NORTHERN ECONOMIST

Livio Di Matteo's Site

4 Posts with tag "transfer payments"

Northern Economist in the Free Press

Winnipeg Free Press - PRINT EDITION

Time for provinces to grow up

Posted: 07/18/2011 1:00 AM

Next week, Canada's provincial premiers will meet in Vancouver. With provincial elections looming this fall for half of them -- Saskatchewan, Manitoba, Ontario, Newfoundland and Labrador and Prince Edward Island -- one can expect little of substance occurring aside from photo ops and the perennial plea for more federal cash.

With the cash escalator of the Health Accord expiring in 2014, expect to see some manoeuvring on how to leverage more money from the federal government.

Yet, any provincial plea for more cash comes at a time when they have become the dominant fiscal tier in the Canadian federation.

In 1961, the estimated total tax revenue the provincial local sector took in -- excluding federal transfers, investment income and sales of goods and services -- was $3.8 billion, as opposed to $6.1 billion by the federal government.

By 2009, the provincial local sector was raking in $243.5 billion in tax revenue and the federal government $196.8 billion.

This represents a remarkable shift in the Canadian federal balance. Between 1961 and 2009, total provincial local tax revenues grew at a rate of 8.7 per cent annually, while those of the federal level have grown at 7.2 per cent.

The change in fortunes is also highlighted when tax revenues are compared to GDP. The federal tax revenue-to-GDP ratio fell from 14.7 per cent in 1961 to 12.9 per cent in 2009, while the equivalent ratio for the provincial local sector rose from 8.6 per cent to 18.3 per cent.

The fact is the provinces and their creatures -- the municipalities -- have become the dominant fiscal tier.

Yet, whenever the premiers gather, it is like adult children coming home to visit their parents and then quickly reverting to the grievances and behaviour of their early childhood.

Despite the fact the federal government still provides them with about 20 per cent of their total revenue and their combined tax revenues actually exceed that of the federal government, the provinces nevertheless inevitably clamour that they are the junior partners in the federation and their needs require yet more assistance.

This year's interactions between Ottawa and the provinces will likely mark a watershed. After a period of minority government, majority government is back, which means it can be assertive in terms of the direction it wishes to take the federal-provincial relationship.

There is some indication that the philosophical underpinning of the Harper government accepts the new status of the provinces and acknowledges their fiscal power as the dominant tier.

With power, however, comes responsibility, and Ottawa will likely see to it that the provinces accept more responsibility for their program expenditures, particularly in the area of social spending and health.

Based on its past actions in areas such as infrastructure and stimulus spending, the Harper government likely sees the role of the federal government not as an endless social transfer agency practising chequebook federalism but as a co-ordinator of the Canadian economic union.

The Martin government was comfortable with the role of the federal government as a social investor and it increased spending on social programs, especially health.

The Harper government seems to view the federal role more as traditional nation-building via spending on defence, Arctic sovereignty and infrastructure at both the provincial and municipal level.

In essence, the Harper government has a classical economic view, which it may increasingly apply to federal provincial relations.

In classical economic thought, the role of government is to provide a basic system of law and infrastructure for the state to enable private individuals to pursue their self-interest within a free market. Government is a night watchman.

Applied to federalism, Ottawa is the night watchman of the Canadian federation, providing a national framework of infrastructure and institutions within which the provinces will pursue their self-interest and structure their social programs. Ottawa will provide a core transfer of resources, but beyond that, the provinces will decide their own patterns of health and social spending, facilitated where possible with federal data-gathering and research to provide information.

The provinces will be treated as grown-ups who must go forth and make their own way in the world.

Livio Di Matteo is a professor of economics at Lakehead University.

Republished from the Winnipeg Free Press print edition July 18, 2011 A11

Transfer Growth: Ontario in the Lead

Being in the nation’s capital can have an exhilarating effect when it comes to fiscal matters.  It was a beautiful day in Ottawa today and I walked around the Parliament buildings before dinner and after dinner as I reflected on the Confederation Flame flickering on Parliament Hill, I began thinking about all the money that Ottawa transfers to the provinces.  Inspired, I decided to quickly download the 2010 Fiscal Reference Tables and calculated per capita provincial federal cash transfers for the last ten years as well as their percent growth.  The results were quite interesting.  There is a definite east-west gradient with the biggest per capita recipients being the four Atlantic provinces but then there is Manitoba. Indeed, Manitoba is definitely not like the other western provinces when it comes to transfers - it is more akin to the Atlantic ones.  

What is also interesting is the growth in per capita federal cash transfers over the 1999-2009 period.  The biggest growth was for Ontario – which grew 179 percent - from 511 to 1425 dollars per capita.  Next was Alberta, and then Quebec followed by British Columbia and Manitoba.  Indeed, it appears that many of the provinces are engaged in a game of federal transfer catch-up with Atlantic Canada.  Only Saskatchewan and Newfoundland exhibited muted growth over this ten year period.  With Ontario's superlative growth in transfers, it appears to have come a long way in redressing the fiscal imbalance. 

 

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Provinces face transfer cuts

Originally appeared in the Financial Post, February 14, 2011

 

60% of federal spending is now transfers of one type or another

By Livio Di Matteo

Transfer payments from Ottawa to the provinces have been a feature of the Canadian federation since 1867. Federal transfers began with the Dominion subsidies that provided the provinces with a per-capita payment that essentially acknowledged the new federal government’s stronger tax base. Since then, transfers to the provinces have grown, with the creation of Equalization in 1957 and then health transfers as a result of the Medicare Act of 1966.

Today Ottawa transfers about $56-billion to the provincial and territorial governments, the three main provincial transfer programs being the Canada Health Transfer at $27-billion, the Canada Social Transfer (for child, post-secondary education and social programs) at $12-billion and Equalization (funds for those provinces with a weaker fiscal capacity) at almost $15-billion.

Equalization payments were recently reformed with a new funding formula, but attention is now shifting to health transfers, as the generous funding provisions of the Health Accord reached in 2004 will expire in 2014. The Canada Health Transfer to the provinces has grown from $20.3- billion in 2005 to $27-billion in 2011 — an annual growth rate of nearly 6%.

Given the recent recession and the slowdown in economic growth combined with large federal deficits, the odds are high that the growth rate of these transfers will be circumscribed. However, public health spending over the last five years has grown at a rate of just over 6% annually. Needless to say, there will be a scramble to curtail health costs should health transfers not continue in a manner the provinces have grown accustomed to.

However, the situation is more complicated than that because the federal government not only transfers money to provincial governments but it also transfers money to individuals via income support programs and to bond holders via debt interest payments. Indeed, the role of the federal government over the last 50 years has morphed into a giant check-writing agency. In 2009, along with sending $56-billion to the provincial and territorial governments, it also sent $69-billion to persons (e.g. Old age security, guaranteed income supplements) and another $29-billion to Canadian bondholders as debt interest payments. As a result, almost 60% of federal expenditures is now transfers of one type or another, with the other 40% going to the provision of public goods and services that we usually associate with government. In the early 1960s, the division was the other way around.

If one looks back over the last 20 years, one sees that the share of federal spending accounted for by transfers to persons has stayed approximately constant at 25%. After declining in the 1990s, the share of federal spending going to provincial and territorial government transfers has grown from 14% to about 21%.

Meanwhile, the share of spending going towards debt service dropped from a peak of 30% in the mid-1990s to about 10% at present. The federal fiscal dividend from its balanced budget and the lowest interest rates in 40 years went to increased provincial transfer spending as well as some tax relief at the federal level. Since 1990, total federal transfers to the provinces have grown by 140% while total federal spending has only grown by 79%.

However, the federal government again has a deficit and mounting debt and debt service costs. Maintaining the growth rate of health and other transfers to the provinces at the rates of the last decade will be much more difficult if interest rates begin to spike upward. Servicing the growing debt will require either cuts to transfers or cuts to programs and services. The calculus is bleak.

Given that transfers now make up the lion’s share of federal spending, transfer reductions will also make up the lion’s share of federal spending restraint. What transfers to reduce? It won’t be debt interest unless Canada decides to make history by joining the international list of sovereign defaulters. That leaves transfers to persons and transfers to other governments.

If the federal government must choose between affecting voters directly via cuts to personal transfers or indirectly by hitting their provincial governments, then the choice is obvious. The provinces are heading towards transfer restraint.

Livio Di Matteo is professor of economics at Lakehead University.

 

The Evolution of Federal Transfers to the Provinces and Territories

The Fiscal Reference Tables of the Federal Department of Finance provide a wealth of information on not only federal but also provincial government revenue and expenditures.  Of particular interest is the series on federal transfer payments to the provincial and territorial governments.  These transfers currently consist mainly of Equalization, the Canada Health Transfer, the Canada Social Transfer and the Territorial Funding Accords.  In the early 1960s, the sum of  transfers was 642 million dollars whereas by 2009 they had grown to 56.990 billion dollars.  Whereas in 1961, federal transfers to other governments represented 8.6 percent of total federal expenditures, by 2009 they represented 20.8 percent (See Figure).  Much of the growth occurred with the expansion of health spending after the onset of Medicare in 1966.  What this means is that over a fifty-year period, federal transfers to the provinces have increased at a faster rate than other categories of federal spending.   However, there are three distinct transfer spending phases within this pattern of overall growth:(1) rapid expansion from 1961 to 1971, (2) decline from 1971 to 1997 and (3) recovery and expansion from 1997 to 2009.  These figures provide an interesting background to the coming debate over federal-provincial transfers with the expiry of the Health Accord in 2014.  This accord has expanded federal health transfers to the provinces at about six percent per year and largely accounts for the rise in the share of federal spending accounted for by transfers in 2004-05.