November 10, 2010
Every year, the federal government transfers approximately $50 billion in its major transfers–the Canada Health Transfer, the Canada Social Transfer and Equalization. These funds help provinces and territories deliver the services Canadians count on. The major agreements that underpin these transfers are set to be re-negotiated in 2014.
There is broad recognition that our fiscal transfer system does not serve Canadians as well as it could. Canada’s foremost federalism experts were surveyed and concluded that on most measures, Canada’s system was average at best.
This Report Card identifies areas of strength and for improvement against commonly agreed upon and international best benchmarks. The goal is to start conversation and an informed public dialogue in the run up to re-negotiation of Canada’s major fiscal transfers.
Every year, the federal government gives the provinces approximately $50 billion through the Canada Health Transfer (CHT), the Canada Social Transfer (CST) and Equalization. Additional billions are allocated through other targeted transfers. These funds help provinces and territories deliver the services Canadians count on, including health care and education. The major agreements that underpin these transfers expire in 2014.
This gives the country just over three years to question, discuss, debate and build consensus toward a new set of arrangements that will help sustain the high-quality public services Canadians expect.
Three years is not a long time. Historically, these discussions have been some of the most drawn out and contentious in Canadian politics. Many experts expect that the negotiation of a new transfer system this time around will be especially acrimonious because the stakes are high.
First, there is an underlying fear that the federal government will resort to actions it took in the mid-1990s—resolving its own fiscal problems by dramatically cutting transfers to the provinces and territories. Unilateral federal cuts this time around could push many provinces to the financial precipice.
While Canada performs relatively well on the benchmark of “autonomy,” it performs relatively poorly on the benchmarks of “accountability” and “transparency.” Our score on revenue adequacy is resoundingly average.
Clearly there is work to be done. This is why the Mowat Centre is undertaking this exercise—responding to the need for change by highlighting strengths and weaknesses in our transfer system—and pointing to potential solutions. These options will provide a way forward for the design of the transfer system, and a platform for a detailed set of recommendations that the Mowat Centre will propose in the summer of 2011.
While the experts surveyed did not agree on all issues, many focused on transformative rather than incremental changes to Canada’s transfer system. Experts did not weigh in on long-standing technical disputes such as whether Equalization should be calculated using a 5 or 10 province standard. Many pointed to more innovative and principled options, often inspired by international practices that approach the issue of inter-regional sharing in very different ways.
The desire to break free from some of Canada’s traditional ways of approaching these transfers is in part inspired by the recognition that Canada’s economic foundations have shifted. Ontario is no longer significantly more prosperous than other provinces and will be unwilling to support inter-regional redistribution at historic levels. Just as importantly, natural resource revenues account for a greater share of provincial revenues; they are unevenly distributed across the country, are unavailable to the federal government for inter-regional sharing, and have a growing importance in the national economy. All of this suggests that a different approach to federal fiscal transfers is warranted.
Moving this agenda forward will be difficult. Instead of unilateralism and intergovernmental conflict, Canada requires a principled discussion. We need to summon the collective will to solve an admittedly difficult problem—how to fund the programs that matter to Canadians in a way that is equitable, predictable and transparent while ensuring that these transfers do not undermine economic efficiency. Fiscal transfers need to work in a way that keeps governments accountable and gives them adequate revenues and autonomy to fulfill their responsibilities.
There are some built-in tensions that need careful balancing. A perfectly efficient system may sacrifice equity, possibly violating a key principle in the Constitution. A system that is highly equitable may be inefficient and drag down the federation’s economic growth. Reconciling these tensions is difficult, but necessary in designing a fiscal transfer system.
The system we are currently dealing with is not the product of deliberate design aimed at reconciling these benchmarks, but an aggregation of one-off and ad hoc decisions driven by the politics of the day. Its current structure and design should not shape Canada’s consideration of where to go from here.
This Report Card is a first step in starting a principles-based conversation that will lead us to strike the best balance for Canada.
Josh Hjartarson, Matthew Mendelsohn & James Pearce
November 10, 2010