Fiscal FederalismFiscal Federalism

Douglas BrownDouglas BrownPols 321Pols 321

St. Francis Xavier UniversitySt. Francis Xavier UniversityOctober 2009October 2009

Fiscal Federalism:Fiscal Federalism:The Search for BalanceThe Search for Balance

A.A. The structure of Canadian fiscal The structure of Canadian fiscal federalismfederalism

B.B. Fiscal Policy Consensus of the ’90sFiscal Policy Consensus of the ’90s

C.C. The Liberals and surplus federalismThe Liberals and surplus federalism

D.D. The Politics of Fiscal ImbalanceThe Politics of Fiscal Imbalance

E.E. 2007 Budget and Beyond2007 Budget and Beyond

F.F. Evaluating Fiscal FederalismEvaluating Fiscal Federalism

A. The Structure of Canadian Fiscal A. The Structure of Canadian Fiscal FederalismFederalism

1.1. Constitutional PowersConstitutional Powers

2.2. Tax Structure and HarmonizationTax Structure and Harmonization

3.3. Intergovernmental TransfersIntergovernmental Transfers

4.4. Fiscal Relations ProcessFiscal Relations Process

1. Constitutional Powers1. Constitutional Powers

The exclusive fields of provincial The exclusive fields of provincial jurisdiction limit room for federal jurisdiction limit room for federal dominationdomination

But provincial autonomy can be But provincial autonomy can be compromised by the federal spending compromised by the federal spending powerpower

Both feds and provinces have access to Both feds and provinces have access to important taxesimportant taxes

2. Tax structure and harmonization2. Tax structure and harmonization

Shared revenues: personal and corporate Shared revenues: personal and corporate income tax, sales taxes, alcohol, tobacco income tax, sales taxes, alcohol, tobacco and fuelsand fuels

Tax collection agreements promote Tax collection agreements promote harmonization (erosion could harm harmonization (erosion could harm economic union)economic union)

1950-2005: gradual decentralization of 1950-2005: gradual decentralization of fed-prov revenue split, from 65/35 to 44/56fed-prov revenue split, from 65/35 to 44/56

3. Intergovernmental transfers3. Intergovernmental transfers

Vertical fiscal gaps: met with cash and tax Vertical fiscal gaps: met with cash and tax transferstransfersHorizontal fiscal gaps: met by Equalization Horizontal fiscal gaps: met by Equalization program, plus equalizing features of other program, plus equalizing features of other transferstransfersThe significance of the relative The significance of the relative “unconditionality” of the system“unconditionality” of the systemEqualization is the key to sustaining Equalization is the key to sustaining provincial autonomy over timeprovincial autonomy over time

Côté

4. Fiscal relations process4. Fiscal relations process

Part of, and at the at heart of, the budget-Part of, and at the at heart of, the budget-making processmaking processIt is complex, technical, bureaucratic and It is complex, technical, bureaucratic and secretivesecretiveFinal decisions most often made by feds Final decisions most often made by feds alone, with more or less consultation with alone, with more or less consultation with the provinces and territories the provinces and territories Parliaments resist being bound by multi-Parliaments resist being bound by multi-year agreementsyear agreements

B. Fiscal Policy Consensus of the B. Fiscal Policy Consensus of the 1990s1990s

Economic globalization and liberalization – free Economic globalization and liberalization – free trade as strategy; welfare state programs trade as strategy; welfare state programs reformedreformedAll governments eliminate deficits, some run big All governments eliminate deficits, some run big surplusessurplusesTaxpayers trust government less, leads to tax Taxpayers trust government less, leads to tax cuts and tax reformcuts and tax reformAcceptance of fiscal decentralization, less Acceptance of fiscal decentralization, less regional redistributionregional redistributionReaches climax in 1995 with cuts to the CHST Reaches climax in 1995 with cuts to the CHST and other programsand other programs

C. The Liberals and the Politics of C. The Liberals and the Politics of SurplusSurplus

Restoration and acceleration of the federal Restoration and acceleration of the federal surplus, 1998 onwardssurplus, 1998 onwardsDirect spending initiatives:Direct spending initiatives: Child tax benefitChild tax benefit Millennium ScholarshipsMillennium Scholarships Homelessness initiativeHomelessness initiative

Gradual, ad-hoc, but eventually a substantial Gradual, ad-hoc, but eventually a substantial restoration of federal health transferrestoration of federal health transfer 2000, 2003 and 2004 “Accords”2000, 2003 and 2004 “Accords”

Equalization: saved from initial cuts, but later Equalization: saved from initial cuts, but later ways found to limit growthways found to limit growth

The Provincial BacklashThe Provincial Backlash

1995 Premiers Council on Social Policy Renewal 1995 Premiers Council on Social Policy Renewal argues for restoring funding cutsargues for restoring funding cuts

2002 Séguin (Quebec) report claims there is a 2002 Séguin (Quebec) report claims there is a vertical fiscal imbalance (VFI)vertical fiscal imbalance (VFI)

2003 Council of the Federation: reaching a 2003 Council of the Federation: reaching a common front on VFIcommon front on VFI

But common front not easily maintained: But common front not easily maintained: Richer provinces seek equal per capita CHST sharesRicher provinces seek equal per capita CHST shares NL and NS offshore accords, 2004-05 NL and NS offshore accords, 2004-05

D. The Fiscal Balance debateD. The Fiscal Balance debate

Is it a fiscal Is it a fiscal imbalanceimbalance or a fiscal or a fiscal gapgap??

Vertical vs. horizontal balance?Vertical vs. horizontal balance?

Chronic or transitory phenomenon?Chronic or transitory phenomenon?

Structural problem or reflecting political Structural problem or reflecting political preferences?preferences?

Solutions: -- rebalance roles? transfer more Solutions: -- rebalance roles? transfer more cash? or transfer tax room?cash? or transfer tax room?

Transferring room for what?Transferring room for what? Tax cuts or spending increases?Tax cuts or spending increases?

Recap of situation, end of 2005Recap of situation, end of 2005

10-year agreement on health care…but 10-year agreement on health care…but provinces feel they are not out of woods on provinces feel they are not out of woods on increasing costsincreasing costs

Equalization and TFF: cash payments fixed, and Equalization and TFF: cash payments fixed, and decoupled from any formula rationaledecoupled from any formula rationale

Separate CST agreement, with potential to be Separate CST agreement, with potential to be the next candidate for renewal and expansionthe next candidate for renewal and expansion

Childcare: bilateral agreements reached Childcare: bilateral agreements reached

Growing disequilibrium with Alberta oil surplusGrowing disequilibrium with Alberta oil surplus

The Harper Conservatives: Budget The Harper Conservatives: Budget Paper, 2006Paper, 2006

Confirms Martin’s 10-year plan on health care, Confirms Martin’s 10-year plan on health care, and for this year, status quo on EQ and TFFand for this year, status quo on EQ and TFF

Acknowledges a VFI existsAcknowledges a VFI exists

Open to idea of a tax transferOpen to idea of a tax transfer

Wants long-term framework for PSE and trainingWants long-term framework for PSE and training

Seeks a transparent, principle-based EQSeeks a transparent, principle-based EQ

Seeks greater tax harmonizationSeeks greater tax harmonization

Launches a one-year multi-table Launches a one-year multi-table intergovernmental and consultative processintergovernmental and consultative process

E. Federal Budget 2007E. Federal Budget 2007

Equalization seen as major way to fix Equalization seen as major way to fix vertical fiscal imbalancevertical fiscal imbalance

Major reform of equalization:Major reform of equalization: 10 province standard plus 50 percent 10 province standard plus 50 percent

inclusion of resource revenues = more moneyinclusion of resource revenues = more money Transparency, stability, predictabilityTransparency, stability, predictability But …new ”Cap” on fiscal capacity is punitive But …new ”Cap” on fiscal capacity is punitive

to new resource producers: Sask, NL and NSto new resource producers: Sask, NL and NS

The Dilemma of the Offshore The Dilemma of the Offshore Accords …1Accords …1

Original accords, 1986, were a quasi-Original accords, 1986, were a quasi-constitutional solution to a difficult dispute over constitutional solution to a difficult dispute over ownership, management and revenues.ownership, management and revenues.

2005 amendments aimed to restore 1986 intent 2005 amendments aimed to restore 1986 intent that NL and NS should be “principal fiscal that NL and NS should be “principal fiscal beneficiaries”.beneficiaries”.

Proposed as a solution when equalization Proposed as a solution when equalization seemed in trouble.seemed in trouble.

Not welcomed by other provinces, seen as Not welcomed by other provinces, seen as distorting of equalization principles.distorting of equalization principles.

The Dilemma of the Offshore Accords …2The Dilemma of the Offshore Accords …2

Competing rhetorical claims of “fairness” Competing rhetorical claims of “fairness” Ontario: no EQ recipient’s fiscal capacity should be Ontario: no EQ recipient’s fiscal capacity should be

higher than ours as a result of side deals.higher than ours as a result of side deals. NS, NL, SK: oil and gas are depleting provincial NS, NL, SK: oil and gas are depleting provincial

assets, not just revenues, and are key to achieving a assets, not just revenues, and are key to achieving a measure of regional equity.measure of regional equity.

NL and NS invoke constitutional principle of promoting NL and NS invoke constitutional principle of promoting regional economic development to justify their position regional economic development to justify their position that offshore accords should not be breached.that offshore accords should not be breached.

Fiscal Federalism and the Fiscal Federalism and the Economic Down-turn, 2008-09Economic Down-turn, 2008-09

Back to deficit financing for both feds and Back to deficit financing for both feds and provsprovs

A lingering public-sector recession is likelyA lingering public-sector recession is likely

A temporary (?) dip in oil and gas and A temporary (?) dip in oil and gas and other resource revenuesother resource revenues

Equalization entitlements bound to changeEqualization entitlements bound to change

Is Ontario a have-not province?Is Ontario a have-not province?

F. Evaluation: The effects of F. Evaluation: The effects of Fiscal Federalism (1)Fiscal Federalism (1)

On the performance of the federationOn the performance of the federation Over the long term it contributes flexibility and Over the long term it contributes flexibility and

a respect for federal valuesa respect for federal values But the system has proven less adaptable in But the system has proven less adaptable in

recent yearsrecent years Intergovernmental culture is now more Intergovernmental culture is now more

combative (politicians get involved more)combative (politicians get involved more) The public’s sense of stability has suffered The public’s sense of stability has suffered

Evaluation: The effect of Fiscal Evaluation: The effect of Fiscal Federalism (2)Federalism (2)

On reaching policy goalsOn reaching policy goals Major economic goals achieved, with strong Major economic goals achieved, with strong

economic performance in past decadeeconomic performance in past decade Equalization and TFF have proven effective Equalization and TFF have proven effective

according to their objectivesaccording to their objectives Social program transfer programs less Social program transfer programs less

effective – fiscal relations do not promote effective – fiscal relations do not promote reform in areas such as health carereform in areas such as health care

Evaluation: The effect of Fiscal Evaluation: The effect of Fiscal Federalism (3)Federalism (3)

On democratic legitimacy On democratic legitimacy Erosion of intergovernmental trust in past Erosion of intergovernmental trust in past

decadedecade Feds seen as “unapologetic unilateralist” Feds seen as “unapologetic unilateralist”

(Stein-Gagne report, 2006)(Stein-Gagne report, 2006) Increasing commitment to accountability, Increasing commitment to accountability,

transparency and public communicationtransparency and public communication