The Great Convergence: Federal Transfer Revenue Shares 1980/81 to 2013/14

Well the Council of the Federation began meeting in St. John’s yesterday and given we are on the cusp of a federal election, there will no doubt be a targeting of Ottawa’s role in provincial finances.  Naturally, there will be some lamentations about the Prime Minister’s absence – once again – from this annual meeting.  As Ontario’s premier has already noted: ““I think that is very important. Now, even that shines a light on how much better it would be if we were having a conversation with the prime minister all along. If the prime minister were there, had always been there, I think it would be a much better launching point for this discussion, but you know.”

I really don’t know if things would be better if the Prime Minister was locked in a room with all the provincial premiers but I do suppose it has the potential for an interesting new reality show.  Of course it really is all about the money. For 2015-16, Ottawa will transfer 68 billion dollars to the provinces – an increase of 29 percent since 2009/10 when the amount was 52.7 billion dollars.  Since 2009/10, the Canada Health Transfer has grown by 39 percent, the Canada Social Transfer by 19 percent and Equalization has grown by 22 percent.  Per capita federal transfers have grown 21 percent – from $1,570 to $1,897.  Ottawa can certainly claim that it has increased funding substantially and that its funding has grown faster than population.

However, what is also of note is that while federal cash transfers have been growing over time, they have been declining in importance as a source of provincial revenues.  As Figure 1 shows, over the entire period 1980/81 to 2013/14 (Source: Federal Fiscal Reference Tables) the federal cash transfer share of provincial revenues has dropped for most provinces.  The average share across all ten provinces in 1980/81 was 32 percent whereas by 2013/14 it had declined to 24 percent. 

Newfoundland and Labrador saw one of the most dramatic drops – from 49 to 16 percent.  The three other Atlantic Canadian provinces also saw a decline though they remain the most transfer dependent of all the provinces.  Quebec’s share has declined from 27 percent, then rebounded and since leveled off at about 20 percent over the last few years while Saskatchewan has seen a decline from a peak reached in the early 1990s of about 32 percent and is now down to 14 percent.  

The exceptions to this trend over the long haul are Canada’s three wealthiest provinces.  British Columbia and Ontario have both exhibited a u-shape to this relationship.  From a federal transfer revenue share of 20 percent in the early 1980s, Ontario declined to 7 percent by the late 1990s and has since grown again to 20 percent.  British Columbia was in the 20 percent range in the early 1980s and declined to about 9 percent by the late 1990s and now has grown to 17 percent.  Meanwhile, Alberta has fluctuated quite a bit ranging from as low as 8 percent to as high as 18 percent but has been climbing steadily since 2007/08 and has grown to about 15 percent. 

There appears to have been a reduction in dispersion and substantial convergence in the federal cash transfer share of provincial revenues over time.  If one calculates a coefficient of variation from 1980/81 to 2013/14, the value declines over this period (but with a brief surge upwards during the mid 1990s in the wake of federal transfer regime changes).  In 1980/81, the share ranged from a maximum of 51 percent for Prince Edward Island to a minimum of 8 percent for Alberta.  By the mid 1990s, the range was a high of 43 percent for Newfoundland and Labrador and a low of 11.3 percent for Alberta.  For 2013/14, we are looking at a maximum of 39 percent for Prince Edward Island and a low of 14 percent for Saskatchewan. 

I suppose there are a number of points that can be made here.  First, some of this fluctuation in transfer revenue shares is inevitably tied to provincial economic performance.  Ontario for example was hard hit by the recession of the early 1980s and that of 2008-09 and its federal cash transfer revenue share is 20 percent in both cases.  Newfoundland and Labrador was certainly aided by its resource boom and its effect on own-source revenues.

Second, over the long haul, for the average federal cash transfer revenue share to decline, it also means that provincial own source revenues have been growing faster than federal cash transfers.  That in of itself is not a bad thing as it can reflect more effort or ability on the part of provinces to fund their own activities. However, during the 1990s, a drop in the federal transfer revenue share inevitably was related to the federal fiscal crisis and the transfer cuts to the provinces.   As well, provinces experiencing a resource boom would expect to see their revenues grow faster than federal transfers and not everyone has experienced one of those recently.

Third, some of the wealthier provinces appear to have gotten their wish for a less redistributive transfer system.  The move to full per capita funding in the Canada Health Transfer is certainly a reflection of this trend.  One can recall that it was not so long ago, that Ontario premier Dalton McGuinty was lamenting the fiscal gap in Ontario in terms of its treatment by the federal government.   Well, federal fiscal flows have certainly become more generous to Ontario, Alberta and British Columbia over the last ten years if their growing federal transfer revenue shares are any indication.

Comments

[Chris]

Thanks for this -- I'm surprised I haven't seen the data presented in this way before. Looks like Ontario is the big outlier here, having been the most dramatic beneficiary over the last 15 years.

[Ali]

Nice

[Best Beta Trading]

It would be nice to go earlier and try to factor education out, with health care to increase federal funding shortly. I'm studying succeeding ponds into carbon-rich peat bogs. That is mostly the northern parts of many provinces. In part because of civil defense (even though it has been suggested to me preventing a disaster is more important), I'm liking building up some northern Territories infrastructures. I'm looking into edible lichens but will likely settle for lichen stores to feed farmed caribou. I think the Territories should be represented separately. Their Northern Demographic represents cities that take in immigrants and is often Provincial gvmt heavy.
Trying to figure out if subways are good civil defense infrastructures...
Bombardier, an example I'm aware of, expects to recoup an annual earnings bonus around 5% of their market cap in 2017. It has been mentioned manufacturing (and other analogous sector players classified as a different sector) hasn't come back yet but maybe some subsidies now could pay off in two years.