What Is Fiscal Imbalance?
Fiscal imbalance exists among provinces, and between the provinces and the federal government.
Among Provinces (“Horizontal Imbalance”)
In simple terms, some provinces are richer than others. Factors such as the strength of the provincial economy, population size, income levels, tax base, and the cost of delivering essential services together define a province’s “richness", or fiscal capacity.
Nova Scotia’s fiscal health has improved significantly in recent years. Yet, our fiscal capacity remains well below the national average.
Despite these differences among provinces, all Canadians have a constitutional right to receive about the same level of services at about the same level of taxation. (Constitution Act, Sec. 36–2)
Equalization is how the federal government has tried to fulfil this constitutional responsibility to all Canadians. While equalization has helped, Nova Scotians are well aware that differences continue to exist—in terms of both the programs and services they receive and the taxes they pay.
Between the Provinces and the Federal Government (“Vertical Imbalance”)
The federal government has most of the money through tax collection, while the provinces have most of the responsibilities for delivering programs and services. As a result, since 1997-98, the federal government has recorded a surplus—in some years a very sizable surplus—while provinces, collectively, have recorded deficits or small surpluses.
The federal government reallocates tax dollars to provinces through programs such as the Canada Health Transfer, the Canada Social Transfer, and Equalization. Over the past decade, however, federal transfers have declined dramatically.
The federal contribution in support of Nova Scotia social programs has declined from about 30 per cent to about 20 per cent. In dollar terms, in 2005-06, it would have taken an additional federal investment of approximately $240 million to obtain the proportion of federal support that existed in 1994-95. The fact that expected increases to social transfers (3.3 per cent annually) are being outpaced by growth in provincial expenditures (4 per cent annually) is widening the gap between what the federal government provides and what provinces need.