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Cablegate: Making the Economic Case for Canada:

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

071548Z Apr 05







E.O. 12958: N/A

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

(C) 04 OTTAWA 2896 (D) 04 OTTAWA 2394



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.

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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.


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


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.


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


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.


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