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### Viewing cable 05OTTAWA1029, MAKING THE ECONOMIC CASE FOR CANADA:

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05OTTAWA1029 | 2005-04-07 15:48 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ottawa

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

    071548Z Apr 05

` `

    UNCLAS SECTION 01 OF 03 OTTAWA 001029

    SIPDIS

    SENSITIVE

    DEPT FOR WHA (DAS JEWELL), WHA/CAN (HOLST) AND INR (SALCEDO)

    USDOC FOR 4310/MAC/ONA

    TREASURY FOR IMI (NAGOSKI)

    E.O. 12958: N/A
    TAGS: ECON SOCI EFIN PGOV CA
    SUBJECT:  MAKING THE ECONOMIC CASE FOR CANADA:
              CAN THE GOC KEEP ONTARIANS ON BOARD?

    REF:  (A) 04 OTTAWA 2865      (B) 04 OTTAWA 2837

          (C) 04 OTTAWA 2896      (D) 04 OTTAWA 2394
          (E) TORONTO 817

    THIS MESSAGE IS SENSITIVE, BUT UNCLASSIFIED.  NOT FOR
    DISTRIBUTION OUTSIDE USG CHANNELS.

    SUMMARY/INTRODUCTION
    --------------------

    ¶1.   (SBU) Having invested a decade of their top talent in
    an effort to win Quebecers to the federalist cause, the
    GOC's national-unity strategists now find themselves in a
    changed landscape.  Provincial governments have grown bolder
    and more effective in asserting themselves on fiscal issues
    (ref B).  Several of them - not only Quebec - now openly
    weigh the economic pluses and minuses of being in Canada
    (ref C).  The richest provinces - Ontario and Alberta - do
    not have credible secession movements, but they potentially
    have many options for scaling back their engagement in
    federal programs.  Perhaps the greatest challenge to Ottawa
    is Ontario's apparently declining willingness to backstop
    the fiscal system (ref E).  Ontario simply has less to gain
    from Canada than it once did - or at least, Ontario
    governments think so.  Moreover, Ontarians and Albertans
    increasingly perceive that bank-rolling "have-not" provinces
    earns no thanks for them, nor for federalism.  If this is
    true, then "fiscal federalism" has arguably failed:  indeed,
    it has trained provincial governments to measure Canada in
    terms of economic self-interest.  For the GOC, making the
    economic case for Canada in Ontario could be even tougher
    and more crucial than it has been in Quebec.  Increasingly,
    the loyalty of a majority of Liberal Members of Parliament
    could be compromised between federal and Ontario interests.
    END SUMMARY/INTRODUCTION.

    "FISCAL FEDERALISM" BENEFITED QUEBEC
    ------------------------------------

    ¶2.   (U) The GOC's pre-World War II nation-building efforts
    focused on transportation, Western settlement, and rural
    development.  The industrial heartlands of Ontario and
    Quebec benefited from relatively high tariff barriers which
    gave them protected markets in other provinces for their
    manufactures and services.

    ¶3.   (U) From the 1950's to the 1990's, flows of funds from
    the GOC to provincial governments (e.g. "Health and Social
    Transfers") and from richer to poorer provincial governments
    ("Equalization Payments") became the main expression of the
    economic union.  Auto-manufacturing Ontario and energy-rich
    Alberta were the net contributors to the system.

    ¶4. (U) Meanwhile, Quebec declined relatively in economic
    status.  While several small provinces received more in
    transfers on a per capita basis, Quebec's larger
    population made it the largest overall beneficiary of
    "fiscal federalism."  The size of transfers to Quebec
    drew little criticism at first.  Separatism was becoming
    a major political force in the mainly French-speaking
    province, so binding Quebecers into Canada was
    considered a top national priority.

    FEDERAL DOLLARS BUY INFLUENCE - NOT GRATITUDE
    ---------------------------------------------

    ¶5. (U) Historically, Canada's federal government used
    fiscal contributions to extend its influence into areas
    of provincial jurisdiction - such as transportation,
    education, and health care.  With few exceptions (ref
    A), the trend was that provinces accepted federally-
    imposed policy standards in return for large
    contributions to their budgets (e.g. through the Canada
    Health Transfer).

    ¶6.  (SBU) While at least seven of ten provinces have
    been net recipients of GOC-administered cash, this does
    little to enhance Ottawa's popularity in provincial
    politics.  Provincial leaders reliably win votes by
    demonizing the GOC.  Indeed, the muddying of federal and
    provincial jurisdictions wrought by "fiscal federalism"
    has made it even easier to blame provincial government
    problems on Ottawa, however scant the justification.

    ¶7.   (SBU) In certain provinces - including Newfoundland and
    Quebec - deep-seated cultures of regional grievance have
    continued to flare, unquenched by federal dollars.  Quebec
    separatists have consistently claimed that their province
    does not receive its "fair share" from the federal system,
    and these claims - which have little factual basis - became
    an important part of the economic case for sovereignty.
    Moreover, they are widely believed.  When polled, most
    Quebec respondents say they think the federal government
    "takes more tax money from Quebecers than it gives back,"
    which is demonstrably false.  Similar doubtful conceptions
    exist in Newfoundland and elsewhere, along with somewhat
    more justifiable beliefs that these provinces' economic
    prospects were crippled by federal policies (for example,
    through the declines of shipbuilding and of the Atlantic
    fishery).

    THE FISCAL STRUGGLE INTENSIFIES
    -------------------------------

    ¶8.    (U) During his tenure as Prime Minister (1993-2003),
    and particularly after the hair's-breadth failure in 1995 of
    a Quebec provincial referendum on separation from Canada,
    Jean Chretien sought to market the virtues of federalism, as
    opposed to merely denouncing separation.  This included an
    intellectual and political push on the economic policy front
    - showing Quebec audiences hard evidence that Canada's
    economic union and fiscal apparatus work for them.  This
    effort to win the loyalty of Quebecers, and to seize the
    initiative in the sovereignty debate, was a top concern of
    some of the GOC's leading minds for most of the past decade.

    ¶9. (U) Current Prime Minister Paul Martin entered office
    in late 2003 intending to improve relations with
    provinces.  This quickly led to provincial leaders'
    combining to press Ottawa for more generous (and less
    conditional) fiscal transfers (ref B), led by a new deal
    on health care funding (ref D).  Meanwhile, individual
    provinces developed and pressed their arguments for
    specific fiscal bargains with the GOC.  Two small
    provinces, Newfoundland and Nova Scotia, successfully
    renegotiated the extent to which their "equalization"
    payments are offset by offshore energy royalties.
    Emboldened, Saskatchewan and the Northwest Territories
    are also pushing long-standing issues related to
    resource revenue.

    TIRED OF LAYING GOLDEN EGGS?
    ----------------------------

    ¶10. (SBU) Energy-rich Alberta, producing about 13
    percent of Canada's GDP, has been the largest provincial
    contributor to Canada's federal fiscal system in both
    absolute and per capita terms, due mainly to oil and gas
    revenue and pricing.  While it has not complained much
    (so far) about making "equalization" payments to poorer
    provinces, Alberta's government - the most conservative
    among the provinces - has clashed repeatedly with Ottawa
    over the conditions attached to health care funding.  In
    the past two years, their position further strengthened
    by surging oil and gas prices, Albertan leaders have
    murmured increasingly about "charting their own fiscal
    course" in key areas, such as health care and taxation
    (ref A).  While Prime Minister Martin acknowledges these
    issues, they do not threaten his party's political base;
    only two of 133 Liberal Party Members of Parliament are
    currently elected from Alberta.

    ¶11. (SBU) Representing 41 percent of Canada's GDP, and
    the overwhelming political base of the Liberal
    government (74 of 133 MP's), Ontario is the heartland of
    Canadian federalism.  Historically, when fighting
    federalist battles in Quebec and elsewhere, GOC
    politicians could count on deep political and financial
    support from Ontarians, whose industries in turn
    strongly benefited from the Canadian economic union and
    GOC nation-building activities.  But since the 1960's,
    mainly due to trade liberalization, these inter-
    provincial economic linkages have declined in importance
    for Canada's industrial heartland, in favor of cross-
    border and global markets.

    ¶12.  (SBU) Ref (E) provides the background to Ontario's
    recent dispute with the GOC over "fiscal federalism."  The
    majority Liberal Party government in Ontario, which faces a
    serious budget deficit problem, reacted negatively to
    Ottawa's negotiation in early 2005 of a more generous deal
    on "equalization" with two small provinces, Newfoundland and
    Nova Scotia.  Ontario leaders now argue that their province
    is systematically shortchanged in various fiscal programs,
    and that as a result, the gap between what Ontarians pay in
    taxes to the GOC and what they receive in return has grown
    from C$2 billion to C$23 billion over the past decade.  They
    also note (ref E) that freer trade with the United States
    has shrunk the compensating benefit of having protected
    markets in Canada.

    ¶13. (SBU) Ontario's argument is open to debate.  First,
    a tally of fiscal payments, even if it is complete and
    fair, does not count all the net benefits of the federal
    system (it misses not just the value of the common
    Canadian market to Ontario industries, but also the
    value of some services supplied by the GOC, such as
    national defense and diplomacy).   Second, Ontario
    leaders implicitly link their budget deficits (and the
    GOC's surpluses) to federal-provincial fiscal
    arrangements.  As the GOC points out, however, these are
    two different things; even with no change in "fiscal
    federalism," Ontario could address its budget challenges
    by raising taxes and/or cutting spending (just as Ottawa
    did in the mid-1990's).

    ¶14. (SBU) These federalist counter-arguments, however
    sound, are likely to be missed by ordinary Ontarian
    voters and businesspeople, who are applauding the
    provincial government's complaints (ref E).  Ontario
    leaders appear set to ride this issue into the next
    provincial election.  At any rate the GOC is not yet
    engaging its Ontario counterpart in this publicity
    struggle.  On the contrary, it created a Parliamentary
    sub-committee to study the "fiscal imbalance," which
    then gave Ontario officials a platform to state their
    case.

    COMMENT
    -------

    ¶15. (SBU) We doubt whether the GOC could outmaneuver the
    Government of Ontario and "sell" Ontarians on the
    benefits of Canada - even if Martin's minority
    government survives until the next Ontario provincial
    election, and if its credibility in this area were not
    being bloodied by a major scandal over the laundering of
    "national unity" funds.

    -- First, for the GOC's national-unity strategists, the
    current situation represents a new and unfamiliar
    battlefield:  they must simultaneously persuade voters
    in most or all provinces (rather than just Quebec) that
    federalism benefits them.

    -- Second, the majority of GOC Members of Parliament who
    represent Ontario voters will be under individual
    pressure to show sympathy with provincial interests, and
    this might cripple the government's campaign at the
    constituency level.

    -- Third, it is clear from experience in several other
    provinces that provincial voters love "Ottawa-bashing"
    and that, even where the benefits of federalism are
    plain to economists, they go unappreciated by voters.

    ¶16. (SBU) With provincial priorities in the ascendant
    across the country, and with all provinces seemingly
    prepared to measure federalism in terms of their
    economic self-interest, it is getting easier to argue
    that "fiscal federalism" has failed as an instrument of
    national unity policy.

    DICKSON

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