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Chapter 1:
Introduction

"This new government will take a new approach. 
It is committed to building a better federation in which governments come together to help Canadians realize their potential. To this end, the Government will respond to concerns about the fiscal imbalance and will work to ensure fiscal arrangements in which all governments have access to the resources they need to meet their responsibilities."

Speech from the Throne
April 4, 2006

Cooperation and collaboration between the Government of Canada and the provinces and territories have been critical to the development of the Canadian federation. Federal, provincial, territorial and municipal governments, working together, have created a network of programs covering health, education, social services, infrastructure, justice and a range of economic and social policies designed both to improve the quality of life of Canadians and to enhance the economic performance of the country.

Fiscal arrangements underpin the relationship between governments. They support the achievement of shared national objectives, reduce interprovincial disparities and provide territories with funding in recognition of the unique challenges of Canada’s North.

Debates over fiscal arrangements in Canada are not new. As discussed in Annex 1, many of the debates of the past focused on challenges that continue to this day—especially the need to continually adapt to changes in fiscal balance that result from evolving circumstances and the changes in the roles and responsibilities of governments that accompany them.

Key issues of past debates—the need to address fiscal disparities among provinces and territories; the need for accountability and transparency, as well as clarity in roles and responsibilities; the need for tax harmonization and other forms of intergovernmental collaboration—also continue to resonate today. In addition, new issues have arisen in recent years, including how to deal with substantial unplanned federal surpluses and the challenges facing municipalities.

Major Concerns

Chapters 2 to 5 set out four major sets of concerns that are the focus of the current debate:

• Chapter 2 describes how large, unplanned federal surpluses have given rise to concerns that federal budgeting has not been sufficiently transparent.

• Chapter 3 describes how the federal government, since recording surpluses, has undertaken significant new spending initiatives in areas of provincial responsibility—while it has neglected some of its core areas of responsibility—leading to concerns about blurred accountability and reduced clarity with respect to roles and responsibilities of each order of government.

• Chapter 4 describes how the federal government cut transfers to provinces and territories in order to get its fiscal house in order in the mid-1990s, and then made significant investments that restored overall transfers. But concerns remain that some transfers have not yet been put on a principle-based, predictable, long-term track. Controversy also surrounds the use of federal transfers to address specific regional needs.

• Chapter 5 describes the need for both orders of government—separately and working together—to do more to enhance the efficiency and competitiveness of the economic union.

The New Approach

Chapter 6 sets out the Government’s approach for following through on the commitment made in the Speech from the Throne on April 4, 2006, to address concerns over the fiscal imbalance. The Government’s approach is based on five principles:

• Accountability through clarity of roles and responsibilities.

• Fiscal responsibility and budget transparency.

• Predictable, long-term fiscal arrangements.

• A competitive and efficient economic union.

• Effective collaborative management of the federation.

Consistent with these five principles, the new government is proposing immediate actions in Budget 2006, and is committing to further action in the coming year after discussions with provinces and territories.

The Government is also proposing to consult Canadians, provinces and territories, academics and other stakeholders on additional ideas for further improving fiscal relations in Canada.

Moving Ahead

Chapter 7 lays out a process of consultations to follow through on the Government’s commitment to restore fiscal balance in Canada.