Follow the Money: Evolving Fiscal Relations

• Author: Kathy L. Brock/Geoffrey Hale
• Pages: 83-100

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Follow the Money:

Evolving Fiscal Relations

Introduction

Canada is almost unique among federal states in that sub-national

governments (provinces, territories, and local governments) have

greater cumulative f‌iscal capacity than the federal government in

terms of legal authority to generate their own-source revenues,

although eective capacity varies widely across provinces. Unlike

many other federations, Canadian provinces have no legal limits

imposed by central government on their def‌icits or debt levels,

although they are potentially subject to disciplines from f‌inancial

markets through higher borrowing costs or diculty in ref‌inan-

cing provincial borrowing, resulting in default. Municipalities and

Indigenous governments are typically far more dependent on trans-

fers from other governments, although the relative size of municipal

sectors varies widely across provinces.

is chapter explores the topic of f‌iscal federalism — the distri-

bution of responsibilities for collecting and spending public rev-

enues among dierent orders or levels of government. It examines

how governments both work together and compete in extracting

money from people and businesses to f‌inance their activities. It

summarizes key challenges posed by federalism to the eectiveness,

FEDERALISM IN CANADA

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eciency, and accountability of governments in raising, spending,

and sharing public funds extracted directly and indirectly from cit-

izens, businesses, and consumers to provide public benef‌its — not

least the benef‌it of securing election and re-election in a competi-

tive, democratic society. It summarizes the ways that constitutions,

politics, and understandings of economics determine which orders

or levels of government spend public funds on dierent types of

services, and how the se activities inf‌luence both levels of economic

activity and balance competing ideas of equity among citizens,

regions, and social interests. Finally, it looks at some of the major

and continuing f‌iscal challenges facing Canadian governments in

the context of federalism, and their implications for the future of

Canada and Canadians.

What Is Fiscal Federalism in Canada and

Why Does It Matter?

In , government spending in Canada totalled . billion or

about  cents of every dollar of domestic economic activity — about

the same amount as in . Put in a wider context, that is a little

more than the . percent average across the G advanced indus-

trial countries. When intergovernmental transfers are stripped out

of the equation (to avoid double counting), Canada’s provincial

and territorial governments raised  percent of total own-source

government revenues, compared with . percent by the federal

government and . percent by local governments in  (see

Table .). Provincial/territorial governments accounted for about

. percent of spending, much more than the federal government

with . percent or local governments at . percent, also net of

transfers. e balance of government spending in Canada is largely

accounted for by social security (such as the Canada and Quebec

Pension Plans) f‌inanced by dedicated taxes on employment income

and subsequent investment revenues managed at varying degrees of

arm’s length from both senior orders of government.