“Fiscal imbalance” caused by interprovincial tax competition--study

July 11, 2006

OTTAWA—The largest contributor to the so-called fiscal imbalance, is interprovincial tax cut competition—not federal cuts in transfer payments, says a study released today by the Canadian Centre for Policy Alternatives.

The study, by CCPA Research Associate Hugh Mackenzie, shows that federal cuts in transfers to the provinces had little real impact on provincial finances as most of the cuts were simply passed on to local governments.

"If there is a true fiscal imbalance anywhere in Canada, it is between local governments and the two 'senior' levels of government,” Mackenzie says. “The fiscal problems faced by local governments are acute and growing.”

The study looks at historical data between 1961 and 2005 and finds that, contrary to popular belief, federal transfers were not responsible for the growth in the Canadian public economy. Instead, it can be attributed to the willingness of provincial governments to tax their citizens to pay for improved public services.

These conclusions have significant implications for the current debate over fiscal federalism and fiscal imbalance. Most importantly, the study points to the need to address the issue of tax competition among provinces.

“Without action to support efforts to defend provincial tax bases, none of the current suggestions for change will resolve the mismatch between revenue raising capacity and public services needs that lies at the heart of the debate,” Mackenzie says. “Simply to call for increased federal transfers, as the Council of the Federation has, misses the point. Tax point transfers from the federal government to the provinces, as proposed by the Canadian Council of Chief Executives, are virtually guaranteed to make the situation worse.”

In addition to adding to the calls for putting highly mobile tax bases under federal jurisdiction, the study makes two new recommendations for change:

  1. the introduction of an interprovincial tax treaty that would limit tax competition among the provinces; and/or
  2. the establishment of national “umbrella taxes” which would protect provincial tax room by allowing the deduction of pre-determined levels of provincial taxes from federal taxes payable.

Mackenzie calls for a renewed approach to equalization that ensures all Canadians have access to an acceptable standard of public services.

The paper also introduces the concept of “national political projects” as a framework for developing new and contextually appropriate roles for the federal government. Examples include broadening the federal government"s role in income security; establishing a national prescription program; and using the federal government’s natural advantages in borrowing costs and risk pooling to create a national infrastructure financing agency.


The Art of the Impossible: Fiscal Federalism and Fiscal Balance in Canada is available on the CCPA web site: http://www.policyalternatives.ca

For more information contact Kerri-Anne Finn, CCPA Communications Officer, at 613-563-1341 x306.