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Annex 2
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2001–02 | 2002–03 | 2003–04 | 2004–05 | Estimate 2005–06 |
Projection 2006–07 |
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(millions of dollars) | ||||||
Federal | 6,742 | 7,073 | 8,891 | 1,456 | 8,000 | 3,600 |
N.L. | -468 | -644 | -914 | -489 | 77 | 6 |
P.E.I. | -17 | -55 | -125 | -34 | -18 | -12 |
N.S. | 113 | 28 | 38 | 165 | 78 | 93 |
N.B. | 79 | 1 | -173 | 242 | 117 | 22 |
Que. | 22 | -728 | -358 | -664 | 0 | 0 |
Ont. | 375 | 117 | -5,483 | -1,555 | -1,369 | -2,350 |
Man. | 63 | 4 | 13 | 405 | 3 | 3 |
Sask. | 1 | 1 | 1 | 383 | 298 | 102 |
Alta. | 1,081 | 2,133 | 4,136 | 5,175 | 7,375 | 4,096 |
B.C. | -1,184 | -2,737 | -1,275 | 2,575 | 1,475 | 600 |
Y.T. | -21 | -5 | 12 | 5 | 38 | 9 |
N.W.T. | 120 | -34 | -65 | -17 | 18 | 31 |
Nun. | -47 | 12 | 7 | -8 | 6 | -8 |
Total provincial- territorial |
117 | -1,907 | -4,187 | 6,184 | 8,098 | 2,592 |
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Sources: Federal and provincial-territorial Public Accounts and budgets. |
Reflecting improvements in budgetary balances, both federal and provincial-territorial debts have declined as a share of gross domestic product (GDP), with the federal debt ratio falling more dramatically. However, federal debt as a share of GDP still exceeds that of most provinces and remains significantly higher than the provincial average.
Lower debt-to-GDP ratios, combined with lower interest rates and an improved credit rating, have enabled both orders of government to allocate a smaller portion of revenues to debt interest payments and a greater portion to program expenditures, tax reductions and debt repayment. Both orders of government have also benefited from increased revenues generated by sustained economic growth.
Overall, Canadians witnessed an impressive fiscal recovery for both orders of government in the past decade. However, such a recovery was made possible only by making difficult choices in the mid-1990s to reduce spending.
Program spending expressed as a share of GDP provides a good measure of spending trends and of the size of governments relative to the economy. It is important to examine the data over a long period of time in order to distinguish between cyclical and structural trends.
Federal program spending as a share of GDP has declined significantly since 1983–84. As a result of spending restraint and strong economic growth, the ratio of federal program spending to GDP declined steadily throughout the latter half of the 1980s. The 1990–91 recession triggered increases in certain federal expenditures like employment insurance, which contributed to a rise in the program spending-to-GDP ratio. The federal government underwent a program of expenditure review and restraint between 1993–94 and 1996–97, which was an essential factor in its fiscal recovery.
Since 1983–84, provincial-territorial program spending has also declined as a share of GDP, but to a lesser extent. Provinces and territories were also hit hard by the recession, which caused a significant increase in spending on social assistance and social services in the early 1990s. Starting in the mid-1990s, most provinces undertook major restructuring to reduce or stabilize their program expenditures. The sustained job creation over the past decade has also significantly reduced provincial spending pressures in the areas of social assistance and social services.
The tighter spending control exercised by both orders of government during the 1990s reflected the need to rebalance government finances after a long period of large and unsustainable deficits.
Since 2000–01, program spending as a percentage of GDP has begun a modest rebound as both federal and provincial-territorial governments addressed significant spending pressures.
Health care has proven to be the number one priority in terms of new investments:
Both orders of government have access to all major sources of tax revenue: personal and corporate income taxes, sales taxes and payroll taxes. Provinces have access to resource revenues, gaming and liquor profits, and property taxes while the federal government has exclusive access to customs import duties as well as taxes on non-residents.
Moreover, among major industrialized federations, only in Canada and the United States do sub-national governments have full control over their tax bases and tax rates—though in some cases, provinces in Canada have chosen to enter into harmonization agreements (notably in the area of income and sales taxes) in order to reduce compliance costs on Canadians and administrative costs.
Both Orders of Government Have Access to Major Tax Fields
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Federal | Provincial | |
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Common revenue sources | ||
Personal income taxes | √ | √ |
Corporate income taxes | √ | √ |
Sales taxes | √ | √ |
Payroll taxes | √ | √ |
Total in 2005 (billions of dollars) | 192.0 | 130.0 |
Unique provincial revenue sources | ||
Resource royalties within provincial jurisdiction | √ | |
Gaming, liquor profits | √ | |
Property taxes | √ | |
Total in 2005 (billions of dollars) | 30.3 | |
Unique federal revenue sources | ||
Customs import duties | √ | |
Taxes on non-residents | √ | |
Total in 2005 (billions of dollars) | 8.4 | |
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Source: National Economic and Financial Accounts |
In Canada, sub-national governments raise the largest share of total government revenues among industrialized federal countries, which is a reflection of the high degree of decentralization of the Canadian federation.
Given their broad access to major tax fields and the control they exercise over their tax bases and rates, provinces and territories are more fiscally autonomous than their counterparts in other federal countries. In particular, they rely more on own-source revenues—and less on federal transfers—to fund their programs and policies.
Provincial revenues (including federal transfers) have generally exceeded federal revenues for more than 25 years, with the gap increasing in recent years. While governments have the legal authority to increase their revenues as required, concerns about competitiveness and the overall tax burden of Canadians limit the extent to which they can and should raise additional revenues in practice.
Starting in the late 1990s, most governments in Canada implemented tax reductions, primarily targeting personal and corporate income tax reductions. As a result, revenue-to-GDP ratios declined for both orders of government. For provinces and territories, the rebound in the revenue ratio in recent years is in large part attributable to increases in federal transfers and resource revenues. Federal tax cuts exceeded provincial tax cuts in dollar terms.
Table A2.2
The Sharper Decline in Federal Revenues is Due in Part to Larger Federal Tax Reductions Since the 1996 Federal
Budget
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Federal | Provincial | |
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(billions of dollars) | ||
Personal income taxes | -31.5 | -21.3 |
Corporate income and capital taxes | -5.3 | -4.6 |
Employment insurance premiums/payroll taxes | -7.2 | -0.4 |
Other revenue measures1 | 0.8 | 5.9 |
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Total | -43.2 | -22.4 |
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1 Includes sales taxes, property taxes, health premiums, tobacco taxes, gasoline taxes and various measures to fight tax evasion.Sources: Department of Finance Canada estimates; provincial governments. |
While Canadian provinces are less dependent on federal cash transfers than their counterparts in other federal countries, transfers still represent a significant source of revenue for the provinces and territories.
As part of its deficit reduction efforts, the federal government cut cash transfers to provinces and territories for health care and other social programs by 30 per cent between 1994–95 and 1997–98, from $18.7 billion to $12.5 billion. Equalization was not cut but a ceiling did temporarily constrain entitlements in 2000–01. Territorial Formula Financing (TFF) was also subject to a ceiling that limited the growth of grants from 1990–91 to 1993–94, and each territory’s Gross Expenditure Base was cut by 5 per cent in the 1995 budget.
Since the federal government balanced its budget in 1997–98, federal cash transfers for health and social programs have rebounded substantially:
Equalization and TFF transfers were also put on a legislated 10-year growth track through to 2013–14 under a new framework announced in October 2004. However, the new framework constituted a departure from past practice, under which both the level and allocation of these transfers were determined by a formula. As a result, concerns have been raised about the ability of both programs to meet their objectives over the longer term. In particular, there is a broad consensus that the programs need to be returned to a formula-based approach for determining both the level and allocation of entitlements under these two transfers.
In all countries, there are differences in economic performance across regions. Given the diverse nature of Canada, substantial economic disparities exist.
The coefficient of variation, illustrated in the charts below, measures the magnitude of the disparities across provinces in each year, thus making it a useful indicator to track trends in disparities over time. Even though economic disparities between provinces are still substantial, they have nevertheless declined significantly over the past 25 years.
In federal countries—and especially in fiscally decentralized countries such as Canada—these economic disparities translate into fiscal disparities (i.e. differences in the ability to raise revenues) among sub-national governments. The pattern of fiscal disparities in Canada has largely mirrored the pattern of economic disparities.
While fiscal disparities (like economic disparities) have generally declined over the past 25 years, the recent rise in natural resource prices that began in 2000 has generated stronger economic and revenue growth in provinces with significant natural resources (notably Alberta, Saskatchewan, British Columbia and Newfoundland and Labrador). As a result, economic and fiscal disparities have widened somewhat, though they remain significantly smaller than in the early 1980s.
Most federal countries, including Canada, have fiscal equalization programs to help reduce fiscal disparities. The principle of equalization is enshrined in subsection 36(2) of Canada’s Constitution Act, 1982. Canada’s Equalization program significantly reduces fiscal disparities among the provinces (see Annex 3).
In all federal countries, economic disparities and the implicit inter-regional redistribution that results from the operation of federal tax and expenditure policies result in different "balances" between federal revenues and expenditures in different regions. Generally speaking, the residents of more prosperous regions, taken as a whole, receive less federal spending and make larger contributions to federal revenues. The opposite is true in less prosperous regions.
Canada is no different in this regard. Because of their relatively higher incomes, citizens and businesses residing in more prosperous provinces, such as Alberta and Ontario, contribute relatively more to federal revenues than they receive from federal programs.
In Canada, as in other federal countries, the "gaps" between federal revenues and expenditures in different provinces reflect the structure of the tax and transfer systems of the federation, including the progressivity of federal taxes, the targeting of support to individual Canadians or families in need, and the commitment to the reduction of provincial-territorial fiscal disparities.
In particular, a number of factors determine the measured balance of individual regions at any given point in time:
Changes in the federal budgetary balance are particularly important in explaining recent changes in regional balances:
In effect, the resulting $18-billion Ontario "gap" is a reflection of the province’s greater prosperity relative to most other provinces. The "gap" can be decomposed based on the extent to which federal revenues and expenditures in Ontario deviate from the national average:
These four areas accounted for over 97 per cent of the "gap," with the remaining 3 per cent reflecting other smaller expenditures, some of which are more heavily weighted towards Ontario (such as federal spending on goods and services) and others that are not.
Federal fiscal balances in Canadian provinces are similar in size to those that would be observed across the United States if the federal government in both countries ran balanced budgets, even though the United States does not have an equalization program:
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Last Updated: 2006-05-02 |