Federal, Provincial Spending a Mess

Worth A Look, Public Sector, Frontier Centre

Financial arrangements between Ottawa and the provinces are in a mess and need a major overhaul, one of the country’s big banks warned yesterday.

The $4.5-billion New Democrat budget deal, new provincial health care and side deals, changes to equalization payments and a surge in program spending under Paul Martin’s Liberals have led to a crazy-quilt of programs and blurred the lines between federal and provincial responsibilities, the Bank of Nova Scotia said in a report.

The report also backed Ontario Premier Dalton McGuinty’s claim that the province is being exploited when it comes to equalization payments.

Federal program spending has been driven up 20% on a per capita basis over the past five years — the fastest pace in a quarter century — limiting room for tax cuts that could make the country more competitive, the bank said.

“By adding new layers to the core Canada Health Transfer and Social Transfer and re-engineering equalization transfers, our governments have created a system that resembles the extraordinarily convoluted contraptions made famous by Pulitzer Prize-winning cartoonist Rube Goldberg,” said chief economist Warren Jestin, referring to Mr. Goldberg’s complex devices designed to accomplish such simple tasks as sharpening a pencil.

“There is an urgent need to simplify the whole gamut of federal/provincial arrangements,” Mr. Jestin said in the report.

“While our governments have talked about reform, the process must move to the centre of the public policy agenda,” says the report, titled Federal-Provincial Fiscal Arrangements: Time to Get Back to Basics.

The bank says the first step is to decide where federal jurisdiction should end and provincial jurisdiction begin. The second step would be to streamline the system, which could in some cases lead to Ottawa vacating tax room to provide provinces and municipalities with stable, long-term access to funding.

“There aren’t many aspects of policy we don’t have both governments participating in now,” Mary Webb, co-author of the report, said in an interview.

The NDP deal, for example, funnels federal spending specifically to post-secondary education and training, affordable housing and energy conservation, areas that provinces would have funded through federal social transfers — if they so wanted.

The federal government’s daycare plan would also have been considered a provincial responsibility in the past, Ms. Webb said.

“Ontario [suffering under the strong Canadian dollar] probably wouldn’t now be going forward on daycare if it wasn’t for the federal money,” she said.

Last fall’s deal with the provinces to boost health care funding by $41-billion over 10 years sets out detailed reporting requirements and targets of waiting times. That may not be a bad thing, but previously provinces would have been able to spend the money as they saw fit.

Meanwhile, the offshore-oil-and-gas-revenue-sharing agreements with Newfoundland and Labrador and Nova Scotia have raised the issue of how non-renewable resource receipts should be treated for other provinces that have since come forward with requests of their own.

Changes to the decades-old equalization system last fall now guarantee a payment of $10.9-billion this year and an increase of 3.5% every year after that.

“That changed the premise of the program,” Ms. Webb said. Previously payments would rise and fall depending on the fortunes of the richer provinces that sent tax revenue to needier provinces.

The report also noted Ontario’s recent $5.7-billion deal with the federal government may have eased its fiscal crunch somewhat, but its net contribution to ever-rising equalization payments will remain a strain.

“[It] is being called on to help finance a considerable amount of Ottawa’s aggressive spending deal,” the report said, noting its net annual equalization outflow has swollen to well over $20-billion from relatively modest levels in the mid-1990s.

“Ironically, a number of other jurisdictions are relying on these transfers to meet their critical fiscal objectives,” the report said.

The bank suggests the government broaden the mandate of the independent panel already looking into the new equalization system to look at the whole issue of federal-provincial fiscal relations, including new tax-raising measures.

Ms. Webb suggested it be guided by one simple maxim.

“If a government has the responsibility of raising revenue, then it should be [its] responsibility for spending the revenue. The public is more easily able to understand what’s happening,” she said.

© National Post 2005