1. Presentation to: XV REGIONAL SEMINAR OF FISCAL POLICY CEPAL/ECLAC, United Nations Santiago de Chile, 27-30 January 2003 ______________________ FISCAL DECENTRALIZATION IN CANADA Dr. T. Russell Robinson Ottawa Canada

2. FORUM OF FEDERATIONS ______________________________________________________ “AN INTERNATIONAL NETWORK THAT SEEKS TO STRENGTHEN DEMOCRATIC GOVERNANCE BY PROMOTING DIALOGUE ON AND UNDERSTANDING OF THE VALUES, PRACTICES, PRINCIPLES, AND POSSIBILITIES OF FEDERALISM “ _________________________________________________________________________________ BEGAN IN OTTAWA, CANADA, AND IN 1999 ESTABLISHED AS A PERMANENT INSTITUTION TO HELP IMPROVE THE PRACTICE OF FEDERALISM WORLDWIDE HAS BOARD OF DIRECTORS FROM NIGERIA, INDIA, GERMANY, SWITZERLAND, BRAZIL AND CANADA, AND PARTICIPATION IS GROWING CLEARING HOUSE FOR INFORMATION & RESOURCES ON PRACTICE OF FEDERALISM PROVIDES POLICY & PROGRAM ASSISTANCE TO GOVERNMENTS FOCUS ON EDUCATION, INFORMATION-SHARING, & MULTILATERAL, COMPARATIVE ACTIVITIES PLEASE CONSULT: www.forumfed.orgwww.forumfed.org

3. OVERVIEW OF CANADA (1898) 0.1% (1870) 0.1% (1999) 0.1% (1949) 1.8% (1867) 24.1% (1873) 0.5% (1867) 3.1% (1867) 2.5% (1867) 37.8% (1870) 3.8% (1905) 3.4% (1905) 9.7% (1871) 13.2% (Date of entry into Confederation) Share of present-day population of 31.1 million 2

4. DIVISION OF POWERS _______________________________ Federal and provincial governments have independent constitutional basis of authority (Municipalities receive their powers & responsibilities from the provincial govts) Few / no constraints on provincial spending / taxation powers or ability to borrow Federal and provincial govts have extensive areas of separate legislative powers Strong executive and bureaucratic capacity at federal, provincial & municipal levels 3

5. CONSTITUTIONAL RESPONSIBILITIES _________________________ FEDERAL PROVINCIAL Money and Banking  International Trade  Airlines  Railways  Foreign Affairs  Defence  Employment Insurance  Pensions   Immigration   Agriculture   Industry   Education  Health  Municipal Institutions  Social Welfare  Police  Natural Resources  Highways  4

6. SPENDING AREAS & PRESSURES ________________________ Few concurrent powers (agriculture, pensions, immigration, industry) Residual power lies with federal level Much interdependence in practice – areas where jurisdiction is not clear or overlaps – through use of the spending power and transfers to provinces Provincial spending pressures Health Care Education Social services Federal spending pressures Security and national defence Senior’s, Aboriginals R & D and Skills Transfers to Provinces (Health) 5

7. ACCESS TO REVENUE SOURCES ______________________ FederalProvincial Personal Income Taxes   Corporate Income Taxes   Sales Taxes   Payroll Taxes   Resource Royalties  Gaming, Liquor Profits  Property Taxes  Customs Import Duties  Taxes on Non-Residents  6

8. Traditional tax bases are shared by Ottawa and the provinces Provincial-only tax bases are growing Federal-only tax bases are small and volatile ACCESS TO REVENUES, CONTINUED _______________________ Common revenue sources Personal income tax Corporate income tax Sales taxes Payroll taxes FederalProvincial Gambling, sale of alcohol Property taxes Natural resource revenues FederalProvincial Provincial-only revenue sources Federal-only revenue sources Customs tariffs and import duties Taxes on non-residents FederalProvincial 7

9. TAX COLLECTION AGREEMENTS _______________________ Main tax fields: personal income tax corporate income tax sales tax Federal government and many provincial governments have entered into Tax Collection Agreements covering each of the three main tax fields 8

10. CANADIAN DECENTRALIZATION: FISCAL TRENDS _______________________________ Provinces Federal REVENUES (% OF GDP) Provinces Federal EXPENDITURES (% OF GDP) Federal Transfers 9

11. DECENTRALIZATION: INTERNATIONAL COMPARISONS _________________________________________________ FEDERAL SHARE OF DIRECT SPENDING (1998) FEDERAL SHARE OF TAX REVENUES (1998) Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics), Inter-American Development Bank 10

12. CANADA’S THREE MAJOR TRANSFER PROGRAMS __________________________________________________ CANADA HEALTH AND SOCIAL TRANSFER (CHST) Block Grant [C$ 35.7 B] Health, PSE, social services EQUALIZATION [C$ 10.3 B] Unconditional Comparable services at comparable tax rates TERRITORIAL FORMULA FINANCING (TFF) Targeted to three northern territories [C$ 1.3 B] 11 2002-03 VALUES

13. HORIZONTAL EQUITY AND CANADIAN FISCAL EQUALIZATION ________________________ The Government of Canada has the constitutional responsibility to reduce fiscal disparities between provinces Post-Equalization revenue raising capacity still higher in more prosperous provinces (e.g. Alberta’s oil resources contribute to its 60% above average fiscal capacity) Inter-provincial tax competition - smaller provinces have difficulty keeping pace 12

14. HOW EQUALIZATION WORKS ________________________________________ Post-Equalization fiscal capacity: ~ C$ 5,900 / capita, or 96% of national average EQUALIZATION PAYMENTS PROVINCIALFISCALCAPACITY 13

15. CANADIAN TRANSFERS MOSTLY UNCONDITIONAL _____________________________________________________ Shared-cost/high-conditionality transfers (% of total transfers) 14 Canada, 1945-1999

16. CANADIAN PROVINCES RELATIVELY “REVENUE INDEPENDENT” ______________________________________________ Federal transfers as a % of total revenues of other levels of government 15 INTERNATIONALCANADIAN PROVINCES Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics); Finance Canada; IADB

17. PROVINCIAL CONTROL OF REVENUES ___________________________________________ Constituent units’ control over their tax bases and tax rates (% of their own-source revenue) 16

18. ACCESS TO REVENUES: PROVINCIAL FISCAL AUTONOMY ___________________________________________ Own-source revenues as % of total provincial-local revenues 82% 81% 70% 61% 59% 56% 22% 88% 87% Canada Belgium Malaysia Germany Switzerland U.S. India Australia Austria Spain 17 0 25 50 75 100 % Canada, 1945-2000 International, latest available data 90 ---------------------------------------- 85 ---------------------------------------- 80 ---------------------------------------- 70 ---------------------------------------- 75 ---------------------------------------- % 1945 50 55 60 65 70 75 80 85 90 95 2000 Year

19. PROVINCIAL ACCESS TO REVENUES _________________________________________ Federal and provincial revenues (% of GDP) 18 All provinces Federal Forecast

20. PROGRAM EXPENDITURES HIGHLY CONSTRAINED Federal and provincial program spending (% of GDP) 10% 15% 20% 25% 1980-811982-831984-851986-871988-891990-911992-931994-951996-971998-992000-01 Federal Provincial 19

21. Federal and provincial governments fiscal balance % of GDP (1981-82 to 2001-02) FISCAL RECOVERY IN LATE 1990s _________________________________________________ 20

22. SUMMING UP _________________________________________________ Comparatively speaking: Canada is a highly decentralized federation Sub-national governments control their own revenues Transfers are relatively minor (on average) and are mostly unconditional Current pressures on social programs (health, education) cause demands for greater transfers (vertical balance debates) The challenge of horizontal balance also continues, especially for poorer provinces & territories 21

23. ANNEX CANADA’S TAX COLLECTION AGREEMENTS

24. TAX COLLECTION AGREEMENTS (TCAs) ______________________________________ Since 1962 joint occupancy of income tax field in a coordinated manner. Agreements with 9 provinces and 3 territories for personal income tax. Agreements with 7 provinces and 3 territories for corporate income tax. A1

25. TERMS AND CONDITIONS OF TCAs ______________________________________________ The federal government agrees to: – collect and administer provincial personal and corporate income taxes – pay provinces the value of income tax assessed, and – provide this service at very small cost Provincial governments agree to use the federal definition of taxable income, thus ensuring a common tax base A2

26. ADMINSTRATION OF TCAs ______________________________________ Three departments involved: Department of Finance Canada is responsible for policy matters and for paying provinces their share of assessed income taxes The Canada Customs and Revenue Agency collects, assesses, audits and enforces provincial legislation The Auditor General of Canada conducts an audit annually of the tax collection account A3