Winnipeg, 14 November 2012: The Frontier Centre has released a study today entitled Strengthening Fiscal Responsibility Through Decentralization. The author of the paper is Steve Lafleur, a policy analyst with the Frontier Centre.
The study examines the current division of spending between the three levels of government, and finds that the federal government has over the years undermined political accountability by overstepping its constitutional boundaries. In turn, provincial governments have done their part to weaken accountability by intervening routinely in municipal matters. The worst examples are when all three levels of government are involved in the same infrastructure project. Rather than shuffling money freely between the three levels of government, the study recommends that spending and revenue generation powers be more clearly divided between the federal, provincial, and municipal governments.
The report finds that while the majority of government spending occurs in areas of provincial jurisdiction, the provinces only control just over 40 per cent of government spending, while the federal government controls over 43 per cent. Although this imbalance may not seem all that steep, nearly two thirds of government expenditures are spent on health, education, and social services alone (all of which are provincial matters). Municipalities control less than 16 per cent of government spending, yet municipal governments undertake most of the government functions that affect our day to day lives.
There are two ways to fix this imbalance. The first is to transfer money from upper to lower levels of government. That is the current approach. However, simply transferring money from one level of government to another severs the direct link between taxation and expenditures. This makes it more difficult for voters in local jurisdictions to judge whether their money is being spent wisely. Moreover, having more than one level of government involved in a policy area weakens accountability and obfuscates from other policy areas by allowing one level of government to blame the other when things go wrong. For instance, it means that the premiers can blame the federal government for shortcomings in the healthcare system, and vice versa without having to present effective solutions. The fact that healthcare is one of the biggest spending areas at the federal and provincial levels also distracts voters from other questions.
The second way to fix the imbalance is for the federal government to terminate direct spending in municipal and provincial policy areas (with rare exceptions), and terminate most fiscal transfers. This approach would shrink federal spending by roughly one third of current levels, bringing about the lowering of federal taxes. The provinces would then have to increase their own taxes in order to fund the shortfall. The same logic should be applied to the relationship between provinces and municipalities.
The two transfers from the federal government that should remain are a transfer of the gas tax to the provinces on a per capita basis, and a transfer of GST revenue to the provinces on a per capita basis. Each of these measures would provide stable funding, and provide a degree of fiscal equalization without the perverse incentives created by the federal equalization program we currently have, which rewards poorly-performing jurisdictions.
While the entire proposal is unlikely to be adopted in the near future, the study offers guiding principles for how to create fiscal balance in Canada.
Download a copy of Strengthening Fiscal Responsibility Through Decentralization here.
For more information, and to arrange an interview with the author, media (only) should contact:
Frontier Centre for Public Policy
Tel: (204) 957-1567 ext. 104
Cell: (204) 228-5599