ACOA's head office, meanwhile, is located in Moncton. It would, of course, be unfair to argue that ACOA has been unable to play its advocacy role. It is much too early to assess the agency's success on this front. It has been busy implementing its Action Program and gathering adherents in the region for support. It is fair to say, however, that ACOA has yet to tackle its most difficult tasks - advocacy and coordination between federal departments and provincial governments.

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It is also fair to suggest that ACOA is probably in a better position to take up the challenge than any of its predecessors. The agency's objective is clear - to promote economic development in Atlantic Canada. It has been given important levers and coordinating mechanisms that no past regional development agencies ever had. It has developed strong support in Atlantic Canada through its Action Program. It can point to a vision of economic development that is ineluctably linked to the region's population in that the approach will succeed only if Atlantic Canadians themselves make it a success. The popUlarity of the agency's Action Program has given ACOA credibility in the region to speak out on economic development, on interprovincial cooperation and on the importance of a region-wide economic outlook. The agency's advisory board members can constitute an important instrument to promote a regional viewpoint and to institutionalize the participation of Atlantic Canadians in developing their region. ACOA can now build on all these forces as a springboard to take on its other more difficult roles and functions. A REVIEW To many economists and officials in Ottawa, Canadian regional policy is a word that has succeeded politically but failed as a policy. That is, most economists argue that regional development measures only serve to slow down the adjustment process and to play havoc with market forces. Still, many politicians and slow-growth regions applaud regional development initiatives, arguing that they are essential to self-sustaining economic growth in regions where development does not come naturally. There is no question that in less than two years, ACOA has succeeded politically, perhaps even more than any of its predecessors. Time will tell if it will succeed in fulfilling its policy role.

It is also important to point out that at the very time that the Mulroney government was negotiating the Free Trade Agreement with the United States, it was also putting together a new regional development agency with new programs and an important new bultget. The Free Trade Agreement signalled to many that the government was looking to market forces as the engine of future growth and for a reduced role of government in the economy. The government could argue that ACOA's focus on promoting sustainable economic development through entrepreneurship signalled a similar message.

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ACOA was also established shortly after the federal government had negotiated the Meech Lake Constitutional Accord. To many, Meech Lake gave the provinces the upper hand in future federal-provincial relations, particularly in the planning and the implementing of new programs in areas of provincial jurisdiction. ACOA, however, is very much a federal-only agency, with its own sets of new programs and initiatives. In addition, when a decision was required as to whether the programs should be implemented directly by the agency or tumed over to the provinces, federal ministers quickly opted for direct delivery. In the end, however, the success of ACOA will not be based on who delivers what. The test will be what is actually accomplished. Will the provincial governments be persuaded to cooperate? To what extent will the national policy fonnulation process be influenced to ensure that new policies and programs apply as well to Atlantic Canada as they do elsewhere? How many new businesses will be started up in Atlantic Canada? If we have learned anything from past efforts, it is that the task will not be easy. Established patterns of federal-provincial relations and government programming are not easy to break. In addition, the federal government is facing a very difficult fiscal situation and it is unlikely that new funds can be made available for regional development. The challenge for ACOA is to do more to encourage greater cooperation among economic actors and to engage all possible levers to promote development in Atlantic Canada at a time when financial resources are bound to become scarce. Of all federal government departments and agencies, however, ACOA should be particularly sensitive to Ottawa's difficult fiscal position. Given its heavy reliance on federal spending, Atlantic Canada stands to lose the most if the federal government is ever forced to make indiscriminate spending cuts. ACOA could seize the opportunity to root Canada's regional development policy in clearly-stated and realistic policy objectives. The regional development banner has been employed, particularly since the early 1970s, to support all kinds of projects in virtually every economic sector and in all regions of the country. It is, in short, the convenient "catch all" to support any number of high profile projects. The result is that what now matters in Canadian regional development policy is not so much what can realistically be done to develop the economic potential of regions with unsolved problems or unexploited potential but rather, what the pocket calculator reveals about federal government spending in one region over another. ACOA has the potential to make two major contributions

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to changing the way we deal with regional development policy. First, it could contribute to redirecting Canada's approach to

regional development away from a preoccupation over spending levels and which regions Ottawa's expenditure budget favours, to a rigorous assessment of the economic circumstances and potential of Atlantic Canada. At the same time, it could put together coherent measures to raise productivity and employment and ensure greater cooperation within the federal government and between governments. lfit achieves these goals, ACOA will be able to claim that it has accomplished a great deal more than any of its predecessors.

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Notes 1.

See Donald J. Savoie, Regional Economic Development: Canada's Search for Solutions (Toronto: University of Toronto Press, 1986).

2.

Ibid., chapter 7.

3.

See Donald J. Savoie, Establishing the Atlantic Canada Opportunities Agency (Ottawa: Office of the Prime Minister, May 1987), pp. 20-36.

4.

Ottawa, Department of Finance, Economic Development for Canada in the 1980s, November 1981, p. 11.

5.

Canada, Hansard, October 1, 1986, p. 12.

6.

I was asked in October 1986 to consult with a cross-section of Atlantic Canadians and to prepare a report for the Prime Minister on the establishment of ACOA. At the time, I was executive director of the Canadian Institute for Research on Regional Development at the Universite de Moncton, where I also taught public administration.

7.

Statement by Hon. Brian Mulroney at Halifax, Nova Scotia, August 2, 1984 (Progressive Conservative Party of Canada), Annex A.

8.

See Donald J. Savoie, Federal-Provincial Collabomtion: The Canada-New Brunswick General Development Agreement

(Montreal: McGill-Queen's University Press, 1981), chapter

8. 9.

See among other, David Springate, Regional Incentives and Private Investment (Montreal: C.D. Howe Institute, 1973).

10.

See, for example, J.P. LeGoffe and B. Rosenfield, Les reac-

tions d'entrepreneurs camuliens d divers programmes d'aide d l'investissement (Ottawa: Economic Council of Canada, April 1979). 11.

For a detailed account of the programs of Enterprise Cape Breton, see Canada, Enterprise Cape Breton, Annual Report, 1987-88.

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12.

See Savoie, Atlantic Canada Opportunities Agency, p. 25.

13.

Ibid., p. 27.

14.

Ibid., p. 76.

15.

Ibid., p. 1.

16.

Peter Aucoin, "Organization by Place, Regional Development and National Policy: The Case of the Atlantic Canada Opportunities Agency," a paper presented to the annual meeting of the Canadian Political Science Association, University of Windsor, June 1988, p. 14.

17.

See, among many others, "New Agency Promises Fresh Start for Region," The Times-Transcript [Moncton], June 5, 1987, p. 13.

18.

Department of Finance, Federal-Provincial Arrangements in the Eighties, a submission to the Parliamentary Task Force on the Federal-Provincial Fiscal Arrangements by the Honourable Allan J. MacEachen, deputy prime minister and Minister of Finance, April 23, 1981, pp. 10-11.

19.

See "Ottawa plans to retain control of Atlantic Agency programs," The Globe and Mail [Toronto], March 1, 1988, p.4.

20.

ecCe n'est que poudre aux yeux," Le Droit [Ottawa-Hull], June 9, 1987, p. 2.

21.

Canada, About the Action Program, Atlantic Canada Opportunities Agency, Moncton, undated.

22.

Consultations with officials of the Atlantic Canada Opportunities Agency, November 8, 1988.

23.

See, J.P. Blanchard, "Notes for Remarks to the 18th Annual Conference of the Schools of Business Administration of Atlantic Canada," November 10, 1988, Universite de Moncton, Moncton, p. 5.

24.

Ibid.

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25.

See, among others, Donald J. Savoie, Federal-Provincial Collaboration: The Canada-New Brunswick General Development Agreement (Montreal: McGill-Queen's University Press, 1981), chapter 7.

26.

Quoted in Andre Raynauld (ed.), Seminar on Regional Development in Canada (Montreal: Le centre de recherche en developpement economique, 1980), p. 12.

27.

See Canada, House of Commons Debates, February 17,1969, p. 6016 and Office of the Prime Minister ReleaseReorganization for Economic Development, January 12, 1982, p. 1.

28.

Canada, House of Commons, Proceedings and Evidence of the Legislative Committee on Bill C-103, February 11, 1988, p. 1:14.

29.

See Canada, Bill C-103, section 5(2).

30.

Canada, Proceedings of the Standing Senate Committee on National Finance, issue no. 12, March 22, 1973, pp. 14:24:

31.

Quoted in Donald J. Savoie, "The Toppling of DREE and Prospects for Regional Economic Development," Canadian Public Policy, vol. X, no. 3, September 1984, p. 329.

CHAPTER 6 NEAR HIT: THE PARTURITION OF A BROADCASTING POLICY John Meisel

Resume

Ce chapitre decrit et analyse Ie processus qui a donne naissance a une nouvelle politique de la radiodiffusion et ala loi C-136, destinee a en assurer la realisation. Le role essentiel du rapport CaplanSauvageau est note, ainsi que les etapes de I'evolution des projets gouvemementaux. L'etape bureaucratique, la premiere etape politique (au niveau du cabinet) et la deuxieme etape politique (au niveau de la legislation) ont ete marquees par la direction vigoureuse du ministre Flora MacDonald, par la coordination exceptionnellement harmonieuse des contributions politique et bureaucratique, par Ie role sans precedent joue par les comites parlementaires, par la participation active d'un nombre extraordinaire d'inte~ts, par l'acceptation par Ie ministre de nombreux amendements au stade des comites et de la troisieme lecture, ainsi que par Ie fait, relie a tout cela, qu'elle a reussi a faire une volte-face par de nombreux interets qui, apres s'etre energiquement opposes a la loi, ont fini par I'appuyer sous sa fonne amendee. On identme les roles joues par Ie "lobbying inverse", Ie CRTC et Radio-Canada. Cette etude de cas fait etat de changements en cours dans I'elaboration des politiques, qui reiletent Ie nouveau besoin ressenti par Ie gouvemement de faire preuve de discretion en repondant a une multitude de conditions exterieures a lui-meme.

131

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I am committed to the development of a new broadcasting policy and a new Act before the end of the Government's first term. - Flora MacDonald, November 3, 1986. I will not say that we are triple elephants in the bearing of this bill, but it would seem to me that we have had a long gestation period, .... - Sheila Finestone, Liberal culture critic, August 10, 1988.

INTRODUCTION That mythical being so beloved of statisticians, the average Canadian, spends about 24 hours a week watching television. l This places .TV only behind sleep as the country's most time consuming leisure pastime. Furthennore, it is widely believed that the impact oftelevision is so strong that it vitally affects the manner in which individuals perceive themselves, their country and the world. Since Canadian television viewing is overwhelmingly American, particularly in the most seductive field - entertainment - there has been considerable concern that the television habit insidiously robs Canadians of their identity and consequently threatens the longterm survival of their culture and of their country. No wonder then that every government since the development not only of television but of radio as well, has sought to devise policies ensuring that the country's identity is not compromised by the ubiquitous electronic media. The course of the Canadian broadcasting system was charted by the Broadcasting Act of 1968.2 This document had received only minor amendments over the years and therefore had become increasingly obsolete in the face of societal and technological changes. While all recent governments have recognized the need to have a new act, the complexity, contentiousness and intractable nature of the issues involved resulted in all of them shying away from a thorough revision. In the mid-1980s, however, the Mulroney government grasped the electronic nettle and, on June 23, 1988, the Minister of Communications, Flora MacDonald, tabled in the House of Commons Canadian Voices: Canadian Choices. A New Broadcasting Policy for Canada3 and a bill to create a new Broadcasting Act. 4

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I intend here to describe and analyze the process that led to the emergence of the new broadcasting policy and the new bill. The content is considered only to the extent that it casts light on the manner in which the bill and its supporting documents came into being. A number of quite extraordinary and unprecedented features of policy and law making marked the development of the new policy and the new bill. Because of the nature and complexity of the case, the old-fashioned chronological approach will serve us well, particularly since it serendipitously points to the three key functional dimensions of law making: the roles of the bureaucracy, the political executive and the legislature. Before addressing these, however, it is appropriate to examine why the Mulroney government decided to develop a new broadcasting policy and to completely revise the Broadcasting Act of 1968. IMPETUS FOR THE BILL Since 1968, many metamorphoses in the Canadian environment pointed to the declining relevance and effectiveness of the legislation governing radio and television. New attitudes to the place in Canadian society of women, Native Peoples, linguistic minorities, distinct regions, and the idea of multiculturalism created demands that were not adequately met under the old act. Politically, the hegemony of the Canadian Radio-Television and Telecommunications Commission (CRTC) in policy making, vis-a-vis the role of the political authorities, created dissatisfaction and tensions, as did certain aspects of the management of the publicly funded Canadian Broadcasting Corporation (CBC). A growing predisposition towards deregulation, evident during the late Trudeau years was enhanced by a neo-conservative cast of mind in the Weltanschauung of the Mulroney government. On the technological front, improved cable facilities, the increasing use of satellites and private receiving dishes - not to mention an explosive growth in the use of video-cassette players - were all elements crying out for re-examination of the broadcasting infrastructure and of the legal definition of broadcasting. Powerful lobbies emerged, exerting increasing pressure on the government to take a close look at the broadcasting system, partly because the new technology made it easier than before to receive American TV signals. In addition, technological and entrepreneurial developments and regulatory decisions fragmented the

134 I How Ottawa Spends

Canadian television market and thus affected the position of both the public and private players. Actions by the government itself added to the pressures for a new policy, although these consequences were sometimes quite unintended. Thus the creation of the Nielsen Task Force on Program Review, the day after the Mulroney government was sworn in, ultimately gave great impetus to the calls for a new broadcast policy. 5 Marcel Masse was the Minister of Communications at the time. 6 Although he had earlier been hostile to the CBC, he now sought to prevent further reductions in its government grants. 7 The Nielsen Task Force was seen as a distinct threat in this context. To blunt its thrust, gain time, and also to escape the immediate need to make some potentially explosive decisions about the future of the CBC, Masse appointed a task force of his own, the CaplanSauvageau Task Force on Broadcast Policy. 8 The idea was to be able to delay responding to whatever Draconian recommendations the Nielsen Task Force might make with respect to broadcasting by insisting that the minister would first have to receive, digest and follow up on the report of his task force. This seemingly excellent evasive action, however, housed a joker. The appearance of the Caplan-Sauvageau Report (C-S Report) was delayed twice, and the vast scope of its contents created strong pressures for policies that may have been quite far from the government's original intentions. In any event, by the time the C-S Report was delivered, Flora MacDonald had replaced Marcel Masse as Minister of Communications. In addition, another quite unrelated action of the government endowed the C-S Report with explosive qualities. The Mulroney government had appointed a committee under James A. McGrath to report on procedural changes for the House of Commons. This group's report led to sweeping changes in the role of legislative committees. 9 The Standing Committee on Communications and Culture (SCCC), responsible for broadcasting, among other matters, became extremely active. At times, the committee appeared almost to share, to a certain degree, the government's responsibility for developing a new broadcasting policy.l0 The C-S Report on its own, and in conjunction with the stance eventually taken by the SCCC, came to generate politically effective demands which could not easily be overlooked by the Minister of Communications. Certain events in the radio and television community also predisposed the government to devise a new broadcasting policy.

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For instance, the vigorous activity of the CRTC in licensing ever more services, and hence fragmenting the market, was occurring outside any policy framework of the government. The only way to apply the government's priorities to CRTC decisions was to extend the Governor-in-Council's powers to issue directives to the regulator. This could be done only through an amendment to or replacement of the Broadcasting Act. Problems associated with the CBC also called for changes in the act. There was ample evidence that the Corporation was not administered as efficiently as it might have been and that its system of accountability was deficient. Francis Fox, the Minister of Communications in the last Trudeau government, had recommended that the top management of the CBC should not reside in the hands of a single indivi~ual - the president - but should be shared by a president and a chairman of the board. The required legislation was never introduced, however. At any rate, in 1986 the Mulroney government was confronted by the startling news that the CBC could not account for $57 million of its funds and that the Auditor General found the Corporation's books in such a lamentable state that he was unable to complete his audit. 11 Quite apart from these concerns, many Conservatives were distinctly uneasy about the CBC. It was widely thought in the party that the public affairs programs of the Corporation were, on the whole, one-sided and often hostile to the government. The fact that Pierre Juneau, the CBC president, had been a Liberal cabinet minister did nothing to assuage their anxiety. In addition, many of the western Conservative MPs - an influential Tory faction thought that the CBC's programming was overwhelmingly dominated by Toronto and not sensitive enough to other parts of the country. While these preoccupations of the Conservative caucus, clearly reflected in the Cabinet, fuelled a desire to amend or replace the existing legislation, they also presented obstacles to reform. The party was by no means united on these issues and there was some fear by moderates that what they saw as unreasonable positions by extremists, seeking some sort of revenge on the CBC or on Juneau, could lead to interference with the essential autonomy of the national broadcaster. But there was general agreement that some change in the Act was needed. What was not at all certain was whether tinkering was all that was required or whether a complete redrafting should be attempted.

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THE BUREAUCRATIC PHASE (SEPTEMBER 1986 • SEPTEMBER 1987) The birth of a broadcast policy and its legislative follow-up, pass through three stages. The distinct "epochs" actually consist of a mixture of all three activities - the bureaucratic, the "political" and the legislative - but each one of them clearly predominates at certain times. The hybrid character of the three stages is manifest in the period during which the role of officials is central and which, accordingly, is called the "bureaucratic phase."

In reality, two major developments dominated between September 1986 and September 1987. The first was the feverish activity surrounding the SCCC. The second was the preparation by officials (in close contact with the minister, to be sure) of the documents that culminated in a broadcasting policy being proposed to the Cabinet Committee on Social Development (CCSD). This lap in the policy cycle could have been labelled the "bureaucraticlegislative phase" except that the focus of the SCCC was not the minister's broadcast scenario. It was therefore not legislative in the sense that the work of the steering committee on Bill 0-136 (Broadcasting Act) was only later concerned with the government's new legislation. When, in September 1986, the Caplan-Sauvageau Report finally saw the light of day (half a year later than was called for by the task force's mandate),12 it provided much of the backdrop for subsequent developments. The task force, which included broadcasters, academics, and a co-chairperson who had been the Secretary of the New Democratic Party, had done an exhaustive job and had produced a huge, far-ranging document. It had held hearings throughout the country at which it considered 267 submissions from individuals and various organizations. In addition, it had received 233 briefs and met privately with 170 people. The list of research studies it commissioned takes up three pages of the report. IS The report made sweeping recommendations with respect to public and private sectors of the production and distribution industries, community broadcasting, the CRTC, services for the official language minorities, Native Peoples and the so-called multicultural communities. It also addressed questions of copyright and program ownership. A new public service was proposed - TV Canadatrel~Canada - to be operated by a consortium of the CBC, the provincial educational broadcasters and the National Film

Near Hit I 137

Board. The mandate of this satellite-to-cable service was to provide attractive programming not otherwise available and particularly shows originating in places other than the United States. The ministers first public reaction to the C-S Report was positive. But as time went on a number of concerns developed. The terms of reference of the task force were quite explicit that its report was to "take full account of the overall social and economic goals of the government, of government goals and priorities, including the need for fiscal restraint, increased reliance on private sector initiatives, •.. and of the policies of the government in other related economic and cultural sectors. "14 The extremely strong pro-CBC and pro-public broadcasting orientation of many of the key recommendations of the task force were not quite compatible with its mandate. Questions were asked as to whether the proposed revenue-raising suggestions, based essentially on taxing the private broadcasters and cable, were realistic in the prevailing Canadian socio-economic climate, and whether the report's recommendation that the CRTC be given greater clout would, in effect, lead to substantial increases in attractive Canadian programming. The Department of Communications (DOC) came to believe, in short, that the task force had basically failed to take into account existing and evolving conditions in devising a broadcast scenario. By relying primarily on changes that would further aggrandize the CBC, the task force was seen as essentially perpetuating the status quo; it had not devised a more promising alternative system geared. to revitalizing both the public and private sectors. 15 In this view the total package of recommendations might fail to achieve desired results, as had been the case with all the other previous inquests into Canada's broadcasting since the 1920s. It might also fail to arouse the political will (of the government caucus, the Cabinet and the CRTC) to succeed. In the light of these concerns, what was to be done? Marcel Masse had at one time thought that the C-S Report might be released as a green paper on broadcasting, thus in a sense obviating the need for the DOC to come up with its own policy. But under the circumstances, particularly in the view of the new minister, Flora MacDonald, this was not a viable option. The alternative was to buckle down and devise a more innovative and politically congenial approach, pennitting the government to adopt or adapt as many of the recommendations of Caplan-Sauvageau as possible. This was not seen as an impossible task, since the minister, the department and Caplan-Sauvageau shared one fundamen-

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tal assumption: the basic challenge was to foster the creation of more, better and more widely viewed Canadian television programs, particularly in the neglected domains of entertainment and children's fare. Accordingly, a three-pronged program was launched by the DOC. First, in January 1987, the C-S Report was referred to the SCCC for study and recommendations. The committee was given the means to travel and hold hearings. 16 Second, an extremely intensive and wide-ranging analysis of the report was undertaken within the DOC, primarily by about a dozen officers in a Broadcasting Policy Working Group. But others in the department such as the directors general for international and federal-provincial relations were asked to submit opinions on how the report might impinge on their turf. Third, various initiatives and consultations were launched with a view to canvassing the possibility of devising a broadcast policy that would, in the eyes of the government, be more attune than Caplan-Sauvageau to the conditions emerging in Canada during the last years of the twentieth, and the advent of the twenty-first century. In addition to "blue-skying," this involved the exploration of various alternatives to some of the mechanisms proposed by the task force report. This work was undertaken not only in response to the C-S Report but also to another force - the vigorous activity of the standing committee. The government had requested a committee report by the middle of April. This timetable was necessary to enable the minister to receive cabinet approval for a policy framework by Easter and to draft the new act over the summer.17 In response to this sense of urgency, the committee tackled its work in three phases. Its so-called Fourth (February 1987), Fifth (April 18) and Sixth (May 6) reports made recommendations about legislation, while the Fifteenth (June 9,1988) report was a massive (429 page) document on broadcasting policy. 18 Public hearings were held in 18 centres across Canada and 261 submissions were received, as well as 234 oral presentations. Every major group concerned with broadcasting became involved with the committee at one stage or another.

So sweeping and energetic a program was certain to have repercussions on the policy front. One of its consequences was that to all intents and purposes two policy-making processes were occurring simultaneously, one by the Conservative government, the other by a multi-party committee. It was inevitable that conflict should develop between them. A serious and much publicized rift

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between the committee and the minister occUlTed when the committee became deeply distressed by what it considered to have been a woefully inadequate response by the minister to its Fifth report. 19 Her testimony in late September 1987 also failed to satisfy the committee. 20 According to Standing Order 99(2), ministers were then obliged to provide a full response to all reports and recommendations of the standing committees within 120 days. The MPs were offended when their first long analysis of the C-S Report (the Sixth report) elicited only about a page in a five-page joint response by Flora MacDonald to the Fifth and Sixth reports. 21 The committee had toiled extremely hard to do its work in the time required and considered that it had received a brush-off. The minister, on the other hand, was in a deep dilemma. Two obstacles stood in the way of a full response to the standing committee. In the first place, it was taking longer to design a new policy than anticipated and she could not respond adequately to the committee's recommendations before the basic shape of the legislation was detennined and before an overall policy was devised. Equally important, various unexpected crises and the vicissitudes of the Cabinet's time-table during the summer, made it impossible for the minister to meet with the appropriate cabinet committee, to share her thoughts with it and to seek approval for a new act. In the absence of a well-articulated policy and a fonnal collegial stance, specific reactions to the committee's suggestions would have been extremely dangerous. AB noted above, the government had some reservations about certain features of the C-S Report and this also made for difficulties. Although the committee failed to adopt all the task force recommendations, it was much more inclined towards its outlook than the minister. The convergence between the perspectives of the committee and the task force was no doubt in part caused by the remarkable fact that Paul Audley, the Executive Director of the task force subsequently assumed the identical role for the committee.22 Furthermore, in another rather unexpected development, the co-chairperson of the task force, particularly Gerald Caplan, engaged in vigorous lobbying on behalf of their recommendations. Not surprisingly, the architects of the task force proposals were convinced that their group had done an excellent and complete job; any further study was, thus, unnecessary and darkly reflected the

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government's intention to weaken the CBC and generally betray Canada's cultural interests. Caplan was a leading member of the Friends of Public Broadcasting (later, Friends of Canadian Broadcasting) and was an articulate and lively critic of the government and the minister, excoriating both in print, on the electronic media, and through personal influence. 23 His close links with the NDP and the Toronto cultural establishment strengthened his already formidable assets as a lobbyist and as a militant. In any event, the fact that the minister had to revise her original timetable, and that no alternative or complementary policy to Caplan-Sauvageau had yet emerged from the DOC gave her increasingly bad press during the summer and autumn of 1987. She had been well received by the media and the cultural community when first appointed but the goodwill gradually dissipated and turned into suspicion and animosity. 24 The reasons were only partly related to broadcasting and included developments in her film distribution policy, the government's Free Trade initiative, and the general political predispositions of many cultural nationalists, particularly in Toronto. The broadcasting field is only one of an enormous number of items within the DOC's jurisdiction. But since it is always an exceedingly active one, the demands it made on the human re8!lurces of the department were considerable, quite aside from the need to prepare a new policy and a new act. Issues arising from the activities of the CBC and the CRTC, for instance, constantly absorbed the attention of officials and deflected attention from the singleminded and concentrated pursuit of a new policy. So as to be able better to focus on this monumental task, the DOC took a critical step in mid-September 1987, when a special broadcasting group was formed whose only task was to press on with the new policy and the act. It immediately held a two-day retreat in Aylmer. Chaired by Jeremy Kinsman, the assistant deputy minister responsible for the cultural sector, it was a rather loosely structured, free wheeling encounter focussing on the scope and broad outlines of a possible policy and act. A consensus emerged at this meeting among the officials that an essentially new approach to broadcasting policy was necessary - as opposed to a piecemeal tampering with existing legislation. The participants believed that a new approach could be fashioned and that their minister and the DOC staff could make it fly. These views were not yet universally accepted by the other sectors of the department but the establishment of a fully dedicated broadcast policy unit created the

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nucleus of a band of strongly committed champions of a distinctive, coherent new policy. The Aylmer retreat marked the advent to the DOC broadcast policy family of Christopher Burke as the director general, Broadcasting and Cultural Industries. Burke was an economist, and a remarkably creative and original person. He came to the department from a regulatory background - a useful preparation for the tasks at hand - and contributed both deep empathy for the cause as well as a certain distance from the conventional nitty gritty of departmental thought. 26 His role in the evolution of a new policy, and its acceptance, was critical, as was that of a number of other members of our dramatis personae. It is as risky to embark on "psycho-public admin." as it is to ply psycho-history. Nevertheless, one gains the strong impression that one of the reasons for the ultimate emergence of a coherent and imaginative new policy was the cohesion and collegiality of the principal actors - whether at the bureaucratic or political levels. This matter will be revisited in the conclusion. An important factor in the highly positive esprit de corps and, ultimately, sense of mission of the officials was the decision implemented in late October to move the broadcasting group into self-contained, slightly isolated offices. The idea originally was to establish quarters in a separate building but this proved impossible. Instead, the unit was moved to a different floor and into a space that had a somewhat protected and intimate character. Its occupants still refer to their enclave as ''the bunker" - a choice of phrase no doubt fraught with deep psychological significance.

Intensive work on the broadcasting file antedated the establishment of the bunker. However, not much happened until after the deposition of the C-S Report in 1986. A number of the ensuing activities deserve note. Among the topics covered by a series of detailed studies was the question of whether the best strategy was to aim for one act or three, the desirable role and mandate for the CBC, CBC funding mechanisms, an Alternative Programming Service, access to broadcasting signals, representation of various groups in the broadcasting system, and community broadcasting. These and other subjects were discussed within the DOC and also with people from outside. One person who provided valuable insight at this stage was Ernest Steele, who had been closely involved in the conception and birth of the 1968 Broadca8ting Act. Although he had later served as the head of the Canadian Association of Broadcasters (CAB), his role in this particular context was not that of industry spokesman.

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One of the striking features of the process now under way was the extraordinary degree to which extensive consultations were undertaken with individuals and groups both within and outside the government. These efforts to obtain infonnation and reactions to various policy options and mechanisms were made not only during this period but continued right up to the final stages of the legislative phase. Individuals and groups representing literally all elements of the broadcast industry were involved, as well as many rather tangential to it. Conversations and negotiations of varying intensity and duration were engaged in with about a dozen other government departments, bureaux and agencies. 26 In addition to drawing on the experience and wit of other units in the DOC, members of the industry, and various government departments and agencies, the broadcasting group also worked out the tenns of reference for studies by a number of consultants. About half of these research documents were delivered during the "bureaucratic phase"; the rest came in early in 1988.27 Little has been said so far about the political dimension of the policy process as it involved the minister and her office. This is somewhat misleading and masks the fact that Flora MacDonald was both the dynamo and the compass of the whole enterprise, guiding the department and conducting the key operations needed on the political front. That she had a clear view of where she wanted to go in broadcasting is evident from the first epigraph of this chapter, taken from one of her earliest speeches as Minister of Communications. When she first oriented herself in the department, she resolved to remedy a lacuna left by all her predecessors. The telecommunications side of the DOC mandate - telephone, satellites, spectrum management - has invariably played second fiddle to the cultural portfolio. Flora MacDonald resolved to redress this imbalance and during the first year of her Communications assignment, she devoted a good part of her energies to telecommunications matters. On the cultural side, it was copyright legislation, book publishing, the film distribution policy and the relentless battle she fought to keep culture off the Free Trade negotiating table, which absorbed most of her time. Broadcasting matters intruded into her world primarily through the various issues related to the CBC. Until the publication of the C-S Report, however, the new policy and legislation were not in the centre of her work.

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All this changed as she began the second year of her stint at the DOC. If one event had to be identified as the turning point, it would be the two-day briefing she received in early June 1987. On this occasion DOC officials, basing their presentations on a massive document they waggishly entitled "Broadcasting 101," briefed the minister on the essential characteristics and basic issues of Canadian broadcasting. A good half of the document concentrated on the need for a new policy and a new act. From this time on, these questions were never to be far from her mind and as time went on she led the cause with a tenacious fanaticism nourished, no doubt, by the long reach of her Highland ancestors. An important step in her march was a brain-storming weekend she convened at Meech Lake towards the end of June 1987. The first day was given over to a far-ranging discussion among herself, her departmental and ministerial staff, and about a dozen invited guests. The latter did not represent any particular interest but were expected to have both experience with l;»roadcasting and an innovative approach to the issues under consideration. They included active or former broadcasters from both the public and private sectors, academics, and people knowledgeable about regulation. The next day saw the continuation of the previous day's deliberations but without the guests. The exercise enabled the minister to gauge whether departmental thinking was compatible with the views of informed outsiders. It also injected some novel notions into the debate and strengthened the department's sense that the work under way was pointing in the right direction. Another milestone, this time involving the most senior officers of the whole department occurred in late August when the DOC's orientations were discussed at a retreat in Cornwall. Here, the minister identified her immediate, top priorities as broadcasting, copyright legislation, and telecommunications, in that order. POLITICAL PHASE I: THE CABINET (OCTOBER 1987 JUNE 1988)

With the major pieces in place by autumn, the minister and her staff were able to tackle the major hurdle, obtaining cabinet approval for their ideas. The first direct contact occurred early in October when the minister presented the Cabinet Committee on Social Development (CCSD) with what the department called the "Cartoon Show." This was a look at a broadcast policy and consequent legislation based on a series of illustrated flip-charts that addressed the

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essential issues in an informative but not overly technical way. The graphics were the work of a specialist in this kind of presentation who insisted that the ideas to be presented always had to be boiled down to their simplest quintessence. This, it was subsequently agreed by the officials, enhanced the clarity not only of expression but also of the thought of the drafters. The purpose of this session was merely to inform the minister's colleagues. No decision was expected. The encounter was deemed a success by the DOC. The general reaction was favorable and the ministers present appeared not to be put off by the possibility of espousing early broadcast legislation. The meeting also made it possible for DOC staff subsequently to sound out the reactions of various departments to the DOC's thinking. General circumstances were such that the minister decided to go ahead and seek formal Cabinet approval before the end of the year. The necessary work was launched preparatory to the submission of the appropriate Memorandum to Cabinet. Another retreat was held by about 30 DOC staff in late November, at which time the broadcasting group was able to share its thoughts with other interested people in the department and receive their reactions. Towards the end of November, the CRTC released its decisions with respect to a new bundle of specialty services to be available on the basic cable service. This announcement demonstrated incontrovertibly that it was the commission and not the Cabinet which was setting broadcast policy in Canada.28 It was perhaps fortuitous that this reminder should have been delivered only a few days before the minister presented her first Memorandum to Cabinet on Broadcasting Policy and new legislation. At any rate, in December 1987, after consideration by the CCSD and the Cabinet Committee on Priorities and Planning, the green light was given and the necessary Record of Decision approved. Some matters, such as the role of the CBC and the Performance Incentive Program were left in abeyance, pending the return to Cabinet by the minister in February of the next year, but the main outlines of the policy were accepted. On 30 December, Miss MacDonald was able to write to the Prime Minister seeking his approval for certain matters in the proposed legislation falling within his prerogative in the domain of the machinery of government, such as the restructuring of the CRTC.

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It would be an exaggeration to say that the Rubicon had been crossed but a Jruijor step forward had unmistakably been taken. A new phase had begun. Henceforth the emphasis would be on completing the preparation of the new policy, drafting the legislation and, above all, ensuring that the final approval of Cabinet, and of the financial requirements, would be obtained as expeditiously as possible. This moment in the policy cycle reflects the need to engage in non-partisan politicking on a surprising number of fronts. Despite some overlap, a natural division of labour emerged among the major players carrying the broadcasting ball for the government. The minister, in addition to making the final decisions with respect to content and strategy, dealt with other ministers individually and through cabinet committees, the Conservative members of the SCCC and caucus, some of the major interests in the broadcasting community and the top echelons of the media. Alain Gourd, the deputy minister, concentrated on the many other deputy ministers whose views were crucial, on relations with concerned interests in Quebec, and on the officials in the Privy Council Office. William Musgrove, the minister's chief of staff, was not only a close and totally trusted ministerial counsellor, but he also enjoyed an unusually high degree of confidence among officials inside and outside the DOC. He was a peerless facilitator in a variety of guises. The assistant deputy minister, Jeremy Kinsman, carried a particularly heavy burden with respect to contacts with various interests, in addition to being the most senior officer in the DOC responsible for culture, including broadcasting. He was, in fact, the field commander, despite the fact that during this critical period film policy also absorbed much of his time. Christopher Burke, therefore, often had to take over from him. Burke, in addition, concentrated on the preparation of the policy statement. He was blessed with the support of a small, intensely dedicated and competent staff, under Mike Helm, who was the DOC's most seasoned and lmowledgeable broadcasting specialist. A bewildering number of sister departments and bureaux needed to be informed, consulted and cajoled about the evolving policy and its financial and legislative requirements. A few examples will indicate how seemingly irrelevant or remote matters impinged on the broadcast policy. A good deal of attention was paid by Caplan-Sauvageau and the drafters of the government policy on the need to distinguish between francophone - and particularly Quebec - conditions and those pertaining elsewhere in the country. The Federal-Provincial Relations Office, mindful of the specific

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way in which the word "distinctive" was used in the Meech Lake Accord, was anxious to prevent the new Broadcasting Act applying the tenn in a manner that might compromise its sense as used in the Accord. The Department of Indian and Northern Affairs had concerns about the implications of the new act (in its reference to the use of Native languages) for Native rights. Some officials in the Department of Justice worried about the relevance of the freedom of expression elements of the C1w,rter ofRights and Freed0m8 for the regulation of broadcast content. And so it went. The postures of Treasury Board and the Department of Finance were critical since the new policy would require additional expenditures for the CBC, Telefilm Canada, and other items. Extensive negotiations were going on between the broadcasting group and members of these departments at about the same level of seniority, but to little effect. The DOC people had the impression that a great deal of stonewalling was going on and that their cause was not getting anywhere. In the end, tense negotiations at the most senior levels, often including the minister, were required to resolve the conflicts. Continuous talks were also maintained with numerous cultural organizations and finns. They had to be consulted, informed, sometimes reassured. Prodigious time was consumed in this process, involving all the most senior members of the department, but particularly Jeremy Kinsman. Hardly any major player was overlooked in these talks. Relations with the CBC and the CRTC were of crucial importance because of these bodies' deep involvement in many aspects of the policy and particularly because changes were proposed that would vitally affect both organizations. But the contacts were anything but satisfactory. A distinction has to be made between the most senior persons and some of their staffs. The latter often were accessible to the DOC team but serious obstacles existed at the top. The CRTC general counsel, for instance, no doubt on instructions from his masters, infonned his DOC counterpart in May 1988 that the CRTC would not consider the draft bill without receiving, inter alia, "the relevant cabinet document" and the cabinet ''record of decision."29 Although the CRTC later did discuss the proposed act with the DOC, the process of working together was difficult. Similarly, important elements within the CBC resented and bitterly opposed the government's plans. These obstacles notwithstanding, numerous ways were found of seeking out the views and reactions of certain individuals in the two "arm's

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length" organizations which figured importantly in both the policy and the bill. Contacts with the Charter section of the Department of Justice were noted above but this department played a much larger role. In addition to exchanges with members of its Compliance and Federal Regulatory Remedies Project, continuous close collaboration started in January between the broadcasting group and the legislative drafters from the Justice Department who were responsible for clothing the bill in the appropriate lan~age. The drafting was well under way even before the Cabinet gave final approval for all elements in the project. As requested, the DOC returned to Cabinet on February 10, a few days after the assistant deputy minister' had briefed his counterparts in the departments whose ministers sat on the CCSD. While final approval was still not forthcoming, progress had been made, and the ground prepared for the acceptance of all aspects of the new policy and of the new bill. On April 20, the CCSD approved the whole package, including the expenditure of the necessary funds. At the same time, the Cabinet Committee on Legislation and House Planning agreed to a timetable which, however, was contingent on the date of the publication of the Standing Committee on Communication and Culture final (Fifteenth) report. Continuous exchanges occurred at the staff and political levels between the DOC and the SCCC about the content of the latter's final report. Prodigious efforts had to be made to hasten its completion. When the report finally emerged, the way was cleared for the tabling in the House of Commons on June 23 1988 by the minister of (1) the government's comprehensive response to the SCCC's three reports on broadcasting, (2) Canadian Voices: Canadian Choices, the new policy, and (3) the Bill (C-136) which received fIrst reading. The legislative battle was joined.

POLITICAL PHASE II: THE LEGISLATURE (JUNE 23 SEPTEMBER 30, 1988) Canadian Voices: Canadian Choices and the bill constitute a single package containing the new broadcast policy. The principal features of the ninety-two sections of the bill and sixty-two pages of the policy statement are these: broadcasting is defined quite differently than in the old act. By focussing on content rather than the

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technology of delivery, the new definition is guaranteed not to become obsolete.so The central place and all-purpose programming role of the CBC are preserved and funds provided so it can attain 95 per cent Canadian content in prime time. The president's office is split and the CBC's accountability and editorial independence are both enhanced. The CRTC is also reorganized and its means of enforcement greatly strengthened. So are the government's powers of direction. The differences between French and English program needs are recognized, as are those of Native Peoples, the two genders, multicultural communities and the handicapped. The private sector is expected to make a significant contribution to Canadian programs in all categories. To facilitate this, a Performance Incentive scheme was proposed, according to which broadcasters would be forgiven a levy set by the CRTC if they channeled funds into Canadian production. Any funds collected from broadcasters who failed to meet set requirements would be diverted to those who had exceeded their assigned Canadian quota. Additional sums were also allocated to Teletilm. As well, within about two years an Alternative Programming Service - a cousin of CaplanSauvageau's TVtrele Canada was to be launched. Cable companies were to be allowed to originate programs under conditions stipulated by the CRTC. Second reading of Bill C-136 occurred on July 19 and 25, and the legislative committee met 10 times in July and August. Numerous witnesses testified, representing a wide spectrum of the cultural and broadcasting communities. No fewer than 91 amendments were proposed at the report stage which occupied the House for five days, culminating in the third reading on August 28. 31 Although the original reception of the bill was not unfavourable,32 the climate changed as the debate and committee hearings unfolded. The most important reason for this was, no doubt, the prevailing political climate. It increasingly affected reactions to the new policy, finally enveloping the proceedings in a highly charged tension. The dominant contributor to this state of affairs was the impending but still unknown date set for a general election. It seemed extremely likely that the Prime Minister would advise the dissolution of the House in time to allow an autumn vote. Under these conditions, party competition and hostility had heated up to the point at which reasonable discourse among politicians became rare. Both sides tended to see nothing but base and unworthy motives in the positions taken by their opponents, each accusing the other of putting partisan advantage ahead of the public good.

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It became important for the government to court the electorate with an impressive list of achievements. A new broadcasting policy and act were therefore attractive, and were seen to be of potential advantage to the Conservative party in urban ridings where, for the most part, its appeal was thin. This element, and the minister's visceral commitment to her policy, led the government to press for a speedy passage. But since many witnesses expressed deep concerns about some aspects of the proposed legislation, the government's pressure was ill received and added fuel to the opposition of many witnesses and MPs.33 Some opposed the bill largely on partisan grounds, others had genuine reservations about certain of its aspects and believed that more time was needed to ensure that this important measure was not flawed. At the same time, the opposition wished to rob their foes of the kudos of achieving in the broadcasting field what had eluded their predecessors. The debates, particularly at the report stage, consequently provide a good illustration of the filibuster. 34 The intensity of the controversy was also heightened by the fact that the issue had been fought since the launching of the C-S Task Force and even before. Passions had been aroused, groups mobilized, and battle lines drawn, long before the policy finally materialized; some interpretations given the proposed bill rekindled and fanned earlier flames. 35 Opposition was also intense because of the large number of witnesses attacking the legislation and the quality and position of some of them. Thirty-five organizations appeared before the legislative committee representing all facets of the broadcasting and cable industries, artistic groups, film makers, provincial government departments and broadcasters, unions, listener and viewer organizations, women's groups and others. The Canada Council, the CBC and the CRTC also appeared, the heads of the latter two fiercely attacking parts of C-136 in the full glare of the electronic and printed media. 36 The Canadian Association of Broadcasters (CAB) attempted to discredit the Program Incentive scheme as counterproductive, and mounted a major lobbying blitz against the bill. The variety and vigour of these and other interventions endowed the parliamentary process with a rare degree of colour and intensity. Despite the heat generated by it, the legislative stage proved extremely useful. 37 Many features of the bill were clarified and some problems identified. At the same time, the ill-concealed, selfserving pleading of some witnesses shed a revealing light on the

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broadcasting world and so helped place some elements of the new policy in a realistic perspective. The uncertainty of the outcome - would the bill get through the House before the dissolution? - added to the excitement and endowed this serious business with the frivolous attraction of a game of chance. The ever-present entertainment content of broadcasting may even have contaminated the proceedings and given them a quality of high drama not usually associated with legislative debates. In any event, the bitterness and acerbity of the House and committee deliberations prepared no one for two startling developments in late August and early September. The first was the decision by the minister to introduce a number of amendments to Bill C-136, prompted by some of the heard testimony. The second was the indubitably related remarkable turnaround in opinion with respect to the bill. While not everyone was pleased, of course, the interests which had been most implacably opposed to the bill, now supported its passage (apart from the private broadcasters who remained opposed). The cultural community had largely come around and, with it, most of the paparazzi. It is a measure of both the sense and vigour with which the bill had been criticized and of the minister's ability to listen, that about 50 amendments were proposed by the government, after having been approved by the Cabinet Committee on Priorities and Planning. Some were merely textual improvements, but several were of major importance. Thus the powers of the Cabinet to lean on the CRTC, strongly opposed by the regulator and others, were reduced and more narrowly defined. The CBC's original mandate with respect to programs that "enlighten," which had been removed, was now restored. It had originally been eliminated from the CBC section of the bill because it had been applied generally to all broadcasters, but this fonnula had aroused anxiety among some experts.88 A clause pennitting the Governor-in-Council to exempt certain classes of broadcasting from CRTC regulation was also removed. This provision had appeared ominous indeed, although it had been intended merely to allow easy deregulation of certain new services operating on the margins of the broadcasting system, such as ''informatics'' services offered by cable. 89 The 1968 phrasing was restored to the section requiring that programming on the Canadian broadcasting system be "predominantly" Canadian and the mandate of the CBC with respect to serving the special needs of regions was enlarged. Some aspects of the revision of the structure and modus operandi of the CRTC were withdrawn, but the government stuck to its guns, despite intense lobbying by the Commission

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with the Privy Council Office, and imposed a number of changes affecting the future work of the Commissioners. One factor predisposing the minister to accept changes was her overriding desire to have the act adopted before the election. She significantly concluded her press release announcing the accepted amendments by saying that they "should enable the committee to finish its work quickly and allow the House to give the legislation a top priority.''''o Strong opposition continued to greet the government's pressure for speedy passage but the overall reaction to the minister's flexibility was very favorable. Most observers who did not have a particular axe to grind found the bill much improved and the minister was beginning to receive a good press. None of this sped up matters much, however, probably because of the impending election and the opposition's temptation to block the passage of what might be seen as a significant success. Even after the acceptance by the government of the amendments noted above, the Liberal and NDP members of the committee insisted that the bill receive extensive debate at the report stage. It was daily becoming more evident that dissolution of the House could be expected at any moment. The 91 motions for amendments proposed would, had the Speaker not managed to group them for discussion, have killed the bill. But skillful work by the Chair and the acceptance by the government of further amendments, enabled the House to give the bill third reading and to pass it on September 28. No time was wasted before the bill was sent to the Senate. It received first reading on the day after it passed the House and debate on second reading was completed the next day, September 30. The deputy leader of the government, Senator Doody, moved that Bill C-136 be read for the third time right then and there. But Senator Frith, the deputy leader of the opposition, denied leave that this be done and the bill was referred to the Standing Senate Committee on Transport and Communications. The death knell had rung, for the House was dissolved the next day. The minister's final shot was a news release expressing shock at what she saw as the Senate's "cynical act." "Following the needless filibuster by Opposition members in the House of Commons," she said, "I can only conclude that the Liberal members in the Senate are acting out of petty political considerations." At the conclusion of her statement she listed a large number of organizations in the cultural community which, after the amendments had been made, supported her bill.41

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The minister, the government, the exhausted warriors in the DOC, and the cultural community might have mourned but others rejoiced. The CAB claimed that its lobbying had turned the tide. The industry clearly had not been able to block the bill in the House but there is a good possibility that it had some impact on the Liberal majority in the Senate. Most senators' partisan zeal and sympathy for the business world had been demonstrated in the past. On this occasion these two strands of its physiognomy combined to abort the birth of a new broadcasting law. CONCLUSION What conclusions can one draw from this saga? Several leap to the mind and fonn an attractive inventory of topics requiring more exhaustive study. . o

Canada has been awash with royal commissions and task forces but none has ever quite equalled the CaplanSauvageau feat of attaining perpetual life. It remains to be seen whether its experience constitutes an historical idiosyncracy or whether it has established a new pattern.

The C-S Report is a rich document whose intrinsic merits will have had a far-reaching influence. But the political agenda of its co-chairpersons, and the Audley legacy they bestowed on the SCCC, made the task force a political actor of major importance. The co-chairpersons' original opposition to the new policy and their subsequent support for the amended bill were of the greatest importance, as was their hectoring before the DOC policy machine was set in motion. Their influence was felt not only in agendasetting but also in the content of the policy, the bill and the amendments. Felines are not the only creatures with nine lives! o

The number of individuals and groups who were involved in the entire scenario is prodigious. There must have been literally thousands of cooks who contributed to the broth. Although contact with too many interests and actors may land one in the soup, there is no doubt that in this instance consultation was not only essential at the level of the minister and officials but also eminently salutary insofar as the public involvement was concerned. Bill C-136 was a much better document than it otherwise would have been, had there been fewer meeting of minds

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(and sometimes of prejudices) before the emergence of the final version. Is this pattern of sweeping consultation an exception or the wave of the future? It is hard to imagine governments henceforth being able to avoid the lively involvement of concerned interests when they draft important pieces of legislation. But whatever the details, the nature of cabinet government is clearly changing. o

The role of the Standing Committee on Communications and Culture is closely related to the question of participation in the policy process but it also raises other issues. Greater experience with this kind of governmental instrument will be required if double, and possibly conflicting, modes of policy making are to be avoided.

Although there was some conflict between the minister and the committee, their relationship was also extremely interesting in that both parties presented one another with sets of questions they expected to be considered and replied to. We witnessed here a completely new kind of interaction between the executive and legislative branches of government which, given some daring, imagination and initiative may, in future, complement the more customary avenues of discourse. o

The case under review demonstrated what this author, at least, sees as a bizarre series of interventions by two agencies which one usually considers to be at ann's length from the government. One of them apparently considers that the distance between it and the government exists only insofar as the government is concerned and not with respect to its own freedom of action.

The CRTC had a large number of useful comments to make on the proposed policy and on the bill. Some were taken into account when the government introduced its amendments. But the commission did much more than convey its views to the government. It played an active political role, presenting its testimony before the committee, which was appropriate, but also lobbying other power centres of the government in hopes of changing the minister's policy by going over her head. It is difficult to reconcile this behaviour with the arm's length principle. The CRTC view on some issues was strongly supported by the CAB and individual private broadcasters. While hard evidence is elusive, there was a widely held view that the position and actions of some of the industry lobbyists

154 I How Ottawa Spends

was in part at least inspired by people working for the commission. If this is the case, then the CRTC was mobilizing political opposition to a government measure, a course of action which endangers the autonomy of the arm's length agency. The CBC also hammered the government and it too made some useful points. But Mr. Juneau's attacks on the plans to split the president's position, proposed by a previous government, by Caplan-Sauvageau, and the SCCC, did not apparently, have the support of the CBC Board. This raises the question of the appropriate spokespersons for such autonomous bodies, and the degree to which the actual management should become involved on political controversy. It is important to remember in this context that whatever else the legislative consideration of the bill may have been, it was a profoundly political process, even when a part of it involved a multi-party committee. o

Mention was made above on several occasions of the importance of particular individuals in the policy process. MacDonald, Burke, Kinsman, Audley, Gourd, Caplan, Sauvageau, Edwards, GormleyC are only some who come to mind. Individual roles cannot be adequately portrayed and assessed here but one facet of the human dimension must be enlarged upon.

Much has been written about the problems confronting the relations between politicians and their officials, and about the manner in which personal factors -likes, dislikes, areas of interest, ambitions - colour and often weaken collective efforts. The manner in which a comfortable division of labour evolved within the DOC with respect to the tasks to be discharged and the psychological importance of the bunker were noted earlier. To this must be added the extraordinarily harmonious (and yet creative and stimulating) rapport that prevailed within the DOC during the critical phases of the birth of the broadcasting bill. An unusually positive team spirit prevailed between the three pillars of such an effort - the officials, the chief of staff and the minister - all of whom appeared to be complementing one another's strengths and weaknesses. The department came to respect and admire the minister who gave everything she had to the cause, and managed to extract similar commitment from her staff. There was widespread speculation that the policy evolved by the department was one which did not really sit well with many members of the minister's caucus and even perhaps at first with the Cabinet.

Near Hit I 155

This is a matter which cannot be verified at present but it does not take much imagination to see that Miss MacDonald had a formidable task on her hands, first in informing her colleagues of the issues involved and then persuading them to opt for a policy that would maintain the tradition of cultural nationalism. This may not have been the party's first predisposition but had been an important element of Canada's broadcasting world until then and, in the minister's and the department's view, was particularly called for at the moment.43 Cabinet acceptance of the new policy and its resolve to assign the bill the highest priority were impressive feathers in MacDonald's bonnet. Noone knew better than her staff what it had taken to win these points and also to extract from Finance the funds needed to implement Canadian Voices. Her determined battle, and success, won her the admiration and affection of the staff. She, on the other hand, was deeply aware of the total commitment of the DOC team and of the inestimable contribution it had made to her efforts on the political front. The cut and thrust of the fray, the intense excitement of sharing a common cause, cemented a series of close relationships and alliances. This seeming digression is necessary because it points to a critical feature of this particular policy process: the uncommonly high level of morale that was essential if this somewhat precarious venture was to succeed. o

We have seen that a quite remarkable change and reversal of opinion characterized the course of Bill C-136. Why this highly volatile swing from acceptance to lapidation and then to support? The amendments, while important, did not alter all that much. It is probable that to a great extent the ultimate turnaround resulted from a quiet but colossal effort on the part of the minister and her staff to explain the bill's nuances to the cultural communityand to seek its help. There was not much the minister could do about the positions of the CAB, the CRTC and the CBC, for instance, but the cultural community was seen as a natural ally, given the nature of the policy. The high morale and dedicated esprit de corps noted above were essential pre-conditions for the waging of an effective campaign to convince the bill's beneficiaries that now was the time to come to the aid of the party.

Lobbying, in this instance, was not only directed at the government by various interests (as is usual). It was equally vigor-

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ous in the other direction - the government sought the support of certain interests, including the media! o

Although the support of the cultural community was intrinsically important, it assumed a major strategic significance as well. A climate indicating that the bill was popular would, it was hoped, deter the opposition from stalling, particularly as the election was approaching. The timing of the support forthcoming from the artistic circles was all-important; it was thought to affect the speed at which the bill would pass through the Commons but it was also hoped that it would influence the Senate's reaction to it.

Timing was exceptionally critical, suggesting that the quality of a policy depends not only on its intrinsic characteristics but also on the moment when it is generated and legislated. In the present case, for instance, the Free Trade initiative affected the climate in which the broadcasting scenario was designed, charging the attitude of important groups towards the government. The life history of the MacDonald broadcasting policy and of Bill C-136 makes a nearly perfect case study of the discretion of the state - of the degree to which the freedom of governments to act is circumscribed by events and conditions external to them. The new bill had to fit circumstances dictated by the proximity to Canada of the United States and by the character of the American broadcasting environment. Likewise, its scope and direction were constrained by the historical evolution of Canada's mixed publici private radio and television industries, by the position in the broadcasting world and in the minds and hearts of many Canadians of the CBC and the CRTC, and by the political clout of an extremely wide range of interests concerned about broadcasting. The context in which the legislation was fashioned and introduced also imposed parameters which limited the range of possibilities available to state action. The political environment - other issues on the horizon, like the Free Trade negotiations, the film distribution policy, the accounting practices of the CBC - created a climate affecting the content of government and opposition thought and the strategy each side deployed in furthering its ends. At the same time, the composition of the government party, parliamentary reform, the state of opinion engendered by a task force report, all narrowed the range within which a new broadcasting scenario could be devised. The hands of the Cabinet were by no means tied but the room in which they could move, and the speed with which they

Near Hit I 157

were able to do so, were determined to a significant degree by extema1ities largely unrelated to the substance of what needed to be done. 44 General conditions and the political climate thus had a determining effect on the broadcasting case. The impending election, as we saw, was particularly important causing, among other things, the haste with which the government wished to expedite the bill through the legislative phase. This pressure, as we also saw, rebounded unfavourably on the minister and made the passage more difficult. The lesson is obvious: the optimal conditions for the smooth passage of a bill require not only an acceptable product but also a sense for, and luck with, the timing. While the creators of Bill C136 can claim that they have met only some of the criteria necessary for such conditions, they have been remarkably skilled, energetic and, indeed, successful. It is likely that the substance of their bill, or something very like it, will become law and will shape Canada's broadcasting environment for a generation or two. Given the fate of the bill at the hands of the Senate in the dying moments of the thirty-third Parliament, one might be tempted to call the exercise a near miss. But in the light of how the matter was handled, and the likely future, it is more accurate to describe what happened as a near hit.

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Notes: 1.

This reading has been remarkably constant during all the 198Os, despite the massive increase in the number and variety of available programs. Canada, Statistics Canada, Culture Statistics, Television Viewing in Canada, 1987,87208, p. 7. In addition to this heavy television viewing, Canadians, on the average, also listen to the radio for 18 hours a week.

2.

Broadcasting Act, March 7, 1968, 16-17, Eliz. 2, c.25.

3.

Communications Canada, Canadian Voices: Canadian Choices. A New Broadcasting Policy for Canada (Ottawa: Supply and Services, 1988). Henceforth cited as Canadian Voices.

4.

Bill C-136. An Act respecting broadcasting and to amend certain Acts in relation thereto and in relation to radiocommunication.

5.

For an evaluation, see V. Seymour Wilson, ''What Legacy? The Nielsen Task Force Program Review," in Katherine A. Graham, (ed.), How Ottawa Spends 1988-89 (Ottawa: Carleton University Press, 1988), pp. 23-47.

6.

Masse was replaced in June 1986 as Minister of Communications by Flora MacDonald.

7.

Matthew Frazer, "Marcel Masse: Whateve) the arts community may say or do, the Tories' 'brilliant young man' from Quebec is out to mak~ the most of his power," The Globe and Mail [Toronto], April 20, 1987, pp. EI-E2.

8.

Task Force on Broadcasting Policy, Report of tM Task Force an Broadcasting Policy (Ottawa: Supply and Services, 1986). Henceforth referred to as C-S Report or task force report.

9.

Canada, House of Commons, Report of the Special Committee on Reform of the House of Commons (The McGrath Committee), 1985. C.E.S. Franks, The Parliament of Canada (Toronto: University of Toronto Press, 1987), pp. 136-142 and passim.

Near Hit I 159

10.

In a highly revealing comment to a journalist, Flora MacDonald said in 1987 "[t]hough it is not well understood, there are other things that dictate the agenda of government now, other than decisions of the executive." She was clearly referring to the Parliamentary Committee. John Partridge, "Minister roasts critics on broadcasting act," The Globe and Mail [Toronto], December 23, 1987, pp. Bl, B2.

11.

For a detailed analysis, see Standing Committee on Communications and Culture, CBC's Financial Management and Acccyunfo,bility. Review and Recommendations Arising from the 1985-86 Annual Report (Ottawa, February 1987) and Canada, House of Commons, Standing Committee on Communications and Culture, Minutes, Nos. 4-7, November and December 1986. Although the problem of the CBC's bookkeeping and the related questions of the Corporation's structure and accountability influenced the events discussed in this chapter (and the climate in which they occurred), they received only scant attention here. Attitudes to the funding of the CBC, the timing of the introduction of the new bill, and the nature of the new legislation - a completely new bill or mere revisions affecting the CBC and possibly the government's powers of direction - were all influenced by the 1986 disclosures concerning the management of the CBC. But while important, they were not central to our concerns and so, for reasons of space, are not developed in what follows.

12.

C-S Report, Appendix A, p. 703.

13.

The appendices, pp. 705-731, provide these and other housekeeping details.

14.

C-S Report, Appendix A, p. 703.

15.

Department of Communications, "Notes for a Statement by Flora MacDonald ... to Standing Committee on Communications and Culture," September 22, 1987.

16.

House of Commons, Standing Committee on Communications and Culture, Interim Report on the Recommendations

of the Task Force on Broadcasting Policy: Specialty Programming Services and Some Proposed Legislative Amendments (Fifth Report), p. 57. Appendix I, Order of Reference.

160 I How Ottawa Spends

17.

Department of Communications, "Notes for a Statement on Broadcasting Policy by the Honourable Flora MacDonald to the Standing Committee on Communications and Culture," February 5, 1987.

18.

Fifth report, as cited in note 16; House of Commons, Standing Committee on Communications and Culture, Recommendations for a New Broadcasti'fl// Act, (Sixth report), May 1987; House of Commons, Standing Committee on Communications and Culture, A Broadcasti'fl// Policy for Canada, (Fifteenth report), June 1988.

19.

In its Fifteenth report the committee reviewed some of the points at issue in a section delightfully entitled "Dialogue with the Government."

20.

As an aftermath to the minister's attendance at the committee's meeting on September 22nd, the committee chairman sent the minister a letter including dozens of questions seeking elaboration on points she had raised with the committee. The minister's reply took 66 single-spaced pages. See note 21. The Fifteenth report elicited a 100 page single-spaced response. See note 21.

21.

Flora MacDonald to J. Edwards, "Government Response to the Fifth Report... and the Standing Committee's Sixth Report," August 26, 1987. Other relevant responses to the committee are Communications Canada, "Response by the Minister of Communications to Questions Raised by the Standing Committee on Communications and Culture Further to the Minister's Appearance Before the Committee on September 22, 1987," November 1987 and Communications Canada, "Government Response to the Fifteenth Report of the Standing Committee on Communications and Culture, A Broadcasting Policy for Canada... " June 1988.

22.

For his perspective on cultural industries and broadcasting, see P. Audley, Canada'8 Cultural Industrie8 (Toronto: Lorimer, 1983) and Idem, "The Agenda for Broadcasting Policy: Reflections on the Caplan-Sauvageau Task Force," in R. Lorimer and D. Wilson, (eds.), Communication Canada (Toronto: Kagan and Woo, 1988).

23.

For an example, see G. Kaplan, "Broadcast report is heading for shelf," Sunday Star [Toronto], June 19, 1988.

Near Hit I 161

24.

Edward Greenspon, "Whatever became of Super-Flora?" The Globe and Mail [Toronto], August 10, 1988, p. Dl.

25.

His play Don't Despair, Fonctionnaire had become something of a cult hit in Ottawa. He died of a heart attack during the Ottawa marathon on June 26, 1988, three days after the tabling of the policy and the bill in the House of Commons. Canadian Voices is dedicated to him.

26.

The Department of Finance, Treasury Board and the Privy Council Office were obviously critical but others became involved. Among them were the departments of the Secretary of State, Justice, Consumer and Corporate Affairs, the Prime Minister's Office, the National Film Board, Teletilm Canada, the CBC and the CRTC.

27.

Nordicity Group Ltd. (peter Lyman), Study of Options for Increasing the Canadian Programming Performance ofthe CBC, December 14, 1987; Item, Assessment ofPerformance Incentive Program for Stimulating Prime-Time Canadian Programming by Private TV Broadcasters, February 1988; The Public Interest Advocacy Centre (R.K. House and Andrew Roman), A New Economic Technique for Regulating Private Sector Television Broadcasters, March 31, 1988; Stratavision Inc., The Structure and Process of

Decision-Making in the Canadian Radio-Television and Telecommunications Commission, December 9, 1987; the DPA Group, Assistance for Cable Extensions, March 25, 1988; Stikernan, Elliott (Gregory Kane), A Review of

Compliance Mechanisms Available to the Canadian RadioTelevision and Telecommunications Commission, November 25, 1987. The dates refer to the time of completion. 28.

The relevant decisions were released by the CRTC in a bound volume entitled More Canadian Program Choices. One of the matters covered was the awarding of the licence for an All News Service by the CBC (Decision CRTC 87-904, pp. 226-253). It was appealed to the Cabinet.

29.

Avrum Cohen to Philip Palmer, May 9, 1986.

30.

Canada, House of Commons, Bill C-195, An Act respecting

broadcasting and certain Acts in relation thereto and in relation to radiocommunication, June 23, 1988; Canadian Voices. For a succinct list of what the government saw as

162 I How Ottawa Spends

highlights, see introductory comments to the second reading by Flora MacDonald, Canada, House of Commons, Debate8, July 19, 1988, pp. 17744-8. 31.

Canada, House of Commons, Debate8, July 19, 15; Canada, House of Commons, Legislative Committee on Bill C-136, Minute8, August 10, 11, 16, 17, 18, 23, 24, 25, 29 and 30.

32.

"Better late than ... " The Globe and Mail [Toronto], June 15, 1988, Editorial, p. D6.

33.

See the debates and Southam News, "Govt. puts squeeze on broadcasting hearings," The Ottawa Citizen, August 17, 1988, p. C21; Jamie Portman, ''Tories ready to shove Broadcasting Act through," The Toronto Star, August 30, 1988, p. 11; ''TV, radio bill needs more work," The Toronto Star, August 25, 1988, Editorial, p. A30.

34.

Note, for instance, Mrs. Finestone's repeated posing of only distantly relevant questions to opposition speakers when their allotted time ran out on September 27, 1988, thus enabling them to continue speaking. Even a Conservative back bencher, opposed to the bill because of its alleged threat to condominium owners, requested anyone in the Chamber to ask him a question when the Speaker indicated that his time was up, so he could continue holding the floor. A Liberal obliged. Canada, House of Commons, Debates, September 27, 1988, p. 19718.

35.

Among the most spectacular and vociferous groups was the Friends of Canadian Broadcasting. The Friends claim that the number of their supporters has risen from about 2,000 in 1985 to 17,000 in 1988. In the summer of that year, Adrienne Clarkson signed a direct mail fundraising appeal which was sent to 500,000 Canadians. Huge advertisements soliciting support were placed by the Friends in the national edition of The Globe and Mail. Network [Toronto], Vol. 1, No.1, Summer 1988, and letter to Friends from Lois Wllson, on behalf of the Steering Committee. The Friends were considered important enough to merit at least two encounters with senior DOC officials. The minister also met with them and, in her press release thanking the C-136 Committee, stated: "A letter has been sent to the Friends of Canadian Broadcasting recognizing their input to this needed and eagerly awaited bill." She added that the letter responds to

Near Hit I 163

a number of concerns expressed by the Friends in their brief to the Legislative Committee. Communications Canada, News Release, September 1, 1988. See also letter addressed by Flora MacDonald to Dear Friend of Canadian Broadcasting, August 30, 1988. 36.

Jamie Portman, "CRTC slams new broadcast law," The Ottawa Citizen, August 24, 1988, p. A4; Hugh Winsor, "Bill threatens independence of CRTC, MP's are told," The Globe aM Mail [Toronto], August 24, 1988, p. AS; Tony Atherton, "Juneau says new act threatens CBC role as public service," The Ottawa Citizen, August 26, 1988, p. A4; CP, "Splitting job of CBC chief dangerous Juneau says," The Toronto Star, August 25, 1988, p. A33.

37.

Val Sears, "Broadcasting bill offers lesson in making laws," The Toronto Star, September 28, 1988.

38.

Frank W. Peers, "Weaknesses in broadcasting bill need attention," The Toronto Star, AuguSt 15, 1988, p. A15.

39.

Communications Canada, News Release, "Government proposes amendments to Broadcasting Bill," August 30, 1988, p. 2. See also the minister's statement and answers to Legislative Committee on August 30, 1988.

40.

Communications Canada, News Release, August 30, 1988, p.2.

41.

Communications Canada, News Release, "Flora MacDonald shocked with Liberal Senators' decision to stall Bill C-136," September 30, 1988.

42.

The last two named were the chairmen of the SCCC during our period. Although exigencies of space prevent me from detailing their contribution, its importance cannot be exaggerated. I hope to chronicle it elsewhere.

43.

Hugh Winsor, "MacDonald deserves credit for proposed broadcasting policy," The Globe and Mail [Toronto], June 27, 1988, p. A2; Jamie Portman, "Mulroney shadow is casting a pall over MacDonald," Calgary Herald, April 12, 1988, p. DI0.

44.

John Meisel, "Flora and Fauna on the Rideau: The Making of Cultural Policy," in K. Graham, (ed.), Hqw Ottawa SperuJ..s 1988-89 (Ottawa: Carleton University Press, 1988).

CHAPTER 7 ROCK-A-BYE, BRIAN: THE NATIONAL STRATEGY ON CHILD CARE Susan D. Phillips

Resume

La strategie nationale sur Ia garde des enfants, annoncee en decembre 1987, reflete l'approche generale du gouvernement conservateur en matiere de politique sociale. La majeure partie de la strategie est constituee par Ie projet de loi sur la garde des enfants (C-I44), qui est mort au Senat avec Ie declenchement des elections de novembre 1988 mais qui risque d'etre reintroduit sous une forme semblable en ·1989. II s'agit d'un arrangement pour faire partager les frais entre Ie federal et Ie provincial, plutot que d'un projet voulant creer un systeme de garde des enfants comprehensif et unUonne. Cet arrangement refiete Ie genre de federalisme preconise par les conservateurs, en ce qu'il est oriente vers les provinces, qu'il n'impose pas les normes ou les objectifs du federal sur les provinces et qu'il ne s'oppose pas a une livraison des programmes qui soit non universelle. La strategie reflete egalement Ie desir du gouvernement de restreindre les depenses en fixant un plafond aux depenses, enlevant ainsi la garde des enfants au regime d'assistance publique du Canada, dont les frais, sans plafond, ne cessent de croitre. Le fait d'enrichir les formules du partage des frais aidera les provinces pauvres a elargir rapidement leurs systemes, mais Ie plafond fixe creera des choix difficiles pour l'Ontario et Ie Quebec. La strategie accorde egalement une importante aide fiscale suppIementaire aux familles individuelles. Si 1'0n soutient que Ie recours au systeme fiscal accorde une reconnaissance symbolique a la valeur des parents qui restent a la maison, il reste qu'il s'agit la d'une reponse distributive a un probleme necessitant une solution redistributive.

165

166 I How Ottawa Spends

Child care has been the major piece of social policy offered by the Conservative government since it came to power in 1984. The need for non-parental care of Canadian children has risen dramatically as more women are engaged, by necessity or choice, in full-time employment outside the home and as the number of single parent families increases with escalating divorce rates. When the Royal Commission on the Status of Women first gave child care saliency on the agenda of social issues in 1970, 20 per cent of women with children under the age of 14 years were in the labour force. 1 By 1987, this figure had jumped to 65 per cent. 2 While there were 243,545 licensed day care spaces in Canada in 1987, of which approximately 125,000 were government subsidized, it is estimated there were more than 1.9 million children under the age of 13 who had potential need of some type of supervision because their parents worked or studied outside the home. 8 The existing system of licensed child care, thus, meets about 13 per cent of the need in Canada. This severe shortage of spaces is recognized by all three political parties and has been the sustained concern of child care advocates, unions, welfare rights organizations and women's groups since the early 1980s. Availability of spaces, however, is not the sole aspect of a child care delivery system. Equally important are the issues of affordability to parents (which raises questions of subsidies and user fees), accessibility to the required types of care (whether infant care, facilities for children with special needs or timing of care to suit parents doing shift work or subject to seasonal schedules) and, finally, quality care (which includes regulation of the physical environment as well as training and pay of child care workers).

In December 1987, the Minister of Health and Welfare, Jake Epp, responded to the growing crisis in child care and to agitation by well-organized advocacy groups who believe that child care is a federal responsibility, as well as a provincial and parental one, by announcing his government's National Strategy on Child Care. The program, which commits $6.4 billion over seven years and aims to double the capacity of the existing system of subsidized spaces by creating 200,000 new subsidized spaces is composed of four disparate components designed to appeal to different audiences. The first component offers $2.3 billion in tax assistance to families with the express intent of permitting them to choose among different types of child care options, including the choice of one parent remaining in the home. Opponents strongly criticize using the tax system through child tax credits and deductions in part because

Rock-a-Bye, Brian 1167

deductions are regressive and also because they believe it mitigates against creating a delivery system that could provide real choice. Therefore, critics consider this aspect of the government's plan wasteful. The second aspect is the Child Care Initiatives Fund of $100 million to finance research and development projects that examine aspects of quality, special needs and system flexibility. A third component, added in July 1988 in direct response to concerns voiced by the Native community, directs $60 million over six years to Indians on reserves to be used to determine child care requirements of on-reserve Indians, train child care workers and build and operate accredited child care services for Indian communities. 4 Both the Child Care Initiatives Fund and the allocation to on-reserve Indians are relatively minor parts of the Strategy and will not be discussed at length in this paper. None of these three components needed specific child care legislation: accordingly, they were implemented following the minister's announcements. 5 The as yet unlegislated part of the strategy is the proposed

Canada Child Care Act (Bill C-l44), a bill that would allocate $4 billion over a fixed tenn of seven years to revised cost-sharing arrangements with the provinces for the creation and operation of child care facilities. Although this bill died as it was being reviewed in Senate Standing Committee when the November 1988 election was called, new legislation is likely to be introduced in more or less identical fonn because Bill C-I44 embodies several principles at the core of the Conservative party's philosophy. 6 Child care legislation was originally anticipated to be presented as soon as the House of Commons reconvened in 1989, but a new Minister of Health and Welfare, examination of government-wide means of expenditure restraint and uncertainty over the fate of the Meech Lake Constitutional Accord have produced delays. The Prime Minister, however, has stated publicly that his government remains committed to a child care act. It is, thus, neither an exercise in historical analysis nor metaphysics to examine the proposed 1988 Canada Child Care Act as part of the Conservative's overall child care strategy, the other components of which are already in place.

This chapter examines the child care strategy in light of the existing means of cost-sharing child care expenses with the provinces, the Canada Assistance Plan (CAP). It also explores the probable effect of the new funding fonnulas on various provinces. This latter task is particularly speculative because much of the information remains confidential subject to federal-provincial negotia-

168 I How Ottawa Spends

tions. It is argued that the National Strategy on Child Care illustrates the Tory approach to social programs that Canadians are likely to see incorporated in other social issues. This approach makes extensive use of the tax system, a distributive policy with emphasis on family choice. It also emphasizes the Conservative vision of a market system: the government wants to distribute tax expenditures to individuals so they can select the type and amount of social service they can afford, rather than create an extensive government-dominated delivery system. Although the tax system may be a very suitable instrument for delivering some types of social programs, we must ask whether real individual choice can be exercised under conditions of severe shortage of supply. The Conservative view of decentralized, collaborative federalism is also clearly demonstrated in the proposed Canada, Child Care Act. It both anticipates and reflects the Meech Lake Constitutional Accord because it deliberately and carefully avoids interfering with provincial jurisdiction to shape the nature of the child care system and it represents a self-imposed restraint on the use of the federal spending power. The Honourable Jake Epp, former Minister of Health and Welfare, repeatedly argued that the federal government has no right to meddle in provincial affairs by forcing national standards or objectives on the provinces and, thus, the federal government exercised its discretion to limit its involvement to cost-sharing arrangements rather than occupy the field by attempting to regulate or shape the configuration of a national child care system. Because their involvement is limited to dollars, not regulations, no province has voiced official opposition in principle to the federal presence in the field and the carefully constructed matchstick structure of national reconciliation has not been jostled.7 Finally, the child care legislation shows the importance of expenditure restraint that will be ever central to the Conservative government over their second term. Although government proponents have argued that the $4 billion over seven years is very generous and adequate to the task of creating at least 200,000 new spaces, the amount is set as a ceiling on federal contributions. The proposed legislation also specifies a fixed time period - seven years - for enriched federal cost-sharing after which time new arrangements will need to be negotiated. These limits constitute a principled attempt by the government to contain one of the last openended cost-sharing programs, the Canada Assistance Plan. In this way it represents a move from open-ended cost-sharing to a facsimile of block funding - that is, to cost-sharing of fixed amounts. This change is viewed by the government as an act of fiscal responsi-

Rock-a-Bye, Brian 1169

bilityand by the child care advocates as a restriction of existing funding. Although the child care advocacy organizations have been vociferous in their condemnation of the government strategy, it should be recognized that child care is an extremely difficult policy field for any federal government to be involved in effectively. There is incredible diversity across the provinces and between urban and rural areas in the shape of existing child care delivery mechanisms. The system in Alberta, for example, is approximately 75 per cent commercial care and both for-profit and non-profit facilities are government subsidized. In Saskatchewan, on the other hand, only non-profit care is licensed. 8 The government of Ontario, unlike most other provinces, gives the municipalities great responsibility for the delivery of services and requires that they cost-share part of the provincial portion. The new direction presented in the Ontario three year plan begun in 1987-88 is to move child care from a welfare connotation to a basic public service by eventually making care available to all who require it through operating and capital grants to licensed care. In contrast, the B.C. government views child care as a welfare service, which is delivered by a subsidy coupon to needy families, which can be redeemed for licensed or unlicensed care. B.C. refuses to consider providing operating grants directly to child care facilities as this would subsidize those who can afford to pay. The system in the Atlantic provinces tends to rely heavily on care in family homes, often unlicensed and unregulated, rather than in group centres. Unlike the debate that enveloped the Canada Health Act, an act that at least contained an implicit understanding of what a health care delivery system would look like (public hospitals, licensed physicians and nurses, regulations regarding the physical plant and so on), there is no consensus about the configuration of a child care system due, in part, to existing system diversities and, in part, to intensely held values about the proper care of children. Facilities at present include licensed and unlicensed care, small family home as well as larger group day care and school-based centres, commercial and non-profit ownership. Child care facilities can be directed by parent-controlled boards on one hand or by owner-entrepreneurs on the other. Finally, there are regulated standards for child care workers in some provinces versus minimum requirements for training in other provinces. Child care advocates have been articulate in demanding quality care; but a central issue in tenns of the governing instruments by which care is provided is whether quality is inherent in the type of care offered

170 I How Ottawa Spends

(commercial generally regarded as lesser quality than non-profit) or whether quality can be regulated. 9 Child care policy is, thus, complicated by the existing regional diversities, by jurisdictional issues between provincial and federal governments and by the question of whether or not different government instruments can be substituted for each other on an interchangeable basis. Can regulation replace non-profit care and can use of the tax system replace direct investment without prejudicing quality and accessibility?

THE POLITICAL PROCESS LEADING TO THE NATIONAL STRATEGY To his credit, Brian Mulroney promised during the election campaign of 1984 that he would make child care a priority issue by introducing a national child care policy - an initiative that no previous Canadian government and no other Conservative leader, especially Thatcher or Reagan, had been willing to take. The political process that culminated in the National Strategy, however, did not begin with the 1984 election rhetoric. The growing shortage of spaces was an issue that no government could long ignore. In its 1970 report, the Royal Commission on the Status of Women was the first, but lonely, voice to argue that government has a shared responsibility with parents to contribute to services for caring for children and that women could never achieve equality without such services. Almost nothing more was heard or done on child care until the Task Force on Child Care (the Cooke Task Force), established by the Liberal government in its dying days of May 1984, issued its report in March of 1986. The Cooke Report offered the advocates almost everything they could have hoped for: it presented recommendations for an integrated and comprehensive child care system, including measures for parental leave, that would be built on flexible federal-provincial cost-sharing of operating and capital grants to the non-profit sector and that would over the long term move to a completely publicly funded, non-profit system with no user fees. The price tag for a fully funded system was estimated to be $11.3 billion in the year 2001. 10 The impact of the Cooke Report was to heighten expectations that the political will might exist to create such a comprehensive system and to provide a wealth of data and specific recommendations that served as a legislative bible for advocacy groups. The holistic view of a comprehensive child care system had also been reinforced by the Abella Royal Commission on EqUality in

Rock-a-Bye. Brian 1171

Employment in 1984 which reiterated that "child care is not a luxury, it is a necessity" and a prerequisite to women's equality in the work force. 11 Extended provisions for parental leave and maternity benefits were recommended by both the Parliamentary Committee on Equality Rights (Boyer Committee) in October 1985 and by the Commission of Inquiry on Unemployment Insurance (Forget Commission) in 1986. 12 The Conservative government waited relatively late in its term, however, to respond with its own proposals. In November 1985 the Special Parliamentary Committee on Child Care, chaired by Shirley Martin, was constituted. From February to June 1986 it travelled across the country and heard over 6,000 pages of testimony from more than 1,000 witnesses. 13 The committee report, issued in March 1987, bears only faint resemblance to most of the briefs submitted to it. 14 The report is motivated by the principle of parental choice and recommends continued reliance on the income tax system through child tax credits, continued subsidies under the Canada Assistance Plan and a supplemental new act to provide capital and operating grants to licensed facilities, including forprofit centres. 16 In response, both the Liberal and the New Democrat members of the committee tiled dissenting minority reports. 16 The government's National Strategy announced in December 1987 adheres to the Martin report in philosophy and generally in substance although details do vary. Following its announcement, the income tax measures were implemented in the February 1988 Budget Speech. The Canada Child Care Act was introduced in the House of Commons in July 1988. Due to the impending election, it received a whirlwind debate of less than three days in legislative committee in early September 1988. The Senate, although generally reluctant, was prompted by the persistent efforts of Conservative Senator Spivak and Liberal Senator Marsden to be a major player in the process. Rather than merely waiting to provide a perfunctory last glance at the legislation before Royal Assent, the Senate Standing Committee on Social Affairs, Science and Technology struck its own Subcommittee on Child Care in April 1988 to review the Martin committee report (before the Commons legislative committee on Bill C-I44 met). The Subcommittee invited expert witnesses to appear and produced a strong report. 17 After Bill C-I44 was passed on from the Commons, the full Senate Standing Committee heard extensive testimony from advocates and under the direction of the wily Senator Allan MacEachen was in the process of scurrying about to call more witnesses when Parliament was dissolved. Although they have been accused of sounding the death

172 I How Ottawa Spends

knell for the legislation, the Senate, in fact, attempted to provide a forum for witnesses not heard before the legislative committee in "the other place." During the election campaign, child care received a brief flurry of attention before it was overshadowed by the free trade issue. The campaign promises ignored the more complicated issues of affordability, commercial care and provincial jurisdiction and made the issue a simple nwnbers game. While the Liberals proposed to double the Tory number of spaces (to 400,000) over seven years at a cost of $7.8 billion, the NDP proposed to create 200,000 spaces in one-half the time with the same amount of money as the Tories. 18 Seldom does legislation have such a broad array of interest groups so uniformly and articulately opposed to it as are aligned against the Conservative child care strategy. When the Honourable Jake Epp says the proposed Child Care Act was "a product of broad consultation with interest groups and citizens across the country," he fails to say that almost all who appeared at hearings were vehemently opposed to the policy.19 Dissenting national voices include, among others, the Canadian Day Care Advocacy Association (CDCAA), major unions - including the Canadian Labour Congress, Public Service Alliance of Canada, Canadian Union of Public Employees, and the National Union of Provincial Government Employees - the Canadian Teachers' Federation, the Federation of Nurses, National Anti-Poverty Organization, Canadian Jewish Congress, Canadian Federation of Students, National Council of Welfare, Canadian Advisory Council on the Status of Women and women's groups (notably the National Action Committee on the Status of Women}.20 It is this broad constellation of interest groups, which are diverse in their primary constituencies but which coalesce around the need for a quality, governmentsubsidized system of child care, that are referred to in this chapter as the "child care advocates." There is also opposition to the strategy from groups who believe that greater support should be provided to mothers at home~ The more extreme right wing groups, such as R.E.A.L. Women, are opposed in principle to non-parental child care because they believe it is bad for children and because they feel that women should be encouraged to remain in the home. Because the process has offered over the past five years at least five major public forums to present positions, advocacy organizations had the opportunity and a model (based on the Cooke Task Force Report) to forge and voice coherent positions against the government and to communicate with each other to serve as

Rock-a-Bye, Brian / 173

a vocal opposition coalition - albeit a loose one. When the heightened expectations created by the Cooke Report were dashed by the reality of limited funding, advocates were more disappointed than they would have been without a prototype and extensive public hearings. In this way the process has worked against the government's ability to create a winning supportive constituency for the strategy. It was only the Tory majority in the House that saved Bill C-I44 from its critics in 1988 and that will force similar legislation through the policy hurdles in 1989 or 1990. The use of discretion has been important in the policy process. The advocacy associations used the media well and disseminated information to other non-governmental organizations so that child care became publicly perceived to be a federal responsibility. The federal government then used the available discretionary spending power to take action in a policy field that they could have argued was strictly provincial jurisdiction. Due to their desire not to agitate the provincial governments while the Meech Lake Accord is still under consideration, the Conservatives restricted their latitude of choice to taxation measures and a cost-sharing arrangement. Although they could have chosen to exercise bold federal leadership by initiating a program of national objectives - an initiative not incompatible with the Meech Lake Accord - they would have faced considerable backlash from the provincial governments which the Prime Minister wished to avoid in the interests of national reconciliation and for the political purposes of arriving quickly at a federal-provincial agreement. The government wished to inject funds as soon as possible to spur expansion of child care spaces and to remove funding from the open-ended CAP before costs skyrocketed under greatly increased spending by Ontario and Quebec. Moreover, an enacted child care policy would have been a star aspect of a government's track record going into an election. The strategy is a compromise between the Minister of Finance, who insisted on a fixed ceiling to the money allocated and who preferred to use the tax system as extensively as possible, and the Minister of National Health and Welfare whose concerns focussed on expanding the existing system as quickly as possible. The result of this compromise leans toward the position of the Minister of Finance. There is heavy reliance on tax assistance and legislation to fund child care within fixed expenditure limits. But, as Senator Spivak observes, the proposed act is merely a framework funding arrangement, rather than legislation that contemplates or creates a national, comprehensive child care system. 21

174 I How Ottawa Spends

THE NATIONAL STRATEGY ON CHILD CARE Child care under the government's National Strategy is delivered through two governing instruments - tax expenditures under personal income tax and direct spending under cost-sharing arrangements with provincial governments. The strategy will be analyzed in this chapter as a package because the combination of instruments reflects the Conservative market-based approach to social policy which leaves the provision of services to the market and the provinces. TAX MEASURES There are a variety of tax expenditures and credits under the income tax system that offer chlld benefits in order to create equity between families with children and those without and to give recognition to the important social task of childrearing. These include the child tax credit, child care expense deduction, child tax exemption (converted in the 1988 tax year to a $65 non-refundable credit) and the equivalent to married exemption for single parents (converted in the 1988 tax year to a credit of $850). Because the benefits grew piecemeal and were designed at different times to assist different sets of people, the child benefits of the tax system do not form an integrated system with consistent objectives and beneficiaries. The historica1legacy and sacred symbolism of these tax benefits makes it very difficult for any government to break away from them. For the Conservative government, continued use of tax measures for child care is indeed attractive because it supports their overriding market philosophy of parent choice. The goal of promoting a return to the traditional family model of mother in the home was undoubtedly favoured and promoted by the more small-c conservative members of the Tory caucus who could not be readily ignored in formulating the policy. Moreover, this approach fits with the fonner Minister Epp's personal view that society does not sufficiently value mothers who choose family over career. 22 The National Child Care Strategy dedicates about one-third of its total allocation ($2.3 billion over seven years) to increases in the Child Tax Credit and the Child Care Expense Deduction. The refundable child tax credit, first implemented in 1978, is designed to provide assistance supplemental to the Family Allowance to low and middle income families.23 As a progressive measure compatible with tax reform, the amount of the benefit decreases with rising net family income. Unlike a deduction, if one has no taxable income,

Rock-a-Bye, Brian 1175

the credit can be claimed as a refund, rather than merely applied against the calculations of taxable income. Any parent who receives the Family Allowance (usually the mother) is eligible to receive the full credit of $559 for each child 18 years and under if the annual family income (in 1988) was $24,090 or less. Above this threshold, the credit is "taxed-back" at the rate of five per cent of net family income which means that the maximum credit is reduced by five cents for every one dollar of net famlly income above the cut point.24 For a family with two children, the child tax credits would evaporate completely once its net income reached $46,450. 26 As part of the child care strategy, the Conservative government increased the value of the credit for a child six years and under by $200 (a $100 increase in the 1988 tax year and an additional $100 in 1989) for an eventual credit of$759 per eligible child. Note that this credit can be claimed by eligible families whether or not expenses for non-parental care are incurred. The supplement, thus, is meant to assist parents at home or those who do not have receipts for care. The central concern with the child tax credit as part of a child care strategy is that of choice. Would an extra $200 per year encourage a woman to stay home rather than enter the labour force, assuming she considered only economic variables in her decision? Because this money is displaced from creating affordable and accessible quality day care spaces, should the woman choose to go to work outside the home, she may be unable to find spaces for her children and would, by default, be forced to remain at home or leave her children under conditions of inadequate supervision. As the National Council of Welfare notes, the child tax credit will not help low income families find suitable care and an additional $200 pales in comparison to child care costs that normally exceed $3,000 a year per child.26 In remarks made before the Senate Standing Committee in May 1988, the Minister acknowledges the symbolic value of the supplement to the child tax credit. It is an attempt to extend the National Strategy to encompass families who do not rely on non-parental care, rather than to adequately compensate mothers at home: I never pretended that the child tax credit. . . [was a] compensation for mothers who stayed at home. I have never characterized it in that way, but I thought it was important that the government should give recognition to that area of child care as against simply coming in with a formal child day care system as advocated by some. Z1 From the perspective of groups organized to promote the interests of at-home mothers, the tax measures do not go far enough to

176 I How Ottawa Spends

subsidize women who choose to stay at home.28 However, the costs of adequately compensating parents at home would be prohibitive. In contrast to the child tax credit, the child care expense deduction is viewed as a legitimate cost of doing business, that is, as an employment expense for parents in the paid labour force or taking training courses.29 Under the old rules, the lower income spouse could claim up to $2000 per child to a maximum of $8000 per family for receipted child care expenses for children 14 years and under (providing the total claims do not exceed two-thirds of that individual's income). The Tory strategy will increase the deduction from $2000 to $4000 for a child six and under or with special needs (for 7-14 years of age the deduction remains $2000) and will remove the maximum family limit. A major problem with claiming the deduction is that the claimant must be able to produce receipts. For those who obtain their child care in the "grey market" of unlicensed babysitters, maiden aunts and grandmas who are reluctant to give receipts because they do not wish to file a tax return, the deduction is of no value. As a result, less than one-half of those families with children in non-parental day care_ actually claimed the deduction. 30 For those families who have receipts, the deduction may help meet the costs of child care, but its real value depends on the availability and price of the service where they live. Even with the doubled amount of the deduction, the real costs of child care are not covered in most cases. The National Council of Welfare calculates that a family with an infant and a preschooler and an average family income of $45,000 would receive a tax savings of $1,504 by claiming the maximum deduction of $8,000. But the average cost of placing the two children in day care would be approximately $10,000. 31 A lower income family would be unlikely to be able to pay for the service in the first place to claim the deduction. Although this family would qualify for government subsidies to assist in paying for the care, they may have difficulty finding a vacant subsidized space. In this case, they would probably be forced into the informal grey market to find care. I Perhaps the only major deduction that survived tax reform, the child care expense deduction is regarded as regressive because its value increases as the marginal tax rate goes up and it has no value for the very low income earner at all. For example, a twoincome couple with two preschool children and a family income of $100,000 could enjoy a tax saving of $3,286 (by claiming the deduc-

Rock-a-Bye, Brian /177

tion of $8,(00); a middle income family earning $45,000 would receive a benefit of $1,504 and a low income family would not benefit from the deduetion at all but would get $400 in additional refundable tax credits.32 The following graph illustrates that under the combined supplements to the child tax credit and child care expense deduction, financially well-off families will receive the greatest benefit.

Figure 7.1

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178 I How Ottawa Spends

There have been numerous recommendations, including those by the Special Parliamentary Committee, the Advisory Council on the Status of Women and the National Council of Welfare, to convert the expense deduction into a child tax credit compatible with the government's own philosophy of tax reform. 33 However, the child care expense deduction would be politically difficult to abolish because it is viewed as a justifiable business expense and because it primarily benefits the middle and upper middle income brackets. As Table 7.1 illustrates, compared to other chlld benefits this deduction is relatively modest because it is used by fewer families than other benefits. 34 Table 7.1 Comparison of Tax Expenditures in 1988 on Child Tax Credit and Child Care Expense Deduction Child Care Expense Deduction, (1988 Estimates) Income Group $5,000 or less $5,000-$10,000 $10,000-$15,000 $15,000-$20,000 $20,000-$25,000 $25,000-$30,000 $30,000-$40,000 $40,000-$50,000 $50,000+ TOTAL

Percentage of Claimants 3.66% 8.60 12.70 15.38 15.98 14.57 15.06 7.51 6.56 100.00

Total No. of Claimants

Total Cost to Federal Govt. ($ millions)

20,698 48,634 71,820 86.775 90,368 82,395 85,166 42,470 37,097

$ 2.0 8.4 18.7 25.6 31.0 36.2 40.5 23.6 28.0

565,508

$214.0

Child Tax Credit, 1988 (Estimates) Income Group $5,000 or less $5,000-$10,000 $10,000-$15,000 $15,000-$20,000 $20,000-$25,000 $25,000-$30,000 $30,000-$40,000 $40,000-$50,000 $50,000+

Percentage of Claimants 41.39% 21.60 12.14 8.48 6.25 4.39 3.56 1.49 0.77

Total No. of Claimants 1,045,007 546,012 306,879 214,360 157,990 110,972 89,991 37,665 19,464

Total Cost to Federal Govt. ($ millions) $ 920.8 435.1 201.5 118.1 84.8 57.4 37.0 9.0 3.9

2,527,834 TOTAL 100.00 1,867.6 Source: Senate of Canada, Child Benefits Proposal for a Guaranteed Family Supplement Scheme (Report of the Standing Senate Committee on Social Affairs, Science and Technology, June, 1987).

Rock-a-Bye, Brian 1179

The tax assistance proportion ($2.3 billion) of the National Strategy appears at first glance to be about one-third of the total allocation ($6.4 billion), but we see on closer inspection that this figure represents only the cost of the increase or new money in the tax measures, not their total value over the seven year life of the legislation. To calculate the aggregate value of tax assistance we need to add the cost of maintaining the existing tax expenditures to the cost of the supplemental program. The estimated cost of the child care expense deduction in 1988 was $214 million; over the seven years of the strategy this amounts to $1.5 billion. Added to the strategy's supplemental tax assistance, the total cost to the federal government of tax breaks directed to child care is $3.8 billion. Total Cost of Tax Assistance for Child Care

Cost of Child Care Expense Deduction in 1988 over seven years,

=

$214 million

total cost of child care expense deduction cost of supplement (expense deduction + child tax credit)

=

1.5 billion 2.3 billion

TOTAL COST OF TAX ASSISTANCE FOR CHILD CARE

= $3.8 billion

The federal government will also spend approximately $l.B billion per year (or $13.1 billion over seven years) on the basic portion of the child tax credit. 35 It would be unfair, however, to characterize the child tax credit as expenditures on child care because the enormous cost of the child tax credit includes claims for children 18 years of age and under and claims by parents who remained the full-time caregiver. The credit is fundamentally an income redistribution measure rather than a child care assistance measure. The fact that expenditures on the child care expense deduction and the tax supplements alone ($3.8 billion), however, are roughly equivalent to allocations for cost-sharing under the proposed Child Care Act ($4 billion) demonstrates the Conservatives' preference for use of the tax system as the mode of delivery for social policy.

It is not surprising that many of the child care advocates recommend that reliance on the tax system be reduced in favour of direct investment in a child care delivery system. A report released in December 1988 by the National Council of Welfare states that "our approach would see an end to expensive and wasteful tax breaks that can never help Canada create the child care facil-

180 I How Ottawa Spends

ities it needs.,,36 Specifically, they recommend that the child care expense deduction be converted to a child care expense credit averaging $527 ($340 federal portion plus an average of $187 provincial portion). This credit would be limited by a sunset clause so that it would automatically expire at the end of seven years. The Council would like to see the money redirected to increase the supply of licensed child care spaces - 750,000 spaces, four times the Tory target, over the seven years - and to provide greater subsidies to maintaining those spaces. In their vision, child care would be based solely on the ability to pay so that low income families would no longer have to pay any part of the cost while well-to-do families would pay hefty fees. The tax system, however, is designed to fulfil many different objectives simultaneously. The symbolic value of giving recognition to stay-at-home parents, the legitimacy of the expense deduction as part of business expenses and the ability to deal with taxation as a federal responsibility - combined with the Tory philosophy of parental choice - means that the tax system is likely to remain firmly entrenched as the major vehicle for delivering federal child care expenditures for the present regime. Moreover, it is politically attractive because it delivers policy directly to individuals in a manner that is visibly attributed to the federal government, rather than camouflaged in cost-sharing with other levels of government. As long as federalism continues to decentralize with strong provincial governments and a minimalist federal presence in national programs, the federal government will seek means of policy delivery that enhances its visibility to individual voters. Tax assistance for child care is, however, a distributive response to a problem in need of a redistributive solution. Tax credits and deductions apply only to the demand side of the social welfare equation and in times when the "kinder and gentler" notion has become popular (as part of philosophical free trade with the United States), the supply side of social policy must also be addressed. Although it has been framed by the ideology of the Conservatives as primarily a private issue of parental choice, child care is in reality a public policy issue that should focus attention on a delivery system. THE CANADA CHILD CARE ACT The significant new initiative of the government strategy is the introduction of the proposed Canada Child Care Act to replace

Rock-a-Bye, Brian 1181

the existing day care provisions of the Canada Assistance Plan as the vehicle for cost-sharing child care services with the provinces. The Canada Assistance Plan is a welfare program designed to costshare a broad atTay of social services, but was never intended to be adopted as a comprehensive means of child care service delivery. Under one section of CAP, the provinces and territories establish tests to determine families "in need." Those who qualify may increase their welfare cheque or directly purchase child care services on behalf of the family. Due to the manner in which "need" is determined, however, all parents receiving subsidized care are not necessarily on welfare. For these needy recipients, CAP permits payments for child care in both for-profit and non-profit licensed centres and family care homes. Under a different section of the Plan, assistance is provided to families who are likely to become in need and is normally determined by an income test. 87 The federal and provincial governments each set income guidelines as to who qualifies, but as we shall see, the federal levels tend to be more generous than provincial ones. The proportion of the cost of care that is subsidized varies from one government to another. While some provinces pay maximum subsidies that are sufficient to cover the entire cost of the service, others provide lower subsidies that require the user to pay the difference between the subsidized rate and the actual cost. As a result, some licensed centres provide a "stripped-down" version of child care that is less expensive, but also of lesser quality. Eligibility for assistance under CAP does not guarantee that a subsidized space will be available at any cost and some communities notoriously have waiting lists that are several years long for subsidized spaces. Unless child care funding is removed from CAP, it will never be able to shed its welfare connotation. Moreover, while operating expenses to centres may be provided for the subsidized spaces, CAP is not explicitly a plan for covering operating costs of day centres and it shares only the smaIl portion of capital costs related to depreciation. The provinces have not, therefore, been encouraged to invest in a complete array of services and they have not used the funding opportunities offered by CAP to the fullest. In all cases, the provinces set a lower threshold income level or "turning point" at which parents are eligible for a subsidy than does the federal government. For example, a single parent family with one child could, according to federal rules, receive a maximum subsidy if the parents' after-tax income was $24,000 or less, while in Newfoundland, that family could not earn more than $9,000, in Quebec $12,500 and in British Columbia about $11,000.38

182 I How Ottawa Spends

In theory, CAP is an open-ended cost-sharing arrangement under which the federal government will reimburse its share as the provinces remit their expenses, with no imposed upper limit to what these expenses might be. Due· to the different turning points for client eligibility, however, the provinces have not historically taken up the full extent of the 50/50 cost-sharing that they could claim. For these reasons, the subsidy system is underutilized and, in fact, only 29 per cent of those families with preschool children eligible for full subsidy under CAP actually receive it. 39 As Table 7.2 illustrates, the federal share of provincial expenditure is in reality less than 50/50 due to restrictions that subsidies be used in the non-profit sector and restrictions on the number of subsidized spaces that provinces allocate. Table 7.2 Provincial Child Care Expenditures and Reimbursements under the Canada Assistance Plan (Estimates)

Province

1985-86 Provo CAP CAP Exp Pay Share ($Millions) (%)

1986-87 Prov CAP CAP Exp Pay Share ($Millions) (%)

1987-88 Prov CAP CAP Exp Pay Share ($Millions) (%)

British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia Newfoundland P. E. I.

25.2 11.2 50.9 8.4 12.5 6.0 21.0 8.6 133.5 54.0 72.4 22.0 3.1 1.1 5.8 2.5 1.1 .4 .7 .3

26.9 12.8 63.4 8.6 12.3 5.9 23.8 9.7 166.1 66.0 81.8 28.2 3.1 1.0 5.6 2.8 1.5 .6 .7 .3

35.0 78.0 13.0 30.5 215.0 95.0 2.9 6.1 2.2 1.1

44 17

48 41 40 30 35 43 36 43

48 14 48 41 40 34 32 50 40 43

11.0 8.7 6.0 10.6 74.3 28.0 1.1 3.0 .8 .4

31 11

46 35 35 29 38 49 36 36

Source: National Health and Welfare

The proposed 1988 Canada Child Care Act (CCCA) is intended to remove child care from its welfare stigma, to provide a more flexible cost-sharing arrangement that would inject sufficient funds to "kick-start" development of at least 200,000 new, subsidized spaces over a seven year period. The Act, however, is silent on the definition of a "subsidized space" and, thus, does not specify the amount of money that a province would have to provide to a space to qualify it as "subsidized." The Minister of Finance took a major part in developing the policy and has a designated authority in the bill equivalent to the Minister of Health and Welfare. Mr. Wilson's intentions were to ensure that the legislation was

Rock-a-Bye, Brian 1183

designed in the interests of fiscal control. As a reflection of this desire, the bill establishes the principle of a fixed ceiling on costsharing by setting a limit not exceeding $4 billion. Minister Epp reinforced this intent in his statement before the legislative committee: ... so we have put a cap on not only from the federal point of view but from the point of view of the ability to manage new programs financially.... I think one is going to see in the future, no matter what political stripe governments in Ottawa [we] have, more and more of this federal-provincial type of agreement, where both the provinces and the federal government know what their financial obligations are downstream. 40 This ceiling converts the open-ended cost-sharing arrangement of CAP into the equivalent of negotiated block funding grants, although the provinces must still spend in order to get their allotment. The federal government will contribute 50/50 on operating costs of both commercial and non-profit spaces and share capital costs for non-profit spaces on an enriched 75125 formula. There is also a "top-up" provision to a maximum of 90/10 federal cost-sharing to aid the poorest provinces that have drastically underdeveloped systems to catch up and to enable them to participate because they may have been unable to provide even 50 cent dollars. The formula for the maximum federal contribution is calculated based on a comparison of national and provincial per capita entitlements per year, but provincial allocations will be negotiated one by one with the provinces. Although the preamble of the Act mentions the need to improve the availability, affordability, quality and accessibility of child care services, the body of the Act is silent about national objectives and delivery standards. Rather, the Act takes the position of non-intervention in provincial regulatory jurisdiction. Provinces are given the choice of remaining with CAP or joining this funding arrangement. It is anticipated that all - with the possible exception of Ontario and Quebec - would switch due to the increased flexibility. Indeed the very insertion of such a generous formula may be construed as a means to ensure that provinces opt in to the new finite arrangement and out of the ceiling-less Canada Assistance Plan. In its principles, the 1988 Canada Child Care Act is very similar to the Canada Assistance Plan in one significant

184 I How Ottawa Spends

aspect and diametrically different in another. Like CAP, the proposed Act places minimum conditions and accountability requirements on the provinces. In stark contrast to CAP, it places legislated limits on the total amount of money available and, thereby, places ceilings on the dollar allotments to individual provinces. There are four aspects and critiques of the proposed legislation that are worth examining in detail: 1) the generosity of the amount of funds allocated, 2) the issue of national objectives and accountability, 3) concern about funding for-profit care relative to the aim of maintaining quality and 4) identification of winners and losers among the provinces.

Capping CAP The greatest concern of the child care advocacy organizations and opposition parliamentarians is that the $4 billion is, in reality, less, not more money than would have been available under the openended CAP program: that the proposed Canada Child Care Act would "cap CAP" and, thereby, serve as a policy of containment. This argument is based on the fact that the provinces in the past have not taken up CAP as fully as they might, but could do so in the future by raising their threshold income levels under which families qualify for subsidies and by increased direct spending on operating costs to push CAP expenditures exponentially beyond their present levels. A background document prepared for the Parliamentary Special Committee concludes that if all provinces were to adopt the federal subsidy guidelines, 72 per cent of Canadian children under six years with working parents would be eligible for a full or partial subsidy.41 In rebuttal, Mr. Epp asserts that this is a theoretical and even spurious argument because it is unlikely that the provinces would ever spend to their full potential under CAP. In reality, the ability of the provinces to spend serves as the major restraint on CAP expenditures. If we examine projections of existing provincial expenditures (not hypothetical forecasts based on greater take-up rates) as shown in the following graph, it can be roughly estimated that CAP spending over seven years would total between $2.2 and $2.6 billion at an estimated growth rate of 15 per cent a year. 42 Several provinces, notably Ontario and Quebec, however, have already implemented or developed plans to greatly expand their child care systems over the next few years. With Ontario expanding its services by 133 per cent over three years and Quebec

Figure 7.2 Actual and Predicted Provincial Expenditures on Child Care 1983-1995

$1,400 $1,200 $1,000 S800 $Millions

$600 $400

5'

~

$200 $0 '83

'84

'85

'86

'87

'88

'89

'90

'91

'92

'93

Year Ending Source: Total estimated provincial expenditures 1989-95 = (approx.) $6.1 billion. Federal share under CAP ." (approx.) $2.2 billion. (based on Health and Welfare Estimates; assumes 15% annual growth.)

'94

'95

OJ ~ en ~.

-81 III

;:,

186 I How Ottawa Spends

doubling its spaces over five years, it is not unreasonable to assume a period of greatly increased overall provincial spending. 43 In addition, costs may rise significantly in the foreseeable future as salary enhancement of day care workers (who presently earn an average annual income of $8,867) becomes desirable to prevent rapid turnover and, thus, maintain quality care or as pay equity legislation forces salary increases. 44 Because the child care debate has focussed on the federal government, we tend to lose sight of the fact that most of the provinces have not taken the leadership role in creating and regulating the delivery system as they might. The advantage of the proposed Canada Child Care Act over CAP as a funding formula is that it provides more flexible and enriched funding arrangements to help the provinces, especially the poorer ones, to expand their facilities. The danger is that because the system has been so chronically under-funded in the past, the $4 billion allocated, although seemingly a lot, will merely perpetuate inadequacy. From the advocates' point of view, the target of 200,000 spaces is itself inadequate: when added to the existing services, 200,000 new spaces will satisfy less than 25 per cent of the need. The myth of the debate is that the $4 billion dedicated by the proposed Canada Child Care Act is new money. In fact, it is primarily money that has been recycled. Using very restrictive parameters, it is estimated that at least one-half of this money would have been spent under CAP at any rate and there is reasonable evidence to conclude that CAP spending to 1995 would have been at least as much as the "new" fund.

National Objectives and Accountability The child care debate is aggravated by two irreconcilable views of federalism: a nation-centred versus a province-centred view of the political order. 45 A fundamental issue is the extent to which the federal government can legitimately use its spending power to leverage provinces into particular delivery system configurations. The child care advocates want to see a strong federal leadership role with national objectives clearly articulated in legislation to pennit some measure of consistency across provinces and accountability of federal monies spent. While most have backed away from (if they ever really supported) national standards that would be uniform across the country - for example, that the child/worker ratio be identical in Metro Toronto as in Labrador City - they do want some federal "criteria" that would imply what the provincial standards should look like. 46 Their concern is focussed less on

Rock-a-Bye, Brian 1187

ensuring similarity in regulations across provinces, and more on the strength of regulations: that is, a concern that the provincial governments act to provide a strong regulatory environment that promotes quality care. Because the provinces in the past have been generally hesitant to do this on their own volition, the advocates assert that regulations must be imposed by the federal government and enforced under accountability requirements of the funding arrangement. 47 In contrast, the Conservative government is diligently avoiding trespass on provincial jurisdiction. Jake Epp has repeatedly stated: The federal Government should not, and this Government will not, dictate to the provinces the design and delivery of services that are so clearly within their own jurisdictions.... There is no federal role in standards today. 48 In this sense, the proposed Canada Child Care Act anticipates section 7 of the Meech Lake Accord, which provides constitutional recognition of the federal spending power by providing reasonable compensation to a province for opting out of national programs provided that it establishes a provincial program compatible with national objectives. In this case, the federal government has itself limited the potential broader effects of its spending power by avoiding delineation of social policy details that would spark the tensions of federalism. 49 It is not argued that the void of enforceable national objectives in the CCCA is due to the Meech Lake Accord. Rather, it is contended that the philosophy of decentralized federalism of the Tory government brought us both the 1987 Constitutional Accord and this framework funding legislation which leaves the details to be etched in by collaborative negotiations between executives. As Simeon observes, relaxed conditions in cost-sharing arrangements are not an abrupt change, but have been evident (with the noted exception of the Canada Health Act) since the early 1970s.50 The conflicting views of federalism can be easily discerned in the following exchange which took place between John Bosley, Conservative MP, and Lynn Kaye, President of the National Action Committee on the Status of Women, during the legislative committee hearings:

Mr. Bosley: We cannot guarantee what the provinces will or will not do, we can only say that we are going to do our

188 I How Ottawa Spends

very best to use every carrot we have financially to encourage them to do more. That is precisely what the policy is. Ms. Kaye: That is precisely the point, because you have not used every carrot, and that is our critique. The federal government is quite capable of setting out more carrots and more conditions about the way the money will be made available. In so doing, it can create a system that creates greater consistency across the country and higher quality standards. 51 Not only is this hands-off approach consistent with the Tory philosophy, it is also politically expedient because an attempt to augment the use of spending power with standards or other specific federal conditions would have produced long wranglings over details similar to the confrontations over the Canada Health Act and would have been counter to the federal government's intent to kick-start investment in child care immediately without delays in negotiating. All regulatory requirements and standards such as level of training, size of centres and child/worker ratios will be established by the provinces. According to an amendment to the legislation made in committee, they must commit themselves to giving special priority to meeting the needs of children from low income families and linguistic and ethnic minorities. Each province will negotiate an agreement in which the province will designate targets for the creation of spaces and will specify what aspects of services they will regulate. The provinces, however, do not need to indicate in federal-provincial agreements what the standards themselves will be. This type of agreement that embodies political decentralization gives rise to problems of accountability and enforcement. The federal government must rely on accurate and compliant reporting from centres to provincial governments and from provinces to the federal government because National Health and Welfare has no means of auditing the system directly. This type of conditional grant poses the question: how much accountability should the federal government expect? But, the dilemma in an agreement such as this one in which only vague national objectives rather than specific standards are laid out is: accountability for what? Virtually nothing is specified in the framework agreement that the recipients of the funds could be held accountable against. The watchdog of accountability on provincial compliance with their specified intentions will not be the federal government, but will be provincial publics. Implicitly, the legislation anticipates that if a province is not meeting its own designated targets or enforcing its regulations, watch-

Rock-a-Bye, Brian 1189

ful provincial child care advocates and parents will notice and pressure the provincial government into compliance. Few federal governments, however, would wish to be in a position of having to enforce standards in a policy field as strewn with diversity and as mined with ideological positions on the role of the commercial sector as is the present child care system. Indeed, the federal government would likely be even more ineffectual in this capacity than provincial governments have been, but it would not have been impossible to delineate stronger requirements in the legislation for ensuring that the provinces enforce their own standards. The province-centred view of federalism suggests that we have nothing to fear from the provinces because each is, after all, a duly elected representative of its political community.62 But given the past history of provincial underfunding, we should hope that the child care negotiators are sharp and that the tensions between provincial finance ministers who want to pull the purse strings tighter and community/social services ministers responsible for day care who want to expand facilities are overcome so that provincial commitment is made to a better child care system.

For-Profit Care and the Quality Debate The dominant issue in the debate over quality care is whether quality is best created and maintained through the regulatory environment or is inherent in the auspices - for-profit or non-profit of the facility. A recent study conducted for the Parliamentary Task Force suggests that non-profit care generally does provide better quality and that in Canada the regulatory environment to enforce child care standards is relatively weak. 63 The proposed Canada Child Care Act provides capital funding on a 75/25 basis for non-profit care only, but offers its 50150 cost-sharing on operating costs to both the non-profit and commercial sectors. 54 The fear on the part of advocates is that an expanded forprofit sector will reduce quality and lower afford ability because child care is a highly labour intensive industry in which profits are made by reducing the number or quality of staff or by raising fees. Moreover, most of the child care advocates who appeared at public hearings argue that it is immoral to make money off children. They fear further commercialization of child care through invasion of American chains under the Free Trade Agreement because oper-

190 I How Ottawa Spends

ating subsidies could not be denied to American finns if they were provided to Canadian ones. The advocates' preference would be to severely restrict commercial day care and provide incentives for the small "mom-and-pop" operations to convert to non-profit centres controlled by parent-boards. Even the Senate made strong recommendations on the commercial sector in child care: If one is interested in creating a real child care system, the time has come to use this energy within a non-profit structure.... In short, government should not be funding new commercial services through capital or operating grants, or fee subsidies, or by any other means. 65 Support was provided to the commercial sector in the Act, not due primarily to the Conservative pro-business ideology (although the Conservatives in general are not philosophically uncomfortable with commercial child care), but on the political exigency of dealing with existing system characteristics. In Alberta, 75 per cent of child care is provided in for-profit centres, in Ontario 40 per cent and in the Atlantic provinces, the "commercial" home care operators predominate. Because the Conservatives wanted the legislation implemented swiftly with full conversion from the open-ended CAP and wanted to avoid inter-governmental confrontation, concessions were made in an anticipatory fashion to the provinces via operating grants to the commercial sector. This federal support for commercial care will have the effect of expanding the for-profit sector. Already the new Conservative government in Manitoba has reversed the practice of the former New Democratic government that provided support only to non-profit facilities and has recently provided new subsidies to commercial care. 66 The expansion of for-profit care provides further reason to strengthen the provincial regulatory and enforcement mechanisms. A strong regulatory environment would not be produced as a result of the Canada Child Care Act; this initiative is left entirely for provincial governments.

Provincial Winners and Losers At the time of writing, negotiations with the provinces over agreements have been stalled in anticipation of new legislation. It can be fairly safely assumed that a new Act will contain more or less the same funding formulas as Bill C-144 because it is the enriched cost-sharing that serves as the hook to bring the provinces into the agreement. In spite of some initial concerns raised by provincial

Rock-a-Bye. Brian I 191

day care coordinators in a document leaked to the press, most provinces are likely to opt into the proposed funding fonnula. For provincial politicians concerned about electoral time horizons, the short-tenn gains of increased funding over seven years will outweigh the long-tenn considerations of open-ended funding under CAP. 67 The provinces which will benefit the most will be the poorer provinces eligible for the greatly enriched cost-sharing and Alberta which will at last be able to receive federal support for its extensive commercial sector. Analysis done for this chapter suggests that Ontario and Quebec will both be disadvantaged under the Act relative to the existing CAP arrangement. They will immediately hit their ceiling on provincial allotments due to the overall limit on the fund; if new legislation does not provide a bigger pot of money, their participation will be in question. The proposed Canada Child Care Act offers a "top-up" provision to a limit of 90 per cent of provincial expenditures, above the standard 50/50 share in operating costs to encourage the poor provinces with undeveloped systems to invest heavily and quickly in an effort to catch-up with the wealthier provinces. Over time, the aim is to equalize expenditures per child across the country. Due to the various restrictions of CAP, the federal share of expenditures that would be paid under the existing arrangement is only about 30 per cent. Table 7.3 shows the differential cost-sharing each province would receive for their operating costs and the maximum federal contributions using 1987 actual provincial expenditures as examples. The table serves only as an illustration of relative provincial allotments because, in reality, the input figures would be projected expenditures drawn from the negotiated agreements between the provinces and federal government. Each province's cost-sharing calculation will change over time because individual provincial allocations are tied in the fonnula to the aggregate expenditures of all provinces. It can be safely assumed, however, that no province would get less than 50 per cent of its 1987 expenditures. 68 Three provinces - New Brunswick, Nova Scotia and Newfoundland - receive the limit of 90/10; British Columbia, Saskatchewan and P.E.I. get top-up provisions of varying proportions, while Alberta, Manitoba, Ontario and Quebec would costshare at the basic 50/50 split for operating costs and 75/25 (federal! provincial) for capital costs. Ontario would receive the single largest chunk of money due

to its population, size of existing system and projected future spending, but would do less well in terms of dollars and spaces than it would have under an open-ended fonnula - even if it cost-

192 I How Ottawa Spends TABLE 7.3 Federal-Provincial Cost Sharing under Bill C-144 Based on 1987 Actual Provincial Expenditures on Child Care Province

Maximum Provincial Federal Entitlement Contribution 1 perChild2 ($millions)

B.C.

$18.1 39.0 7.8 15.3 108.0 47.5 2.6 5.5 2.0 .9

Alberta Sask. Manitoba Ontario Quebec N.B. N.S. Nfld. P.E. I.

$30 69 26

65 57 35 9 15 8 19

Amount Cost-Sharing of FederaV Top-Up3 Provincial ($millions) full none full none none none limit limit limn full

($ .6) ($1.25)

($1.2) ($2.4) ($ .9) ($ .35)

52148

50/50 60/40 50/50 50/50 50/50 90110 90/10 90/10 82118

Figures for Yukon and N.W.T. not available 1. These figures are derived by application of the formula of Bill C-144 to 1987 expenditures and include contributions to operating costs only. 2. The Provincial Entitlement is calculated as: Federal Contribution to Province through 50/50 cost-sharing (1987) Number of Children in Province 0-14 years The National Average Entitlement is $44. A Province is eligible for top-up if its provincial entitlement is < 70 per cent of this amount (ie. < $31). 3. The possibilites are: no top-up (50150 cost-sharing); full top-up (federal share limit (maximum enrichment Is 90/10 split).

sono

= 50 to 90 per cent);

shared at only (federal/provincial). The government of Ontario embarked on a major expansion of its system beginning in 198788 that will provide an increase of $165 million over the three year planning cycle. 59 Due to the fixed ceiling of the federal strategy, the minister responsible, Mr. Sweeney, has publicly stated that the Ontario system will require a cutback of 15 per cent in its first year under the province's New Directions for Child Care Plan. Aldermen from the City of Toronto appeared before the legislative committee to say that the city's own expansion plans had been limited by the provincial necessity to cut back in proposed funding and they expressed fears that the federal strategy will hurt the ability of municipalities to address the child care crisis. Whether Ontario opts into such a scheme will depend on the level of funding provided by new legislation and on the availability of operating grants for its commercial sector. 60

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Quebec will be in a similar position because the government has announced plans to spend an extra $200 million over the next three years; this would raise Quebec's expenditures from approximately $95 million in 1987 to $193 million in 1991-92. 61 If this expansion were cost-shared at the capital cost rate of 75/25, Quebec alone could absorb roughly 20 per cent of the total amount for all provinces. The government of Quebec, like that of Ontario, will be forced either to cut its spending plans, carry a large portion of its expenditures above the CCCA shared-cost or choose to remain in CAP under which 30 per cent of all its expanded expenses could be met. Whether Quebec decides to opt into this kind of scheme is likely to depend on the status of the Meech Lake Accord. If there appears to be some possibility of salvaging the Constitutional Accord when new legislation is passed, Quebec would probably join the federal child care plan as the provincial government would not want to risk losing the much desired Accord by appearing to be isolationist. If the Accord appears to be lost, Quebec is likely to remain with funding under the Canada Assistance Plan.

Due to the funding ceiling, there will be some hard choices for almost all of the provinces to make: choices between capital construction, operating grants, subsidies and enhancing the salaries of child care workers. As a social assistance measure, CAP has had the effect, argues Banting, of contributing to more comparable standards of welfare across the provinces. 62 As a mechanism for subsidizing child care, however, CAP has pennitted the diversity in system configurations to build. Because the proposed Child Care Act, like CAP, places minimal conditions on its money, the provinces will be relatively unfettered in the development of facilities and regulations. Therefore, the diversity in the nature of the system between provinces is likely to increase. British Columbia, for example, has announced that it will continue to use its child care expenditures as subsidies for the welfare system and will not give operating grants to centres. This restriction may have the unintended consequence of forcing day care operators to close down at their present location due to the high costs of maintenance and re-establish themselves as a new business to take advantage of capital start-up funds. 68 Unlike most of the other provinces, Quebec intends to expand its school-based care program for young children (aged six to eleven years) outside of regular school hours. 64 In all provinces, growth of the commercial sector is likely to expand. The ministers with responsibility for child care in Manitoba and Nova Scotia have both indicated they would like to see private, commercial centres get funding. 65

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The funding formulas are preferable to those of CAP, but immediately force us to ask again whether the total amount of money is adequate. Provincial day care coordinators have unambiguously stated that the $4 billion ceiling puts them in a "fiscal straightjacket.,,66 They have expressed concem that the bill grants wide and unprecedented powers to the Minister of Finance in an area of social policy that has traditionally been the reserve of the Minister of Health and Welfare. Another serious problem anticipated by provincial officials is that Bill C-l44 does not build in protection against inflation. Although the proposed Act states that maintenance funding (set at the level of provincial allotments in 1985) will be provided for the eighth and subsequent years when the capital cost-sharing ceases, the provinces fear that assurances regarding future maintenance funding are inadequate. As soon as legislation is reintroduced, the provinces will present their plans and dicker bilaterally - and in secret - with federal officials over the largest amount and best cost-sharing arrangements they can extract. The tension between provincial finance ministers and ministers responsible for child care services probably mirrors that at the federal level in which line officials and their minister want to expand services as extensively as possible and the Minister of Finance wishes to curb overall spending. 67 We can expect to see considerable negotiations within as well as between govemments.

CONCLUSION

The present structure of child care services in Canada is often likened to our public education system in the 1850s or 1860s: it is profoundly immature and under-funded. The National Strategy on Child Care is not a coherent and comprehensive plan to provide child care services. We should not expect it to produce a consistent and universal delivery system like the contemporary public education or the health care systems. The strategy is, rather, a fragmented package designed to appeal to a diversity of audiences. There is extensive symbolic use of the tax system to recognize the societal significance of stay-at-home parents which is highly compatible with the Tory approach of the social service market. The concem is that tax assistance does not provide real choice for either low income parents who need to eam more than the $200 supplement to the tax credit or for parents who use the underfunded child care system. In broad terms, symbolic policies, such as the use of the tax system in this policy arena, tend to force

Rock-a-Bye, Brian 1195

attention on the significance of their target or on implicit ideologies while diverting energy from substantive issues and deflecting attention from questions about their actual effect. 68 The proposed Canada Child Care Act is strictly a cost-sharing arrangement not unlike the Canada Assistance Plan with its minimal specification of objectives, standards and conditions and which is based on a restricted view of the federal spending power. In one very significant aspect, however, the Act is dramatically different from CAP: the CCCA places a legislated ceiling on the amount of money available, whereas CAP is an open-ended program. The proposed Child Care Act is not intended to be a plan for a delivery system with national enforceable objectives. There is no attempt here to "Trudeauize" the provinces into compliance on details of social policy. In accordance with both Conservative goals of national reconciliation and fiscal restraint, this tactic reduces the possibility that some provinces may not opt-in and choose other compensation (in this case, the open-ended Canada Assistance Plan). As Banting argues in his excellent analysis of the spending power under the Meech Lake Accord, the long-term product of this approach will be a more regionally diverse pattern of social service initiatives which are sensitive to regional particularities and preferences. 69 This increased variety will occur in provincial regulatory schemas and is permitted by the non-specificity of national objectives and accountability mechanisms. It is likely to occur in spite of the fact that the top-up provision attempts to equalize per capita spending across the provinces. For those who value the legitimacy of diversity and strength of provincial governments in a federal state, this is a positive development. For those on the opposite conceptual pole of federalism who view national programs with Canada-wide objectives as an important source of collective affirmation and as an instrument of national unity and who view secret collaborative negotiations between governments as an abrogation of accountability, the Canada Child Care Act is indeed a sorry and dangerous potential prototype for other social program initiatives. Although a large portion, if not all, of the $4 billion allocated to the proposed Child Care Act is old money, the flexible funding formula has a distinct advantage for the provinces over the previous CAP mechanism. The enriched cost-sharing will benefit all provinces, but will especially help the poorer provinces, providing they can undertake to meet their 10 per cent share. The Child Care bill entrenches the principle of fiscal control over open-ended costsharing programs by setting maximum limits on its funding. The effect of this ceiling will be to disadvantage those provinces that

196 I How Ottawa Spends

already have comparatively well developed, although still underfunded, child care systems and that have large scale plans to expand. The debate will rage for a considerable time yet as to whether this amount is adequate to providing the designated 200,000 spaces and whether it will serve as a policy of containment over the CAP arrangement. An even more serious question remains: are 200,000 new spaces over seven years enough? The child care advocates have answered in a resounding chorus of "nays." The federal government, in contrast, argues that this is about all that the provinces realistically can afford to build in a seven year period. Further, because the Act is only a funding arrangement that targets only numbers in order to avoid interference with provincial jurisdictions, it cannot - and does not try to - address the related issues of affordability, accessibility and quality care.

Finally, a major component of a comprehensive child care system entirely overlooked by the National Strategy is extended maternity benefits and parental leave. There is reason to believe that neither the pronounced trend of more mothers in the labour force will reverse itself over the foreseeable future, nor that women would want a return to traditional at-home lifestyles. Extended parental leave, not tax assistance, would provide the basis for some degree of real family choice. In a comparative analysis of parental leave provisions in Western Europe, Eastern bloc and North American countries conducted by the Cooke Task Force, Canada ranked second to last, negatively outdone only by the United States, in the length and replacement income of its parenta1leave measures. Extended and flexible parental leave would give parents the ability to enter and exit from the labour force so that they can remain at home with very young children without being seriously penalized in future employment. The Scandinavian countries serve as an excellent model for parental leave and the Cooke Task Force, the Martin Parliamentary Committee and the Forget Commission, as well as a recent Federal Court decision, all recommended extending provisions for parental leave. 70 This is a policy field that the federal government can legitimately be involved in under the Unemploy'm6'nt Insurance Act, the Canada Labour Code and in its own role as an employer. The absence of extended parental leave in a policy that purports to be a national strategy on child care is a glaring omission that should be addressed in the Tories' second term.

Rock-a-Bye, Brian 1197

WHEN THE BOUGH BREAKS .•• At this point, we are anxiously awaiting the reintroduction of child care legislation, perhaps as early as the summer of 1989 or as late as 1990. The fact that a new minister, the Honorable Pernn Beatty, has assumed the portfolio of National Health and Welfare means that Bill C-I44 may be opened for re-examination. In particular, Minister Beatty may try to overcome the negative public response to the Child Care Act. Given the Tory philosophy of federalism and the politics of restraint, however, the parameters of mobility will be limited. The activist role assumed by the Minister of Finance and the increased attention on the deficit will undoubtedly require that fiscal control be maintained by a fixed ceiling on expenditures. The provincial and public response to the limit of $4 billion indicates that the government should seriously consider increasing the amount of money allocated. But, can we afford to pay more than $4 billion over the next seven years for a child care system? It must be recognized that without new legislation, much of this amount would be spent anyway under CAP, but would be directed to the provinces that can afford to spend under the 30170 (federall provincial) cost-sharing of the Canada Assistance Plan. If the distributive tax assistance measures are reduced in favour of direct investment in the delivery system, additional funding could be found, even without adding new dollars. Any less money in new legislation would be a policy of containment on child care. Given the Tory approach to federalism, the new legislation is unlikely to be other than a framework agreement that does not intrude into provincial jurisdiction with specific conditions or regulatory requirements. In starting again, however, the Conservative government might consider amendments that would give the federal government greater accountability on its money; these might include the specified right of the federal government to withhold funds from provinces that have not established reasonable standards or which have not been enforcing their standards. Finally, the government might give more serious attention to the issue raised repeatedly by the advocates: the argument that non-profit care directed by a parent-controlled board is the best way to ensure quality care. To date, the child care debate has been set in a political discourse which views child care primarily as aid for needy families. For this reason, the issues of income security and redistribution have been confused with the need to build a child care delivery system. 71 Few voices in the debate, even the feminist ones, are vocally arguing the fundamental point raised by the Royal Commis-

198 I How Ottawa Spends

sion on the Status of Women and by Judge Abella: Women will never be able to achieve equality or to expand their traditional roles as homemakers and mothers without a comprehensive, affordable child care system. Perhaps women's groups need to rock this cradle more vigorously in order to add a new level of discourse to the upcoming round of the child care debate.

Rock-a-Bye, Brian 1199

Notes

*

The research assistance of Sandy Stewart and critical review by Katherine Graham and Bruce Doern are gratefully aclmowledged. Thanks are also due to the federal and provincial officials, as well as Martha Friendly of the Childcare Resource Unit, University of Toronto, and Ben Battle of the National Council on Welfare who discussed child care policy at length with me.

1.

Royal Commission on the Status of Women in Canada, Report (Ottawa: Information Canada, 1970), p. 263. These figures are based on an April 1967 child care survey conducted by the Dominion Bureau of Statistics.

2.

National Council of Welfare, Child Care A Better Alter-

native (Ottawa: Department of Health and Welfare, 1988), p.3.

3.

Ibid.

4.

The original strategy did not explicitly deal with child care arrangements for on-reserve Indians, but successful lobbying by Native organizations brought the dedicated $60 million. In July 1988, the minister announced an additional $1 billion ($940 million to the Child Care Act and $60 million to the initiative for Native child care). This supplement is the result of preliminary negotiations with the provinces, notably Ontario, at which time it became evident that the original costing figures for 200,000 new spaces were based on a grossly underfunded system and that Ontario's expansion alone could take up a very large chunk of the money.

5.

The minister noted his intention in the House of Commons on September 20, 1988 to announce early in 1989 details of the on-reserve Indian program and to enter into agreements with Indian communities so that funds will be available April 1, 1989.

6.

Globe and Mail [Toronto], December 19, 1988.

7.

The Social Services Minister in Alberta, Connie Osterman, has expressed concern about infringement on provincial jurisdiction, but this has not taken the form of outright condemnation of the proposed Act in principle. Calgary Herald, July 26, 1988, p. AI.

200 I How Ottawa Spends

8.

Childcare Resource and Research Unit: Childcare Information Sheet (Toronto: Centre for Urban and Community Studies, University of Toronto, 1987), nos. 12 and 30.

9.

For an examination of the quality debate, see: Martha Friendly, Daycare-For-Profit: Where Does the Money Go? (Toronto: Daycare Resource and Research Unit, Centre for Urban and Community Studies, University of Toronto, 1986) and SPR Associates Inc., An E~loratory Review of Selected

Issues in For-Profit Versus Not-Far-Profit Child Care (Toronto: SPR Associates Inc., 1986). 10.

Task Force on Child Care, Report (Ottawa: Status of Women Canada, 1986), p. 331. The Cooke Task Force argued that some of these costs would be offset by job creation.

11.

Royal Commission on Equality in Employment, Report (Toronto, 1984), p. 192.

12.

Conunission on Review of the Unemployment Insurance Act, Report (Ottawa: Supply and Services, 1985).

13.

Special Parliamentary Committee on Child Care, Proceedings (Ottawa: House of Commons, 1985), Issues 1-51.

14.

Martha Friendly, "What the People Said," (Toronto: Daycare Resource and Research Unit, Centre for Urban and Community Studies, University of Toronto, 1987).

15.

The Martin Report recommends replacing the child care expense deductions with a credit of up to $3,000 per child under 14 years and argues in favour of extended parental leave provisions. Special Committee on Child Care, Sharing the Responsibility (Ottawa: Queen's Printer, March 1987), p.22.

16.

Lucie Pepin, M.P., "Choices for Childcare: Now and the Future," The Liberal Minority Report on Childcare (Ottawa: Liberal Party of Canada, March 1987). Margaret Mitchell, M.P., "Caring for Canada's Children: A Special Report on the Crisis in Child Care," (Ottawa: New Democratic Party, March 1987).

17.

Senate of Canada, Subcommittee of the Standing Senate Committee on Social Affairs, Science and Technology, Report

Rock-a-Bye, Brian /201

of the Subcommittee on Child Care (Ottawa: Senate of Canada, July 1988). In June 1987, the Senate Committee produced another excellent review of the family allowance, child tax credit and child care expense deduction. See, Senate of Canada, Standing Senate Committee on Social Affairs, Science and Technology, Child Benefits Proposal for a Guaranteed Family Supplement Scheme (Ottawa: Senate of Canada, June 1987). 18.

Ottawa Citizen, October 20, 1988. Toronto Star, October 5, 1988. The gaff made by John Turner in which he appeared confused as to how much the Liberal alternative would really cost and the ease with which child care was soon silenced in the campaign suggests that child care was less than a top priority for the political parties in the 1988 election.

19.

House of Commons, Hansard (Ottawa: Queen's Printer, September 20, 1988), p. 19447. During the television debates of the election campaign, Prime Minister Mulroney seemed to downplay the role and concerns of interest groups when he said that he didn't need to listen to them because he had Barbara McDougall and Flora MacDonald in his Cabinet.

20.

On September 29, 1988 a coalition of 14 national organizations sent a letter to Prime Minister Mulroney requesting that the government withdraw or substantially amend Bill C-I44. Their opposition is based primarily on: 1) lack of national objectives, 2) limitations on funding and 3) encouragement of commercial care. These groups were joined by others for a meeting in Ottawa in February 1989 to devise strategies for continued advocacy of the federal government and to begin lobbying provincial social service ministers so that they might push the federal government for more money in the new legislation. The Canadian Ethnocultural Council has also expressed concerns that the legislation require child care services to be sensitive to minority and heritage language rights and multiculturalism.

21.

Senate of Canada, Proceedings of the Standing Senate Committee on Social Affairs, Science and Technology (Ottawa: Senate of Canada, Issue No. 15, October 1, 1988), p. 15:118.

22.

Senate of Canada, Proceedings of the Standing Senate Committee on Social Affairs, Science and Technology

202 I How Ottawa Spends

(Ottawa: Senate of Canada, Issue No.7, May 10, 1988), p. 7:20. For the symbolic significance and societal value of mothers who choose to remain at home, Minister Epp states in this speech that he also favours the implementation of a homemakers' pension. 23.

The politics of compromise that produced the refundable child tax credit are discussed in Brigette Kitchen, "The Refundable Child Tax Credit," Canadian T(Wation, Fall 1979, pp. 44-51 and G. Bruce Doem, T(W E~enditure Decisions arul the Politics of the Canadian B'Wlgetary Process. Paper presented for the John Deutsch Institute for the Study of Economic Policy, Queen's University, November 1988.

24.

The Conservative government reduced the income threshold of the credit on January 1, 1986. and partially indexed the credit to the Consumer Price Index. Two installments on the basic credit are now paid to very low income families Oess than $16,000 income) so that they do not need to wait until year end to receive the refund.

25.

National Council of Welfare, ope cit., p. 15.

26.

National Council of Welfare, Ibid., p. 16.

27.

Senate of Canada, Proceedings of the Standing Senate

Ccnnmittee on Social Affairs, Science arul Technology (Ottawa: Senate of Canada, Issue No.7, May 10, 1988), p. 7:27.

28.

Representatives of "Kids First," an Alberta non-profit group of mothers at home argued that the income tax system gives greater advantage to two income families. They would like to see a considerably larger credit to at-home moms. House of Commons, Minutes of the Proceedings and Evidence of the Legislative Ccnnmittee on Bill C-l4/# (Ottawa: Queen's Printer, Issue 4, September 7, 1988), pp. 4:41-55.

29.

Established in 1972, the child care expense deduction was originally available to one parent families only. The ceiling has been raised twice from the original $500 to $1,000 in 1976 and to $2,000 in 1983. For further discussion of this deduction, see: Senate of Canada, Child Benefits Proposal for a Guaranteed Family Supplement Scheme, ope cit., and Christine Blain, "Government Spending on ChUd Care in

Rock-a-Bye, Brian 1203

Canada," in Financing Child Care: Current Arrangements (Ottawa: Status of Women Canada, Background Paper for the Report of the Task Force on Child Care, Series 1, 1985), pp. 166-231. 30.

A study by Statistics Canada in 1981 estimated that expenses were claimed for only 44 per cent of children in the day care of a non-relative. Reasons for not claiming the deduction were: 39 per cent said they were unable to get receipts; 18 per cent said the deduction paid too little to bother; 12 per cent stated their incomes were too high or too low to make a difference and 9 per cent noted the claim process was too complicated. See, Report o/the Task Force on Child Care, op. cit., pp. 168-175.

31.

For average cost figures per province in 1986, see: Childcare Resource and Research Unit, ChildcareIn/ormationSheet, op. cit. The Canadian Advisory Council on the Status of Women estimates that in Ottawa, the cost for this family would be $17,000. See: Canadian Advisory Council on the Status of Women, Brie/to the Legislative Committee on Bill C-l44 (Ottawa: Canadian Advisory Council on the Status of Women, September 6, 1988), p. 13.

32.

National Council of Welfare, op. cit., p. 20.

33.

Special Parliamentary Committee on Child Care, Sharing the Responsibility, op. cit., Chapter 2. Canadian Advisory Council on the Status of Women, Communique, National Council of Welfare, December 3, 1987.

34.

Senate of Canada, Child Benefits Prqposal/or a Guaranteed Family Supplement Scheme, op. cit., p. 19.

35.

Ibid., p. 11.

36.

National Council of Welfare, qp. cit., p. 39.

37.

If the province uses an income test, the subsidy can only be applied to non· profit care. Ontario and the N. W. T. are the only governments to use the more intrusive needs test and, hence, their subsidies can be used in the commercial or nonprofit sectors. Ontario is in the process of moving to an income test rather than the needs test, which will limit its funding under CAP for commercial care; this is one reason

204 I How Ottawa Spends

it is interested in the proposed Child Care Act which allows operating subsidies for both commercial and non-profit care. A detailed analysis of CAP procedures is not vital to the present discussion and has been covered in: Allan Moscovitch, "The Canada Assistance Plan: A Twenty Year Assessment, 1966-1986," in Katherine Graham, (ed.), How Ottawa

Spend81988-89, The Ccmservatives Heading into the Stretch (Ottawa: Carleton University Press, 1988), pp. 269-307. Task Force on Program Review, Service to the Public, Canada A88istance Plan (Ottawa: Supply and Services, 1985). Special Committee on Child Care, Provincial Day Care Subsidy SY8tems in Canada (Ottawa: A Background document prepared by the Staff of the Special Committee on Child Care, 1987).

38.

Special Parliamentary Committee on Child Care, Sharing the Responsibility, op. cit., p. 29.

39.

Special Parliamentary Committee on Child Care, Provincial Day Care Subsidy Systems in Canada, qp. cit., p. 16.

40.

House of Commons, Minutes of the Proceedings and E'l!iJUmce of the Legislative Cmnmittee on Bill C-l.u (Ottawa: Queen's Printer, Issue 2, September 1, 1988), p. 2:18.

41.

Special Parliamentary Committee on Child Care, Provincial Day Care Subsidy SY8tems in Canada, ffJJ. cit., p. 16. The National Action Committee on the Status of Women (NAC) estimates that assuming 12 per cent growth rate in CAP (the rate over the past four years), the predicted increase in spaces under CAP funding would be 300,000 over the period. Testimony by Lynn Kaye, President ofNAC, House of Commons, Minutes of Proceedings and Evidence of the Legislative Committee on Bill C-IlH (Ottawa: Queen's Printer, Issue No.5, September 8, 1988), p. 5:142.

42.

The federal allocation of $4 billion was arrived at by estimating the cost of spaces in 1987 and multiplying this figure by the number of spaces (200,000) they wished to create. At first this produced a figure of $3 billion, but negotiations with the provinces indicated that this figure was inadequate. NAC had anticipated this shortfall and in January 1988 noted in its critique of the strategy that the government would require an additional $1.5 billion to pay for its own program. National Action Committee on the Status of Women, Smoke

Rock-a-Bye, Brian I 205

arul Minws? Or a Federal NatimuLl Child Care Strategy? (Toronto: National Action Committee, January 1988). In July 1988, the minister announced $940 million extra for the Canadn. Child Care Act. The figure of $2.6 billion for estimated CAP spending accords with the calculation made by the Advisory Council on the Status of Women in their brief to the legislative committee. 43.

The document that outlines Ontario's plan is: New Directions for Childcare (Toronto: Ministry of Community and Social Services, 1987). Quebec's plans to double its number of spaces is described in: Montreal Gazette, November 25, 1988, p. A4.

44.

Statistics Canada, Canadians and their Occupations: A Profile (Ottawa: Supply and Services, 1989), p. 269. Based on 1986 data. This figure includes workers in day care centres and those in unlicensed home care. The average income for licensed day care workers is somewhat higher, but still comparatively low. In Nova Scotia, for instance, child care workers with one to four years of post-secondary education earn one-half to one-third of the salaries of elementary school teachers with equivalent amounts of training. They earn 35 per cent of government farm workers (with no postsecondary education) in charge of animals and 53 per cent less than industrial workers. In British Columbia, 32.9 per cent of child care workers receive from $10,000 to $15,000 and 17.8 per cent earn less than $10,000 annually. It is not unreasonable to assume pay equity will eventually address these discrepancies. Low wages lead to high turnover of staff and the resulting lack of stability is a serious detriment to quality care. See: Senate of Canada, Proceedings of the Sf4ruling Senate Committee on Social Affairs, Science and Technology (Ottawa: Senate of Canada, Issue No. 15, October 1, 1988), p. 15:90 and 15:109.

45.

Richard Simeon, "Meech Lake and Shifting Conceptions of Canadian Federalism," Canadian Public Policy, Vol. XIV: Supplementary, 1988, pp. 7-24.

46.

Senate of Canada, Standing Senate Committee on Social Affairs, Science and Technology, Proceedings of the Subcommittee on Child Care (Ottawa: Senate of Canada, Issue No.2, April 12, 1988), p. 2:62.

206 I How Ottawa Spends

47.

In a review of more than 1,600 day care inspection reports from Ontario, The Globe and Mail found that nearly 40 per cent of licensed centres fell short of provincial regulations on qUality. This is due, in part, to lack of funding for inspection and, in part, to the province's desire not to close centres given the shortage of spaces. Yet Ontario is regarded as the province with the best inspection system. Andrew McIntosh and Ann Ruhala, "Policing of Ontario's Day-Care:' TM Globe and Mail [Toronto], February 7, 1989, p. AI0.

48.

House of Commons, Hansard, (Ottawa: Queen's Printer, September 20, 1988, p. 19444 and Senate of Canada,

Proceedings of the Standing Senate Committee on Social Affairs, Science and Technology (Ottawa: Senate of Canada, Issue No. 15, October 1, 1988), p. 15:36. 49.

As Keith Banting notes, this avoidance of standards is quite different from the recent federal government initiative with the provinces in housing which does provide for substantial federal control over construction standards, income levels of beneficiaries and even the geographic distribution of new housing units within each province. K.G. Banting, "Federalism, Social Refonn and the Spending Power," Canadian Public Policy, Vol. XIV: Supplementary, 1988, p. 86.

50.

Simeon, ope cit., p. 18.

5l.

House of Commons, Minutes 0/ Proceedings and E1Jidence o/the Legislative Committee on Bill C-l44 (Ottawa: Queen's Printer, Issue No.5, September 8, 1988), p. 5:150.

52.

Simeon, ope cit. For a view supportive of restricted federal spending power and provincial diversity see, Andrew Petter, "Meech Ado About Nothing? Federalism Democracy and the Spending Power," in K.E. Swinton and C.J. Rogerson,

Competing Constitutional Visions: The Meech Lake Accord (Toronto: Carswell, 1988), pp. 187-202. 53.

SPR Associates Inc., ope cit.

54.

Under CAP, if provinces used an income test to determine eligibility, subsidies could be directed to non-profit centres only. If a needs test was used (as Ontario and the N.W.T. chose to do), the funding could be directed to either nonprofit or for-profit centres. In effect, CAP makes very minor contributions to commercial child care.

Rock-a-Bye, Brian I 207

55.

Senate of Canada, Report of the Subcommittee on Child

Care, Ibid., p. 24. 56.

Calgary Herald, September 7, 1988, p. A10. Winnipeg Free Press, September 7, 1988, p. 1.

57.

Leonard Shifrin, "Child Bonus Arrived in Time for Election," Ottawa Citizen, January 12, 1989, p. A1S.

58.

For a description of the fonnula, see "Appendix" in House of Commons, Minutes of Proceedings and Evidence of the Legislative Committee on ]Jill C-l1,J, (Ottawa: Queen's Printer, issue no. 2, September 1, 1988).

59.

Ontario, Ministry of Community and Social Services, Ibid.

60.

House of Commons, Minutes of Proceedings and Evidence of the Legislative Committee on Bill C-l1,J, (Ottawa: Queen's Printer, Issue No.5, September 8, 1988), p. 5:96. It should be recognized that Ontario's funding for its conunercial sector under CAP will be diminished when it moves from a needs to an income test.

61.

Montreal Gazette, November 25, 1988, p. A4.

62.

Keith G. Banting, The Welfare State and Canadian Federalism, 2nd ed. (Kingston and Montreal: McGill-Queen's University Press, 1987), pp. 114-115.

63.

Senate of Canada, Proceedings of the Suboommittee on Child Care (Ottawa: Senate of Canada, Issue No.3, April 21, 1988), pp.3:6-25.

64.

Montreal Gazette, ope cit.

65.

Winnipeg Free Press, September 7, 1988, p. 1. Halifax Chronicle Herald, February 19, 1988, pp. 1 and 2.

66.

Graham Fraser, "Provincial Officials Assail Day Care Plan," The Globe and Mail [Toronto], November 15, 1988, p. A5. Leslie Fruman, "Day Care Plan," Toronto Star, November 13, 1988, p. F8.

67.

Interviews with federal officials from October to December 1988 indicated that there are intragovemmental negotia-

208 I How Ottawa Spends

tions between ministers of finance and those responsible for program delivery at both the federal and provincia1levels.

68.

Carolyn Tuohy, "Conflict and Accommodation in the Canadian Health Care System," in Robert G. Evans and Greg L. Stoddart, (eds.), Medicare at Maturity: Achievements, Les80'fUl and ChallenD68 (Banff: Banff Centre School of Management, 1987), p. 412; Murray Edelman, TM S1f11lbolic U868 ofPolitics (Urbana: University of Illinois Press, 1964), p.47.

69.

Banting, Ibid., pp. 88-89.

70.

The Schacter case is currently on appeal from the Federal Court.

71.

For a discussion of the concept of the "universe of political discourse," see: Jane Jenson, "The Limits of 'and the' Discourse," in Jane Jenson, Elisabeth Hagen and Cea1laigb Reddy, Feminization ofthe Labor Force (New York: Oxford University Press, 1988), pp. 155-172. The mainstreaming of the child care debate in Canada is discussed by Susan Prentice, "The 'Mainstreaming' of Daycare," in Sue Findlay and Melanie Randall, (eds.), Feminist Perspectives on the Canadian State, an issue of Resources for Feminist Research, 17, 3, September 1988, pp. 59-63.

CHAPTERS CANADA'S IMMIGRATION POLICY: COMPASSION, ECONOMIC NECESSITY OR LIFEBOAT ETHICS? Nasir Islam

Resume

On examine Ia politique canadienne en matiere d'immigration au cours des annees quatre-vingts, en particulier les mesures proposees par Ie gouvernement Mulroney. On se concentre sur l'intention des politiques, les buts operationnels et les programmes destines a realiser ces objectifs. On examine en detail Ie programme des immigrants entrepreneurs et la procedure de determination des refugies. On avance l'argument que dans la poIitique en matiere d'immigration, les facteurs ressortant de l'economie ou du marche du travail tendent a I'emporter sur des considerations d'ordre demograpbique et humanitaire.

Immigration has been a key element in Canada's socio-economic development since Confederation. Immigrants have made a very significant contribution to the growth of the labour force and market expansion for local goods and services. They have also contributed to the ever-increasing diversity and richness of the Canadian vertical mosaic. Despite its vital role, Canadians have traditionally remained ambivalent toward immigration. They vacillate between compassion and backlash. They like immigrants who contribute to capital formation, create jobs, alleviate labour shortages yet do not take away jobs from Canadians. Immigrants who may be an economic burden or a security or health hazard are not welcome. Canadians like to be the "international good guys" but are wary of the potential socio-economic costs of immigration. 209

210 I How Ottawa Spends

The vagaries of the economic and business cycle, leading to ups and downs in the levels of unemployment, has strengthened this ambivalence. Recently a never-ending stream of refugees, fleeing from surrogate wars, ethnic conflicts, political repression and worsening economic conditions, has tested the Canadian compassion, producing compassion fatigue and a backlash against refugees and immigrants. These attitudes toward immigrants are reflected in Canadian public policy on immigration in two important ways. First, various governments oscillate between restrictive and open measures, adjusting public policy to short-term economic and political factors. This results in policies that alternatively turn the tap on and turn the tap off on the flow of immigrants. Second, there is an over-emphasis on selectivity. The government devotes a great deal of attention to the control and regulation of the volume and quality of immigrants. A climate of lifeboat ethics results which discourages entry of those who may in any way endanger the stability and short-term survival of the Canadian lifeboat. This chapter will examine the immigration policies of the Mulroney government from 1984 to the present time. The central focus will be the government's policy objectives and the programs designed to implement these objectives. There will be an attempt to appraise the policy objectives and evaluate the programs in tenns of their effectiveness and efficiency. The chapter will also try to explore the discretionary limits imposed on the government in the immigration policy arena. BACKGROUND: PUTI'ING IMMIGRATION POLICY IN ITS HISTORICAL CONTEXT The foundations of the present immigration policy were laid in the mid-l960s. This was the era of an expansionist open door policy of immigration based on universal criteria (i. e., education, skills as opposed to ethnicity, or religion or nationality) of selection. This policy was formalized in the 1966 White Paper on Immigration. The White Paper focussed on the benefits of immigration, provided a rationale for an open door policy and instituted a selection system based on universal criteria. 1 Although immigration issues were far from eliciting a Canadian consensus, and a certain degree of ambivalence prevailed, there was a strident demand to eliminate discriminatory barriers. This was a reflection of the relative economic prosperity and liberal political climate of the decade. 2

Canada's Immigration Policy I 211

During this period, policy concerns about linkages between demographic as well as labour force considerations and immigration were retlected in the creation of the new Department of Manpower and Immigration.8 This expansionist policy based on manpower requirements was hardly surprising in view of rapid economic growth and labour shortages in skilled and professional categories. 4 By the mid-1970s this expansionist policy was no longer in tune with the changing economic environment. Canada experienced a very high rate of growth in its labour force, largely due to the baby boom generation, women and an increasing number of immigrants entering the labour force. The Arab oil embargo contributed to simultaneous production slow-downs and higher inflation. The combination of these factors lead to a high degree of unemployment. The government reacted with, among other measures, a restrictive immigration policy.6 This restrictive approach was reflected in the recommendations of the 1974 Green Paper on Immigration. The 19761mmigration Act, embodying these recommendations, became the basis of public policy on immigration. It continues to provide the basic policy framework within which the Canadian immigration policy is designed and implemented. The Act was designed to ensure some degree of demographic stabilization, family reunification, meet the labour market needs, impose universal criteria of admissibility and fulfil Canada's obligations to settle refugees. 6 POLICY OBJECTIVES: LONG-TERM VERSUS SHORT· TERM Formal statements of public policy stipulate at least four major categories or types of policy objectives in the arena of immigration: demographic, economic, social and humanitarian. The cu.nent immigration law requires that immigration policy be designed in view of demographic objectives concerning the size, rate of growth, stmcture and geographical distribution of the Canadian population. The law also requires the government to make explicit the manner in which these demographic considerations have been taken into account in presenting the annual Levels of Immigration Report to the Parliament. 7 Immigration policy has very significant implications for two major demographic issues: the size and the age structure of the Canadian population. Canada's total fertility rate (TFR) has

212 I How Ottawa Spends

remained below replacement levels for the past 16 years. It is unlikely there will be a significant increase in fertility levels in the near future. 8 Other studies of the TFR tend to support this view. 9 The Canadian population is expected to peak at 29 million at the turn of the century and decline thereafter. 10 Should there be a further decline in the TFR, the expected population decrease may even set in a decade earlier. ll Canada's declining rate of population growth has a significant impact on the age structure of its population. The Canadian population is characterized by an aging trend, with the smallest ever number of people under the age of 14 years and the largest ever number of people over 65 years of age. 12 A larger popUlation is viewed as necessary to permit economies of scale in production and the provision of additional resources to assure our social well-being. It is conducive to technological change. An aging population places an increasingly greater burden on a diminishing labour force and is less adaptable to changing economic circumstances and technology.13 Samuel and Jansson consider the absolute population size as an important detenninant of purchasing power and demand for goods and services. The age structure is important because it determines the proportion of workers to non-workers in a society.14 These arguments remain controversial and there seems to be no agreement on optimum popUlation size. There is, however, some consensus among experts and academics that population growth has a positive effect on economic growth and therefore the decline in the Canadian population needs to be stopped. It can be arrested, either by pro-natal policies or by pennitting higher levels of net immigration. No policy debate has arisen in Canada on the issue of fertility as a means of arresting the popUlation decline. Despite some concern for demographic considerations, Canadian governments during the last two decades did not seem to use immigration as a tool to increase population. They seemed satisfied with relatively low levels of net immigration and its marginal effect on the future population growth. This also seems to be consistent with the prevailing public preference to maintain the current level of population growth instead of stemming the declining growth rate. 15 Empirical data show that while the TFR has steadily declined along with the rate of population growth, immigration intake has gone up or down in response to short-term labour market considerations. 16 The age structure of the population has also received scant attention from the policy makers in the past. Instead, the immigration policy is intensifying the aging problem. 17

Canada's Immigration Policy 1213

The present government, like its predecessors, has not fixed any specific demographic objectives. It has, however, shown a great deal of concern for the demographic factors during its first term of office. There is a reawakening of concern about the immigrationdemographic linkage. 18 In 1985, the Immigration Minister stressed the need for a comprehensive review of the relationship between immigration and demographic needs as well as the socio-economic implications of the future size, structure and growth rate of the Canadian population. The government later announced a comprehensive review of demographic implications of socio-economic policies under the direction of the Minister of Health and Welfare. The findings of this review were originally scheduled to be announced in March 1989. The Immigration Act of 1976 is relatively clear in spelling out a mandate for the Immigration Department. The specific objectives, however, are not stated in clearly-operational terms. The law requires the immigration policy to foster the development of a strong and viable economy and the prosperity of all regions in Canada. It stipulates that immigration policy will be designed to enrich and strengthen the cultural and social fabric of Canada. It will facilitate the reunification of Canadian citizens and permanent residents with their close relatives in Canada. The law forbids any discrimination on the basis of race, ethnicity, nationality, sex or religion. The immigration policy must also fulfil Canada's international obligations concerning refugees and uphold its humanitarian traditions. 19 The Canada Employment and Immigration Commission's (CEIC) mission statement consists of two basic elements: development of a policy framework necessary for the efficient functioning of the Canadian labour market; and a reiteration of immigration policy objectives mentioned in the above paragraph.20 The Immigration Act and the mission statement provide the basis for the fourfold taxonomy of objectives frequently mentioned in official statements and documents. The 1988-89 Estimates, for example, maintain that the objective of the Immigration Program is to contribute to the economic, social, humanitarian and cultural interests of Canada. 21 CEIC's annual reports emphasize the same fourfold categorization of objectives. 22 Socio-humanitarian objectives refer to Canada's traditions of social justice, equity and concerns for refugees and persecuted people. Demographic objectives reflect concern for the size, structure and rate of growth of the population.

214 I How Ottawa Spends

Economic objectives represent concern for economic growth, investment and capital fonnation, job creation and short-tenn labour market needs. These formal statements of policy objectives remain relatively general and ambiguous. Therefore, they are subject to different interpretations. It is also apparent that long-term demographic considerations are sometimes at odds with short-term, cyclical labour market concems.

IMMIGRATION STREAMS: WHO GETS IN AND HOW? The social, humanitarian and economic objectives manifest themselves in the three corresponding immigration streams or categories. The social stream is uniquely composed of the family class and largely serves to reunite families. The family class or the family reunification program has often been called the comerstone of Canadian immigration policy. It has always been accepted as a desirable goal for Canada's immigration strategy. 23 It is clearly spelled out in the present legislation. 24 The program represents the government's commitment to the maintenance of the family unit in Canada. The separation of immediate family members has been viewed as a source of severe hardship and stress. Consequently the Family Reunification Program is considered important in promoting social stability. 25 For the purpose of family class immigration, the family is defined as a mother, father and dependent children under age 20 years. The Standing Committee on Immigration in its ninth report, published in 1986, recommended broadening the definition of family and created three classes in the social stream: family class, assisted family class and assisted relatives. These recommendations would have enabled adoptive children, widowed parents, parents without children, and fiancees to be included in the family class. The assisted family class would include: parents with dependents, siblings and non-dependent children. Nieces, nephews, grandchildren, aunts and uncles would be included in the assisted relatives class. The report also proposed to use actual dependency rather than the agebased concept of dependency in admitting members of the family class. 26 The government, however, maintained that too wide a definition of the family class would be detrimental to applicants in other classes by clogging the system with applications. ~ Adult siblings

Canada's Immigration Policy I 215

and non-dependent sons and daughters usually establish separate households in Canada. The government, therefore, believes that restructuring the family class would have a severe detrimental effect on its ability to manage immigration levels in response to labour market conditions.28 These applicants will continue to be selected on the basis of economic criteria as assisted relatives in the economic stream. However, the government has significantly enhanced their admissibility by increasing the kinship bonus from 10 to 15 points and by lowering the qualifying marks from 60 to 55. The government has also shifted the dependency requirement from age (below 21 years) to civil status; never-married children are now automatically included in the family class no matter what their age. Under the expanded admissibility criteria, parents of any age can also be sponsored by immigrants with three years residency in Canada. 29 Although the basic structure of the family class has not changed, the modification in the selection system and dependency test will have a considerable effect on immigration growth in the social stream. Immigrants in the family class will continue to be selected on the basis of demand (sponsorship applications) by residents in Canada. The sponsorship applications, in general, follow the trend in the economic stream. A larger number of immigrants admitted through the economic class usually leads to a 1arger number of sponsorship applications for the next two or three years. Sponsorship demand also tends to be higher in periods of economic growth and relatively lower when unemployment is high. The humanitarian stream is composed of Convention refugees, designated classes and those entering under special humanitarian measures. Convention refugees are defined by the UN 1951 Convention as those "who by reason of a well-founded fear of persecution for reasons of race, religion, nationality, membership in a particular social group or political opinion" are unwilling or unable to return to their country of residence. 30 The designated classes have been created for people who do not meet the UN definition of refugees but who are in refugeelike situations. At present there are three such designated classes: o Indo-Chinese persons: including people who have fled from Vietnam, Kampuchea and Laos and have not resettled. o Political prisoners and oppressed persons: these individuals would normally come under the refugee definition except they are still in their own countries.

216 I How Ottawa Spends o

Self-exiled persons: people who have left their country of origin but have not become settled anywhere and are afraid to return to their countries because of reprisals from their governments. This class includes people from Eastern European countries with the exception of Yugoslavia. 31

In addition to these two categories of refugees, Canada allows easy access to people from strife-torn countries who have suffered from civil wars, or regional and ethnic conflicts. Presently citizens of EI Salvador, Guatemala, Lebanon and Sri Lanka can enter Canada under special relaxed measures. 32 The economic stream of immigrants comprises business immigrants, independents and assisted relatives and retirees. Business immigrants consist of three categories: entrepreneurs, self-employed people and investors. People in this sub-category are chosen largely on the basis of economic criteria of job creation, investment and entrepreneurial skills. Retirees are chosen on the basis of their financial independence and ability to sustain themselves, without being a burden on social welfare systems. Independents and assisted relatives - by far the largest group in the economic stream - are selected on the basis of labour market criteria. The independent sub-category consists of workers chosen for open occupations purely on the basis of criteria given in Table 8.1. It does not include business immigrants. Assisted relatives undergo the same selection process as the independents, except they receive a bonus in units of assessment

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