Provinces Should Fund More of Their Own Programs Rather than Increasing Reliance on Federal Transfers - C.D. Howe Institute

Jul 14, 2015, 11:10 ET from C.D. Howe Institute

TORONTO, July 14, 2015 /CNW/ - Spending control and greater reliance on their own revenues are more promising responses to provincial budget pressures than higher federal transfers, according to a new report released today by the C.D. Howe Institute. In "Adaptability, Accountability and Sustainability: Intergovernmental Fiscal Arrangements in Canada," authors William Robson and Alexandre Laurin foresee demographic stresses on provincial government budgets, but argue that more federal money will undermine accountability and forestall needed reforms.

"Central governments in federations typically raise more than they need to fund the programs they provide directly, and sub-central governments typically raise less than they need, but in Canada, the gaps have grown troublingly large," notes Robson. "If provincial governments are too reliant on federal money, the key principle that governments in a federation are sovereign in their respective spheres gets strained," he adds.

The report notes that intergovernmental transfers can address spillovers among provinces, redistribute incomes regionally to achieve certain standards of public services and other programs across the country, and mitigate interprovincial migration. It argues, however, that Canada's past and present transfers do not consistently reflect these purposes. On the downside, the report notes the potential of federal transfers to undermine accountability and induce unsustainable fiscal policies, and argues that Canadians should not assume that expanding transfers further will have good effects.

Looking ahead, the report argues that responding effectively to upward pressure on provincial budgets, particularly health-related spending, will require a mix of tax increases and spending restraint from provinces, and ideally some partial prefunding of programs such as pharmacare and long-term care.

"Such reforms are likelier if the federal government limits growth in intergovernmental transfers, and reduces its tax take, in consumption taxes for example, so as to make more tax room available to the provinces," notes Laurin. "Provinces should fund their own spending increases, and be accountable for it," conclude the authors.

For the report go to:

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SOURCE C.D. Howe Institute