Tuesday, February 07, 2006

Federalism and Public Policy II: Is Fiscal Imbalance Something to be "Fixed"?

Like finding unintended humour in an unlikely place? Take a look at "The Existence, Extent and Elimination of Canada's Fiscal Imbalance," a report released in June 2005 by a special Finance Subcommittee of the House of Commons, a.k.a. "the Loubier Report".

What was funny was how, in order to reach its bizarre conclusion that provinces should simply be given federal tax room to match their expenditure needs, the then-Conservative & Bloc Quebecois opposition majority on the Committee looked right past what an impressive array of experts from all corners of the political spectrum had to say about the subject. Consider the following comments:

  • "The provincial case that there is a fiscal imbalance between the responsibilities of the provinces and the revenue available to the federal government rests upon some very questionable assumptions." ---Janice MacKinnon, former Minister of Finance of Saskatchewan and author of Minding the Public Purse: The Fiscal Crisis, Political Trade-Offs and Canada's Future
  • "The very premise of the committee's work is faulty"---Brian Lee Crowley, founder of the Atlantic Institute of Market Studies
  • "[Having each level of government raise just as much tax revenue as it spends on its own responsibilities is] "both conceptually wrong and practically impossible"---Richard Bird, Rotman School of Management, University of Toronto
  • "Those are two items [i.e. the health care guarantee and fiscal re-balancing guarantee] that are not in what I was presented to analyze... I don't think, frankly, that those are in the platform, they're just under discussion. ...Those items were not costed, which leads me to believe that they're something that they're having under consideration that they're not committed to." ---Paul Darby, deputy chief economist of the Conference Board of Canada, explaining what elements of the Conservative election platform were left out of what he was presented for financial assessment
  • [The assumption of the Loubier Committee] "that there is an imbalance that needs fixing violates the first rule of policy analysis, which is to get the question right" ---Rod Dobell, Institute of Public Administration, University of Victoria

Clearly, "getting the question right" means understanding that the common everyday notion of an 'imbalance' as something that is by definition 'bad', needing to be "balanced", has virtually no place in this discussion. Most theorists of economic federalism instead attempt to estimate what the best level of imbalance is for efficient federal governance: how much federal fiscal leverage is needed to foster tax harmonization; prevent wasteful competition between provinces or a "race to the bottom" in terms of taxation and services; ensure that national standards are adhered to in health care and social policy; and cover the emergencies of the federal government's international jurisdiction in an increasingly global future.

What is really at issue in the current debate is whether there is a VFI (expenditure/revenue mismatch) once federal transfers (equalization and other direct spending obligations) are fully taken into account. Also at issue is whether, after a couple of decades in which the trade-off was the Feds cutting back on their share of shared cost programs in exchange for a loosening of conditions for federal funding, there should be a return to greater conditionality as the federal share of funding for social programs is increased. A little bit of history is in order here: the current strength of the federal position relative to the provinces follows a period in which their positions were reversed on two occasions. Fiscal relations have always been in flux, there has never been a perfect balance, nor has it ever been particularly important that they be balanced. Provinces have on occasion overstated the VFI by ignoring the significance of the 1977 tax transfer and referring to the old 50/50 shared cost formula as a valid benchmark. (Not without mentioning old levels of conditionality, you don't!)

It is noteworthy that in the early 1970s, before the federal fiscal position began to rapidly deteriorate, federal revenues in excess of own expenditures were around 30 percent; coincidentally, federal revenue balances since 1995 have once again been in the 30 percent range. Indeed, this has enabled the federal government to commit $65 billion in new health funding over the past six years. Of course, that does not completely close the differential between 7% annual rises in health spending and government revenues (including federal transfers) of only 5%. Paul Boothe and Mary Carson have shown in a recent study that this will leave a funding gap of $10 billion after five years, $12.9 billion after six years, and $15.9 billion after seven years. But I would be happier to see the federal government continue to pay down its debts and limit any future escalator clauses in federal transfers to the rate of growth in revenue, while provinces implement new revenue measures and economies of their own. As Paul Wells in McLeans Magazine bluntly put it last June, "Shut up and raise your own taxes"!

A federal budget balance of up to 30% "excess" revenue is both historically normal and potentially valuable to the pursuit of economic efficiency and equity within the federation. This fact should be recognized by provincial politicians even if --as in Quebec--they can't always say so. Such a recognition should be the basis for any intergovernmental agreement about what a "fair" federal cash contribution to provincial health care is. In the spirit of compromise, the federal government could commit to unconditional transfers of cash and tax room above the 30% level. As for conditionality, I would like to see a return to more dedicated funding for postsecondary education and income security. It is tempting under present circumstances for provincial governments to under-invest in these areas, especially given the high mobility of students, labourers and welfare recipients. It is an appropriate role for the federal government to ensure that non-health priorities such as municipal government and postsecondary education do not get crowded out by the undoubtedly greater pressures every province feels to put more money into healthcare, although the spirit of s. 106A of the Meech Lake Accord---i.e. providing for provincial opting out that is "compatible with national objectives"---is also appropriate.

As an academic, I am used to being ignored. I admit, it is amusing to see the careful testimony of an all-star team of experts swept under the political carpet by a parliamentary sub-committee. But there may be a serious downside to all of this. Prime Minister Harper will never stand in the House of Commons and say, as he did when he was a policy wonk at the National Citizens Coalition, that "two-tier health care is a great idea". What he will say, and has already said in his capacity as Conservative Party leader, is that he intends to let the provinces do what they wish with their own jurisdiction provided that is technically consistent with the provisions of the Canada Health Act. But this betrays either a naivete on the part of the Prime Minister about the law--since the Canada Health Act is far from self-applying and the precise scope of its provisions far from self-evident--or an assumption that we are naive: what provinces will actually wish to do depends in turn upon their fiscal capacity, along with the extent of Ottawa's willingness to use its own fiscal leverage to enforce and promote national standards.

Still think that federal tax room should simply be handed over to provinces in order to match any growth in their spending responsibilities? You've got to be kidding!

6 comments:

me said...
This comment has been removed by a blog administrator.
me said...

The ability of the federal to dictate policy in areas of provincial constitutional jurisdiction depends on federal payments being conditional. Giving unconditional transfers or giving tax points to the provinces gives up federal leverage.

Is federal leverage a good or bad thing? What business does the fed have in provincial jurisdiction? From this legal perspective the leverage looks like interference that is improper and possibly unconstitutional.

With a perfect constitution, those things that were best done at the provincial level without the need for federal harmonization would be at the province level. Those things that required an international voice or intra-provincial harmonization would have federal or joint jurisdiction.

Not knowing the rationale for the constitutional division of powers, I’m inclined to believe that the division of responsibilities/taxation is largely a historical matter that is arbitrary. (I wonder if the fact that the feds has more tax raising ability was partly due to the understanding that they could provide a supplementary and harmonizing role.)

The case for federal harmonization of education and health should be considered on its own basis. I think it is probably compelling as long as it doesn’t impede debate and best practices.

Mark Crawford said...

me: Thanks for your comment! "Fiscal Federalism" is a notoriously complex and arcane subject. I had intended to read all of my old books on the subject, as well as the entirety of the Loubier Committee proceedings, before writing this, but my books are in storage in Prince George and I didn't have time. If I can find the time, I'll revise and re-post this column. What I think we can say is this:

On the one hand, Canada's experience with federal-provincial cost-sharing shows that it is bad public policy to have the provinces running a program like health care while the federal government is committed to paying a share of its costs with no power to administer the programs and ensure their cost-effectiveness.

On the other hand, the provinces can be faulted for making unrealistic demands on the federal purse and for not recognizing the economic rationale and constitutional legitimacy of the federal spending power.

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CuriosityKilledTheCat said...

The issue is Harper's gameplan to substantially reduce the powers of the central government in Canada by devolving those powers on the provinces. If Harper is successful, Canada will become a balkanized nation of bickering premiers, with no common standards uniting Canadians as a nation, and with the Prime Minister sitting in the booth closest to the kitchen, with his hands tucked under his seat, doing nothing.

Harper and his New Tories aim at a massive transfer of power (legislative, financial) to the provinces, through a deal cut in smoky rooms, and over a policy which has not been tested by being debated vigorously during an election campaign. Harper is aiming at a stealth-change of how Canada functions, agreed to by premiers and him, without the voters of the provinces or the voters of Canada being involved in such a decision. It is akin to a Meech Lake Accord without requiring Canadians to vote on it.

Is this process of Harper's democractic? Not by a long shot.

Have Canadians agreed to these dramatic changes in the federal / provincial structure? Not by a long shot.

Will Harper open his dealings to public debate? Never – he does not agree with his decisions being debated by voter representatives.

Harper is aiming at making Ontario the "bad guy", and getting the other provinces to gang up on Ontario's Premier. He is hoping to stampede Ontario into agreeing to a deal, so that Harper can then go the country for an election, hoping to win more seats in Quebec and gain a majority government.

As Chantal Hebert wrote: "Nothing would do more to accelerate Harper's plan to emerge as the default federalist option in Quebec than a campaign that found the federal Liberals and the Bloc Québécois on the wrong side of a deal with Charest on the fiscal imbalance."

Harper's stampede tactics (similar to those used by Bush in his deceptive entry into the war in Iraq) have been successful so far – he suckered Duceppe and Layton into supporting a vote of no confidence in the Liberal government. If it worked once, why not try again?

What can Ontario's Premier, Dalton McGuinty, do given the by now obvious strategy of Harper?

Simple. He can take a stand on principle: that such decisions should be made by the people. McGuinty can make the whole backroom-dealing process transparent by simply stating right now that he requires two things to take place: (1) that all meetings of Premiers on this subject, and any meeting he has with Harper, be open to the public, and televised; and (2) that he will not agree to any deal unless it has been put to the voters of Ontario through a plebescite.

This will immediately make the whole process of nation-changing more democratic, put pressure on the Premiers of all provinces to consider voters as well and perhaps adopt similar plebescites, and relieve McGuinty of any pressure to rush into a deal "in the interests of Canada" (as John Tory has tried to frame it).

So, Dalton: strike a blow for democracy. Call for transparency in meetings of Premiers on this "backroom Meech Lake Deal", and have Ontario voters decide the issue.

Mark Crawford said...

Thanks for your comment,Curiosity!

It strikes me as a fair comment, especially when one considers what former leaders such as Mike Harris and Preston Manning said about health care reform once they had left politics (and now that Preston is said to covet Ralph Klein's job...), to say nothing of what Stephen Harper had to say about single-tier health care when he was a policy wonk with the National Citizens' Coalition...it could be a Dark Age ahead.