new division of Canada's Financial Resources
of contents, the Preface from the President of the Commission and
the Summary are presented here. The entire
document is only available in PDF format (1.03 Mo).
from the President of the Commission
Signatures of the Commissioners
List of Tables and Diagrams
List of Charts
Introduction: The Commission's mandate and its approach
PART ONE - The nature of the problem
CHAPTER 1 - Definition and scope of fiscal imbalance
1. A major issue
2. The notion of fiscal imbalance
3. The current and projected scope of fiscal imbalance
TWO - The causes of fiscal imbalance
CHAPTER 2 - Imbalance between expenditures and access to sources of revenue
1. The provinces are subject to considerable pressure in respect
Service delivery: the provinces are bearing the pressure
1.1.1 Health care
1.1.2 Education and training
1.1.4 Other spending
1.2 Transfers exert limited structural pressure
1.2.1 Limited pressure on federal old age security programs
1.2.2 Employment insurance is subject to less extensive structural
1.2.3 Transfers to the provinces are designed to limit pressure
on federal spending
1.2.4 Income security
division does not reflect the spending dynamic
An occupation of taxation fields that puts the federal government
at an advantage
2.2 Federal government control over the provinces' revenues
repayment and fiscal imbalance
3 - Inadequate intergovernmental transfers
1. The canada health and social transfer
A conditional transfer program
1.2 A program whose terms create problems
1.2.1 The federal government's arbitrariness
1.2.2 The CHST allocation penalizes the less affluent provinces
1.3 A program from which the federal government has disengaged
1.3.1 Evaluation of the size of federal disengagement
1.3.2 The federal government's point of view
Terms of application that prevent the program from fulfilling
2.1.1 The current standard is not satisfactory
2.1.2 The ceiling on equalization entitlements
2.1.3 Tax bases that are poorly defined or incomplete
2.2 The variability of equalization payments
2.3.1 Base tax-back
2.3.2 Rate tax-back
fiscal arrangements formulation process
3.2 Institutions and mechanisms
4 - The "federal spending power" and its implications
forms of "federal spending power"
2. Québec and the "federal spending power"
An instrument of the federal government whose constitutionality
has not been established
2.2 Proposals defended by Québec
THREE - The consequences of fiscal imbalance and solutions
5 - The consequences of fiscal imbalance
1. Citizens' needs are ill-addressed
2. Less efficient delivery of government services
3. The provinces' decision-making and budgetary autonomy is Threatened
6 - Recommendations
1. Restore fiscal balance within the federation
Additional financial resources for the provinces
1.2 Elimination of the CHST and a new division of tax room
1.2.1 The financial impact for Québec
1.2.2 Advantages and disadvantages of each scenario
1.2.3 impact on the federal government
1.3 Enhancement of the equalization program
1.3.1 Technical procedures governing the equalization program
1.3.2 The equalization program's ability to satisfy its objectives
1.4 Counteract the "federal spending power"
to all new causes of imbalance
Systematic, transparent monitoring of the fiscal imbalance dynamic
2.2 Broaden exchanges and discussion with the other provinces
OF TABLES AND DIAGRAMS
LIST OF CHARTS
FROM THE PRESIDENT OF THE COMMISSION
Less than a year ago, the Québec government set up a commission
to study the fiscal imbalance between the federal government and
Québec. The Commission on Fiscal Imbalance has now completed
its work and the results are contained in this report.
imbalance is a difficult concept, encompassing complex issues tied
to established fiscal relations between the federal government and
the provinces, with both qualitative and quantitative dimensions.
Its very definition had to be clarified, and of course, the Commission
had to be in a position to assess and analyse the phenomena tied
to fiscal imbalance with the necessary depth and rigour.
adopted an approach based primarily on deepening its understanding
and analysis, extending the studies and assessments already available,
and systematically examining the hypotheses submitted to it, all
the while avoiding any a priori positions in its deliberations.
At the same time, the Commission tried to remain as close as possible
to the practical issues, since fiscal imbalance directly concerns
Quebecers, and the Commission had no intention of losing sight of
this reality at any time.
studies were undertaken to answer certain precise questions. The
Commission received analyses from many experts, including specialists
from other countries. Public hearings also provided an opportunity
to hear the views of many spokespersons of various groups and citizens
interested in the debate.
to confirming the existence and showing the scope of the fiscal
imbalance, the Commission's work produced a set of recommendations
to correct the situation.
were formulated constructively, from a practical concern to advance
the debate. They are important recommendations that outline what
could become a new structure of financial and fiscal relations within
the Canadian federation. At the same time, the Commission has examined
ways of responding in the future to any new cause of fiscal imbalance
and has made a number of suggestions in this respect.
the Commission has concluded its work, I want to acknowledge the
remarkable cooperation and contribution of each commissioner and
the secretariat staff. The Commission on Fiscal Imbalance consisted
of people from very different backgrounds, but experts in their
respective fields. The report is the result of a joint effort stemming
from approaches and concerns that often differed, but were always
relevant, contributing to its depth and its interest.
is convinced that it has at least shed light on key facets of a
topic as complex and important as fiscal imbalance and that it has
fulfilled its mandate.
President of the Commission on Fiscal Imbalance
The Québec government formed the Commission on Fiscal Imbalance
on May 9, 2001 to identify and study the causes of fiscal imbalance
between the federal government and Québec, its actual consequences
and the practical solutions that could be implemented to correct
report deals with these issues first by confirming the existence
and scope of fiscal imbalance. The Commission considered that its
deliberations were situated within the current constitutional framework,
and that when relevant and possible, the analysis had to be broadened
to all provinces of Canada.
of the problem
imbalance has been one of the major issues of the Canadian federation
since the mid-1990s. At that time, the federal government made major
cuts to payments under the Canada Health and Social Transfer (CHST),
while provincial social spending was rising sharply.
consensus on its existence
the federal government disputes the existence of fiscal imbalance,
the public hearings held by the Commission confirmed a broad consensus
in Québec in this regard. A survey conducted on the initiative
of the Commission in Québec and in Canada as a whole confirms
this fact: the public and the players most directly involved in
the debate are aware that there is a significant fiscal imbalance
to the detriment of the provinces.
by the Conference Board of Canada
and projected budget balances of the two orders of government provide
an initial direct expression of this imbalance and its scope. The
study carried out by the Conference Board of Canada at the Commission's
request is revealing in this regard: according to these projections,
if current revenue and program structure is maintained, the Québec
government would post recurring deficits averaging $3 billion each
year until 2019-2020. At the same time, the federal government would
achieve ever-greater surpluses reaching almost $90 billion in 2019-2020.
causes of fiscal imbalance
imbalance between the government of Canada and the Québec
government and, more generally, between the federal government and
the provinces, stems essentially from three separate causes, namely
imbalance between spending and access to sources of revenue, the
inadequacy of intergovernmental transfers from the federal government
to the provinces and the "federal spending power."
between spending and access to sources of revenue
study, the Conference Board of Canada explicitly identified the
first cause of fiscal imbalance: there is a structural difference
between the federal government and the Québec government
from the standpoint of revenue and spending.
- In the
case of the federal government, the current positive discrepancy
between revenue and spending will grow steadily because of the debt
repayment that the discrepancy will make possible.
Québec, the balance between revenue and spending is much
more precarious, which explains why the government cannot reduce
its debt and the projected budgetary balance is negative throughout
the forecast period.
Revenues and Expenditures of the Federal Government
and the Québec Government, 2000-2001 to 2019-2020
(average annual change in per cent)
between growth in revenues and expenditures
Conference Board of Canada.
detailed, systematic analysis of the main categories of expenditures
and revenues of the two orders of government confirms that the provinces
are subject to considerable pressure as regards spending, while
the division of revenue does not reflect this dynamic.
debt service and repayment, which the federal government often mentions
to justify its budget surpluses, in fact exacerbate fiscal imbalance
by allowing the federal government to increase its leeway year after
between the federal government and the provinces, the second cause
of fiscal imbalance, explain many of the problems currently plaguing
the Canadian federation in terms of fiscal relations among governments.
CHST is the most problematic transfer program. It applies to fields
of jurisdiction attributed to the provinces, and its attendant conditions,
as well as its defining terms, clearly limit the provinces' decision-making
and budgetary autonomy in these fields of jurisdiction. The federal
government's cuts in recent years confer a particular dimension
on these difficulties.
whose purpose is to reduce disparities in fiscal capacity among
the provinces, fails to eliminate major differences in the fiscal
capacities of the provinces because it applies a five-province standard.
The ceiling on equalization entitlements imposes an arbitrary limit
on payments, further impeding it from achieving its objective. The
formula for allocating the impact of the ceiling on equalization
payments is inequitable and particularly penalizes Québec.
bases used to determine equalization entitlements are ill-defined
or incomplete. For instance, the property tax base is calculated
using a formula that does not correspond to the actual situation
of property values, which deprives Québec each year of about
$800 million. Equalization payments sometimes vary considerably
over time and this variability is caused in part by the mechanics
of revising the data and technical changes, which is difficult to
accept. Furthermore, "tax-back," with which the Commission
dealt specifically, can exacerbate fiscal imbalance for the provinces
transfers, such as the CHST, are one expression of the "federal
spending power" the federal government invokes to intervene
in provincial fields of jurisdiction.
the amounts in question, federal intervention through the "federal
spending power" has a considerable impact on provincial policy
in the provinces' fields of jurisdiction. This impact had a destabilizing
effect when the federal government withdrew from several programs
or, more broadly, when it reduced social transfers overall.
is likely to recur in new sectors of federal government intervention,
for example, in health care and education, where direct, one-off,
visible expenditures are preferred to system-wide expenditures,
which are largely the provinces' responsibility.
In a broader
perspective, federal initiatives distort the provinces' budgetary
choices by favouring certain sectors or approaches to the detriment
of other options.
government initiatives in conjunction with "federal spending
power" in the provinces' fields of jurisdiction are, ultimately,
only possible because of the resources available to the federal
government, which exceed those that it needs to assume its jurisdiction.
The "federal spending power" is therefore directly tied
to the division of tax fields between the two orders of government.
A fiscal gap in favour of the federal government can only aid and
abet intervention in the provinces' fields of jurisdiction since
it can mobilize substantial resources and allocate them at its discretion
in fields that it deems strategically or politically worthwhile.
traditional responses to the "federal spending power"
reflect the logic of fiscal balance and the means by which the current
fiscal imbalance could be brought to an end.
of fiscal imbalance
imbalance, because of its scope, has a significant impact on provincial
government operations and accordingly the delivery of public services.
Furthermore, the practical result of the encroachment on the provinces'
decision-making and budgetary autonomy is that in the provinces,
the choices of people are not taken into account precisely where
they should be.
are poorly addressed
its public hearings, the Commission heard many accounts that confirm
the impact of the fiscal imbalance and the resulting lack of resources
for Québec, as far as the adressing of needs is concerned.
delivery of services
the consequences of the fiscal imbalance are not measured solely
in terms of unaddressed or poorly satisfied needs. The various dysfunctions
in fiscal relations between governments mean that the delivery of
public services is less efficient than it could be.
administration and delivery of social programs and public services
suffer directly from the problems identified, particularly the operating
terms and conditions of transfer programs.
is uncertainty concerning the size of the amounts transferred.
transfer payment procedures introduce a dynamic that distorts the
priorization of needs.
interventions in provincial fields of jurisdiction are costly in
terms of efficiency because of the resulting duplication. The Commission
places particular emphasis on the problem of accountability raised
by the simultaneous presence of two orders of government in the
same field of intervention.
decision-making and budgetary autonomy
even more basic level, fiscal imbalance raises the whole question
of respect for the provinces' decision-making and budgetary autonomy,
and accordingly of people's capacity to make their own choices in
fields defined by the Constitution - which is the very basis of
with its specific needs and collective preferences tied to its unique
situation in North America, is obviously very sensitive to the ability
to make its own choices in such basic areas as health, education
and social assistance.
imbalance thus constitutes a dysfunction of the federal system.
To eliminate it, major transformations are needed in intergovernmental
fiscal relations within Canada. The transformations identified by
the Commission provide a blueprint of what would be a Canadian federation
that respects more closely the principles of federalism, in the
short and medium term.
fiscal balance within the federation
provinces must have additional financial resources to address the
needs within their fields of jurisdiction. In Québec's case,
such resources are estimated at an annual $2 billion in the short
term, $3 billion in the medium term, and at least $8 billion for
the provinces overall.
terms and conditions governing the existing division of resources
must be changed, by eliminating the CHST and freeing a new tax room
for the provinces.
Commission recommends the elimination of the CHST and its replacement
by a new division of tax room, because of the assured and predictable
nature of the source of funds to which the provinces would have
access, its unconditional nature and the greater accountability
that would result.
Commission expresses its preference for an occupation of the GST
field by the provinces. In light of the financial objective adopted,
the federal government should entirely relinquish the GST in favour
of the provinces. However, the Commission does not wish to reject
the scenario calling for a new division of the personal income
both instances, the new division of tax room would focus on the
equivalent of between $26 and $27 billion for Canada as a whole,
i.e. the amount of the existing CHST, to which would be added
the additional financial resources freed for the provinces.
Commission believes that the new division of taxation must not
lead to federal government deficits. This is possible if the new
division is implemented gradually and account is taken of actual
federal government surpluses. Priority should be given to allocating
future surpluses to the new division of tax room in favour of
division of tax room the Commission is recommending would restore
funding previously supplied by the CHST: the tax room Québec
would obtain would represent from 18.4% to 19.7% of funding for
health, post-secondary education and income security in 2005-2006,
whereas the CHST provided 19.8% of this funding in 1994-1995, subsequently
falling to 11.9% in 2000-2001.
Note: CHST including special Québec abatement and excluding
federal trust accounts.
Sources: Commission on Fiscal Imbalance; Gouvernement du Québec,
2002-2003 budget; Conference Board of Canada.
equalization program must be improved.
Commission is of the opinion that equalization payments must be
defined using a standard that reflects the average fiscal capacity
of all of the provinces, i.e. the ten-province standard, which
would replace the existing five-province standard. The shift to
the ten-province standard should be effected gradually to allow
for the impact of this change on federal public finances and prevent
it from leading them into deficit. However, the federal government
should clearly consider the ten-province standard as the objective
to attain by indicating the percentage of equalization paid in
relation to the amount that would result from its full application.
Commission recommends the elimination of the "ceiling"
and "floor" provisions so that the equalization program
can satisfy its objective more adequately and to improve its equity.
Commission requests total compliance with the representative tax
system approach, which is the very basis for the measurement of
the provinces' fiscal capacity. At the next renewal of the equalization
program, fiscal capacity for the property tax base must be measured
on the basis of property assessment rolls. Similarly, the full
amount of revenue from the sale of goods and services must be
subject to equalization.
- The Commission recommends that any new method or data be submitted
to the provinces and subjected to satisfactory study before being
applied. No change in methodology or data should be implemented
during the five-year period following a renewal of the equalization
- To counteract
"federal spending power."
Commission wishes to emphasize that the new division of financial
resources that it recommends would limit future federal government
initiatives under the aegis of "federal spending power"
by reducing the financial leeway available for this purpose.
Commission also recommends that:
Québec vigorously reiterate its traditional stance concerning
the absence of a constitutional basis for "federal spending
power" since this "power" does not respect the
division of powers stipulated in the Constitution;
Québec maintain its demand to exercise an unconditional
right to opt out with full financial compensation in respect
of any program implemented by the federal government in a field
falling under provincial jurisdiction.
to all new causes of imbalance
imbalance hampers in the functioning of a federation. For this reason,
procedures must be implemented to respond rapidly to new causes
must engage in an ongoing, reliable assessment of the conditions
surrounding financial relations between the two orders of government.
Commission recommends that the federal government significantly
enhance the information available to the public concerning fiscal
balance in the federation and intergovernmental fiscal arrangements.
Commission is of the opinion that, given the issues at stake,
the federal-provincial analysis of fiscal balance and transfer
programs should be revitalized and made much more transparent.
Commission believes that the National Assembly should engage in
systematic monitoring of various facets of fiscal imbalance through
discussion by a parliamentary committee of a report submitted
annually by the Minister of Finance and including the advice of
a Committee of experts.
- A genuine
process of exchanges and discussion between the two orders of government
should be initiated on all facets of intergovernmental fiscal relations.
The Commission recommends that the Québec government pursue
its efforts to ultimately establish with the other provinces a genuine,
permanent and effective process of exchanges and discussion between
the two orders of government on intergovernmental fiscal relations.
is convinced the recommandations it has formulated would correct
the fiscal imbalance that is currently a feature of intergovernmental
fiscal relations wihin the canadian federation.
of fiscal balance will directly benefit individuals since they will
receive from the provinces an adequate level of services in sectors
they consider a priority. Moreover, it will fully enable them to
make the choices to which they are entitled in the fields stipulated
by the Constitution as under provincial jurisdiction.
to make choices in clearly identified fields is at the very heart
of the federal system. It is a cornerstone of federalism, to which
Quebecers are especially sensitive. The restoration of fiscal balance
in Canada through a new division of financial resources must respect
and guarantee it.