Fiscal Coordination in Canada

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1 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

Snapshot of Canada Yukon (1898) 0.1% North-West Territories (1870) 0.1% Provinces and territories (date of entry into Confederation) and % share of 2009 population of 33.

2 Snapshot of Canada Yukon (1898) 0.1% North-West Territories (1870) 0.1% Provinces and territories (date of entry into Confederation) and % share of 2009 population of 33.6 million British Columbia (1871) 13.2% Alberta (1905) 10.9% Nunavut (1999) 0.1% Ontario (1867) 38.7% Québec (1867) 23.2% Newfoundland & Labrador (1949) 1.5% Prince Edward Island (1873) 0.4% Saskatchewan (1905) 3.1% Manitoba (1870) 3.6% New Brunswick (1867) 2.2% Nova Scotia (1867) 2.8% 2

3 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 3

4 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 4

5 Share of Total Own-Source Revenue High Degree of Fiscal Decentralization 70% Federal and Provincial-Local Shares of Own-Source Government Revenue: 1961 to % Provincial-Local 50% 40% Federal 30% Source: Statistics Canada and Finance Canada calculations 5

6 Share of Total High Degree of Fiscal Decentralization 80% Federal and Provincial-Local Shares of Government Expenditure, Excluding Inter-Governmental Transfers 70% 60% 50% 40% 30% 20% Provincial-Local Federal Source: Statistics Canada and Finance Canada calculations 6

7 More decentralized than most federations Expenditures Federal share of direct spending Revenues Federal share of own-source revenues 75% 50% 37% 37% 41% 53% 61% 75% 50% 45% 45% 65% 60% 66% 25% 25% 0% Switzerland Canada Germany Australia USA 0% Switzerland Canada Germany Australia USA 7

8 Percent of State Revenue More decentralized than most federations 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, % 90% 80% 70% 60% 50% 40% 30% Other Full or partial discretion on rates only Rates and reliefs set by central government Full discretion on rates and reliefs Tax sharing arrangment 20% 10% 46.8 Source: The Fiscal Autonomy of Sub- Central Governments: An Update. OECD Network on Fiscal Relations Across Levels of Government. 0% 1.6 Germany Austria Belgium Australia Canada Switzerland 8

9 More decentralized than most federations Level of tax effort varies considerably across country Tax effort for non-resource tax bases in (av erage = 100) NL PE NS NB QC ON MB SK AB BC Source: Finance Canada 9

10 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) 10

11 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 11

12 Fiscal Transfers 35% 30% 25% 20% 15% 10% 5% Federal Transfers as Share of Spending / Revenue Federal Provincial 0% Source: Public Accounts and Finance Canada calculations 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 12

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 provincialterritorial governments, including audit, evaluation and direct reporting to citizens Major federal transfers are largely unconditional, but tied to national standards written into Federal statutes 13

14 Fiscal Transfers - Equalization Large fiscal disparities among regions in Canada by OECD standards, largely due to distribution of natural resources. 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Fiscal capacities (in $ per capita) Natural resources Other tax bases NL PE NS NB QC ON MB SK AB BC Source: Finance Canada calculations Pre- and post-equalization capacities (in $ per capita) Equalization partially reduces disparities by redistributing federal revenues to bring all provinces up to national average level based on national average tax rates 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Equalization Pre-Equalization capacities NL PE NS NB QC ON MB SK AB BC Source: Finance Canada calculations 14

15 Fiscal Discipline Decentralized structure can pose challenge to ensuring 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 15

16 Fiscal Discipline Government Budget Discipline has improved over last 30 years Canadians now expect balanced budgets 4 Aggregate provincial/territorial and federal budget balance as a percentage of GDP All provinces and territories Federal -10 Source: Statistics Canada and Finance Canada calculations 16

17 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 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 Standard & Poor s Credit Ratings (as of June 2009) 2 Canada BC AAA AAA AB AAA 1 SK AA+ MB AA 0 ON QC AA A+ NB AA- -1 NS A+ PE NL A A 17

18 Causes of Increased Fiscal Discipline Tax effort (national average = 100) 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 140 Relationship between provincial debt and tax effort % 0% 10% 20% 30% 40% 50% Provincial debt-gdp ratios 18

19 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 19

20 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 20

21 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: ($ billions) Projected Federal Government Budget Balance Source: 2010 Budget Update 21

22 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 22

June Decentralization, Provincial Tax Autonomy and Equalization in Canada

June Decentralization, Provincial Tax Autonomy and Equalization in Canada June 20081 Decentralization, Provincial Tax Autonomy and Equalization in Canada Overview What are the interrelationships/connections between the high degree of tax decentralization and provincial tax autonomy