Apparently, ten out of ten premiers (13 out of 13 if we count the territories) can agree that Canada is suffering from a “fiscal imbalance” between Ottawa and the provinces. At their annual meetings, which are wrapping up in Charlottetown today, the provincial premiers are arguing that since the Federal budget is moving into surplus (while the provinces and territories still have a combined deficit of $16.1 billion), its time for the federal government to boost transfers to make “significant investments “ in two areas – health care for an aging population and the nation’s infrastructure.
Two points here. First point. It is unfortunate the premiers like using the term “fiscal imbalance” to characterize a call for more money from the federal government because like the federal government has pointed out in its rebuttal, the provinces do not suffer from a fiscal imbalance. I am a bit of a traditionalist when it comes to the term fiscal imbalance. I use it to refer to the historic condition rooted in the creation of the Canadian federation whereby the provinces got the income elastic expenditures (health and education) and inelastic revenue source (direct taxation) while the federal government got income elastic revenues (any revenues whatsoever) and income inelastic expenditures (that is, not health and education).
As a result, the provinces were short of money for decades with their needs met by ad hoc grants. This was not resolved until the modern system of federal grants and transfers was implemented in the post World War Two era. As well, the provinces are no longer limited to direct taxation and have available to them pretty much all the revenue tools the federal government has with the key exception being tariff revenues (which are no longer significant). As a result, provincial revenues have been doing quite well and collective provincial-territorial revenues now exceed those of the federal government. Actually, they have exceeded federal revenues for quite some time now.
Figure 1 shows total revenues at the two levels of government without adjusting for any intergovernmental transfers. Figure 2 subtracts federal grants to other governments from federal revenues and provincial grants to other governments from provincial revenues to provide an estimate of revenues net of obligations to other levels of government. Needless to say, using either approach, there has been a growing revenue gap between Ottawa and the provinces – provincial/territorial revenues have been growing faster than the federal government. Between 1991 and 2012, total federal revenues grew 99 percent and provincial territorial revenues grew 145 percent (from Figure 1). Using Figure 2, federal revenues over this period grew 77 percent and provincial ones 144 percent. You might argue that the federal government weakened its revenue base via tax cuts over this period but it has been transferring a larger share of that total revenue to the provinces over time.
Second point. The premiers do have a point when they complain that the current federal funding formula for health transfers does not meet their needs. Population characteristics are becoming more diverse across the provinces and territories and health needs are tied to aspects of the life cycle like getting old. Some provinces have populations aging at a faster rate than others. The current per capita allocation is a crude mechanism and the federal government could do better when it comes to a more sophisticated design of the Canada Health Transfer. At minimum the CHT should be broken up into two components. First, a share based on a per capita allocation as is currently the case reflecting the fixed costs of running a public health care system. Second, a needs based share reflecting differences in population characteristics such as age distribution. For a more detailed look at some aspects of this issue, check out Marchildon and Mou in the latest issue of Canadian Public Policy.
Summing up. The provinces do not suffer from a fiscal imbalance. They suffer from wanting to spend more while having someone else pay for it. What else is new? Having said this, there are improvements that could be made to the current system of federal transfers to the provinces and territories. The federal government can do better than simply allocating health transfer funds on a per capita basis and then washing its hands.