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