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Ottawa, October 4, 1995
1995-077
Federal and Territorial Finance Ministers Agree to Renew Formula Financing: New Incentive for Economic Development Introduced
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David Walker, Parliamentary Secretary to the Minister of Finance and Ethel Blondin-Andrew, Secretary of State, Training and Youth, on behalf of Finance Minister Paul Martin, with Yukon Government Finance Minister John Ostashek, and Government of the Northwest Territories Finance Minister John D. Pollard, announced today that they have agreed to renew the Territorial Formula Financing Agreements for four years. Federal transfers to the territories, under these agreements, are the principal source of revenues for territorial governments.
A key feature of the new agreements will be a new incentive for territorial governments to promote economic activity in their regions. The three Finance Ministers agreed that the new economic development incentive is an important innovation in Formula Financing. Increased economic development will lead to greater territorial self-sufficiency and will benefit all parties concerned -- governments and citizens alike.
Mr. Martin noted the important role played by Mr. Walker in bringing the agreements to fruition.
The new agreements will retain the basic structure of the previous formula for the territorial governments. In addition, they will respect the fiscal limits imposed on Territorial Formula Financing in the 1995 federal budget.
The effective period of the agreements will be from April 1, 1995 to April 1, 1999. The detailed drafting of the agreements is expected to be finalized by the end of this year.
The attached backgrounder provides more information on Territorial Formula Financing and the new economic development incentive.
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For further information:
Frank Gregg
Federal-Provincial Relations Division
Department of Finance
Government of Canada
(613) 992-1731
Jean Guertin
Fiscal Policy
Department of Finance
Government of Northwest Territories
(403) 920-6374
Léo Chassé
Budget and Fiscal Relations
Department of Finance
Government of Yukon
(403) 667-5274
Territorial Formula Financing Backgrounder
Territorial Formula Financing is an annual transfer from the federal government to territorial governments - in 1995-96 the Northwest Territories (NWT) will receive an estimated $875 million and Yukon Territory $290 million.
This transfer is the principal source of revenues for territorial governments - it accounts for roughly 70 per cent of revenues for the NWT and around 60 per cent of revenues for Yukon. Territorial governments also currently receive transfers under Established Programs Financing and the Canada Assistance Plan and will receive the Canada Health and Social Transfer (CHST) announced in the 1995 federal budget.
Territorial Formula Financing is based on a formula which takes into account both the expenditure needs and the revenue means of territorial governments.
Territorial Formula Financing was introduced in 1985-86, replacing a system of annual grants negotiated by federal and territorial governments. The introduction of Formula Financing supported the evolution of accountable and responsible government in the North by making territorial governments responsible to their electorates, rather than the federal government, for their fiscal decisions.
The 1995 federal budget announced two measures for Territorial Formula Financing: a freeze in 1995-96 entitlements at 1994-95 levels; and, a 5-per-cent reduction in the 1996-97 Gross Expenditure Base (an input into the Formula). Territorial Formula Financing will resume growth after 1996-97.
Territorial Formula Financing is governed by agreements between federal and territorial Finance Ministers. Federal and territorial Finance Ministers have agreed to renew these agreements for four years. The new agreements will expire on April 1, 1999 to coincide with the creation of Nunavut.
A key feature of the new Territorial Formula Financing agreements will be a new fiscal incentive for territorial governments to promote economic growth in their regions.
- Under Formula Financing, when a territory's revenue capacity increases as a result of economic expansion, it becomes more self-sufficient and its grant from the federal government declines.
- With the new economic development incentive, as a territory's revenues increase, its federal grant will decline by 20 per cent less than previously. Thus, territorial governments will have additional incentive to successfully promote economic development.
The impact of the economic development incentive on government revenues will depend on the amount of economic growth it generates. Governments and northerners are all expected to benefit:
- territorial governments will benefit from higher total territorial revenues;
- the federal government will benefit from lower territorial dependence on federal grants; and
- northerners will benefit from additional job creation and a more diversified economy.
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