Fiscal Federalism Douglas Brown Pols 321 St. Francis Xavier University October 2008

Fiscal Federalism: The Search for Balance The structure of Canadian fiscal federalism Fiscal Policy Consensus of the ’90s The Liberals and surplus federalism The Politics of Fiscal Imbalance 2007 Budget and Beyond Evaluating Fiscal Federalism

The Structure of Canadian Fiscal Federalism Constitutional Powers Tax Structure and Harmonization Intergovernmental Transfers Fiscal Relations Process

Constitutional Powers The exclusive fields of provincial jurisdiction limit room for federal domination But provincial autonomy can be compromised by the federal spending power Both feds and provinces have access to important taxes

Tax structure and harmonization Shared revenues: personal and corporate income tax, sales taxes, alcohol, tobacco and fuels Tax collection agreements promote harmonization (erosion could harm economic union) : gradual decentralization of fed-prov revenue split, from 65/35 to 44/56

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

Côté

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

Fiscal Policy Consensus of the 1990s Economic globalization and liberalization – free trade as strategy; welfare state programs reformed All governments eliminate deficits, some run big surpluses Taxpayers trust government less, leads to tax cuts and tax reform Acceptance of fiscal decentralization, less regional redistribution Reaches climax in 1995 with cuts to the CHST and other programs

The Liberals and the Politics of Surplus Restoration and acceleration of the federal surplus, 1998 onwards Direct spending initiatives: Child tax benefit Child tax benefit Millennium Scholarships Millennium Scholarships Homelessness initiative Homelessness initiative Gradual, ad-hoc, but eventually a substantial restoration of federal health transfer 2000, 2003 and 2004 “Accords” 2000, 2003 and 2004 “Accords” Equalization: saved from initial cuts, but later ways found to limit growth

The Provincial Backlash 1995 Premiers Council on Social Policy Renewal argues for restoring funding cuts 2002 Séguin (Quebec) report claims there is a vertical fiscal imbalance (VFI) 2003 Council of the Federation: reaching a common front on VFI But common front not easily maintained: Richer provinces seek equal per capita CHST shares Richer provinces seek equal per capita CHST shares NL and NS offshore accords, NL and NS offshore accords,

The Fiscal Balance debate Is it a fiscal imbalance or a fiscal gap? Vertical vs. horizontal balance? Chronic or transitory phenomenon? Structural problem or reflecting political preferences? Solutions: -- rebalance roles? transfer more cash? or transfer tax room? Transferring room for what? Tax cuts or spending increases? Tax cuts or spending increases?

Recap of situation, end of year agreement on health care…but provinces feel they are not out of woods on increasing costs Equalization and TFF: cash payments fixed, and decoupled from any formula rationale Separate CST agreement, with potential to be the next candidate for renewal and expansion Childcare: bilateral agreements reached Growing disequilibrium with Alberta oil surplus

The Harper Conservatives: Budget Paper, 2006 Confirms Martin’s 10-year plan on health care, and for this year, status quo on EQ and TFF Acknowledges a VFI exists Open to idea of a tax transfer Wants long-term framework for PSE and training Seeks a transparent, principle-based EQ Seeks greater tax harmonization Launches a one-year multi-table intergovernmental and consultative process

Federal Budget 2007 Equalization seen as major way to fix vertical fiscal imbalance Major reform of equalization: 10 province standard plus 50 percent inclusion of resource revenues = more money 10 province standard plus 50 percent inclusion of resource revenues = more money Transparency, stability, predictability Transparency, stability, predictability But …new ”Cap” on fiscal capacity is punitive to new resource producers: Sask, NL and NS But …new ”Cap” on fiscal capacity is punitive to new resource producers: Sask, NL and NS

The Dilemma of the Offshore Accords …1 Original accords, 1986, were a quasi- constitutional solution to a difficult dispute over ownership, management and revenues amendments aimed to restore 1986 intent that NL and NS should be “principal fiscal beneficiaries”. Proposed as a solution when equalization seemed in trouble. Not welcomed by other provinces, seen as distorting of equalization principles.

The Dilemma of the Offshore Accords …2 Competing rhetorical claims of “fairness” Ontario: no EQ recipient’s fiscal capacity should be higher than ours as a result of side deals. Ontario: no EQ recipient’s fiscal capacity should be higher than ours as a result of side deals. NS, NL, SK: oil and gas are depleting provincial assets, not just revenues, and are key to achieving a measure of regional equity. NS, NL, SK: oil and gas are depleting provincial assets, not just revenues, and are key to achieving a measure of regional equity. NL and NS invoke constitutional principle of promoting regional economic development to justify their position that offshore accords should not be breached.

Evaluation: The effects of Fiscal Federalism (1) On the performance of the federation Over the long term it contributes flexibility and a respect for federal values Over the long term it contributes flexibility and a respect for federal values But the system has proven less adaptable in recent years But the system has proven less adaptable in recent years Intergovernmental culture is now more combative (politicians get involved more) Intergovernmental culture is now 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 Federalism (2) On reaching policy goals Major economic goals achieved, with strong economic performance in past decade Major economic goals achieved, with strong economic performance in past decade Equalization and TFF have proven effective according to their objectives Equalization and TFF have proven effective according to their objectives Social program transfer programs less effective – fiscal relations do not promote reform in areas such as health care Social program transfer programs less effective – fiscal relations do not promote reform in areas such as health care

Evaluation: The effect of Fiscal Federalism (3) On democratic legitimacy Erosion of intergovernmental trust in past decade Erosion of intergovernmental trust in past decade Feds seen as “unapologetic unilateralist” (Stein-Gagne report, 2006) Feds seen as “unapologetic unilateralist” (Stein-Gagne report, 2006) Increasing commitment to accountability, transparency and public communication Increasing commitment to accountability, transparency and public communication