Fiscal Federalism and Decentralization Parallels of Canadian Experience

Canadian Federation Constitution articulates the division of powers –A federal government –10 provincial governments –3 territorial governments –numerous municipal (local) governments –newly evolving system of self-government for aboriginal communities

Canadian Fiscal Federalism Reconciliation of national unity respecting regional diversity –history of pluralism, regional economies, diversity of population, and multiculturalism Canadians can enjoy national standards and comparable services at comparable levels of taxation no matter where they live

Division of Taxing Powers Federal: Any mode of taxation Provincial: Direct taxation Municipal: Delegated by the provinces

Division of Taxing Powers Robin Boadway and Ronald Watts. Fiscal Federalism in Canada. Kingston: Institute of Intergovernmental Relations, P. 6.

Division of Spending Powers Federal: −Banking −National Defense −Postal Services −Criminal Law, etc. Provincial: −Health Care −Education −Social Services, etc. Joint: −Immigration −Agriculture

Fiscal Imbalances Vertical Fiscal Imbalance –Federal and provincial governments have a mismatch between revenue and expenditure responsibilities Horizontal Fiscal Imbalance –Different provinces have different fiscal capacities and abilities to provide public services

Recent Canadian Developments Federal budgets have consistently included surpluses and reduced debt levels since 1997 Provincial fiscal prospects are more uncertain and uneven Imbalance the result of built-in growth rates of existing revenue and expenditure structures

Recent Canadian Developments Federal government has recently shown a preference for direct spending initiatives on social services and post-secondary education Health care remains an active social transfer to the provinces, though direct federal spending has also increased Tax system is now being used to fund social transfers

Grants Major grants include: –Canada Health Transfer –Canada Social Transfer –Equalization –Territorial Formula Financing –Other

The Financial Crisis Current crisis has led to centralization of national finances: –over $66 billion in mortgages purchased –$4 billion loan to the automotive sector –formation of the Canadian Secured Credit Facility (CSCF) –changes to improve the capacity of the Canadian Deposit Insurance Corporation (CDIC) –Concerted federal/provincial action

Conclusions The Canadian Experience: –Fiscal Federalism –Decentralization –Centralization