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Presentation to: XV REGIONAL SEMINAR OF FISCAL POLICY CEPAL/ECLAC, United Nations Santiago de Chile, 27-30 January 2003 ______________________ FISCAL DECENTRALIZATION IN CANADA Dr. T. Russell Robinson Ottawa Canada FORUM OF FEDERATIONS ______________________________________________________ “AN INTERNATIONAL NETWORK THAT SEEKS TO STRENGTHEN DEMOCRATIC GOVERNANCE BY PROMOTING DIALOGUE ON AND UNDERSTANDING OF THE VALUES, PRACTICES, PRINCIPLES, AND POSSIBILITIES OF FEDERALISM “ _________________________________________________________________________________ BEGAN IN OTTAWA, CANADA, AND IN 1999 ESTABLISHED AS A PERMANENT INSTITUTION TO HELP IMPROVE THE PRACTICE OF FEDERALISM WORLDWIDE HAS BOARD OF DIRECTORS FROM NIGERIA, INDIA, GERMANY, SWITZERLAND, BRAZIL AND CANADA, AND PARTICIPATION IS GROWING CLEARING HOUSE FOR INFORMATION & RESOURCES ON PRACTICE OF FEDERALISM PROVIDES POLICY & PROGRAM ASSISTANCE TO GOVERNMENTS FOCUS ON EDUCATION, INFORMATION-SHARING, & MULTILATERAL, COMPARATIVE ACTIVITIES PLEASE CONSULT: www.forumfed.org 2 OVERVIEW OF CANADA (1999) 0.1% (1898) 0.1% (Date of entry into Confederation) Share of present-day population of 31.1 million (1870) 0.1% (1949) (1871) 13.2% 1.8% (1905) 9.7% (1905) 3.4% (1867) (1870) (1867) 3.8% 37.8% 24.1% (1873) 0.5% (1867) 2.5% (1867) 3.1% DIVISION OF POWERS _______________________________ Federal and provincial governments have independent constitutional basis of authority (Municipalities receive their powers & responsibilities from the provincial govts) Few / no constraints on provincial spending / taxation powers or ability to borrow Federal and provincial govts have extensive areas of separate legislative powers Strong executive and bureaucratic capacity at federal, provincial & municipal levels 3 CONSTITUTIONAL RESPONSIBILITIES _________________________ FEDERAL PROVINCIAL Money and Banking International Trade Airlines Railways Foreign Affairs Defence Employment Insurance Pensions Immigration Agriculture Industry Education Health Municipal Institutions Social Welfare Police Natural Resources Highways 4 5 SPENDING AREAS & PRESSURES ________________________ Few concurrent powers (agriculture, pensions, immigration, industry) Residual power lies with federal level Much interdependence in practice Provincial spending pressures Health Care Education Social services Federal spending pressures – areas where jurisdiction is not clear or overlaps – through use of the spending power and transfers to provinces Security and national defence Senior’s, Aboriginals R & D and Skills Transfers to Provinces (Health) 6 ACCESS TO REVENUE SOURCES ______________________ Federal Personal Income Taxes Corporate Income Taxes Sales Taxes Payroll Taxes Resource Royalties Gaming, Liquor Profits Property Taxes Customs Import Duties Taxes on Non-Residents Provincial ACCESS TO REVENUES, CONTINUED _______________________ Traditional tax bases are shared by Ottawa and the provinces Provincial-only tax bases are growing Federal-only tax bases are small and volatile 7 Common revenue sources Federal Provincial Personal income tax Corporate income tax Sales taxes Payroll taxes Provincial-only revenue sources Federal Provincial Gambling, sale of alcohol Property taxes Natural resource revenues Federal-only revenue sources Federal Provincial Customs tariffs and import duties Taxes on non-residents 8 TAX COLLECTION AGREEMENTS _______________________ Main tax fields: • personal income tax • corporate income tax • sales tax Federal government and many provincial governments have entered into Tax Collection Agreements covering each of the three main tax fields CANADIAN DECENTRALIZATION: FISCAL TRENDS _______________________________ REVENUES (% OF GDP) EXPENDITURES (% OF GDP) 60% 60% 50% 50% 40% 40% Provinces 20% Provinces Federal Transfers 10% 30% 20% 10% Federal Federal 0% 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 0% Federal Transfers 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 30% 9 10 DECENTRALIZATION: INTERNATIONAL COMPARISONS _________________________________________________ FEDERAL SHARE OF DIRECT SPENDING (1998) FEDERAL SHARE OF TAX REVENUES (1998) Austria 69% Argentina Spain 68% Spain 83% 81% Germany 62% Mexico 77% Mexico 61% Austria 76% 69% Brazil 57% Germany Australia 56% Australia 67% Brazil 66% 53% Switzerland U.S. 51% U.S. 58% Argentina 50% Switzerland 58% 0% 20% 40% 47% Canada 41% Canada 60% 80% 0% 20% 40% 60% 80% 100% Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics), Inter-American Development Bank CANADA’S THREE MAJOR TRANSFER PROGRAMS __________________________________________________ CANADA HEALTH AND SOCIAL TRANSFER (CHST) • Block Grant [C$ 35.7 B] • Health, PSE, social services EQUALIZATION [C$ 10.3 B] • Unconditional • Comparable services at comparable tax rates TERRITORIAL FORMULA FINANCING (TFF) • Targeted to three northern territories [C$ 1.3 B] 2002-03 VALUES 11 HORIZONTAL EQUITY AND CANADIAN FISCAL EQUALIZATION ________________________ The Government of Canada has the constitutional responsibility to reduce fiscal disparities between provinces Post-Equalization revenue raising capacity still higher in more prosperous provinces (e.g. Alberta’s oil resources contribute to its 60% above average fiscal capacity) Inter-provincial tax competition - smaller provinces have difficulty keeping pace 12 13 HOW EQUALIZATION WORKS ________________________________________ $10,000 $8,000 Post-Equalization fiscal capacity: ~ C$ 5,900 / capita, or 96% of national average $8,984 $6,000 EQUALIZATION PAYMENTS $4,000 $4,280 $4,462 $3,938 $4,035 $2,000 $4,819 $5,232 $5,477 $5,837 $6,414 PROVINCIALFISCALCAPACITY $0 Nfld. P.E.I. N.B. N.S. Man. Que. Sask. B.C. Fiscal capacity BEFORE equalization Ont. Alta. Equalization 14 CANADIAN TRANSFERS MOSTLY UNCONDITIONAL _____________________________________________________ Shared-cost/high-conditionality transfers (% of total transfers) U.S. 100% 100% Canada, 1945-1999 90% Malaysia 86% 80% Switzerland 73% Austria 70% 69% Germany 60% 65% Australia 50% 40% 53% India 30% 38% Spain 20% 24% 10% Canada 17% 1995 1990 1985 1980 1975 100% 1970 80% 1965 60% 1960 40% 1955 20% 1950 0% 1945 0% 15 CANADIAN PROVINCES RELATIVELY “REVENUE INDEPENDENT” ______________________________________________ Federal transfers as a % of total revenues of other levels of government 56% Argentina 55% Spain Nfld. 39% P.E.I. 35% Austria 35% N.B. 33% Australia 35% N.S. 32% Mexico 35% Man. 34% Brazil 28% U.S. 24% Germany Canada 0% 12% 10% 20% INTERNATIONAL 30% Sask. 16% Qué. 16% B.C. 25% Switzerland 18% 40% 50% 60% 9% Ont. 7% Alta. 7% 0% 20% CANADIAN PROVINCES 40% 60% 80% 100% Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics); Finance Canada; IADB PROVINCIAL CONTROL OF REVENUES ___________________________________________ Constituent units’ control over their tax bases and tax rates (% of their own-source revenue) 100% 100% 100% 89% 75% 50% 25% 8% 2% 0% Austria Germany 0% Canada UnitedStates Switzerland Belgium 16 ACCESS TO REVENUES: PROVINCIAL FISCAL AUTONOMY 17 ___________________________________________ Own-source revenues as % of total provincial-local revenues Canada, 1945-2000 90 ---------------------------------------85 ---------------------------------------% 80 ---------------------------------------75 ---------------------------------------- International, latest available data Canada 88% Belgium 87% Malaysia 82% Germany 82% Switzerland 81% 70% U.S. India 61% Australia 59% Austria 70 ---------------------------------------1945 50 55 60 65 70 75 80 85 90 95 2000 Year 56% 22% Spain 0 25 50 % 75 100 18 PROVINCIAL ACCESS TO REVENUES _________________________________________ Federal and provincial revenues (% of GDP) 20% 19% All provinces 18% 17% Forecast 16% Federal 15% 14% 80-81 83-84 86-87 89-90 92-93 95-96 98-99 01-02 04-05 19 PROGRAM EXPENDITURES HIGHLY CONSTRAINED Federal and provincial program spending (% of GDP) 25% 20% 15% Provincial Federal 2000-01 1998-99 1996-97 1994-95 1992-93 1990-91 1988-89 1986-87 1984-85 1982-83 1980-81 10% FISCAL RECOVERY IN LATE 1990s 20 _________________________________________________ Federal and provincial governments fiscal balance % of GDP (1981-82 to 2001-02) 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 01-02 99-00 97-98 95-96 93-94 91-92 89-90 87-88 85-86 83-84 81-82 Federal government Provincial governments SUMMING UP 21 _________________________________________________ Comparatively speaking: Canada is a highly decentralized federation Sub-national governments control their own revenues Transfers are relatively minor (on average) and are mostly unconditional Current pressures on social programs (health, education) cause demands for greater transfers (vertical balance debates) The challenge of horizontal balance also continues, especially for poorer provinces & territories ANNEX CANADA’S TAX COLLECTION AGREEMENTS A1 TAX COLLECTION AGREEMENTS (TCAs) ______________________________________ • Since 1962 joint occupancy of income tax field in a coordinated manner. • Agreements with 9 provinces and 3 territories for personal income tax. • Agreements with 7 provinces and 3 territories for corporate income tax. A2 TERMS AND CONDITIONS OF TCAs ______________________________________________ • The federal government agrees to: – collect and administer provincial personal and corporate income taxes – pay provinces the value of income tax assessed, and – provide this service at very small cost • Provincial governments agree to use the federal definition of taxable income, thus ensuring a common tax base ADMINSTRATION OF TCAs A3 ______________________________________ Three departments involved: • Department of Finance Canada is responsible for policy matters and for paying provinces their share of assessed income taxes • The Canada Customs and Revenue Agency collects, assesses, audits and enforces provincial legislation • The Auditor General of Canada conducts an audit annually of the tax collection account