Fiscal Federalism in Canada
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Fiscal Federalism in Canada Robin Boadway and Ronald Watts* Institute of Intergovernmental Relations Queen’s University Kingston, Ontario Canada July, 2000 * The major contributions to this project by John McLean and Jean-Francois Tremblay are acknowledged. i The purpose of this report is to explain the major dynamics affecting fiscal federalism in Canada. It is written primarily for an audience that does not have an extensive knowledge of Canada but it does make use of terms and concepts that are common in the study of fiscal federalism. The major figures in Canadian fiscal federalism are the federal and provincial governments. Territorial governments, local governments and the newly emerging models of aboriginal self-government are significant figures in fiscal relations in Canada, and they receive some attention in the report, but the main focus of this analysis is on the relationship between the federal government and the provinces. The content of the report combines material from the study of economics and political science to provide both a quantitative and qualitative analysis of fiscal federalism in Canada. The report focuses on explaining the current relationship between governments but in doing so a significant amount of attention is given to explaining the historical developments that have led to the current situation. ii Table of Contents A. FEDERALISM IN CANADA: THE CONSTITUTIONAL AND POLITICAL CONTEXT ......................................................................................................................... 1 1. CONSTITUTIONAL STATUS OF VARIOUS ORDERS OF GOVERNMENT ............................. 1 The Federal, Provincial and Territorial Legislatures ................................................ 2 The Courts ................................................................................................................... 3 Constitutional Status of the Federal and Provincial Governments ............................ 3 Local and Territorial Governments ............................................................................ 4 2. CONSTITUTIONAL ALLOCATION OF REVENUE AND EXPENDITURE RESPONSIBILITIES AND PROVISIONS RELATED TO INTERGOVERNMENTAL TRANSFERS ................................. 4 Constitutional Allocation of Revenue ......................................................................... 4 Personal Income Taxes ........................................................................................... 5 Corporate Income Taxes ......................................................................................... 5 Sales Taxes .............................................................................................................. 5 Constitutional Allocation of Expenditure Responsibilities ......................................... 7 Constitutional Provisions Related to Intergovernmental Transfers ........................... 8 3. CONSTITUTIONAL OR OTHER SPENDING POWER PROVISIONS .................................... 10 4. POLITICAL AND LEGAL DYNAMICS - INCLUDING THE ROLE OF LAW AND ROLE OF POLITICS IN THE DECISION-MAKING PROCESSES ........................................................... 12 Role of Law in the Decision-Making Process ........................................................... 13 The Constitutional Amending Formula and the Difficulty of Amending the Constitution ........................................................................................................... 14 Reference Procedures ............................................................................................ 15 Appointments to the Appeal Courts ...................................................................... 16 Role of Politics in the Decision-Making Process ..................................................... 17 Executive Federalism ............................................................................................ 17 The Differences Between the Provinces ............................................................... 19 The Role of Quebec .............................................................................................. 21 Role of the Federal Government in Intergovernmental Relations ........................ 23 iii 5. TRANSPARENCY AND ACCOUNTABILITY .................................................................... 24 Revenue and Expenditure Responsibilities of Governments ..................................... 24 Executive Federalism ................................................................................................ 26 Recent Developments: The Social Union Framework Agreement ............................ 27 B. A SUMMARY OF FEDERAL AND PROVINCIAL BUDGETARY ELATIONS IN CANADA .................................................................................................................... 28 1. FEDERAL AND PROVINCIAL SHARES OF TOTAL PUBLIC SPENDING ........................... 29 Shares Including Intergovernmental Transfers ........................................................ 31 Shares Excluding Intergovernmental Transfers ....................................................... 31 2. FEDERAL AND PROVINCIAL GOVERNMENT SHARES OF TOTAL GOVERNMENT REVENUES ..................................................................................................................... 33 3. TRANSFER PAYMENTS FROM FEDERAL TO PROVINCIAL GOVERNMENTS ................... 35 4. VERTICAL FISCAL IMBALANCES ................................................................................. 39 VFI Excluding Intergovernmental Transfers ............................................................ 41 VFI Including Intergovernmental Transfers ............................................................. 42 5. HORIZONTAL FISCAL IMBALANCES ............................................................................ 42 HFI of Provincial Expenditures ................................................................................ 43 HFI of Provincial Taxes Before Intergovernmental Transfers ................................. 46 HFI of Provincial Taxes After Intergovernmental Transfers ................................... 48 Tax Capacity Differences for Equalization Purposes ............................................... 53 C. SYSTEM OF INTERGOVERNMENTAL TRANSFERS .................................... 58 1. NATURE OF PROGRAMS FOCUSED ON VERTICAL IMBALANCES ................................. 62 2. NATURE OF PROGRAMS FOCUSED ON HORIZONTAL IMBALANCES ............................ 67 3. NATURE OF OTHER INTERGOVERNMENTAL TRANSFERS ............................................ 73 D. SYSTEMS OF TAX HARMONIZATION AND TAX COLLECTION ............... 76 1. INCOME TAX HARMONIZATION .................................................................................. 77 Corporate Tax Collection Agreements ..................................................................... 77 Personal Tax Collection Agreements ........................................................................ 79 2. SALES TAX HARMONIZATION .................................................................................... 80 3. PAYROLL TAX HARMONIZATION ............................................................................... 82 4. OTHER ISSUES IN TAX HARMONIZATION ................................................................... 83 iv E. ANALYSIS: ECONOMIC ASPECTS .................................................................... 84 1. IMPACTS ON ECONOMIC EFFICIENCY ......................................................................... 84 Decentralization as a Source of Efficiency ............................................................... 84 Fiscal Arrangements as Facilitators of Decentralization ........................................ 85 Efficiency in the Economic Union ........................................................................ 86 Fiscal Efficiency ................................................................................................... 87 2. IMPACTS ON EQUITY .................................................................................................. 88 Equity and Public Services ....................................................................................... 89 Vertical Equity .......................................................................................................... 90 Horizontal Equity ...................................................................................................... 91 POLITICAL ASPECTS ................................................................................................. 92 1. IMPACT ON STABILITY ............................................................................................... 92 2. AREAS OF CONSENSUS ............................................................................................... 92 3. AREAS OF DISPUTE .................................................................................................... 93 Ability to Adapt to Changes .................................................................................... 100 4. TRANSPARENCY AND ACCOUNTABILITY CONSIDERATIONS ..................................... 103 5. POLITICAL CULTURE ................................................................................................ 106 APPENDIX .................................................................................................................... 109 v List of Tables Table A.1: Taxes Levied by Federal, Provincial and Territorial Governments .................. 6 Table B.1: Federal