Whither Fiscal Federalism?

Yes, yawn, fiscal federalism is pretty darn dull. But it is also pretty darn important.  The division of responsibilities and resources between the feds and the provinces is central to the shape of Canadian fiscal policy overall and to the level and design of a host of jointly financed programs, including health, post secondary education and infrastructure investment.

I spent Tuesday at a conference at Queen’s on said subject which was held under Chatham House rules for no particularly good reason, so no attributions.  But here are a few things I learned.

I was reminded just how extraordinarily decentralized is the Canadian state even within the world of federal states.  The provinces occupy almost all of the major tax fields and then some,  have relatively modest dependence on transfers from the federal government (just 19% of their revenues, and just 15% of combined provincial/local revenues) , and very little conditionality is now attached to those transfers with the Canada Health Act being the major possible exception (and it has not been applied for many years.) If you tally up provincial and local spending (and local governments are creations of the provinces) it comes to about 70% of total government spending. The federal share of total tax revenues is, at 45%, greater than their share of direct spending which is only about one third of the total once transfers to provinces and local governemnts are netted out.

As I have noted before on this blog, much has been made of the fact that the Eurozone is in crisis because it has a common currency but no common fiscal policy. The same is true of Canada.  Ministers of Finance meet and the federal Minister sometimes nags the provinces – almost always for alleged profligacy – but whether provinces run surpluses or deficits is pretty much up to them.  That’s probably a good thing today with the feds leading the call for austerity, but there is a downside in that provinces running large deficits (notably Ontario) or facing large accumulated debts (notably Quebec)  do pay a significant interest rate spread compared to the federal government. It is very much a moot point if there is an implicit federal guarantee on provincial debt, or if there is any residual power to intervene in provincial fiscal policy (note that Alberta’s  Depression era Social Credit legislation was struck down.)  Basically provinces which want to maintain and improve services face ‘market discipline” and get only modest help from the feds, so must raise taxes or run deficits.

Federal transfers are, of course, still very important, totalling over $50 Billion this year, not counting special stimulus measures.  Equalization ($14 billion) is increasing in line with nominal GDP while the CHT (Canada Health Transfer) is $24 billion and growing to 2014 by 6% per year. Other transfers are growing more slowly.

The key issue in fed-prov relations is what happens to the CHT in 2014. While it now pays for only a modest share of total provincial health spending, such spending now makes up the majority of provincial spending and is growing more rapidly than the tax base.  Fiscal hawks would like Flaherty to back up the austerity message and reduce the federal deficit faster by limiting the growth of transfers – but I am prepared to bet heavily that there will be no announcement of any kind of policy this side of an election. I am also prepared to bet heavily that the (ambiguous) promise by Flaherty not to cut transfers will not survive for long, especially if the Conservatives get a majority. The message to the provinces will be to cut health care costs by privatizing delivery and by imposing various user fees, at which point the whole issue of the Canada Health Act and its injunctions against fees for physician and hospital services will come into play.

Another significant aspect of Canadian fiscal federalism is that we equalize revenues up, not down.  Combined with the unequal distribution of resource revenues, that translates into very significant differences between the provinces.  Alberta’s tax effort is less than 80% of the national average but spending per capita is well above the average. Ontario spends only 95% of the national average per capita but faces a very large deficit. Quebec spends significantly above the average to fund its pharma and child care programs among others, but also taxes well above the average. Yet almost nobody is prepared to talk about greater sharing of resource revenues to ease the fiscal problems of  all provinces east of Saskatchewan.

One comment

  • “Yet almost nobody is prepared to talk about greater sharing of resource revenues to ease the fiscal problems of all provinces east of Saskatchewan.”

    It would have been more fair if resource revenues went to the federal government rather then provincial. The areas where resources greatly benefit from the economic activity generated by extracting them. They don’t need the royalties on top of it.

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