Fiscal update and “fiscal imbalance”

Yesterday’s release of the Fiscal Reference Tables also provides data at the provincial level. I reckon that the latest federal surplus of $13.2 billion might start some new cries of “fiscal imbalance” among the provinces in the lead-up to some federal-provincial negotiations this Fall (apart from a wide-ranging discussion paper released at budget time, we still have no real idea of what the Harper government’s position is). For a few years, the principal argument for “fiscal imbalance” has been the presence of federal surpluses coexisting with provincial deficits (this is a bogus argument as provinces have taxation powers that have largely been used to deliver tax cuts in recent years).

Let’s check the fiscal reference tables regarding provincial finances. The bottom line for all provinces together is a surplus of $13.2 billion, exactly the same as the federal balance. Every province except PEI had a balanced budget or better in 2005/06. So there goes one argument for the alleged “fiscal imbalance”.

But probing deeper reveals the real fiscal imbalance: Alberta accounts for $8.9 billion of the total. That is, the imbalance is among the provinces themselves, rather than with the federal government (a horizontal fiscal imbalance is the problem, not a vertical one). And the difference is due to resource royalties, primarily oil and gas. The second largest surplus was BC at $3.1 billion, and again resource royalties play a big part in this number.

As we head into negotiations to achieve a better fiscal relationship, this issue should be at the top of the agenda. Equalization can play some role in pulling up other provinces, but the feds do not have access to the key tax base in question, resource royalties, so they cannot fully bridge the gap. A resource royalty sharing pool, anyone?

UPDATE: Well, that did not take long. Here’s Ontario Premier Dalton McGuinty:

Surplus proves fiscal imbalance, McGuinty says

Canadian Press

TORONTO — Ontario Premier Dalton McGuinty says the federal government’s $13.2-billion surplus is further proof of a fiscal imbalance between Ottawa and the provinces.

Mr. McGuinty said Tuesday that the amount of the surplus shows what all the premiers have been saying: Ottawa has more money than responsibilities while they are in the exact opposite position.

The federal Conservatives say they will put the $13.2-billion toward the debt, but Mr. McGuinty said they should use some of it to offset Ontario’s complaints that it isn’t treated fairly.