Financing multilevel governments:A Canadian’s perspective

1. Financing multilevel governments:A Canadian’s perspective by François Vaillancourt Economics department Université de Montréal

2. Financing multilevel governments: A Canadian’s perspective-Outline • Environment and Challenges to federations • Sharing own resources • Sharing central resources • Sharing the debt field

3. Environment- structural/Canada • Number of entities:10 provinces ,3 territories, N aboriginal • Physical size /Distances Large: 5.5 time zones • Political size:Important difference in population 1-100 and size 1-150 between provinces • Economic size: Important différences in per capita by provinces (GDP) 1-2 • Spatial heterogeneity: Majority of francophones in Québec

4. Challenges-structural • Climate change :Canada uneven impact linked to distribution of oil and gas resources • Demography : Canada Ageing of population: Canada uneven impact due to internal migration + international migrants • Political:CanadaSovereignty threat from Québec: latent but still potent(40-45%)

5. Challenges-structural • Political :Centralize or decentralize too much: Canada Federal Spending Power • Economic External Globalisation:Canada NAFTA + $: uneven regional distribution • Economic:fixed resources Canada Oil and gas resources revenues :provincial royalties uneven distribution

6. Example of Impact Matrix

7. Challenges medium term • Who can finance: fiscal constraints • Financing to respect or modify fields of competencies/behaviour? • Canadian spending power or Eve’s apple • American multilevel transferS • Unfunded mandates • Budgetary games: trust funds,

8. Challenges medium term fiscal

9. Challenges: medium term fiscal-1

10. Challenges –short term • Ideas or debates Séguin report on fiscal disequilibrium 03/02 • Politics Federal minorities(L: 06/04- 01/06+C:01/06-) • L:Set equalisation by indexed total(10/04) • L:Exclude resources for Nfld (flags!) (02/05) • C:solve fiscal disequilibrium for québec votes • Politics: Provincial strenght

11. Responses:Canadian Challenges- No action but reports • 3/03/2006: Council of Federation report CF Reconciling the Irreconcilable Addressing Canada’s Fiscal imbalance • 6/06/2006:Federal government report FG Achieving a National Purpose Putting Equalisation back on track

12. Sharing own resources • Two key criteria • Immobility of tax bases • Autonomy at the margin of SN So CIT =>central, PIT=> SN and VAT=> ?

13. Sharing own resources 2 • Canadian /Swiss / USA tax autonomy is unususal • Australian/ German consensual or constitutional/legal uniformity • Scottish or Spanish timidity • Spanish use of PIT autonomy to benefit groups also observed in Canada

14. Sharing own resources 3 • Sharing on formula basis(population) is not taxation • Sharing on derivation basis often neglects incidence(customs duties,excises,CIT) • Is public consumption occurring where taxes are paid?

15. Sharing own resources 4 • Canada: discussion of transfer of federal VAT to provinces (drop in rate) Provinces could occupy vacated fiscal space • Australia: creation of VAT as replacement source of state grants • Spain: Catalan autonomy

16. Sharing central resources-Issues • What government • What funding • How much funding • How to share it

17. Sharing central resources-H or V What government:Vertical/ horizontal transfers • Horizontal :German inter Lander transfers remain the exception; • Vertical: Australia/ Canada more common

18. Sharing central resources-H orV-2 • Sharing of profits from central organisations:Central banks in Switzerland and Tanzania • Importance of transfers to individuals from central government=>create tax base for SN

19. Sharing central resources-H or V -3 • Note that Inter regional accounting often raised in Canada • In the past sovereignty debate; • Currently by Ontario GDP flows • Issues of borders, incidence, transfers to individuals, tax expenditures, price/quantity

20. Sharing central resources financed by What source of funds • General revenues • Subset of one or more specific revenue And • Annual setting of amount by central G • Multi year formula

21. Sharing central resources-financed by • Canada :All federal revenues are implicitely included: PIT,CIT,GST/VAT No natural resources royalties • Australia: VAT is source of equalisation while SPP are funded from general revenues

22. Sharing central resources-How much • Replacement of past autonomous amounts: • Evolution issue(France TIPP)/ comparisons to past/ link to spending(social-France) • Budget balancing :disincentives on spending and revenues • Collections:in/dis-incentives to collect –depends on design • Needs :evolution issues

23. Sharing central resources-How much-2 Canada:Equalisation • pre 2004 RTS formula five province standard(implicit exclusion of oil and gas) • Since 2004 five year agreement for equalisation with indexation of fixed amount • Canada Health+Social: Numerous changes in 1999-2004 =>Per capita +indexation • Canada Territories:Needs Barnett formula like

24. Sharing central resources-how much-3 • Australia • VAT(GST) revenue for equalisation • Budget Balancing Assistance for abolished state taxes linked to VAT • Commonwealth decision/conditions for SPP for health and education from general revenues

25. Sharing central resources-how much-4 • Proposals in reports CHST • CF • Maintain CHT amount and indexation 6% • Increase CST amount by 4.9 billion to correct underfunding(1994-1995 standard) and inflation and Index CST 4.5% • FG Nothing

26. Sharing central resources-how much • Equalisation • CF Pool set using: • Ten province standard • 100% inclusion of natural resource revenues in base • Scaling factor negotiated

27. Sharing central resources-how much • FG Pool set using • Ten province standard • 50 % inclusion of natural resource revenues in base • A cap by province:no receiving province can have a higher fiscal capacity than the poorest non receiving province

28. Sharing central resources-shared how • Distribution between SN –General indicator • Fiscal capacity –RTS + or without • Expenditure RES • Costs (topography,.. or needs(population characteristics)

29. Sharing central resources-shared how • Canada RTS modified • Australia RTS+RES • Proposals in reports • CF • Explicit rejection of RES:complexity and incentives • Explicit rejection of macro indicators

30. Canadian proposals:other elements • GF makes specific recommendations on various items.We note: • No CGG type body; provide more information • CF and GF recommend use of 3-year moving average lagged 2 years

31. Access to debt • No constraints in Australia, Canada or USA • Is Maastrich 3%/60% necessary or are there self correcting mechanisms? • Such borrowing constraints (on SNG) are common in developing countries

32. A word on Fiscal disequilibrium • Predicted spending VS predicted revenues with Unchanged behaviour :does it make sense with fiscal autonomy? • Raise rates • Cut spending • Raid on open treasury!

33. Conclusion • Never import institutions blindly ;each country is unique • Incentives matter and are universal • Formulas are nice but results matter