Financing multilevel governments:A Canadian’s
perspectiveby
François Vaillancourt
Economics department
Université de Montréal
Financing multilevel governments: A Canadian’s perspective-Outline
• Environment and Challenges to federations
• Sharing own resources
• Sharing central resources
• Sharing the debt field
Environment- structural/Canada
– Number of entities:10 provinces ,3 territories, N aboriginal
– Physical size /Distances Large: 5.5 time zones– Political size:Important difference in population
1-100 and size 1-150 between provinces– Economic size: Important différences in per
capita by provinces (GDP) 1-2– Spatial heterogeneity: Majority of francophones
in Québec
Challenges-structural
• Climate change :Canada uneven impact linked to distribution of oil and gas resources
• Demography : Canada Ageing of population: Canada uneven impact due to internal migration + international migrants
• Political:Canada Sovereignty threat from Québec: latent but still potent(40-45%)
Challenges-structural
• Political :Centralize or decentralize too much: Canada Federal Spending Power
• Economic External Globalisation:Canada NAFTA + $: uneven regional distribution
• Economic:fixed resources Canada Oil and gas resources revenues :provincial royalties uneven distribution
Example of Impact MatrixRegion challenge
Climate change/Kyoto
Ageing NAFTA+$ Resources
Atlantic 0 _ 0 + and -
Québec +(electricity)
_ - -
Ontario 0 0 -- -
West Alberta:- +Alberta + + (Man)
Challenges medium term
• Who can finance: fiscal constraints
• Financing to respect or modify fields of competencies/behaviour?– Canadian spending power or Eve’s apple– American multilevel transferS
• Unfunded mandates
• Budgetary games: trust funds,
Challenges medium term fiscal
010203040506070
1990 1995 2000 2005
Federal government and provincial debt,Canada, 4 years, %GDP
ExpendituresRevenuesDebt fedDebt prov
Challenges: medium term fiscal-1
9,4
16,5
26
11,616
25,5
9,4
22,329,4
12,4
27,2
40,8
0
10
20
30
40
50
95-96 98-99 2003-2004 2005-2006
Federal transfers,canada ,4 years, Billion$( nominal-24% inflation 95-05)
equalisationCHSTtotal
Challenges –short term
• Ideas or debates Séguin report on fiscal disequilibrium 03/02
• Politics Federal minorities(L: 06/04- 01/06+C:01/06-) – L:Set equalisation by indexed total(10/04)– L:Exclude resources for Nfld (flags!) (02/05)– C:solve fiscal disequilibrium for québec votes
• Politics: Provincial strenght
Responses:Canadian Challenges-
No action but reports
• 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
• Two key criteria– Immobility of tax bases– Autonomy at the margin of SN
So CIT =>central, PIT=> SN and VAT=> ?
Sharing own resources 2
• Canadian /Swiss / USA tax autonomy is unususal
• Australian/ German consensual or constitutional/legal uniformity
• Scottish or Spanish timidity
• Spanish use of PIT autonomy to benefit groups also observed in Canada
Sharing own resources 3
• Sharing on formula basis(population) is not taxation
• Sharing on derivation basis often neglects incidence(customs duties,excises,CIT)
• Is public consumption occurring where taxes are paid?
Sharing own resources 4
• Canada: discussion of transfer of federal VAT to provinces (drop in rate) Provinces could occupy vacated fiscal space
• Australia: creation of VAT as replacement source of state grants
• Spain: Catalan autonomy
Sharing central resources-Issues
• What government
• What funding
• How much funding
• How to share it
Sharing central resources-H or V
What government:Vertical/ horizontal transfers
• Horizontal :German inter Lander transfers remain the exception;
• Vertical: Australia/ Canada more common
Sharing central resources-H orV-2
• Sharing of profits from central organisations:Central banks in Switzerland and Tanzania
• Importance of transfers to individuals from central government=>create tax base for SN
Sharing central resources-H or V -3
• Note that Inter regional accounting often raised in Canada
• In the past sovereignty debate;
• Currently by Ontario GDP flows– Issues of borders, incidence, transfers to
individuals, tax expenditures, price/quantity
Sharing central resources financed by
What source of funds
• General revenues
• Subset of one or more specific revenue
And
• Annual setting of amount by central G
• Multi year formula
Sharing central resources-financed by
• Canada :All federal revenues are implicitely included: PIT,CIT,GST/VAT No natural resources royalties
• Australia: VAT is source of equalisation while SPP are funded from general revenues
Sharing central resources-How much
• Replacement of past autonomous amounts:– Evolution issue(France TIPP)/ comparisons to
past/ link to spending(social-France)
• Budget balancing :disincentives on spending and revenues
• Collections:in/dis-incentives to collect –depends on design
• Needs :evolution issues
Sharing central resources-How much-2
Canada:Equalisation– pre 2004 RTS formula five province
standard(implicit exclusion of oil and gas)– Since 2004 five year agreement for equalisation
with indexation of fixed amount
• Canada Health+Social: Numerous changes in 1999-2004 =>Per capita +indexation
• Canada Territories:Needs Barnett formula like
Sharing central resources-how much-3
• Australia – VAT(GST) revenue for equalisation– Budget Balancing Assistance for abolished
state taxes linked to VAT– Commonwealth decision/conditions for SPP for
health and education from general revenues
Sharing central resources-how much-4
• Proposals in reports CHST
• CF– Maintain CHT amount and indexation 6%– Increase CST amount by 4.9 billion to correct
underfunding(1994-1995 standard) and inflation and Index CST 4.5%
• FG Nothing
Sharing central resources-how much
• Equalisation
• CF Pool set using: – Ten province standard – 100% inclusion of natural resource revenues in
base– Scaling factor negotiated
Sharing central resources-how much
• FG Pool set using
–Ten province standard
–50 % inclusion of natural resource revenues in base
–A cap by province:no receiving province can have a higher fiscal capacity than the poorest non receiving province
Sharing central resources-shared how
• Distribution between SN –General indicator
• Fiscal capacity –RTS
+ or without
• Expenditure RES– Costs (topography,.. or needs(population
characteristics)
Sharing central resources-shared how
• Canada RTS modified
• Australia RTS+RES
• Proposals in reports
• CF– Explicit rejection of RES:complexity and
incentives– Explicit rejection of macro indicators
Canadian proposals:other elements
• GF makes specific recommendations on various items.We note:– No CGG type body; provide more information– CF and GF recommend use of 3-year moving
average lagged 2 years
Access to debt
• No constraints in Australia, Canada or USA
• Is Maastrich 3%/60% necessary or are there self correcting mechanisms?
• Such borrowing constraints (on SNG) are common in developing countries
A word on Fiscal disequilibrium
• Predicted spending VS predicted revenues with Unchanged behaviour :does it make sense with fiscal autonomy?
• Raise rates
• Cut spending
• Raid on open treasury!