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Presentation to: XV REGIONAL SEMINAR OF FISCAL POLICY CEPAL/ECLAC, United Nations

Presentation to: XV REGIONAL SEMINAR OF FISCAL POLICY CEPAL/ECLAC, United Nations Santiago de Chile, 27-30 January 2003 ______________________ FISCAL DECENTRALIZATION IN CANADA Dr. T. Russell Robinson Ottawa Canada.

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Presentation to: XV REGIONAL SEMINAR OF FISCAL POLICY CEPAL/ECLAC, United Nations

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  1. Presentation to: XV REGIONAL SEMINAR OF FISCAL POLICY CEPAL/ECLAC, United Nations Santiago de Chile, 27-30 January 2003 ______________________ FISCAL DECENTRALIZATION IN CANADA Dr. T. Russell Robinson Ottawa Canada

  2. FORUM OF FEDERATIONS______________________________________________________ • “AN INTERNATIONAL NETWORK THAT SEEKS TO STRENGTHEN DEMOCRATIC GOVERNANCE BY PROMOTING DIALOGUE ON AND UNDERSTANDING OF THE VALUES, PRACTICES, PRINCIPLES, AND POSSIBILITIES OF FEDERALISM “ _________________________________________________________________________________ • BEGAN IN OTTAWA, CANADA, AND IN 1999 ESTABLISHED AS A PERMANENT INSTITUTION TO HELP IMPROVE THE PRACTICE OF FEDERALISM WORLDWIDE • HAS BOARD OF DIRECTORS FROM NIGERIA, INDIA, GERMANY, SWITZERLAND, BRAZIL AND CANADA, AND PARTICIPATION IS GROWING • CLEARING HOUSE FOR INFORMATION & RESOURCES ON PRACTICE OF FEDERALISM • PROVIDES POLICY & PROGRAM ASSISTANCE TO GOVERNMENTS • FOCUS ON EDUCATION, INFORMATION-SHARING, & MULTILATERAL, COMPARATIVE ACTIVITIES PLEASE CONSULT:www.forumfed.org

  3. 2 OVERVIEW OF CANADA (Date of entry into Confederation) Share of present-day population of 31.1 million (1999) 0.1% (1949) 1.8% (1898) 0.1% (1870) 0.1% (1871) 13.2% (1905) 9.7% (1867) 24.1% (1905) 3.4% (1870) 3.8% (1867) 37.8% (1873) 0.5% (1867) 3.1% (1867) 2.5%

  4. 3 DIVISION OF POWERS_______________________________ • Federal and provincial governments have independent constitutional basis of authority • (Municipalities receive their powers & responsibilities from the provincial govts) • Few / no constraints on provincial spending / taxation powers or ability to borrow • Federal and provincial govts have extensive areas of separate legislative powers • Strong executive and bureaucratic capacity at federal, provincial & municipal levels

  5. 4 CONSTITUTIONAL RESPONSIBILITIES_________________________ FEDERAL PROVINCIAL Money and Banking  International Trade  Airlines  Railways  Foreign Affairs  Defence  Employment Insurance  Pensions  Immigration  Agriculture  Industry  Education  Health  Municipal Institutions  Social Welfare  Police  Natural Resources  Highways 

  6. 5 Provincial spending pressures Federal spending pressures SPENDING AREAS & PRESSURES________________________ • Few concurrent powers (agriculture, pensions, immigration, industry) • Residual power lies with federal level • Much interdependence in practice • areas where jurisdiction is not clear or overlaps • through use of the spending power and transfers to provinces Health Care Education Social services Security and national defence Senior’s, Aboriginals R & D and Skills Transfers to Provinces (Health)

  7. 6 ACCESS TO REVENUE SOURCES______________________ Federal Provincial Personal Income Taxes  Corporate Income Taxes  Sales Taxes  Payroll Taxes  Resource Royalties  Gaming, Liquor Profits  Property Taxes  Customs Import Duties  Taxes on Non-Residents 

  8. 7 Common revenue sources Federal Provincial Personal income tax Corporate income taxSales taxesPayroll taxes Provincial-only revenue sources Federal Provincial Gambling, sale of alcoholProperty taxesNatural resource revenues Federal-only revenue sources Federal Provincial Customs tariffs and import dutiesTaxes on non-residents ACCESS TO REVENUES, CONTINUED_______________________ • Traditional tax basesare shared by Ottawa and the provinces • Provincial-only tax bases are growing • Federal-only tax basesare small and volatile

  9. 8 TAX COLLECTION AGREEMENTS_______________________ Main tax fields: • personal income tax • corporate income tax • sales tax Federal government and many provincial governments have entered into Tax Collection Agreements covering each of the three main tax fields

  10. 9 CANADIAN DECENTRALIZATION:FISCAL TRENDS_______________________________ REVENUES (% OF GDP) EXPENDITURES (% OF GDP) Provinces Provinces Federal Transfers Federal Transfers Federal Federal

  11. 10 DECENTRALIZATION: INTERNATIONAL COMPARISONS_________________________________________________ FEDERAL SHARE OF DIRECT SPENDING (1998) FEDERAL SHARE OF TAX REVENUES (1998) Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics), Inter-American Development Bank

  12. 11 CANADA’S THREE MAJOR TRANSFER PROGRAMS__________________________________________________ CANADA HEALTH AND SOCIAL TRANSFER (CHST) • Block Grant[C$ 35.7 B] • Health, PSE, social services EQUALIZATION [C$ 10.3 B] • Unconditional • Comparable services at comparable tax rates TERRITORIAL FORMULA FINANCING (TFF) • Targeted to three northern territories[C$ 1.3 B] 2002-03 VALUES

  13. 12 HORIZONTAL EQUITY AND CANADIAN FISCAL EQUALIZATION________________________ • The Government of Canada has the constitutional responsibility to reduce fiscal disparities between provinces • Post-Equalization revenue raising capacity still higher in more prosperous provinces (e.g. Alberta’s oil resources contribute to its 60% above average fiscal capacity) • Inter-provincial tax competition - smaller provinces have difficulty keeping pace

  14. 13 Post-Equalization fiscal capacity: ~ C$ 5,900 / capita, or 96% of national average HOW EQUALIZATION WORKS________________________________________ EQUALIZATION PAYMENTS PROVINCIALFISCALCAPACITY

  15. 14 CANADIAN TRANSFERS MOSTLY UNCONDITIONAL_____________________________________________________ Shared-cost/high-conditionality transfers (% of total transfers) Canada, 1945-1999

  16. 15 CANADIAN PROVINCES RELATIVELY “REVENUE INDEPENDENT”______________________________________________ Federal transfers as a % of total revenues of other levels of government INTERNATIONAL CANADIAN PROVINCES Sources: World Bank, Fiscal Decentralization Indicators, March 2001 (based on IMF’s Government Finance Statistics); Finance Canada; IADB

  17. 16 PROVINCIAL CONTROL OF REVENUES___________________________________________ Constituent units’ control over their tax bases and tax rates (% of their own-source revenue)

  18. 17 Own-source revenues as % of total provincial-local revenues 88% 87% 82% 82% 81% 70% 61% 59% 56% 22% ACCESS TO REVENUES: PROVINCIAL FISCAL AUTONOMY___________________________________________ Canada Canada, 1945-2000 International, latest available data 90 ---------------------------------------- Belgium 85 ---------------------------------------- Malaysia Germany % Switzerland 80 ---------------------------------------- U.S. India 75 ---------------------------------------- Australia Austria 70 ---------------------------------------- Spain 1945 50 55 60 65 70 75 80 85 90 95 2000 0 25 50 75 100 Year %

  19. 18 PROVINCIAL ACCESS TO REVENUES_________________________________________Federal and provincial revenues (% of GDP) All provinces Forecast Federal

  20. 19 25% 20% Federal and provincial program spending (% of GDP) 15% 10% 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 Provincial Federal PROGRAM EXPENDITURES HIGHLY CONSTRAINED

  21. 20 FISCAL RECOVERY IN LATE 1990s _________________________________________________ Federal and provincial governments fiscal balance% of GDP (1981-82 to 2001-02)

  22. 21 SUMMING UP_________________________________________________ • Comparatively speaking: Canada is a highly decentralized federation • Sub-national governments control their own revenues • Transfers are relatively minor (on average) and are mostly unconditional • Current pressures on social programs (health, education) cause demands for greater transfers (vertical balance debates) • The challenge of horizontal balance also continues, especially for poorer provinces & territories

  23. ANNEX CANADA’S TAX COLLECTION AGREEMENTS

  24. A1 TAX COLLECTION AGREEMENTS (TCAs)______________________________________ • Since 1962 joint occupancy of income tax field in a coordinated manner. • Agreements with 9 provinces and 3 territories for personal income tax. • Agreements with 7 provinces and 3 territories for corporate income tax.

  25. A2 TERMS AND CONDITIONS OF TCAs______________________________________________ • The federal government agrees to: – collect and administer provincial personal and corporate income taxes – pay provinces the value of income tax assessed, and – provide this service at very small cost • Provincial governments agree to use the federal definition of taxable income, thus ensuring a common tax base

  26. A3 ADMINSTRATION OF TCAs______________________________________ Three departments involved: • Department of Finance Canada is responsible for policy matters and for paying provinces their share of assessed income taxes • The Canada Customs and Revenue Agency collects, assesses, audits and enforces provincial legislation • The Auditor General of Canada conducts an audit annually of the tax collection account

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