Phony “fiscal imbalance” being used to undermine federalism, says study

May 25, 2006

OTTAWA—A new study from the Canadian Centre for Policy Alternatives warns that solving the alleged “fiscal imbalance” runs the risk of becoming a downsizing exercise for the federal government.

The study, authored by CCPA Senior Economist Marc Lee, breaks the “fiscal imbalance” code. Different definitions of the term “fiscal imbalance,” in a context of federal-provincial fights over cash and partisan politics, have muddied the waters of the debate.

“The term ‘fiscal imbalance’ is a loaded one,” says Lee. “It is a pejorative term that implies that balance must be restored. But a careful look at Canadian history and other federations worldwide suggests that Canada does not have deep structural problems that need to be fixed.”

To date, the issue has revolved around provinces seeking more money from Ottawa. The report warns that, in its current incarnation, more radical decentralization measures could be put on the table due to pressure from influential lobby groups, like the Canadian Council of Chief Executives.

“Missing from the story is tax cuts and tax competition,” Lee adds. “Provincial governments undercut their fiscal positions through tax cuts over the past decade. The decentralization push hinges around deep federal tax cuts to pay for the elimination of federal transfers for health care, post-secondary education and social welfare.”

To maintain public services, provinces would then have to raise their own taxes. Lee argues that this is a mirage because of provincial tax competition, and that the result would be greater regional inequality in Canada. Smaller and poorer provinces would be the losers because they would have to raise their taxes much more to provide public services equivalent to richer provinces.

While the federal government has not made its position clear, Prime Minister Harper is sympathetic to decentralization.

“Canada is already one of the most decentralized countries in the world,” says Lee. “With the small-government Conservatives seeking to appease separatists in Quebec, the ingredients are on the table for a major restructuring of the Canadian federation. The result may be a social fabric that is unrecognizable and greatly frayed.”

Rather than decentralization, the study recommends uploading to the federal government some provincial responsibilities that would benefit from a national approach. These could include Pharmacare, social assistance, and labour market training. If current levels of transfers to the provinces are maintained, uploading would provide a windfall to the provinces that could be used to reinvest in other provincial programs.

“The current federal approach risks neglecting two real imbalances that need to be addressed,” Lee concludes. “The first is ‘the Alberta problem’, or what to do about revenue-raising imbalances among the provinces arising from resource royalties. The second is the imbalance between both senior levels of government and Canada’s cities.”


Tax Cuts and the “Fiscal Imbalance” is available from the CCPA web site:

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

Attached Documents: