Transcript Forum of Federations

Presentation to:
XV REGIONAL SEMINAR OF FISCAL POLICY
CEPAL/ECLAC, United Nations
Santiago de Chile, 27-30 January 2003
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FISCAL DECENTRALIZATION IN CANADA
Dr. T. Russell Robinson
Ottawa
Canada
FORUM OF FEDERATIONS
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“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
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CLEARING HOUSE FOR INFORMATION & RESOURCES ON PRACTICE OF
FEDERALISM
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PROVIDES POLICY & PROGRAM ASSISTANCE TO GOVERNMENTS
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FOCUS ON EDUCATION, INFORMATION-SHARING, & MULTILATERAL,
COMPARATIVE ACTIVITIES
PLEASE CONSULT:
www.forumfed.org
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OVERVIEW OF CANADA
(1999)
0.1%
(1898)
0.1%
(Date of entry into Confederation)
Share of present-day population of
31.1 million
(1870)
0.1%
(1949)
(1871)
13.2%
1.8%
(1905)
9.7%
(1905)
3.4%
(1867)
(1870)
(1867)
3.8%
37.8%
24.1%
(1873)
0.5%
(1867)
2.5%
(1867)
3.1%
DIVISION OF POWERS
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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
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CONSTITUTIONAL RESPONSIBILITIES
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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
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SPENDING AREAS & PRESSURES
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Few concurrent powers
(agriculture, pensions,
immigration, industry)
Residual power lies with
federal level
Much interdependence in
practice
Provincial spending pressures
Health Care
Education
Social services
Federal spending pressures
– areas where jurisdiction
is not clear or overlaps
– through use of the
spending power and
transfers to provinces
Security and national defence
Senior’s, Aboriginals
R & D and Skills
Transfers to Provinces (Health)
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ACCESS TO REVENUE SOURCES
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Federal
Personal Income Taxes
Corporate Income Taxes
Sales Taxes
Payroll Taxes
Resource Royalties
Gaming, Liquor Profits
Property Taxes
Customs Import Duties
Taxes on Non-Residents
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Provincial
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ACCESS TO REVENUES, CONTINUED
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Traditional tax
bases
are shared by
Ottawa and the
provinces
 Provincial-only tax
bases are growing
 Federal-only tax
bases
are small and
volatile
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Common revenue sources
Federal Provincial
Personal income tax
Corporate income tax
Sales taxes
Payroll taxes
Provincial-only revenue sources
Federal Provincial
Gambling, sale of alcohol
Property taxes
Natural resource revenues
Federal-only revenue sources
Federal Provincial
Customs tariffs and import duties
Taxes on non-residents
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TAX COLLECTION AGREEMENTS
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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
CANADIAN DECENTRALIZATION:
FISCAL TRENDS
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REVENUES (% OF GDP)
EXPENDITURES (% OF GDP)
60%
60%
50%
50%
40%
40%
Provinces
20%
Provinces
Federal Transfers
10%
30%
20%
10%
Federal
Federal
0%
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
0%
Federal Transfers
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
30%
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DECENTRALIZATION:
INTERNATIONAL COMPARISONS
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FEDERAL SHARE OF DIRECT
SPENDING (1998)
FEDERAL SHARE OF TAX REVENUES
(1998)
Austria
69%
Argentina
Spain
68%
Spain
83%
81%
Germany
62%
Mexico
77%
Mexico
61%
Austria
76%
69%
Brazil
57%
Germany
Australia
56%
Australia
67%
Brazil
66%
53%
Switzerland
U.S.
51%
U.S.
58%
Argentina
50%
Switzerland
58%
0%
20%
40%
47%
Canada
41%
Canada
60%
80%
0%
20%
40%
60%
80% 100%
Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics), Inter-American Development Bank
CANADA’S THREE MAJOR TRANSFER
PROGRAMS
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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]
2002-03 VALUES
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HORIZONTAL EQUITY AND CANADIAN
FISCAL EQUALIZATION
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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
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HOW EQUALIZATION WORKS
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$10,000
$8,000
Post-Equalization fiscal
capacity: ~ C$ 5,900 / capita,
or 96% of national average
$8,984
$6,000
EQUALIZATION PAYMENTS
$4,000
$4,280 $4,462
$3,938 $4,035
$2,000
$4,819 $5,232
$5,477
$5,837 $6,414
PROVINCIALFISCALCAPACITY
$0
Nfld. P.E.I.
N.B.
N.S.
Man. Que. Sask. B.C.
Fiscal capacity BEFORE equalization
Ont.
Alta.
Equalization
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CANADIAN TRANSFERS MOSTLY
UNCONDITIONAL
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Shared-cost/high-conditionality transfers (% of total transfers)
U.S.
100%
100%
Canada, 1945-1999
90%
Malaysia
86%
80%
Switzerland
73%
Austria
70%
69%
Germany
60%
65%
Australia
50%
40%
53%
India
30%
38%
Spain
20%
24%
10%
Canada
17%
1995
1990
1985
1980
1975
100%
1970
80%
1965
60%
1960
40%
1955
20%
1950
0%
1945
0%
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CANADIAN PROVINCES RELATIVELY
“REVENUE INDEPENDENT”
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Federal transfers as a % of total revenues of other levels of government
56%
Argentina
55%
Spain
Nfld.
39%
P.E.I.
35%
Austria
35%
N.B.
33%
Australia
35%
N.S.
32%
Mexico
35%
Man.
34%
Brazil
28%
U.S.
24%
Germany
Canada
0%
12%
10%
20%
INTERNATIONAL
30%
Sask.
16%
Qué.
16%
B.C.
25%
Switzerland
18%
40%
50%
60%
9%
Ont.
7%
Alta.
7%
0%
20%
CANADIAN PROVINCES
40%
60%
80%
100%
Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics); Finance Canada; IADB
PROVINCIAL CONTROL OF REVENUES
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Constituent units’ control over their tax bases and tax rates
(% of their own-source revenue)
100%
100%
100%
89%
75%
50%
25%
8%
2%
0%
Austria
Germany
0%
Canada
UnitedStates
Switzerland
Belgium
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ACCESS TO REVENUES: PROVINCIAL
FISCAL AUTONOMY
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Own-source revenues as % of total provincial-local revenues
Canada, 1945-2000
90 ---------------------------------------85 ---------------------------------------%
80 ---------------------------------------75 ----------------------------------------
International, latest available data
Canada
88%
Belgium
87%
Malaysia
82%
Germany
82%
Switzerland
81%
70%
U.S.
India
61%
Australia
59%
Austria
70 ---------------------------------------1945 50 55 60 65 70 75 80 85 90 95 2000
Year
56%
22%
Spain
0
25
50
%
75
100
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PROVINCIAL ACCESS TO REVENUES
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Federal and provincial revenues (% of GDP)
20%
19%
All provinces
18%
17%
Forecast
16%
Federal
15%
14%
80-81
83-84
86-87
89-90
92-93
95-96
98-99
01-02
04-05
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PROGRAM EXPENDITURES HIGHLY
CONSTRAINED
Federal and provincial program spending (% of GDP)
25%
20%
15%
Provincial
Federal
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
10%
FISCAL RECOVERY IN LATE 1990s
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Federal and provincial governments fiscal balance
% of GDP (1981-82 to 2001-02)
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
01-02
99-00
97-98
95-96
93-94
91-92
89-90
87-88
85-86
83-84
81-82
Federal government
Provincial governments
SUMMING UP
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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
ANNEX
CANADA’S TAX COLLECTION
AGREEMENTS
A1
TAX COLLECTION AGREEMENTS (TCAs)
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• 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.
A2
TERMS AND CONDITIONS OF TCAs
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• 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
ADMINSTRATION OF TCAs
A3
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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