financing multilevel governments:a canadian’s perspective by françois vaillancourt economics...

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

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Financing multilevel governments:A Canadian’s

perspectiveby

François Vaillancourt

Economics department

Université de Montréal

Financing multilevel governments: A Canadian’s perspective-Outline

• Environment and Challenges to federations

• Sharing own resources

• Sharing central resources

• Sharing the debt field

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

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:Canada Sovereignty threat from Québec: latent but still potent(40-45%)

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

Example of Impact MatrixRegion challenge

Climate change/Kyoto

Ageing NAFTA+$ Resources

Atlantic 0 _ 0 + and -

Québec +(electricity)

_ - -

Ontario 0 0 -- -

West Alberta:- +Alberta + + (Man)

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,

Challenges medium term fiscal

010203040506070

1990 1995 2000 2005

Federal government and provincial debt,Canada, 4 years, %GDP

ExpendituresRevenuesDebt fedDebt prov

Challenges: medium term fiscal-1

9,4

16,5

26

11,616

25,5

9,4

22,329,4

12,4

27,2

40,8

0

10

20

30

40

50

95-96 98-99 2003-2004 2005-2006

Federal transfers,canada ,4 years, Billion$( nominal-24% inflation 95-05)

equalisationCHSTtotal

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

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

Sharing own resources

• Two key criteria– Immobility of tax bases– Autonomy at the margin of SN

So CIT =>central, PIT=> SN and VAT=> ?

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

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?

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

Sharing central resources-Issues

• What government

• What funding

• How much funding

• How to share it

Sharing central resources-H or V

What government:Vertical/ horizontal transfers

• Horizontal :German inter Lander transfers remain the exception;

• Vertical: Australia/ Canada more common

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

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

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

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

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

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

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

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

Sharing central resources-how much

• Equalisation

• CF Pool set using: – Ten province standard – 100% inclusion of natural resource revenues in

base– Scaling factor negotiated

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

Sharing central resources-shared how

• Distribution between SN –General indicator

• Fiscal capacity –RTS

+ or without

• Expenditure RES– Costs (topography,.. or needs(population

characteristics)

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

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

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

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!

Conclusion

• Never import institutions blindly ;each country is unique

• Incentives matter and are universal

• Formulas are nice but results matter