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Canadian fiscal federalism: issues and possible policy changes-2006 by François Vaillancourt Economics department Université de Montréal.

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Presentation on theme: "Canadian fiscal federalism: issues and possible policy changes-2006 by François Vaillancourt Economics department Université de Montréal."— Presentation transcript:

1 Canadian fiscal federalism: issues and possible policy changes-2006 by François Vaillancourt Economics department Université de Montréal

2 1$=0.7 euro Outline of presentation Outline Canadian situation Sharing own resources Sharing central resources Debt not addressed: no central constraints on debt/ deficit of provinces;some loose self- imposed ones

3 Canada:basic facts –10 provinces,3 territories, N aboriginal –Large: 5.5 time zones –Important difference in population 1-100 and size 1-150 between provinces –Important differences in per capita by provinces (GDP) 1-2 –Majority of francophones in Québec

4 Canadian Challenges-structural Climate change :uneven impact linked to distribution of oil and gas resources Ageing of population: uneven impact due to internal migration + choices of international migrants Sovereignty threat from Québec: latent but still potent

5 Canadian Challenges-structural NAFTA integration +high $: uneven distribution Oil and gas resources revenues :provincial royalties uneven distribution Federal Spending Power:the temptation to impact on provincial choices

6 Region challenge Climate change/Ky oto AgeingNAFTA+$Resources Atlantic0_0+ and - Québec+(electricit y) _-- Ontario00--- WestAlberta:-+Alberta++ (Man)

7 Federal fiscal environment

8 Federal transfers

9 Canadian challenges –short term Séguin report on fiscal disequilibrium 03/02 Federal Liberal minority(06/04- 01/06) –Set overall equalisation through indexed total not RTS formula(10/04) –Exclude natural resource from equalisation base for Nfld (flags!) and NS (02/05)-8 years Federal conservative minority(01/06-) –Promised to solve fiscal disequilibrium:to attract Québec votes

10 Fiscal disequilibrium;myth or reality? Federal government has surpluses,provinces deficits(except Alberta); Federal government has greater share of GDP elastic revenues Provinces have greater share for demographically elastic expenditures-health Provinces cannot raise taxes:already too high+ tax competition

11 Fiscal disequilibrium: myth! Provinces want more transfers: +VFI,-VFG VFG=(Predicted spending - predicted revenues) with Unchanged behaviour :does it make sense with fiscal autonomy? Raise rates or Cut spending are not chosen by provinces Federal government gains influence,votes?

12 Canadian Challenges-responses Recent reports in Canada 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

13 Sharing own resources

14 Sharing own resources changes? Recent changes No proposals in reports 2000+: Less harmonisation in PIT; little debate Discussion of transfer of federal VAT to provinces (drop in rate from 7 to 6% on 1/07/2006 =>5% promised) Provinces could occupy vacated fiscal space on their own

15 Sharing central resources-Issues What government: Canada :federal V transfers What funding: Canada General federal revenues How much funding: Canada RTS modified and enveloppe How to share it:Canada RTS modified and per capita

16 H or V changes? Changes No changes proposed in reports Note that Inter regional accounting(GDP flows) often raised in Canada –In the past sovereignty debate –currently by Ontario No correction for deficit in public discourse

17 General or specific revenue sources: changes Canada :All federal revenues are included: PIT,CIT,GST/VAT,… No federal natural resources royalties(except in Territories) –1982 constitutional amendment No Changes proposed –The 1980 NEP factor

18 How much to share Federal legal decision Equalisation –pre 2004 RTS formula five province standard(implicit exclusion of oil and gas) –Since 2004 indexation of fixed amount Canada Health+Social: Numerous changes in 1999-2004 =>Per capita +indexation

19 CHST changes 2000+ Split CHST into CHT and CST Introduction of foundations to shift federal surpluses from debt reduction to spending (CMSF,CFI,..) Introduction of labelling conditions +some standards(?) Use once of transfer conditional on annual federal surplus

20 Proposed changes in CHT+CST Proposals in reports CHST CF: –Maintain CHT amount and indexation 6% – Increase CST amount by 4.9 billion to correct underfundin(1994-1995 standard) and inflation and index CST at 4.5% annually FG: No proposal outside mandate

21 Proposed changes in Equalisation-CF CF: Pool set using: –Ten province standard –100% inclusion of natural resource revenues in base –Scaling factor(<1) if necessary to be negotiated between provinces and federal G

22 Proposed changes in equalisation-FG GF Pool set using –Ten province standard –50 % inclusion of natural resource revenues in base –fiscal capacity of any receiving province < than the poorest non receiving province –Scaling (<1)by federal government if necessary

23 Changes set aside FG –Explicit rejection of RES: complexity and incentives –Explicit rejection of macro indicators:portfolio(proxy) approach to RTS may approximate this

24 Other changes to equalisation CF and GF recommend use of 3-year moving average lagged 2 years GF makes specific recommendations on –Property tax measurement –Use of proxy measures of tax bases –Non inclusion of user fees in tax capacity –Use of actual revenues for natural resource base

25 Institutional changes CF –Create a First Minister Fiscal Council(FMFC) –Create a Canadian Institute for Fiscal Information FG No new body:more information and discussion

26 The Territories Pre 2004 approach was: TFFGrant=GEB(expenditures)-ER(revenues) 2004-: % indexed sum for the 3 Territories together shared on basis of past shares Proposed for each territory(PAGE index) TFFGrant=NOB(expenditures)-RC(Revenue) With RC 70% of 7 sources resources excluded Nunavut issue

27 Bottom line CF: Equalisation (base case pre 2004) 9,4=>15,1Billion(100%NR); =>13,7(50%NR) =>12,3(0%NR CF 4,5 CST+ X =7-10 increase FG:Equalisation Debates which base case 11,7=>12.6 billion

28 Issues Is it preferable to set an amount and to it distribute through RTS formula OR Use RTS for both and explicitly scale back Impact of exclusion of user fees on their use Proxies : susbtitutes for ill- measured(exclusion?) or small items? Use of natural resource revenues as base.

29 Conclusion Recent changes in inter-governmental finance in Canada can be summarized as : 1.Less desire for autonomy by provinces 2.More federal presence in health field 3.Less formula based, +arbitrary equalisation Some would argue that first two items are bad but others would argue that increased federal presence is appropriate No one supports the third change

30 Conclusion First two aspects are subject to ongoing tussle Adoption of FG report would rectify last No debate on long term changes Muddle through as usual!

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