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