Follow the Money: Evolving Fiscal Relations

AuthorKathy L. Brock/Geoffrey Hale
 
Follow the Money:
Evolving Fiscal Relations
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,
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.

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