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Index for my Toronto Budget 2004 project
"Fiscal Imbalance" in Canada
26/03/2004

The more I read or think about the federal-provincial "Fiscal Imbalance", the more I just don't get it.

Stephen Harper wrote, recently (PDF):

At the federal level, Paul Martin’s downloading has worsened the fiscal imbalance between Ottawa, the provinces and also the municipalities. The federal government must simply accept the fact that it collects more revenues than it needs to cover its own responsibilities. Meanwhile the provinces face growing demands for social programs like health care and education yet have less ability to collect taxes. Too often the result is that provinces go cap-in-hand to Ottawa asking for larger and larger sums to cover the differences between their spending responsibilities and their tax revenues. We must simply find a better approach than this. Over the long term, we need to address this fiscal imbalance through a better alignment of tax and spending responsibility.

Harper's solution for this is:

  1. He would slash federal spending and reduce federal taxes
  2. The provinces could increase taxes and then pay their own way on health care, education, infrastructure, etc.

Harper presents these as linked, but I don't see why they must be. Technically, there is nothing stopping the provinces from immediately raising their taxes to "cover the differences between their spending responsibilities and their tax revenues".

Yes, one could argue that if the provinces acted unilaterally and raised their taxes independent of a federal cut, then the overall tax burden would be too high. But the two problems remain independent. The problem is not one of "fiscal imbalance" but rather federal taxation and spending on programs that Harper thinks aren't worth it.

If health care (or any other program of provincial responsbilitiy) is suffering in the provinces due to lack of funding, what really prevents these provinces from raising taxes to close the gap? Nothing, except what I assume is a concern that provincial tax rates would be too high in comparision to other markets. Provinces, today, do not want to increase their tax rates because they are competing with each other to have the lowest rates. But, wouldn't this continue to be true even if Stephen Harper was elected and slashed spending and taxation in Ottawa? Wouldn't the provinces still be competiting with each other to have the lowest rates?

The point of this posting is not to challenge (nor to support) Harper's suggestions about cuts in the federal government. Rather, I am raising questions about this oft-repeated claim that Ottawa prevents the provinces from being able to successfully meet their own needs. On the contrary, it seems that using federal taxes to fund some programs of provincial jurisdiction may protect those programs from the race-to-the-bottom that could be created by intra-provincial competition.

Any thoughts?

Perhaps the provinces actually like federal funding of provincial issues. And, perhaps, the provinces like to complain about "fiscal imbalance" to allow them to pass the buck on their failures, not to mention as a tool for clawing even more money out of Ottawa. Consider this excerpt from Jeffrey Simpson's column about budget complainers in yesterday's Globe:

Premiers. Well, some of them had the good sense to say nothing. But those who did talk, complained (surprise! surprise!) that there was no new money for health. Excuse me? Ottawa is in the midst of spending $34.8-billion over five years for health, plus a one-time payment of $2-billion in 2003-2004. To say, as premiers and others repeatedly do, that there is no new money for health seriously distorts what's happening.

Completely over the top went Quebec's Finance Minister, Yves Séguin. The budget, he charged in a mangled metaphor, was a "new page in the museum of horrors of fiscal imbalance." He added, "And I weigh my words." Really?

As for the Conservatives, whether they are right or wrong, it is true that decentralizing power in Canada is a popular position to take when you build from a base of disgruntled regions.

POSTSCRIPT: Given what my blog is known for, I should point out that I do, indeed, see a fiscal imbalance between provinces and municipalities. There is no inconsistency here. One difference is that municipalities do not have the appropriate taxation abilities (while provinces do). I.e., Ontario cities have been forced to pay for income-redistrubuting social programs out of property taxes, and they are an inadequate tool.

It's a question of downloading to a tier that has the appropriate taxing power (provinces) or to one that does not (municipalities).

There is also a question of sharing between jurisdictions, but I will leave that as a separate issue.


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