Fiscal Coordination in Canada - OECD · Fiscal Coordination in Canada 12 Fiscal Transfers 0% 5% 10% 15% 20% 25% 30% 35% 1980-81 1990-91 2000-01 2010-11 Major Federal Transfers to

Fiscal Coordination in Canada

Nipun Vats Federal-Provincial Relations Division, FInance Canada

Presentation to OECD-MENA Senior Budget Officials

Nov 1, 2010

This presentation does not necessarily reflect the views of

the Department of Finance

2

Snapshot of Canada

Provinces and territories (date of entry into Confederation)

and % share of 2009

population of 33.6 million

British Columbia

(1871) 13.2%

Ontario (1867) 38.7%

North-West Territories

(1870) 0.1% Yukon

(1898) 0.1%

Nunavut (1999) 0.1%

Saskatchewan (1905) 3.1%

New Brunswick (1867) 2.2%

Nova Scotia (1867) 2.8%

Prince Edward Island

(1873) 0.4%

Québec (1867) 23.2%

Manitoba (1870) 3.6%

Newfoundland & Labrador (1949) 1.5%

Alberta (1905) 10.9%

Fiscal Coordination in Canada

3 Fiscal Coordination in Canada

Roles and Responsibilities

Highly decentralized Westminster federation, with roles of

orders of governments shaped by:

1. Constitution

– Sets clear federal-provincial roles and responsibilities

– Provinces responsible for many key expenditure areas (welfare, health,

education)

– Both orders of government have access to, and full discretion over, most

major revenue sources (e.g. income and sales taxes)

– Provinces have ownership of natural resources and resulting royalties

• Both levels of government are highly autonomous:

– Responsible to their own legislatures;

– Have wide range of taxation and borrowing powers


Roles and Responsibilities

Highly decentralized Westminster federation, with powers of

orders of government shaped by:

2. Historical evolution of federal-provincial relations

– Provinces were well-established political units prior to confederation

– Substantial policy and administrative capacity

– Increasing provincial use of available tax room and provincial autonomy of

social programs post-WW2

In practice, Canada has evolved towards:

– Shared legislation/regulation and spending power in many policy areas

– Joint occupancy of most major direct and indirect tax fields

– Relatively “equal partnership” of federal and provincial governments


High Degree of Fiscal Decentralization

Source: Statistics Canada and Finance Canada calculations

Federal and Provincial-Local Shares of Own-Source Government

Revenue: 1961 to 2006

30%

40%

50%

60%

70%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Sh

are

of

To

tal

Ow

n-S

ou

rce R

even

ue

Federal

Provincial-Local


Federal and Provincial-Local Shares of Government

Expenditure, Excluding Inter-Governmental Transfers

20%

30%

40%

50%

60%

70%

80%

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Sh

are

of

To

tal

Provincial-Local

Federal

High Degree of Fiscal Decentralization



More decentralized than most federations

Federal share of direct spending

0%

25%

50%

75%

Switzerland Canada Germany Australia USA

Expenditures

Federal share of own-source revenues

0%

25%

50%

75%

Switzerland Canada Germany Australia

USA

Revenues

45% 45%

65% 60%

66%

37%

61%

53%

41% 37%



Canadian provinces have the highest degree of tax autonomy among

state-level sub-central governments in the OECD federations

Each provinces levies own taxes at its own rates – tax competition

possible

Tax-Autonomy of State/Province/Länder, 2005

81.4 81.4

52.8

46.8

1.6

7.220.7

53.2

98.4 100

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Germany

Austria

Belgium

Australia

Canada

Switzerla

nd

Perc

ent o

f Sta

te R

even

ue

Other

Full or partial discretionon rates only

Rates and reliefs set bycentral government

Full discretion on ratesand reliefs

Tax sharing arrangment

Source: The Fiscal Autonomy of Sub-

Central Governments: An Update .

OECD Network on Fiscal Relations

Across Levels of Government.



Level of tax effort varies considerably across country

Tax effort for non-resource tax bases in 2008-09 (av erage = 100)

106

118111 112

126

103

114110

67

85

50

60

70

80

90

100

110

120

130

NL P E NS NB QC ON M B SK AB BC

Source: Finance Canada


Management of Fiscal Relations

Despite decentralization, fiscal coordination

essential given the importance of coherence in:

– Taxation: To ensure efficient tax system within

jurisdictions (tax harmonization, federal tax collection)

– Spending: To avoid duplication, respect roles

– Borrowing: Each government’s credit-worthiness

affected by others in the federation

Federal Government also has constitutional

responsibility to ensure all provinces have capacity to

provide comparable services to Canadians (Equalization)


Management of Fiscal Relations

Largely informal structures of coordination:

First Ministers meetings (PM and Provincial Premiers) – No formal schedule or structure, convened on major issues (e.g. health care)

Finance Ministers Meetings – Regular discussions of economic and fiscal issues; consultations in advance

of federal budgets

Meetings of senior officials – Regular meetings on fiscal, tax, budgetary and transfer issues

No formal decision-making power


Fiscal Transfers

0%

5%

10%

15%

20%

25%

30%

35%

1980-81 1990-91 2000-01 2010-11

Federal Provincial

Major Federal Transfers to provincial governments

Equalization ($14.4 billion) - To address fiscal disparities among the 10 provinces

- Cash payments; formula driven

Territorial Formula Financing (TFF, $2.7 billion) - To address the special needs of the three northern

territories

- Cash payments; formula driven

Canada Health Transfer (CHT, $25.4 billion) - A dedicated transfer in support of health care

- Cash and tax payments; equal per capita total allocation

Canada Social Transfer (CST, $11.2 billion) - A block transfer in support of post-secondary education,

social programs and programs for children

- Cash and tax payments; equal per capita cash allocation

Source: Public Accounts and Finance Canada calculations

Federal Transfers as Share

of Spending / Revenue

13

Fiscal Transfers have evolved over time

Major transfers have evolved from conditional grants to

block funding, with new accountability frameworks

Rely on existing accountability regimes of provincial-

territorial governments, including audit, evaluation and

direct reporting to citizens

Major federal transfers are largely unconditional, but tied

to national standards written into Federal statutes


Fiscal Transfers - Equalization

Large fiscal disparities among regions in Canada by OECD

standards, largely due to distribution of natural resources.

Fiscal capacities (in $ per capita)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

NL PE NS NB QC ON MB SK AB BC

Natural resourcesOther tax bases

Equalization partially reduces disparities by redistributing federal revenues to bring all

provinces up to “national average” level – based on national average tax rates

Pre- and post-Equalization capacities

(in $ per capita)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

NL PE NS NB QC ON MB SK AB BC

Equalization

Pre-Equalizationcapacities

Source: Finance Canada calculations Source: Finance Canada calculations


Fiscal Discipline

–Unconstrained spending power at both levels – potential for overlaps in spending

–Very limited federal leverage over provincial spending.

Little conditionality of federal transfers (too small, concerns about role of federal government)

–Result: federal and provincial debt/GDP burdens were among the highest in OECD as recently as the mid-1990s

However, debt burdens declined significantly in wake of mostly balanced budgets (federally and in most provinces) from the late 1990s until the recent recession…

… though Canadian provinces still remain among the world’s largest sub-sovereign borrowers

Decentralized structure can pose challenge to ensuring

fiscal discipline:


Fiscal Discipline

Aggregate provincial/territorial and federal budget balance

as a percentage of GDP

-10

-8

-6

-4

-2

0

2

4

1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11

All provinces and

territories

Federal

• Government Budget Discipline has improved over last 30 years

• Canadians now expect balanced budgets


17

Causes of Increased Fiscal Discipline

Intergovernmental coordination? – No formal coordination mechanisms/constraints

Self-imposed constraints (balanced budget legislation)? – Do exist, but have not provided hard constraints

Credit market discipline? – Implicit federal guarantee priced into provincial credit cost

% spread over US Treasuries, 10-year bonds, Canadian federal and provincial governments

June 1999 to June 2009

-1

0

1

2

Jun-

99

Dec

-99

Jun-

00

Dec

-00

Jun-

01

Dec

-01

Jun-

02

Dec

-02

Jun-

03

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Standard & Poor’s

Credit Ratings (as of June 2009)

AAA BC

AAA AB

AA+ SK

AA MB

AA ON

A+ QC

AA- NB

A+ NS

A PE

A NL

AAA Canada


Cultural shift following indebtedness of early 90’s – Domestic & international pressure allowed for major budgetary re-balancing

– Ongoing public expectations for stronger budgetary balances

Link between provincial debt and tax rates – High degree of provincial revenue-raising autonomy means provincial taxes

raised well before federal action would be required

– Creates public demand for sound provincial budgetary management

Causes of Increased Fiscal Discipline

Relationship between

provincial debt and tax effort

60

80

100

120

140

-10% 0% 10% 20% 30% 40% 50%

Tax

effo

rt

(nat

iona

l ave

rage

= 1

00)

Provincial debt-GDP ratios


Fiscal Discipline: Financial Reporting

• Federal/Provincial governments are publicly accountable in legislation

• Each jurisdiction has its own

• Annual budget document, voted upon by legislature

• Public Accounts

• Auditor general

• Crown corporations / Government Business enterprises also have audited financial statements


Fiscal Discipline and Accountability

Public Accounts of each order of government include

• Audited fiscal statements

• Conform to general accounting practices (include debt charges, claims

against crown, and contingent liabilities)

• Budget documents contain fiscal forecasts and spending

plan for upcoming year

• Federal forecast based on private sector forecasts

• Enhances credibility and transparency


Looking Forward

Recent recession resulted in temporary return to budget deficits for

federal and provincial governments, due to:

- Automatic fiscal stabilizers (e.g. employment insurance)

- Fiscal stimulus measures over two years (3.8% of GDP)

Stimulus measures unlikely to affect medium-term budgetary discipline:

Projected Federal Government Budget Balance

-60

-40

-20

0

202009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

($ billions)

Source: 2010 Budget Update


Looking Forward

Over longer-term, fiscal discipline in Canada will be even

more crucial, given:

– Aging population - smaller personal tax base

– Rising health care costs – provincial responsibility; taking larger share of

provincial budgets

– Productivity challenges

Will require concerted efforts from all levels of government to

ensure fiscal discipline

Could lead to more federal-provincial coordination to

strengthen Canadian economy

Documents

Fiscal Coordination in Canada - OECD · Fiscal Coordination in Canada 12 Fiscal Transfers 0% 5% 10% 15% 20% 25% 30% 35% 1980-81 1990-91 2000-01 2010-11 Major Federal Transfers to