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Studies in Comparative Federalism: Canada AN INFORMATION REPORT Studies In Comparative- Federalism: CANADA ADVISORY COMMISSION- ON HTERWVERNMENTAL RElATlONS Washington, D.C. 20575 JULY 1981 M-127 Preface Inthe State and Local Fiscal Assistance Amendments of 1976 (P.L. 94-488), Congress asked the Advisory Commission on Inter- governmental Relations to study and evaluate "the allocation and coordination of taxing and spending authorities between levels of gov- ernment, including a comparison of other Fed- eral Government systems." The objective of this research is to determine how federal sys- tems in other industralized nations have dealt with issues of fiscal federalism that are of cur- rent concern in the United States. To carry out this assignment, we have com- missioned studies of federal systems in three highly developed industrialized countries with strong national governments: Australia, Canada, and West Germany. In addition, a comparative study of the United states and the three countries has been prepared. Individual country studies were assigned to eminent scholars of fiscal affairs; in two cases, the au- thors were citizens of the country under study. This analysis of Canada is of particular inter- est because it describes a federal system during a period of great stress caused by divisive cul- tural and linguistic pressures, and by the im- pact upon provincial and national fiscal capa- bilities of the uneven distribution of valuable mineral resources. These pressures have caused Canada to examine anew the balance of national-provincial powers. We believe this study of the Canadian ex- perience can make a substantial contribution to understanding some of the problems confront- ing our own federal system, as well as their solution. James G. Watt Chairman Acknowledgments Theprincipal author of this study is Professor Richard H. Leach, Department of Political Sci- ence and Director of the Canadian Studies I11 Center at Duke University. Special thanks go to Douglas H. Clark, Assistant Director, Federal- Provincial Relations Division, Department of Finance, Government of Canada, who not only reviewed the draft of the study and offered a great many suggestions for its improvement, but also supplied many of the figures and facts so essential to make the study accurate. At the Advisory Commission on Inter- governmental Relations, the studies of com- parative federalism were under the general di- rection of John Shannon, Assistant Director for Taxation and Finance. L. Richard Gabler and Susannah E. Calkins prepared this study for publication. Lavinia B. Clarke typed the manu- script; Emily Crews typed the tables and pre- pared the map. Thanks go to a'great many officials of both the national and many of the provincial gov- ernments of Canada who willingly supplied data on request. The Canadian holdings in the Perkins Library at Duke University were the primary source of material; a debt of gratitude is owed to the staff of Perkins Library for the assistance they rendered. Wayne F. Anderson Executive Director John Shannon Assistant Director Taxation and Finance Contents Canadian Federalism: Processes. Financing. Problems .....1 Introduction ............................................ 1 Chapter 1 Canada: Provinces and Nation ............................5 Geographic and Historical Bases ......................... 5 Constitutional Basis .................................... 7 Chapter 2 The Disparate Provinces .................................. 9 Current Economic Indicators ............................9 v Overall Trends .........................................12 The Atlantic Provinces ................................13 Quebec ...............................................15 Ontario ...............................................15 The Prairie Provinces .................................16 British Columbia .....................................17 The North ............................................17 Chapter 3 Cities in the Canadian Mosaic ............................21 Metropolitan Centers ...................................21 Municipal Government in Canada .......................22 Chapter 4 Intergovernmental Fiscal Policymaking ...................29 Formal Structures of Policymaking ......................29 Policymaking by Intergovernmental Consultation ........30 Bureaucracies and Intergovernmental Consultation .......32 Interest Groups .........................................34 The Intergovernmental Process Evaluated ................36 Chapter 5 Fiscal Federalism in Canada ..............................39 1977 Fiscal Arrangements Act ...........................40 Cooperation in the Tax System ........................41 Equalization Payments ................................42 Established Programs Financing .......................47 Impact of the 1977 Arrangements ........................49 Canada Assistance Plan ............................... 54 Other Shared Cost Programs ...........................55 Special Financial Arrangements Between the Federal Government and Quebec ................56 Chapter 6 Taxes and Deficits ........................................57 Overall Government Revenues ...........................60 Revenues of the Federal Government ....................60 Tax and Transfer Revenues of Non-Federal Governments .........................................63 Government Expenditures ...............................65 The Federal Deficit ....................................69 Government Work Forces ...............................69 Chapter 7 Imbalances and Disharmonies ............................77 Fiscal Imbalance ........................................77 Governmental Management (?) of the Economy ..........78 The Impact of Oil Prices on Governmental Revenues .....80 Tax Harmonization .....................................82 Chapter 8 Renegotiating the Federal Bargain .......................87 Proposals for Constitutional Reform .....................88 The Review Process Initiated ............................90 A New Canadian Federation .............................90 Other Requirements for Change .......................94 Map. Tables. Charts. and Figure Map of Canada .............................................. 4 Tables 1 Economic Indicators of the Canadian Provinces ......... 10 2 Provincial Transfers to Local Governments. 1967-76 .... 25 3 Frequency of Federal-Provincial Meetings and Confer- ences According to Level of Representation and Area of Government Activity. 1975 ........................... 31 4 Frequency of Federal-Provincial Meetings and Confer- ences According to Category and Level of Representa- tion. 1975 ........................................... 31 5 Provincial Distribution of Population and Tax Bases. Federal-Provincial Fiscal Arrangements. 1977-82. for the Year 1979-80 .................................... 43 6 Equalization Entitlements by Revenue Source and Prov- ince. Federal-Provincial Fiscal Arrangements. 1977-82. for the Year 1979-80 ................................. 44 7 The Government of Canada's Equalization Payments. 1977-78 ............................................. 45 8 Federal Share of Established Programs Financing. 1977-78 ............................................. 4 8 Conditional Grants and Shared-Cost Programs as of March 31, 1976 and 1977 ............................ 50 Revenues by Level of Government, Before and After In- tergovernmental Transfers, National Accounts Basis, 1926-79 ............................................. 58 National Accounts Budget for all Levels of Government: VII Preliminary 1978 .................................... 61 Intergovernmental Transfers, National Accounts Basis, 1926-79 ............................................. 66 Expenditures by Level of Government, Before and After Intergovernmental Transfers, National Accounts Basis, 1926-79 ............................................. 70 Expenditures by Level of Government, Before and After Intergovernmental Transfers, as Percent of Gross Na- tional Product, 1926-79 .............................. 72 National Accounts Budget for all Levels of Government, 1978 ................................................ 74 1980 Provincial Tax Rates .............................. 83 Charts 1 Percentage Distribution of Total Government Revenue.. 6 2 2 Percentage Distribution of Federal Government Revenue 6 2 3 Distribution of Non-Federal Government Revenue ....... 6 2 4 Government Revenues as a Percentage of Income Base. .. 63 5 Government Revenue and Expenditures as a Percentage of GNP .............................................. 64 6 Government Expenditures on Social Programs as a Pro- portion of GNP, 1964-76 ............................. 68 Figure 1 Differences in Treatment of Businesses in Provincial Tax Policy ............................................... 84 Canadian Federalism: Processes, Financing, Problems INTRODUCTION Muchmore than in the United States, ques- tions of federalism, intergovernmental rela- tions, and centralization versus decen- tralization of power are issues of the day in Canada, not merely in scholarly writing but also in the media and on local street corners. This was especially the case as the 1980s began. In earlier days, federalism and questions of power allocation within the federal system were a matter of concern chiefly to Quebec, and much of the attention the Canadian press and academia paid to issues of federalism related to the aspirations and assertions of that province and its restlessness in confederation. More re- cently, it has become obvious that all ten provinces, in varying degrees of intensity,
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