Most Canadians, if asked, would probably view the issue of the “fiscal imbalance” as a good cure for insomnia. That’s too bad because it is an issue that could fundamentally reshape what it means to be Canadian.
The term “fiscal imbalance” is a loaded one, a pejorative used to imply that balance must be restored to Canadian federalism.
To date, the issue has revolved around provinces seeking more money from Ottawa. Moving forward, the waters of the alleged “fiscal imbalance” are muddy – it means different things to different people due to federal-provincial squabbles, party politics, academic analyses, and the somewhat blurry filter of the media
The reason we should be concerned is because of more radical proposals to shift responsibilities to the provinces in areas where the national interest necessitates a federal presence. With the small-government Conservatives seeking to appease separatists in Quebec, the ingredients are on the table for a major restructuring of the Canadian federation.
Solving the “fiscal imbalance” runs the risk of becoming a downsizing exercise for the federal government. Some influential commentators, including a Quebec government commission, the C.D. Howe Institute, and the Canadian Council of Chief Executives, are calling for massive federal tax cuts, paid for by eliminating the major transfers to the provinces for health care, post-secondary education, and social welfare. The provinces, it is argued, would then pick up the tab by raising their taxes.
Yet, a careful look at Canadian history and other federations worldwide suggests that Canada does not have deep structural problems. It is not obvious that the present situation constitutes an “imbalance,” nor that “empowering the provinces” is the answer in a federation that is already one of the most decentralized in the world.
What is being called an imbalance is, in fact, a relatively normal state of affairs in federal systems. Canada has used federal taxes to fund transfers to the provinces to support social programs, such as medicare, that are now at the heart of our national identity. A number of benefits result, including regional development, greater tax harmonization, the efficiency gains of a single administrative system, and common standards and levels of service.
History demonstrates the importance of a strong federal role in the development and expansion of social programs and the achievement of national standards. For example, the federal government played an essential role in winning the battle over hospital user-fees and extra-billing by doctors in the early 1980s.
The problem with fiscal federalism over the past couple of decades has been the adverse consequences of federal withdrawals from the “cooperative federalism” model, plus increased tax competition among the provinces.
Provinces have rightly criticized the federal government for cuts to transfer payments in the mid-1990s, amounting to approximately $6 billion per year. However, in response to provincial lobbying, these transfers have recovered most of the lost ground.
But provincial governments themselves deserve much of the blame for their current fiscal challenges due to tax cuts over the past decade. The lost revenue to provincial treasuries from personal and corporate tax cuts is estimated to be as much as $30 billion per year, an amount that dwarfs the original loss of federal transfers in the mid-1990s.
Proposals that would see the federal government cut its taxes so that provinces can raise their own taxes would actually worsen regional inequality in Canada. Smaller and poorer provinces would be the losers because they would have to raise their taxes much more to provide public services equivalent to richer provinces.
Moreover, in a climate of tax competition, provinces are not likely raise taxes if some provinces, like Alberta, can rely on underlying budget surpluses arising from resource royalties without needing to raise their taxes. Indeed, the different revenue-raising capacities of provincial governments arising from resource royalties does represent a real imbalance that should be, but is not, currently on the table.
Rather than decentralization, Canada would actually benefit from uploading some provincial responsibilities to the federal government. These include Pharmacare, social assistance and labour market training, areas where the federal government could reinforce its existing activities and programs, and that would benefit from a coordinated national approach.
Federal-provincial talks later this year should not be limited to a narrow tug-of-war over transfer payments nor should they be an exercise in downloading of federal responsibilities. Rather, they should consider options that increase and consolidate federal responsibilities in certain areas, and address the real resource-royalty imbalance among provinces.
The result would be strengthened Canada, with common standards and services, not a patchwork that bears little resemblance to the Canada most of us want.
Marc Lee is a Senior Economist with the BC Office of the Canadian Centre for Policy Alternatives, and the author of Tax Cuts and the “Fiscal Imbalance” available at www.policyalternatives.ca.
June 8, 2006
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