Is there a “Fiscal Imbalance”?

 One of the main arguments that there is a fiscal imbalance between the federal government and provincial governments (a vertical fiscal imbalance) is ongoing federal surpluses in the face of more constrained provincial finances. The latest Financial Management System data from Statistics Canada would seem to reinforce that view:

 In 2005/2006, the consolidated surplus for all Canadian governments, including the two major pension plans, hit its second highest level during the last 20 years.

   Canada's federal, provincial/territorial and local governments, as well as the Canada/Quebec Pension Plans, recorded a combined surplus of $26.0 billion. . . .

   The biggest surplus was recorded by the federal government at $13.5 billion, its ninth annual surplus in a row.

   Alberta recorded the largest surplus among all provincial and territorial governments, $7.3 billion, up $2.4 billion from a year earlier. The increase was driven by rising royalties from the province's natural resources.

   The Canada Pension Plan also contributed significantly with a $7.0 billion surplus, which was down from $7.7 billion in 2004/2005. The Quebec Pension Plan registered a $1.9 billion surplus. These surpluses are in response to anticipated needs to fund future liabilities for the benefits of retiring baby boomers.

Here is where it gets tricky. The combined surplus of the provinces was less than the surplus of Alberta, i.e. all other provinces summed together were in deficit.

What is not mentioned is that the provinces cut their personal and corporate taxes over the past decade by about $30 billion per year (estimate from the Privy Council Office), a number that dwarfs the modest deficit. I'd suggest that this means that provinces have only themselves to blame if they are experiencing deficits. It is true that the feds cut transfers to the provinces in the mid-1990s but much ground has been made up since then.

   The provincial and territorial governments had a combined surplus of $6.6 billion in 2005/2006, up sharply from the $317 million surplus the year before. The continued growth in Alberta's surplus was largely responsible.

   Newfoundland and Labrador came a distant second with a surplus of about $1.9 billion, its first since 1998/1999. Revenues from the Atlantic Accord, which was signed in 2005, were largely responsible.

   Among the provincial and territorial governments, six recorded a deficit in 2005/2006 compared with seven in the previous year.

   Ontario had the largest deficit, $3.3 billion, followed by Quebec at $1.2 billion. Manitoba, Prince Edward Island, Yukon and the Northwest Territories also recorded small deficits. . . .

Ontario's deficit could be interpreted as a poltical decision not to revisit the Harris tax cuts of the 1990s. Much easier to get more money from Ottawa in the form of transfers. The story continues:

   Except for a period in the mid-1990s, federal general government transfers to provincial and territorial governments have increased steadily during the past 18 years.

   In 1988/1989, these transfers amounted to $25.0 billion, or 18.3% of federal government spending. By 2005/2006, they had doubled to $51.2 billion, or 24.3% of spending.

   Health, social services and general purpose transfers have comprised the majority of federal transfers allocated to the provinces and territories. Since 1996/1997, these three categories combined have accounted for between 80% and 90% of total federal transfers each year.

If there is a fiscal imbalance in Canada, I'd argue that it is not a vertical imbalance between the feds and the provinces but a horizontal imbalance among the provinces themselves (the Alberta problem) driven by the fiscal consequences of resource royalties.

There is also a good case to be made that there is a vertical fiscal imbalance between senior governments and muncipalities:

   Federal and provincial and territorial transfers to local general governments have increased in all but four years since 1988. However, as a proportion of total local government revenues, these transfers have fluctuated, and last year actually accounted for less than they did in 1988.

   Transfers from federal, provincial and territorial governments totalled $6.2 billion in 1988, or 23% of all local general government revenues. By 1995, this proportion had increased to 26%.

   However, subsequently it began to decline and by 2001, it was only 16%. This proportion began to recover recently, but even so, by 2005, the estimated $9.7 billion in transfers received by local governments represented only 17% of their revenues.

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