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CANADA 2020 Progressive Policies -- Practical Solutions NATIONAL by lifemate

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									CANADA 2020:
Progressive Policies -- Practical Solutions


    NATIONAL INTEREST/PROVINCIAL JURISDICTION
          FISCAL BALANCE TO THE RESCUE
                           by
                Thomas J Courchene
           School of Policy Studies, Queen’s
                Senior Scholar, IRPP
             tom.courchene@queensu.ca

                Presentation for the Panel
                 Fiscal Means and Needs
                Striking the Right Balance
            Mont Tremblant – June 13-15-- 2006
OUTLINE


!   Defining fiscal imbalance: horizontal and vertical;
!   21st century fiscal-balance challenge – issues in the
    national interest but in provincial jurisdiction (NI/PJ);
!   Quebec, NI/PJ, and vertical fiscal imbalance;
!   The Martin and Harper approaches to NI/PJ;
!   Equalization: the 2004 framework; The Expert Panel report;
    An alternative proposal; Are we over-equalizing?
!   Approaches to vertical fiscal balance;
!   Cities and fiscal means and needs;
!   Societal values and fiscal federalism;
!   Conclusion
 Defining Fiscal Balance: 1

VERTICAL FISCAL IMBALANCE (VFI):
! Most central governments of federal nations collect more in revenues
  than is justified by their spending responsibilities
! One reason for this is that tax bases are increasingly mobile and are
  therefore collected more efficiently higher up the jurisdictional
  hierarchy. On the other hand, with the advent of the information era
  many activities can now be devolved “closer to the people” as it were.
! This difference can be referred to as the fiscal gap
! This gap can be filled by: upward transfers of spending powers;
  downward transfers of additional tax bases or tax shares; federal-
  provincial transfers; and increasing existing taxes and decreasing
  spending at the provincial level. All have been used in Canada.
! If, after this, there still exists a difference, there then can be said to be
  a fiscal imbalance
! While I believe that there is a vertical fiscal imbalance, others do not.
! Complication: Has become a defining issue for federal political parties
Defining Fiscal Balance: 2

HORIZONTAL FISCAL IMBALANCE (HFI):
!   The Constitution states that Ottawa is committed to “the principle of
    making equalization payments to ensure that provincial governments
    have sufficient revenues to provide reasonably comparable levels of
    public services at reasonably comparable levels of taxation”
!   Equalization system in disarray while soaring energy rents are
    generating large interprovincial fiscal disparities
!   Historically, these transfers played nation-building roles:
    . In terms of vertical transfers, the conditional (shared-cost) grants of
     the 50s and 60s allowed Canada to develop the provinces’ social
     policy systems and to embed them within a national framework.
    . Equalization originated when Canada decentralized its income tax
     system (1957). The later further increases in tax decentralization that
     made Canada one of the most decentralized federations, tax-wise,
     would not have been possible without the eq’n program to spread
     the fiscal benefit to the poorer provinces. Hence, eq’n is also in the
     interests of Canada’s richer provinces
Other Roles for Fiscal Federalism:

!   Flexible and efficient intergovernmental fiscal machinery
    has played other key roles
!   Provides much of the process dimension so that
    Constitution can respond to external and domestic
    challenges, e.g., we centralized during wartime and
    decentralized later without altering the Constitution
!   The magnitude of and incentives in the system of
    intergovernmental transfers can alter the de facto division
    of powers. Eg, unconditional transfers increase provincial
    autonomy.
!   Underpins the tax collection agreements—facilitates the
    decentralized, yet harmonized, personal income tax
    system, replete with provisions to ensure the fiscal union
!   Equalization allows citizens no matter where they reside to
    access comparable level of public services and is an
    essential part of the societal glue that binds us together
If we are so creative, what is the problem?

!   Machinery is falling into disrepair
    " Thecurrent versions of Eq’n and CHT/CST maintain features dating
     back over a quarter century. Need updating and revitalizing
!   Recent policies have not helped
    " The  2004 Equalization agreement undermined some key principles of
      the program. The special deals with NL and NS left the program in
      shambles
    " The massive cuts to transfers in the 1995 budget undermined
      provincial confidence. Led to the Vertical Fiscal Imbalance mantra on
      the part of the provinces;
    " Huge energy price increases dramatically increased interprovincial
      fiscal disparities, which morphed the VFI into an HFI and set the
      provinces against each other in a classic zero-sum fashion. Hence,
      fiscal federalism is becoming divisive rather than cohesive.
!   But there is another fascinating development that is
    complicating all this—the emergence of issues that are in
    the national interest but are also in provincial jurisdiction
National Interest / Provincial Jurisdiction: 1

!   The new societal order is privileging knowledge and
    human capital in much the same way as the Industrial
    Revolution privileged physical capital
!   From Lester Thurow:
       capital is borrowable, raw materials are buyable and technology is
    " If
     copyable, what are you left with if you want to run a high wage
     economy? – only skills, there isn’t anything else!
!   Given that knowledge and human capital are critical to:
    " Competitiveness  and wealth creation
    " Enhancing living standards
    " Addressing cohesion and income distribution, it follows that

!   Ottawa has to become involved in areas like PSE, early
    child development, etc., and aspects of health because
    they are in the national interest, even though they are
    largely under provincial jurisdiction (henceforth NI/PJ)
National Interest / Provincial Jurisdiction: 2

!   Cities (especially global city regions, GCRs) have become
    the dynamic motors of the global and national economies:
    " Theare the centres of dense concentrations of human capital, R&D,
     high-value added services, which allows them to become national
     nodes in the networks that drive growth, trade and innovation.
!   From Simon Fraser’s Rick Harris:
    " Canada’s future in terms of productivity, growth and living standards
     will depend how well our GSRs will fare against US and international
     GCRs
!   Again, Ottawa has to become involved even though
    Canada’s cities are creatures of the provinces. And again a
    national-interest/provincial-jurisdiction (NI/PJ) dilemma
!   As my title indicates, addressing this challenge is
    inherently linked to fiscal balance and fiscal federalism.
!   But something else is afoot – the new global order is also
    influencing Quebec’s approach to the federation …
Quebec and the New Global Order

!   My personal speculation is that Quebec too has realized
    that the key to effective sovereignty in the information era
    lies to a significant degree in the range of powers that are
    under provincial jurisdiction
!   It was only 15 years ago that the Quebec Liberal Party’s
    Allaire Report requested a further 22 powers
!   While a Quebec nationalist/federalist government would
    not turn down additional powers, my sense is that there
    has been an important shift away from demanding more
    powers and toward demanding more revenues so that
    Quebec can more effectively exercise its existing powers
!   Hence Quebec’s insistence on redressing the Vertical
    Fiscal Imbalance, and its role in creating the Council of the
    Federation whose first priority was VFI.
!   Prime Ministers Martin and Harper have taken almost polar
    approaches to NI/PJ. …
Pursuing NI/PJ: The Paul Martin Approach

!   Prime Minister Martin’s approach to NI/PJ (national interest / provincial
    jurisdiction) can be stylized as follows
!   Employing what might be termed the federal savings power the 1995
    federal budget dramatically cut the CHST transfers, which served to
    fiscally starve the provinces
!   Because the provinces could not cut (indeed had to increase) health
    spending, they drew funds from everywhere to transfer monies into
    Medicare, creating problems across a wide range of policy areas.
!   Martin then began to restore fiscal balance by using the federal
    spending power to deal with these cash starved NI/PJ areas—human
    capital (millennium scholarships. research chairs, early childhood
    development, day care) and with cities (GST exemption, federal gas
    tax, creation of a federal ministry), and of course health. I have labeled
    this “hourglass federalism,” namely Ottawa’s end run around the
    provinces to deal directly with cities and citizens, effectively leaving
    the provinces as the squeezed middle of the division-of-powers
    hourglass.
NI/PJ: The Paul Martin Approach; 2


!   Indeed, child care, cities and health constituted three of the four
    priorities in the Martin Liberals’ Throne Speech
!   Many Canadians viewed this as an unrestrained exercise of the federal
    spending power fueled by federal surpluses. The Economist likened
    this to operating a “fiscal cafeteria”
!   But at least as many welcomed these initiatives, especially those that
    preferred more uniform programs across the provinces and therefore a
    more active federal presence.
!   This is clearly one way to redress the vertical fiscal imbalance and at
    the same time to resolve the NI/PJ
!   The message for present purposes is that this spending-power
    federalism requires a specific approach to the intergovernmental fiscal
    means and needs issue and to fiscal balance more generally
!   But Harper’s return to a more classical federalism just as clearly
    implies a much different approach to fiscal federalism
Pursuing NI/PJ: Harper’s Open Federalism

!   Prime Minister Harper’s “open federalism” from his 2005
    Quebec City campaign speech is a variant of classical
    federalism:
    "A   respect for provincial jurisdiction, i.e., to the extent that he pursues
      NI/PJ it will be to ensure that the provinces privilege these areas
    " A recognition of a VFI that he has committed to redress via one or
      more of tax-point transfers/shifts in tax fields/cash transfers
    " This will reduce Ottawa’s fiscal ability to exercise the spending
      power, which is consistent with Harper’s philosophy in any event.
    " There is a quid pro quo here to go along with greater provincial
      autonomy – perfecting the Canadian economic union, deepening the
      tax collection agreements, forcing provincial sales taxes into GST
      format, securing a national securities commission
    " Harper is committed to working with the Council of the Federation to
      improve the workings of the federation
    " Harper appears committed to work with the provinces on PSE
      (perhaps via addressing the VFI) and has promised infrastructure for
      cities but not tax transfers
Martin vs Harper and Fiscal Federalism

!   It is not my intention let alone my assigned role to delve
    further into a Martin-Harper comparison on political
    federalism.
!   It is important to note however that their approaches imply
    separate perceptions/realities relating to fiscal needs and
    means, i.e., to the issues relating to fiscal balance in the
    federation.
!   This poses a dilemma. One operating principle might be to
    seek out designs for intergovernmental fiscal architecture
    that tend to maximize the flexibility to respond to all sorts
    of challenges including philosophical swings. Yet it is
    clear that approach taken to the NI/PJ relationship will
    influence the nature of the fiscal arrangements.
!   With this caveat, I now turn to horizontal balance and
    equalization
Equalization I: The 2004 Framework

!   Fixed amount of equialization--$10.9 billion for 2005-06,
    escalated annually by 1.035, ie, by 3.5%
!   Need to define fiscal capacity, e.g., NAS100 which is the
    national average standard with 100% resource inclusion.
!   Calculation procedure to allocate the fixed total
    " Bring province with lowest fiscal capacity up to second lowest;
    " Bring both of these up to third lowest;
    " Continue until the fixed equalization pool is exhausted;
    " Thus, the equalization benchmark is endogenous.

!   Payments are unconditional and come from Ottawa.
!   No province contributes directly to the program.
!   Among the problems is that the level of equalization is
    fixed and not influenced by actual interprovincial
    disparities, such as energy related disparities
Equalization II: The Expert Panel Report
A: Structure

!   The Panel makes a significant contribution with respect to
    the machinery of equalization
!   Revitalizes, modernizes and simplifies the mechanics
!   Consolidates revenue categories from 33 to 5.
!   Redefines problematic tax bases
    " Residential   property tax base is now based on market assessment
    " Actual resource revenues will constitute the fiscal capacity for
      resources revenues which will reduce the ability of provinces and
      officials alike to “game” the system
!   Will increase transparency and public understanding
!   Payments to be made more predictable and less volatile
!   Increased reporting requirements to public
!   This was long overdue. Plaudits to the Panel!
Equalization II: The Expert Panel Report
B: Equalization Proposal

!   Equalization will be principles-based and formula driven
!   Formula will determine both total Eq’n and allocation
!   Panel opts for NAS-50 (national average standard plus 50% inclusion
    of resource revenue). Controversial because provinces tend to favour
    either 100% or zero inclusion. Rational for less than 100% is the
    principle that provinces that own resources should receive a fiscal
    benefit from them. Zero inclusion would be way too generous to
    resource provinces.
!   The choice of 50% as the compromise, but I find it acceptable
!   More controversial is their “cap”– provinces cannot receive
    equalization if they have a fiscal capacity above that of any non-
    receiving province. They assume that the definition of fiscal capacity
    for the application of the cap will be NSAS-100. This makes the cap
    confiscatory in terms of resource revenues over the relevant range.
    This guaranteed a rocky reception from premiers of SK, NL, , etc
!   I would have kept NAS-50 for the cap. The Panel may be flexible here
    since this NAS-100 cap was an operating assumption, not a principle
Equalization II: The Expert Panel Report
B: Equalization Proposal, 2

!   The Panel recommends that equalization should be the primary vehicle
    for equalizing provincial disparities
!   In the current environment, I disagree with this since, as their
    (appended) graph shows, nine of the provinces are between $6,300 and
    $6,900 per capita with Alberta soaring above all of them with a fiscal
    capacity over $11,000. This seems unacceptable for several reasons:
    " The   attempt to apply a cap to SK and NL for a small overrun seems peculiar
      if one leaves Alberta untouched
    " It is not only the optics that are problematical. I can foresee some province
      handing Medicare to Ottawa because it cannot even come close to
      replicating the services provided by Alberta, and trying to do so leaves all its
      activities cash-starved
    " The situation where energy revenues drive up equalization and Ontario
      residents have to pay 43% (its share of Ottawa’s revenues) of the increase
      because Ottawa cannot tax provincial resource revenues is inequitable
!   Nonetheless, there is no equalization proposal that would have
    attracted unanimity in the current environment. The Panel is again to
    be congratulated by offering a principled formula that faces the
    challenges directly. It now forces detractors to come up with a
    principled alternative. My attempt at an alternative follows…
An Alternative Horizontal Balance Proposal:
Integrating Equalization and the CHT/CST

!   Eisenhower once said if you can’t solve a problem, enlarge
    it. That is what my (admittedly controversial) proposal does
!   In many other federations, addressing horizontal balance
    involves some version of an equalization program as well
    as other cash transfers (eg, Australia). I suggest a similar
    approach for Canada.
!   The first part of addressing HFI would be an eq’n program.
    This would bring the poorer provinces up to some
    acceptable standard. This program could draw heavily
    from the proposal by the Expert Panel
!   The second tier would involve the CHT/CST. For 2006-07
    these transfers equal $932 per capita, except for Ontario
    with $$846 and Alberta with $740. These smaller amounts
    are the result of a limited clawback because these are high-
    income provinces for the personal income tax. This
    clawback needs to be i) expanded and ii) redesigned.
An Alternative Horizontal Balance Proposal:
Integrating Equalization and the CHT/CST: 2

!   The clawback should be calculated in terms of NAS-100
    plus equalization, it should be applied after equalization
!   The entire transfer should be eligible for clawback
!   Provinces with a per capita level of this augmented fiscal
    capacity below, say, 110% of the national average would
    get the full $932 per capita. Provinces with aggregate fiscal
    capacity in excess of 110% would lose 20 cents of the
    transfer for every dollar that their income exceeds the
    110% threshold, ie, the tax-back rate is 20%
!   If Alberta were to receive zero CHT/CST monies, this would
    be because its fiscal capacity above the 110% threshold is
    at least $4,660 per capita, -- five times the $932 value of the
    transfer.
!   The federal savings would be redeployed in equalization or
    for redressing VFI.
An Alternative Horizontal Balance Proposal:
Integrating Equalization and the CHT/CST: 3

!   There is room to alter the parameters, such as the clawback rate, the
    threshold and the amount of the transfer subject to clawback.
!   The two parts could be coordinated too. For example, if the
    equalization program were to be NAS 0% (no inclusion of resource
    revenues), then the clawback on the $932 should be something more
    like 50%, for the same reasons that the Expert Panel wanted a cap
!   While Ottawa cannot access Alberta’s resource revenues directly, it
    certainly can access them indirectly via this clawback on aggregate
    fiscal capacity. This is similar to what happens now under the CHT/CST
!   Thus, this is a negative income tax for poor provinces and a positive
    income tax for the rich provinces. We do this for citizens, why not for
    provinces?
!   There is a problem however. These transfers include funds agreed
    upon in the 2004 health accord. This may make it unacceptable.
!   Because concerns about equalization appear to be shifting toward the
    position that we are “over-equalizing,” it is important to devote some
    attention to this issue….
Over-Equalization:
Some Unpleasant Fiscal Arithmetic

!   Row 1 of the appended Table 1 contains Finance Canada 2005-06 data
    for per capita NAS100 fiscal capacity. Ontario ranks third.
!   Row 2 then adds actual equalization and row 3 adds the CHT/CST
    transfers for 2005-06, detailed earlier.
!   Row 4 is the sum of rows 1-3. Now Ontario does rank fifth. With current
    energy prices incorporated in the data, the fortunes of the top four
    provinces would much improve, while an equalization program would
    bring the 5 recipient provinces up. Ontario would remain unchanged.
!   Row 5 presents the consolidated provincial and local revenues by
    province for fiscal year 2004-05. These data are more inclusive than the
    data that go into row 4. Another big difference is that the row 5 data are
    actual revenues, not calculated revenues based on fiscal capacity.
!   The results are quite revealing. Ontario ends up last. Perhaps this is
    not that surprising since the province spends less per capita than
    many other province in many expenditure areas.
!   The real surprise is Alberta, which ends up in second place behind
    Saskatchewan. The explanation for Alberta is two-fold. First, it would
    probably be much higher in relation to the provinces were more recent
    data incorporating higher energy prices used.
Over-Equalization:
Some Unpleasant Fiscal Arithmetic 2
!   Second, Alberta has the lowest tax rates of all the provinces. But if
    Alberta does not tax an area (eg, it has no PST) and passes the savings
    on to its citizens, the eq’n formula assigns a national average tax rate
    to Alberta’s retail sales in calculating its fiscal capacity. If Quebec or
    Manitoba were to maintain low electricity prices and thus pass on the
    savings to their citizens, there is agreement that these potential rents
    should augment their fiscal capacity. But this tends not to be done,
    perhaps for measurement reasons. Yet this serves to increase
    measured fiscal capacity disparities.
!   The other approach to the over-equalization issue in Table 1 relates to
    the observation that the Constitution does not mention revenues per
    capita, but rather “reasonably comparable levels of public services.”
    But because wages and other costs of providing public services vary
    across provinces, the same level of per capita revenues will provide
    different levels of these services in different provinces.
!   Row 6 of Table 1 presents an index of average hourly wages across
    provinces and row 7 corrects the row 4 measures of aggregate fiscal
    capacity to reflect these wage costs. This is a rough and ready
    approach, one that clearly needs more detailed research. But the
    results are what one would expect: interprovincial disparities are
    reduced. Ontario comes out as the province that is able to supply the
    fewest bundles of public services
Over-Equalization:
Some Unpleasant Fiscal Arithmetic 3

!   It may be the case that Ontario is the province that needs the least
    number of these bundles. At the very least one needs to explore this
    before accepting row 7 and 8 as evidence of over-equalization
!   One might usefully recall, however, that Equalization began when trade
    flowed east-west (with Ontario as the privileged north-south conduit)
    and when our economy operated behind high tariff walls. None of this
    exists in 2006. We must maintain our east-west equity concerns, even
    more so in this knowledge era where we must strive to ensure that all
    Canadians have equality of opportunity on the human capital front. But
    we also have to keep an eye on our north-south competitive ability
!   And It is important to note that Ontario’s concern is every bit as much
    about fairness in the funding of equalization as it is about its size. The
    earlier equalization-CHT/CST proposal addresses this funding issue.
!   Nonetheless perspective is needed. As UPEI political scientist David
    Milne once noted: Intergovernmental fiscal arrangements as practice
    and principle are deeply embedded in the “political logic” or “political
    fit” of the times.
Vertical Fiscal Balance: “Uploading”

!   Intriguingly, at the 2004 meeting of the Council of the Federation the
    provinces proposed that Ottawa should take over the responsibility for
    Pharmacare
!   Ottawa said no to the offer, perhaps because it had no intention of
    saddling itself with an open-ended spending mandate. Such
    undertakings properly belong to the provinces!!
!   But it may have been a good fit, since Ottawa controls the testing and
    approving of drugs as well as the laws relating to when generic drugs
    can come on stream.
!   This example is instructive because “rationalizing” the division of
    powers seems more likely in the current time frame than in previous
    times.
!   In effect, this is what the national-interest/provincial-jurisdiction issue
    is fundamentally about, namely allowing the creative exercise of fiscal
    federalism to accommodate this NI/PJ within the existing division of
    powers or (less likely but still possible) altering the division of powers
    to reconcile NI/PJ.
Vertical Fiscal Balance: GST Transfers

!   The most likely candidate for a further tax transfer to the
    provinces is one or more points of the GST, especially if
    and when the PST/GST harmonization occurs.
!   This was the recommendation of Quebec’s commission on
    fiscal imbalance. It is also the recommendation of the
    CCCE, and many economists would also be on side.
!   The GST would seem to be the preferred tax because
    consumption is more evenly distributed across provinces
    than income (personal and corporate) and differences in
    cross-province GST rates are preferable to comparable
    differences in PIT and especially CIT rates.
!   Such a GST tax transfer could represent new funds such
    as those proposed for PSE, or it could be used to replace
    existing cash transfers for health, etc., or less likely it
    could be exchanged for control of some of the existing
    provincial shares of the income taxes, especially CIT.
Vertical Fiscal Balance: GST Transfers, continued

!   There is an intermediate approach to a new tax transfer,
    namely that Ottawa could transfer the proceeds, not the tax
    base itself to the provinces. The proceeds could be
    allocated on an equal per capita base, for example.
!   This would provide much less revenue autonomy to the
    provinces since they would not be able to alter the tax rate,
    and unless these proceeds were completely guaranteed
    (as in Australia) the provinces might still have to worry
    about Ottawa repeating its freezing, capping and cutting
    exercises in respect of the CHST. It is much more difficult
    to take back a transfer of a tax base.
!   Presumably this is why there is a quid quo pro associated
    with the Conservatives’ commitment to address VFI, since
    Ottawa might lose some leverage over the provinces. But
    the quid quo pro is important for efficiency and
    competitiveness in any event.
Cities and Fiscal Balance

!   Canadian cities, (especially the CHRs) are more transfer dependant on
    their provinces relative to other cities in federal nations. Frankfurt, in
    federal Germany, has access to 15% of the personal income tax (half
    from the centre and half from the states). And unitary state Stockholm,
    with 35% of its revenues coming from the PIT, has double the spending
    of Frankfurt.
!   Given the massive lobbying effort that the provinces have mounted for
    increasing their share of Ottawa’s revenues, it is strange that the
    provinces keep the cities on such a tight fiscal leash.
!   Cities own-source revenues come mostly from property taxes, when
    they really need access to a broad-based revenue source like the PIT
    or sales taxes (PST/GST).
!   To be sure, the cities could and should follow the route of US cities to
    rely more on user fees and/or to set up businesses for their various
    utilities
!   The related concern of the GCRs is that other levels of government
    view them is ideal places to redistribute from. What the cities want is
    the ability to retain more of the revenues that are generated within their
    boundaries.
Cities and Fiscal Balance: 2

!   While the larger cities obviously welcome the federal initiatives like the
    gas tax, they view the equal-per-capita allocation as an equalization
    program—they lose out because their per-capita shares of generating
    these revenues are larger than in the average municipality.
!   Note that this is a version of the earlier over-equalization argument.
    Public services per unit cost much more in GCRs than in smaller cities
    and arguably their needs are higher too, given the challenges of
    settling immigrants, of homelessness, and the fact that EI typically
    discriminates against GCRs
!   The provinces have much greater flexibility in privileging their GCRs
    on the revenue side than does Ottawa.
!   Therefore, unless there are changes in the constitutional position of
    cities (which may make sense since it is cities/municipalities and not
    the provinces that actually deliver many federal services), it is the
    provinces that should be pressed to provide greater access to broad-
    based revenue or the proceeds therefrom.
!    GCRs might bring pressure on their provinces by reminding them that
    federations like Germany have “city provinces” (Berlin, Hamburg,
    Bremen), which would address their needs if their provinces don’t.
Cities and Fiscal Balance: 3

!   Where Ottawa may have a larger role is in terms infrastructure funds.
    Just as Ottawa runs regional development programs, one can imagine
    mass transit programs for example that may respond to cities’ needs,
    especially since US cities can access Washington’s infrastructure
    funds.
!   In the coming years, the emphasis on subsidiarity and the decreasing
    costs of information and coordination, will likely mean that more
    powers will devolve to cities.
!   Thus, decentralization will no longer be associated with transferring
    powers from Ottawa to the provinces. Increasingly, it will mean
    transferring money and powers from both of these governmental
    levels to our cities.
!   It is a primarily a question of how, not if, our cities will become more
    formally and more fully integrated into Canadian fiscal and political
    federalism .
!   This is quintessentially a NI/PJ issue. If it is not resolved via the fiscal
    federalism route, then pressures will be directed to altering the cities
    jurisdictional status. Exciting times ahead.
Societal Values and Federalism: I

!   Proposition: The evolution of federations (including the effective
    division of powers and the nature of intergovernmental transfers) is
    not independent of the underlying social and political values of the
    society
!   To see this consider four developed federations

!   AUSTRALIA:

!   Australia is a highly centralized federation and it is a highly egalitarian
    society: Welfare is centralized with uniform levels across states;
    National wage grids apply in many sectors; The states are very
    transfer-dependent, etc. In this environment it should not be surprising
    that Australia has the most comprehensive and egalitarian equalization
    system among developed federations.
!   Thus the workings of the Australian federation mesh extremely well
    with the underlying homogeneity and the egalitarian nature its society.
Societal Values and Federalism: II

!   GERMANY
!   Germany is also centralized and egalitarian but with quite different
    institutions than those in Australia. Most laws including the tax rates
    for major revenues sources are legislated by the center but
    implemented by the Laender.

!   Their Basic Law (constitution) calls for “uniformity of living
    conditions” which is carried out in part by a generous equalization
    program including an inter-Laender revenue sharing pool. As an
    interesting aside, in the wake of the challenges associated with the
    integration of the east, the richer Laender are challenging the
    equalization system on grounds that it over-equalizes

!   Nonetheless, the operations of German fiscal federalism mesh well
    with the collective nature of German society: The second most
    egalitarian modern federation has the second most egalitarian set of
    fiscal arrangements
Societal Values and Federalism: III

!   CANADA
!   The Canadian Constitution embodies a list of exclusive provincial
    powers which, among other features, assigns to the provinces many
    of the areas that serve to define us. Beyond this there is substantial
    decentralization on both the tax and expenditure fronts. Virtually all
    transfers are unconditional. Equalization is much less
    comprehensive than in either Germany and Australia. Opting out has
    been a common feature of the federation

!   But this coincides with a society that is linguistically, legally and
    culturally diverse, even apart from the First Nations. Arguably
    Canada’s decentralization also reflects the fact that the central
    provinces (Quebec and Ontario) still have about 60% of the
    population on the one hand and that Alberta is virtually fiscally
    independent of the center by virtue of its oil wealth
Societal Values and Federalism: IIII

!   UNITED STATES
!   The rugged individualism or free enterprise nature of American society
    is reflected in the laissez-faire US constitutional rhetoric “Life, Liberty
    and the Pursuit of Happiness.” Income distribution at any point in time
    is not a major feature of US society. Therefore, it is not surprising that
    this should also apply to the states. Indeed, alone among modern
    federations the US does not have a formula-based equalization
    program.
!   SUMMARY
!   Intergovernmental transfer arrangements and the
    allocation of fiscal needs and means are anything but
    arbitrary. They complement the existing tax and
    expenditure allocation in a manner that integrates overall
    fiscal federalism in directions consistent with the implicit
    or explicit values and norms of the respective federal
    systems and societies.
!   Thus we need made-in-Canada models
CONCLUSION

In my book A State of Minds: Toward a Human Capital Future
   for Canadians (IRPP,2001) I propose the following Mission
   Statement for 21st century Canada:

          Design a sustainable, socially inclusive and
        internationally competitive infrastructure that
         ensures equal opportunity for all Canadians
      to develop, to enhance and to employ in Canada
       their skills and human capital thereby enabling
              them to become full citizens in the
       information-era Canadian and global societies

Included as a component of the Mission Statement would be
   a bill of human capital rights for our children (similar to
   Tom Kent’s Youth Charter)
I respectfully submit that that this would qualify as a
   “Progressive Value” in the Canada 2020 context.
CONCLUSION          continued


!   The implementation challenge is to embed this (or any
    other chosen goal) within the constitutional, social, cultural
    and moral values that define Canada and Canadians
!   This means striking acceptable balances across a broad
    range of fronts – between equity and efficiency, markets
    and governments, uniformity and diversity, centralization
    and decentralization, and of course federal and provincial.
!   The cohesive process dimension that will make this
    operational is striking the right balance between fiscal
    means and needs, both intergovernmentally and between
    governments and citizens.
!   We have been there before. It is time to draw on our
    demonstrated mastery of the art of federalism
!   If there is a societal will, there certainly is a Canadian way
References

								
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