Fiscal Federalism

1. Fiscal Federalism Douglas Brown Pols 321 St. Francis Xavier University October 2009

2. 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

3. A. The Structure of Canadian Fiscal Federalism • Constitutional Powers • Tax Structure and Harmonization • Intergovernmental Transfers • Fiscal Relations Process

4. 1. 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

5. 2. 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) • 1950-2005: gradual decentralization of fed-prov revenue split, from 65/35 to 44/56

6. 3. 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

8. Côté

9. 4. 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

10. B. 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

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

12. 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 • NL and NS offshore accords, 2004-05

13. D. 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?

15. Recap of situation, end of 2005 • 10-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

16. 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

17. E. 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 • Transparency, stability, predictability • But …new ”Cap” on fiscal capacity is punitive to new resource producers: Sask, NL and NS

18. The Dilemma of the Offshore Accords …1 • Original accords, 1986, were a quasi-constitutional solution to a difficult dispute over ownership, management and revenues. • 2005 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.

19. 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. • 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.

20. Fiscal Federalism and the Economic Down-turn, 2008-09 • Back to deficit financing for both feds and provs • A lingering public-sector recession is likely • A temporary (?) dip in oil and gas and other resource revenues • Equalization entitlements bound to change • Is Ontario a have-not province?

21. F. 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 • But the system has proven less adaptable in recent years • Intergovernmental culture is now more combative (politicians get involved more) • The public’s sense of stability has suffered

22. Evaluation: The effect of Fiscal Federalism (2) • On reaching policy goals • Major economic goals achieved, with strong economic performance in past decade • 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

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