Canadian Fiscal Arrangements: What Works, What Might Work Better

Edited by Harvey Lazar

Canada needs an independent finance commission similar to those in Australia, India and South Africa to provide arm's length figures and analysis on intergovernmental fiscal relationships, says Harvey Lazar, director emeritus of the Institute of Intergovernmental Relations at Queen's University.

Lazar's proposal is contained in the introduction to Canadian Fiscal Arrangements: What Works What Might Work Better. His essay looks at how trust has eroded in intergovernmental fiscal relations as governments have dealt with their own financial stringencies without the benefit of a broad consensus within Canadian society about the appropriate role of the state or the nature of the federation.

He also points out how confused Canadians are with the current sparring of governments over fiscal imbalances: "What is the public to think when Ottawa claims to pay for more than 40 per cent of provincial and territorial health care costs and the provinces only a few years ago were suggesting the appropriate number was barely over 10 per cent and neither was factually wrong given its assumptions?"

The commission would provide clarity. He concedes that its terms of reference would be controversial as would be the method of its appointment. He sees appointments made by the federal government, after formally enlisting provincial opinion. The commissioners would be appointed to a fixed term of five to seven years to ensure their independence.

The range of tasks assigned to the commission could run from the modest (an annual report on how much the federal government contributes to provincial coffers) to the ambitious (annual reports on progress meeting constitutional objectives on equalization and regional disparities).

"Given the lack of trust among governments, such an institution is worthy of serious consideration," he writes.

Lazar also notes:

• It has been increasingly difficult in recent years to find an overarching vision about the appropriate role for the state or about the nature of the federation that commands widespread public support, which impacts on intergovernmental fiscal relations.
• Provincial and local governments raise about 54-55 per cent of total government revenues in Canada and have done so for the last quarter century with remarkably little variation. They account, however, for about 67 to 68 per cent of total government spending (excluding intergovernmental transfers) -- a proportion that climbed from under 40 per cent in the early and mid-1950s to a 61-63 per cent share in the late 1970s and now today's slightly higher level. "The heart of the case supporting the allegations of vertical fiscal imbalance is that the federal government enjoys revenues that are larger than its expenditure obligations whereas the opposite is the case for provinces and local governments," he says.
• Virtually all federations have a vertical fiscal gap, with their federal government collecting more revenue than they need relative to their direct spending obligations.
• "If the federal government were to decide that threats to Canadian security require an additional $8-10 billion annually for defence, security and foreign aid, and then added those amounts to federal expenditures, this would effectively end the debate about vertical fiscal imbalance as anticipated federal surpluses would disappear for the next several years and possibly much longer. But when Ottawa is adding or considering further cash transfer payments of $5 billion annually or indeed more for health care, child care and cities -- all of which are exclusively or mainly the constitutional responsibility of the provinces -- and relatively little new spending for program items that are clearly within its constitutional mandate, the provincial argument about vertical fiscal imbalance carries more weight."
• In recent years, provinces and local governments have in aggregate received just under 20 per cent of their revenue from the federal government -- 19.8 per cent -- which is considerably less than in most federations. In Australia the figure is 45.3 per cent; Germany, 43.8 per cent; and the United States 29.6 per cent.
• Consideration should be given to adding to the September 2004 intergovernmental health agreement and future similar agreements a clause that in the event of unforeseen fiscal events requiring cutbacks in federal spending, reductions in cash transfer payments to the provinces will not be proportionately greater than federal cutbacks to its own programs.

 

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