Transcript 85504ACT204

Canadian fiscal federalism:
issues and possible policy
changes-2006
by
François Vaillancourt
Economics department
Université de Montréal
1$=0.7 euro
Outline of presentation
Outline
• Canadian situation
• Sharing own resources
• Sharing central resources
Debt not addressed: no central constraints on
debt/ deficit of provinces;some loose selfimposed ones
Canada:basic facts
– 10 provinces ,3 territories, N aboriginal
– Large: 5.5 time zones
– Important difference in population 1-100 and
size 1-150 between provinces
– Important differences in per capita by provinces
(GDP) 1-2
– Majority of francophones in Québec
Canadian Challenges-structural
• Climate change :uneven impact linked to
distribution of oil and gas resources
• Ageing of population: uneven impact due
to internal migration + choices of
international migrants
• Sovereignty threat from Québec: latent
but still potent
Canadian Challenges-structural
• NAFTA integration +high $: uneven
distribution
• Oil and gas resources revenues :provincial
royalties uneven distribution
• Federal Spending Power:the temptation to
impact on provincial choices
Region
challenge
Climate
Ageing
change/Ky
oto
0
_
NAFTA+$ Resources
0
+ and -
-
-
Ontario
+(electricit _
y)
0
0
--
-
West
Alberta:-
+
+ (Man)
Atlantic
Québec
+Alberta
Federal fiscal environment
Federal government and provincial
debt,Canada, 4 years, %GDP
70
60
50
40
30
20
10
0
Expenditures
Revenues
Debt fed
Debt prov
1990
1995
2000
2005
Federal transfers
Federal transfers,canada ,4 years, Billion$( nominal24% inflation 95-05)
50
40,8
40
30
20
10
26
16,5
9,4
25,5
16
11,6
29,4
22,3
9,4
27,2
12,4
0
95-96
98-99
2003-2004 2005-2006
equalisation
CHST
total
Canadian challenges –short term
• Séguin report on fiscal disequilibrium 03/02
• Federal Liberal minority(06/04- 01/06)
– Set overall equalisation through indexed total
not RTS formula(10/04)
– Exclude natural resource from equalisation base
for Nfld (flags!) and NS (02/05)-8 years
• Federal conservative minority(01/06-)
– Promised to solve fiscal disequilibrium:to
attract Québec votes
Fiscal disequilibrium;myth or
reality?
• Federal government has surpluses,provinces
deficits(except Alberta);
• Federal government has greater share of
GDP elastic revenues
• Provinces have greater share for
demographically elastic expenditures-health
• Provinces cannot raise taxes:already too
high+ tax competition
Fiscal disequilibrium: myth!
• Provinces want more transfers: +VFI,-VFG
• VFG=(Predicted spending - predicted
revenues) with Unchanged behaviour
:does it make sense with fiscal autonomy?
• Raise rates or Cut spending are not chosen
by provinces
• Federal government gains influence ,votes?
Canadian Challenges-responses
Recent reports in Canada
• 3/03/2006: Council of Federation report CF
Reconciling the Irreconcilable Addressing
Canada’s Fiscal imbalance
• 6/06/2006:Federal government report FG
Achieving a National Purpose Putting
Equalisation back on track
Sharing own resources
Federal and provincial shares of 3 major
taxes, Canada ,2005 and total in billion
$
200
166
150
132
100
50
67
63
49
37
33
PIT
CIT
64
36
0
VAT+RST
federal
provincial
Total$
Sharing own resources changes?
Recent changes No proposals in reports
• 2000+: Less harmonisation in PIT; little
debate
• Discussion of transfer of federal VAT to
provinces (drop in rate from 7 to 6% on
1/07/2006 =>5% promised) Provinces could
occupy vacated fiscal space on their own
Sharing central resources-Issues
• What government: Canada :federal V
transfers
• What funding: Canada General federal
revenues
• How much funding: Canada RTS modified
and enveloppe
• How to share it:Canada RTS modified and
per capita
H or V changes?
Changes No changes proposed in reports
• Note that Inter regional accounting(GDP
flows) often raised in Canada
– In the past sovereignty debate
– currently by Ontario
No correction for deficit in public discourse
General or specific revenue
sources: changes
• Canada :All federal revenues are included:
PIT,CIT,GST/VAT,…
• No federal natural resources
royalties(except in Territories) –1982
constitutional amendment
• No Changes proposed
– The 1980 NEP factor
How much to share
Federal legal decision
Equalisation
– pre 2004 RTS formula five province
standard(implicit exclusion of oil and gas)
– Since 2004 indexation of fixed amount
• Canada Health+Social: Numerous changes
in 1999-2004 =>Per capita +indexation
CHST changes 2000+
• Split CHST into CHT and CST
• Introduction of foundations to shift federal
surpluses from debt reduction to spending
(CMSF,CFI,..)
• Introduction of labelling conditions +some
standards(?)
• Use once of transfer conditional on annual
federal surplus
Proposed changes in CHT+CST
• Proposals in reports CHST
• CF:
– Maintain CHT amount and indexation 6%
– Increase CST amount by 4.9 billion to correct
underfundin(1994-1995 standard) and inflation
and index CST at 4.5% annually
• FG: No proposal outside mandate
Proposed changes in
Equalisation-CF
CF: Pool set using:
– Ten province standard
– 100% inclusion of natural resource revenues in
base
– Scaling factor(<1) if necessary to be negotiated
between provinces and federal G
Proposed changes in
equalisation-FG
• GF Pool set using
–Ten province standard
–50 % inclusion of natural resource
revenues in base
–fiscal capacity of any receiving province <
than the poorest non receiving province
–Scaling (<1)by federal government if
necessary
Changes set aside
FG
– Explicit rejection of RES: complexity and
incentives
– Explicit rejection of macro
indicators:portfolio(proxy) approach to RTS
may approximate this
Other changes to equalisation
• CF and GF recommend use of 3-year
moving average lagged 2 years
• GF makes specific recommendations on
–
–
–
–
Property tax measurement
Use of proxy measures of tax bases
Non inclusion of user fees in tax capacity
Use of actual revenues for natural resource base
Institutional changes
• CF
– Create a First Minister Fiscal Council(FMFC)
– Create a Canadian Institute for Fiscal
Information
• FG No new body:more information and
discussion
The Territories
• Pre 2004 approach was:
TFFGrant=GEB(expenditures)-ER(revenues)
• 2004-: % indexed sum for the 3 Territories
together shared on basis of past shares
• Proposed for each territory(PAGE index)
TFFGrant=NOB(expenditures)-RC(Revenue)
With RC 70% of 7 sources resources excluded
Nunavut issue
Bottom line
• CF: Equalisation (base case pre 2004)
9,4=>15,1Billion(100%NR);
=>13,7(50%NR)
=>12,3(0%NR
• CF 4,5 CST+ X =7-10 increase
• FG:Equalisation
Debates which base case
11,7=>12.6 billion
Issues
• Is it preferable to set an amount and to it
distribute through RTS formula OR
Use RTS for both and explicitly scale back
• Impact of exclusion of user fees on their use
• Proxies : susbtitutes for illmeasured(exclusion?) or small items?
• Use of natural resource revenues as base.
Conclusion
•
Recent changes in inter-governmental
finance in Canada can be summarized as :
1. Less desire for autonomy by provinces
2. More federal presence in health field
3. Less formula based, +arbitrary equalisation
•
•
Some would argue that first two items are
bad but others would argue that increased
federal presence is appropriate
No one supports the third change
Conclusion
• First two aspects are subject to ongoing
tussle
• Adoption of FG report would rectify last
• No debate on long term changes
• Muddle through as usual!