The end of the fiscal imbalance
Reading the papers after the budget was a walk through a parallel universe. The Liberals' interim leader, Bill Graham, was quoted denouncing it as Canada's first "neo-conservative" budget, apparently unaware that the budget promised to outspend his own party's election platform by several billion dollars, while such tax cuts as it contained were largely cribbed from the Liberals' 2005 budget.
The Ottawa Citizen, meanwhile, gave thanks for "a budget that offers relief from years of Liberal social engineering," before noting, in the next paragraph, that "the budget offers tax incentives to use public transit, to enroll children in organized sports, and to encourage students to excel academically." Yes, it's out with the old Liberal social engineering -- and in with the new Conservative social engineering.
But the part of the budget that seemed to cause the most confusion was the section on federal-provincial relations and the infamous "fiscal imbalance." The Globe's Heather Scoffield detected signs that the government "is steering the country in a radically different direction," while her colleague John Ibbitson -- well, someone tie him down before he floats away. "One day, this will be known as the budget where everything changed," he rhapsodized, "the budget that will put an end to decades of relentlessly expanding federal power, of meddling in provincial jurisdictions, of Ottawa's smothering embrace."
Really. I read the same budget -- at least, I think it was the same budget -- and I didn't see anything of the kind. Take the fiscal imbalance. Notwithstanding the Tories' previous advocacy of the provincial cause, the budget seems strangely vague about what they would do about it, or even whether it exists: Throughout, the budget is careful to commit the government only to "address concerns about fiscal imbalance." (Emphasis mine.) And anyone reading the accompanying background paper, "Restoring Fiscal Balance in Canada," would come away convinced the whole thing was a hoax. As, in fact, it is.
So, for example, for all the attention paid to the federal government's larger-than-expected surpluses in recent years, the paper is careful to note that the provinces' aggregate fiscal position has also regularly come in over forecast, and by the same amount: about $5-billion a year. It points out that the provinces "have access to all major tax fields in use today" -- the same as the feds -- and that it has become common "for both orders of government to spend in areas over which they do not exercise legislative jurisdiction." (Emphasis mine, again.) It reports that the federal debt-to-GDP ratio is nearly twice that of the provinces.
It notes that federal transfers to the provinces, at $40-billion and change, are now at or near record levels, both in absolute terms and as a share of all federal spending. It also includes a telling graph showing how the federal and provincial governments' respective shares of total spending and revenues have changed over the years. Federal own-purpose expenditures (i.e. excluding transfers) now stand at just one-third of the total, the lowest ever. Ottawa's share of own-purpose revenues is similarly at a historic low.
Lowest ever, and lowest anywhere: "In Canada, sub-national governments raise the largest share of total government revenues among industrialized federal countries." Moreover, they "are more fiscally autonomous than their counterparts in other countries," being less dependent on cash transfers and having greater freedom to set their own rates and bases. The notion that Canada suffers from Ottawa's smothering embrace, that the provinces are starved for cash while Ottawa dines out, is not just arguable, and not just wrong: It is the diametric opposite of the truth.
And as for Ontario's fabled $23-billion (now $18-billion) "gap" -- the paper simply tears it to shreds. That particular fiscal imbalance, it states flatly, is "a reflection of the province's greater prosperity relative to most other provinces." About 42% of it is explained by above-average revenues; another 14% is Ontario's share of federal debt reduction; 23% is because it does not qualify for equalization; and so on.
Indeed, it is increasingly clear the Harper government is not talking about fiscal imbalance at all -- or not in the sense the provinces attach to it. It is talking about disentanglement: about reducing overlap between the two levels of government, restricting use of the federal spending power in provincial jurisdictions -- though even here it is careful to talk about "new" programs (a concession the previous government had already made, via the Social Union agreement). But there will be no wholesale withdrawal of the federal government from national life, nor does it intend to simply cut a bunch of fat cheques to the provinces.
Rather, issues of fiscal federalism will be rolled into a larger discussion about improving the federation, specifically the economic union -- a negotiation, over the next six months to a year, in which the feds will bring their own set of demands. These are listed, prominently and repeatedly, throughout the budget: a common national securities regulator; harmonization of provincial sales taxes with the GST; and a general reduction of provincial barriers to trade and labour mobility. The message is unmistakable. You want the quid? Come up with the quo.
The Ottawa Citizen, meanwhile, gave thanks for "a budget that offers relief from years of Liberal social engineering," before noting, in the next paragraph, that "the budget offers tax incentives to use public transit, to enroll children in organized sports, and to encourage students to excel academically." Yes, it's out with the old Liberal social engineering -- and in with the new Conservative social engineering.
But the part of the budget that seemed to cause the most confusion was the section on federal-provincial relations and the infamous "fiscal imbalance." The Globe's Heather Scoffield detected signs that the government "is steering the country in a radically different direction," while her colleague John Ibbitson -- well, someone tie him down before he floats away. "One day, this will be known as the budget where everything changed," he rhapsodized, "the budget that will put an end to decades of relentlessly expanding federal power, of meddling in provincial jurisdictions, of Ottawa's smothering embrace."
Really. I read the same budget -- at least, I think it was the same budget -- and I didn't see anything of the kind. Take the fiscal imbalance. Notwithstanding the Tories' previous advocacy of the provincial cause, the budget seems strangely vague about what they would do about it, or even whether it exists: Throughout, the budget is careful to commit the government only to "address concerns about fiscal imbalance." (Emphasis mine.) And anyone reading the accompanying background paper, "Restoring Fiscal Balance in Canada," would come away convinced the whole thing was a hoax. As, in fact, it is.
So, for example, for all the attention paid to the federal government's larger-than-expected surpluses in recent years, the paper is careful to note that the provinces' aggregate fiscal position has also regularly come in over forecast, and by the same amount: about $5-billion a year. It points out that the provinces "have access to all major tax fields in use today" -- the same as the feds -- and that it has become common "for both orders of government to spend in areas over which they do not exercise legislative jurisdiction." (Emphasis mine, again.) It reports that the federal debt-to-GDP ratio is nearly twice that of the provinces.
It notes that federal transfers to the provinces, at $40-billion and change, are now at or near record levels, both in absolute terms and as a share of all federal spending. It also includes a telling graph showing how the federal and provincial governments' respective shares of total spending and revenues have changed over the years. Federal own-purpose expenditures (i.e. excluding transfers) now stand at just one-third of the total, the lowest ever. Ottawa's share of own-purpose revenues is similarly at a historic low.
Lowest ever, and lowest anywhere: "In Canada, sub-national governments raise the largest share of total government revenues among industrialized federal countries." Moreover, they "are more fiscally autonomous than their counterparts in other countries," being less dependent on cash transfers and having greater freedom to set their own rates and bases. The notion that Canada suffers from Ottawa's smothering embrace, that the provinces are starved for cash while Ottawa dines out, is not just arguable, and not just wrong: It is the diametric opposite of the truth.
And as for Ontario's fabled $23-billion (now $18-billion) "gap" -- the paper simply tears it to shreds. That particular fiscal imbalance, it states flatly, is "a reflection of the province's greater prosperity relative to most other provinces." About 42% of it is explained by above-average revenues; another 14% is Ontario's share of federal debt reduction; 23% is because it does not qualify for equalization; and so on.
Indeed, it is increasingly clear the Harper government is not talking about fiscal imbalance at all -- or not in the sense the provinces attach to it. It is talking about disentanglement: about reducing overlap between the two levels of government, restricting use of the federal spending power in provincial jurisdictions -- though even here it is careful to talk about "new" programs (a concession the previous government had already made, via the Social Union agreement). But there will be no wholesale withdrawal of the federal government from national life, nor does it intend to simply cut a bunch of fat cheques to the provinces.
Rather, issues of fiscal federalism will be rolled into a larger discussion about improving the federation, specifically the economic union -- a negotiation, over the next six months to a year, in which the feds will bring their own set of demands. These are listed, prominently and repeatedly, throughout the budget: a common national securities regulator; harmonization of provincial sales taxes with the GST; and a general reduction of provincial barriers to trade and labour mobility. The message is unmistakable. You want the quid? Come up with the quo.
5/06/2006
