presentation to: xv regional seminar of fiscal policy cepal/eclac, united nations santiago de chile,...

Presentation to:

XV REGIONAL SEMINAR OF FISCAL POLICY

CEPAL/ECLAC, United Nations

Santiago de Chile, 27-30 January 2003

______________________

FISCAL DECENTRALIZATION IN CANADA

Dr. T. Russell Robinson

Ottawa Canada

FORUM OF FEDERATIONSFORUM OF FEDERATIONS____________________________________________________________________________________________________________

“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

CLEARING HOUSE FOR INFORMATION & RESOURCES ON PRACTICE OF FEDERALISM

PROVIDES POLICY & PROGRAM ASSISTANCE TO GOVERNMENTS

FOCUS ON EDUCATION, INFORMATION-SHARING, & MULTILATERAL, COMPARATIVE ACTIVITIES

PLEASE CONSULT: www.forumfed.org

OVERVIEW OF CANADAOVERVIEW OF CANADA

(1898)

0.1%

(1870) 0.1%

(1999)

0.1%

(1949)

1.8%

(1867)

24.1% (1873)

0.5%

(1867)

3.1%(1867)

2.5%

(1867)

37.8%

(1870)

3.8%

(1905)

3.4%

(1905)

9.7%

(1871)

13.2%

(Date of entry into Confederation)

Share of present-day population of 31.1 million

2

DIVISION OF POWERS_______________________________

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

3

CONSTITUTIONAL RESPONSIBILITIES_________________________

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

4

SPENDING AREAS & PRESSURES________________________

Few concurrent powers (agriculture, pensions, immigration, industry)

Residual power lies with federal level

Much interdependence in practice– areas where jurisdiction is

not clear or overlaps– through use of the

spending power and transfers to provinces

Provincial spending pressures

Health CareEducationSocial services

Federal spending pressures

Security and national defence

Senior’s, Aboriginals

R & D and Skills

Transfers to Provinces (Health)

5

ACCESS TO REVENUE SOURCES______________________

Federal Provincial

Personal Income Taxes Corporate Income Taxes Sales Taxes Payroll Taxes Resource Royalties Gaming, Liquor Profits Property Taxes Customs Import Duties Taxes on Non-Residents

6

Traditional tax basesare shared by Ottawa and the provinces

Provincial-only tax bases are growing

Federal-only tax basesare small and volatile

ACCESS TO REVENUES, CONTINUED_______________________

Common revenue sources

Personal income taxCorporate income taxSales taxesPayroll taxes

Federal Provincial

Gambling, sale of alcoholProperty taxesNatural resource revenues

Federal Provincial

Provincial-only revenue sources

Federal-only revenue sources

Customs tariffs and import dutiesTaxes on non-residents

Federal Provincial

7

TAX COLLECTION AGREEMENTS_______________________

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

8

CANADIAN DECENTRALIZATION:FISCAL TRENDS

_______________________________

0%

10%

20%

30%

40%

50%

60%

19

45

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

Provinces

Federal

REVENUES (% OF GDP)

0%

10%

20%

30%

40%

50%

60%

19

45

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

Provinces

Federal

EXPENDITURES (% OF GDP)

Federal Transfers Federal Transfers

9

DECENTRALIZATION: INTERNATIONAL COMPARISONS

_________________________________________________

41%

53%

57%

61%

62%

68%

69%

56%

51%

50%

0% 20% 40% 60% 80%

Canada

Argentina

U.S.

Switzerland

Australia

Brazil

Mexico

Germany

Spain

Austria

47%

66%

67%

69%

76%

77%

83%

81%

58%

58%

0% 20% 40% 60% 80% 100%

Canada

Switzerland

U.S.

Brazil

Australia

Germany

Austria

Mexico

Spain

Argentina

FEDERAL SHARE OF DIRECT

SPENDING (1998)

FEDERAL SHARE OF TAX REVENUES (1998)

Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics), Inter-American Development Bank

10

CANADA’S THREE MAJOR TRANSFER PROGRAMS

__________________________________________________

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]

11

2002-03 VALUES

HORIZONTAL EQUITY AND CANADIAN FISCAL EQUALIZATION

________________________

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

12

HOW EQUALIZATION WORKS________________________________________

$3,938 $4,035 $4,280 $4,462$4,819

$5,477$5,837

$8,984

$5,232$6,414

$0

$2,000

$4,000

$6,000

$8,000

$10,000

Nfld. P.E.I. N.B. N.S. Man. Que. Sask. B.C. Ont. Alta.

Fiscal capacity BEFORE equalization Equalization

Post-Equalization fiscal capacity: ~ C$ 5,900 / capita, or 96% of national average

EQUALIZATION PAYMENTS

PROVINCIALFISCALCAPACITY

13

CANADIAN TRANSFERS MOSTLY UNCONDITIONAL

_____________________________________________________

38%

53%

65%

69%

73%

86%

100%

17%

24%

0% 20% 40% 60% 80% 100%

Canada

Spain

India

Australia

Germany

Austria

Switzerland

Malaysia

U.S.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

Shared-cost/high-conditionality transfers (% of total transfers)

14

Canada, 1945-1999

CANADIAN PROVINCES RELATIVELY “REVENUE INDEPENDENT”

______________________________________________

25%

28%

34%

35%

35%

35%

55%

56%

12%

24%

0% 10% 20% 30% 40% 50% 60%

Canada

Germany

Switzerland

U.S.

Brazil

Mexico

Australia

Austria

Spain

Argentina

Federal transfers as a % of total revenues of other levels of government

15

7%

9%

16%

16%

18%

32%

33%

35%

39%

7%

0% 20% 40% 60% 80% 100%

Alta.

Ont.

B.C.

Qué.

Sask.

Man.

N.S.

N.B.

P.E.I.

Nfld.

INTERNATIONAL CANADIAN PROVINCES

Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics); Finance Canada; IADB

PROVINCIAL CONTROL OF REVENUES___________________________________________

100% 100%89%

8%2% 0%

0%

25%

50%

75%

100%

Canada United-States

Switzerland Belgium Austria Germany

Constituent units’ control over their tax bases and tax rates

(% of their own-source revenue)

16

ACCESS TO REVENUES: PROVINCIAL FISCAL AUTONOMY

___________________________________________

Own-source revenues as % of total provincial-local revenues

82%

82%

81%

70%

61%

59%

56%

22%

88%

87%

Canada

Belgium

Malaysia

Germany

Switzerland

U.S.

India

Australia

Austria

Spain

17

0 25 50 75 100%

Canada, 1945-2000 International, latest available data

90 ----------------------------------------

85 ----------------------------------------

80 ----------------------------------------

70 ----------------------------------------

75 ----------------------------------------

%

1945 50 55 60 65 70 75 80 85 90 95 2000Year

PROVINCIAL ACCESS TO REVENUES_________________________________________

Federal and provincial revenues (% of GDP)

14%

15%

16%

17%

18%

19%

20%

80-81 83-84 86-87 89-90 92-93 95-96 98-99 01-02 04-05

18

All provinces

Federal

Forecast

PROGRAM EXPENDITURES HIGHLY CONSTRAINED

Federal and provincial program spending (% of GDP)

10%

15%

20%

25%

1980

-81

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

FederalProvincial

19

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

81-8

2

83-8

4

85-8

6

87-8

8

89-9

0

91-9

2

93-9

4

95-9

6

97-9

8

99-0

0

01-0

2

Federal governmentProvincial governments

Federal and provincial governments fiscal balance% of GDP (1981-82 to 2001-02)

FISCAL RECOVERY IN LATE 1990s_________________________________________________

20

SUMMING UP_________________________________________________

Comparatively speaking: Canada is a highly decentralized federation

Sub-national governments control their own revenuesTransfers are relatively minor (on average) and are mostly

unconditionalCurrent 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

21

ANNEXCANADA’S TAX COLLECTION

AGREEMENTS

TAX COLLECTION AGREEMENTS (TCAs)______________________________________

• 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.

A1

TERMS AND CONDITIONS OF TCAs______________________________________________

• 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

A2

ADMINSTRATION OF TCAs______________________________________

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

A3