Financing multilevel governments:A Canadian’s perspective by François Vaillancourt Economics department Université de Montréal

Financing multilevel governments: A Canadian’s perspective-Outline Environment and Challenges to federations Sharing own resources Sharing central resources Sharing the debt field

Environment- structural/Canada –Number of entities:10 provinces,3 territories, N aboriginal –Physical size /Distances Large: 5.5 time zones –Political size:Important difference in population and size between provinces –Economic size: Important différences in per capita by provinces (GDP) 1-2 –Spatial heterogeneity: Majority of francophones in Québec

Challenges-structural Climate change :Canada uneven impact linked to distribution of oil and gas resources Demography : Canada Ageing of population: Canada uneven impact due to internal migration + international migrants Political:Canada Sovereignty threat from Québec: latent but still potent(40-45%)

Challenges-structural Political :Centralize or decentralize too much: Canada Federal Spending Power Economic External Globalisation:Canada NAFTA + $: uneven regional distribution Economic:fixed resources Canada Oil and gas resources revenues :provincial royalties uneven distribution

Example of Impact Matrix Region challenge Climate change/Ky oto AgeingNAFTA+$Resources Atlantic0_0+ and - Québec+(electricit y) _-- Ontario00--- WestAlberta:-+Alberta++ (Man)

Challenges medium term Who can finance: fiscal constraints Financing to respect or modify fields of competencies/behaviour? –Canadian spending power or Eve’s apple –American multilevel transferS Unfunded mandates Budgetary games: trust funds,

Challenges medium term fiscal

Challenges: medium term fiscal-1

Challenges –short term Ideas or debates Séguin report on fiscal disequilibrium 03/02 Politics Federal minorities(L: 06/04- 01/06+C:01/06-) –L:Set equalisation by indexed total(10/04) –L:Exclude resources for Nfld (flags!) (02/05) –C:solve fiscal disequilibrium for québec votes Politics: Provincial strenght

Responses:Canadian Challenges- No action but reports 3/03/2006: Council of Federation report CF Reconciling the Irreconcilable Addressing Canada’s Fiscal imbalance 6/06/2006:Federal government report FG Achieving a National Purpose Putting Equalisation back on track

Sharing own resources Two key criteria –Immobility of tax bases –Autonomy at the margin of SN So CIT =>central, PIT=> SN and VAT=> ?

Sharing own resources 2 Canadian /Swiss / USA tax autonomy is unususal Australian/ German consensual or constitutional/legal uniformity Scottish or Spanish timidity Spanish use of PIT autonomy to benefit groups also observed in Canada

Sharing own resources 3 Sharing on formula basis(population) is not taxation Sharing on derivation basis often neglects incidence(customs duties,excises,CIT) Is public consumption occurring where taxes are paid?

Sharing own resources 4 Canada: discussion of transfer of federal VAT to provinces (drop in rate) Provinces could occupy vacated fiscal space Australia: creation of VAT as replacement source of state grants Spain: Catalan autonomy

Sharing central resources-Issues What government What funding How much funding How to share it

Sharing central resources -H or V What government:Vertical/ horizontal transfers Horizontal :German inter Lander transfers remain the exception; Vertical: Australia/ Canada more common

Sharing central resources -H orV-2 Sharing of profits from central organisations:Central banks in Switzerland and Tanzania Importance of transfers to individuals from central government=>create tax base for SN

Sharing central resources -H or V -3 Note that Inter regional accounting often raised in Canada In the past sovereignty debate; Currently by Ontario GDP flows –Issues of borders, incidence, transfers to individuals, tax expenditures, price/quantity

Sharing central resources financed by What source of funds General revenues Subset of one or more specific revenue And Annual setting of amount by central G Multi year formula

Sharing central resources- financed by Canada :All federal revenues are implicitely included: PIT,CIT,GST/VAT No natural resources royalties Australia: VAT is source of equalisation while SPP are funded from general revenues

Sharing central resources-How much Replacement of past autonomous amounts: –Evolution issue(France TIPP)/ comparisons to past/ link to spending(social-France) Budget balancing :disincentives on spending and revenues Collections:in/dis-incentives to collect – depends on design Needs :evolution issues

Sharing central resources-How much-2 Canada:Equalisation –pre 2004 RTS formula five province standard(implicit exclusion of oil and gas) –Since 2004 five year agreement for equalisation with indexation of fixed amount Canada Health+Social: Numerous changes in =>Per capita +indexation Canada Territories:Needs Barnett formula like

Sharing central resources-how much-3 Australia –VAT(GST) revenue for equalisation –Budget Balancing Assistance for abolished state taxes linked to VAT –Commonwealth decision/conditions for SPP for health and education from general revenues

Sharing central resources-how much-4 Proposals in reports CHST CF –Maintain CHT amount and indexation 6% – Increase CST amount by 4.9 billion to correct underfunding( standard) and inflation and Index CST 4.5% FG Nothing

Sharing central resources-how much Equalisation CF Pool set using: –Ten province standard –100% inclusion of natural resource revenues in base –Scaling factor negotiated

Sharing central resources-how much FG Pool set using –Ten province standard –50 % inclusion of natural resource revenues in base –A cap by province:no receiving province can have a higher fiscal capacity than the poorest non receiving province

Sharing central resources-shared how Distribution between SN –General indicator Fiscal capacity –RTS + or without Expenditure RES –Costs (topography,.. or needs(population characteristics)

Sharing central resources-shared how Canada RTS modified Australia RTS+RES Proposals in reports CF –Explicit rejection of RES:complexity and incentives –Explicit rejection of macro indicators

Canadian proposals:other elements GF makes specific recommendations on various items.We note: –No CGG type body; provide more information –CF and GF recommend use of 3-year moving average lagged 2 years

Access to debt No constraints in Australia, Canada or USA Is Maastrich 3%/60% necessary or are there self correcting mechanisms? Such borrowing constraints (on SNG) are common in developing countries

A word on Fiscal disequilibrium Predicted spending VS predicted revenues with Unchanged behaviour :does it make sense with fiscal autonomy? Raise rates Cut spending Raid on open treasury!

Conclusion Never import institutions blindly ;each country is unique Incentives matter and are universal Formulas are nice but results matter