PRB 06-39E
FEDERAL GOVERNMENT FINANCES:
AN EXAMINATION OF FEDERAL REVENUES AND
EXPENDITURES IN THE PROVINCES
Michael Holden
Economics Division
14 February 2007
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TABLE OF CONTENTS
Page
INTRODUCTION .................................................................................................................
1
OVERVIEW OF FEDERAL REVENUES AND EXPENDITURES...................................
2
FEDERAL GOVERNMENT REVENUES BY PROVINCE ...............................................
5
A. Overview.......................................................................................................................
5
B. Revenue Collection by Province ...................................................................................
6
C. Trends in Revenue Growth ...........................................................................................
8
FEDERAL GOVERNMENT EXPENDITURES BY PROVINCE ......................................
9
A. Net Expenditures on Goods and Services .....................................................................
11
B. Federal Transfers to Persons .........................................................................................
13
C. Federal Transfers to Provinces......................................................................................
16
D. Federal Interest Payments on the National Debt...........................................................
18
CONCLUSION......................................................................................................................
20
FEDERAL GOVERNMENT FINANCES:
AN EXAMINATION OF FEDERAL REVENUES AND
EXPENDITURES IN THE PROVINCES
INTRODUCTION
In the realm of federal-provincial relations, a considerable amount of time is spent
debating the appropriate distribution of federal revenues and expenditures in the provinces. It is
common to see analysts and commentators compare the value of federal revenues collected from
within each province with the total value of federal spending in each. The objective of these
analyses is to determine through this narrow focus whether or not provinces “gain” or “lose” by
being part of Canada.
For these analysts, the test of whether or not a province benefits from
federal revenues and expenditures rests more or less solely on the notion of net expenditures. If
federal revenues collected exceed federal expenditures in a given province, then that province is
said to be a net contributor to the federation because more federal money is flowing out than in.
Conversely, if federal expenditures exceed revenues in any given province, that province is said
to be a net beneficiary, because more federal money is flowing in than out.
Varying levels of economic prosperity, resource endowments, and strategic
considerations make it inevitable that certain parts of a country – be they cities, regions or
provinces – will benefit more from net federal spending than will other parts of the country.
Indeed, if the federal government in Canada matched each dollar of revenue collected in a
province with a dollar of spending, that level of government would be largely redundant; the
provinces themselves already do just that. Given that some redistribution – whether implicit or
explicit – is necessary, and even desirable, in a federal country, the issue becomes one of degree:
what level of redistribution is necessary, desirable or fair?
The answer to this question is clearly subjective. Some provinces have argued
that their net contribution to the federation is too high. The Ontario government’s campaign
highlighting its “$23-billion gap” is a recent high-profile example, although some in Alberta also
believe that the net flow of tax revenues out of their province is excessive. At the same time,
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however, some provinces that are net beneficiaries of federal spending argue that they do not
receive enough support from the federal government. Recent debates over the generosity and
distribution of the Equalization Program illustrate this point.
What is often missing in this debate is not only a clear sense of the sources and
disposition of federal revenues, but also an explanation of why it is that comparatively more
revenue is collected in certain provinces and comparatively more is spent in others. To some
degree, of course, the explanation is obvious: the federal government collects more revenue in
some provinces because they are richer and have stronger economies generating higher tax
revenues; and it spends more in others because they are poorer, with weaker economic activity
and lower tax revenues.
To leave the analysis at that, however, greatly oversimplifies the situation.
Differences in wealth across the provinces offer, first of all, only a partial explanation of the
redistributive effects of net federal spending. Secondly, and more importantly, much of what is
interpreted as an interprovincial redistribution of wealth is, in fact, an interpersonal redistribution –
an implicit transfer from richer Canadians to poorer Canadians – independent of provincial
boundaries.
This paper provides a detailed overview of federal revenues and expenditures in
the provinces, including an examination of the different revenue sources and types of federal
spending by province. Unlike other analyses, which focus solely on where the money comes
from and where it goes, this paper looks more closely at the reasons federal revenues and major
categories of expenditure are greater in some provinces than in others.
OVERVIEW OF FEDERAL REVENUES AND EXPENDITURES
In 2004, the most recent year for which these data are available, the federal
government collected revenues from Canadians averaging $6,254 per person and made
expenditures averaging $6,082 per person (see Figure 1).( 1 ) In real terms, these figures are
consistent with the federal record in recent years; there has been little movement in either
revenues or expenditures since 1997. Real per capita expenditures, in particular, have been flat
since that year, following a significant decline in the mid-1990s when the federal government
was cutting spending in order to eliminate the deficit. Real per capita revenues, for their part,
grew strongly in the second half of the 1990s, but have since fallen back somewhat, due to a
combination of tax cuts and slower economic growth early in the decade.
(1)
All figures in this paper, unless otherwise specified, refer to per capita dollars. All data are from
Statistics Canada’s Provincial Economic Accounts.
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Figure 1 – Real Per Capita Federal
Revenues and Expenditures
7,500
7,000
6,500
6,000
5,500
5,000
4,500
4,000
3,500
3,000
in 2004 $
Total expenditures
Total revenues
1981
1984
1987
1990
1993
1996
1999
2002
Source: Author’s calculations using Statistics Canada data.
While overall federal revenues and expenditures have been relatively steady in
recent years, that consistency masks considerable variation across the provinces. Figure 2
provides an overview of per capita federal revenues and expenditures by province in 2004. That
year, revenues exceeded expenditures in three provinces – Alberta, Ontario and British Columbia.
In the case of Alberta and Ontario, the gap is significant. The federal government collected an
average of $7,864 per person in Alberta, while spending an average of $5,101. In Ontario, the
difference was not as large – $6,961 in revenues and $5,268 in expenditures.
Figure 2 – Per Capita Federal Revenues
and Expenditures by Province, 2004
12,000 $
10,000
8,000
6,000
4,000
2,000
Revenues
Expenditures
0
Can NF PEI NS NB QC ON MB SK AB BC
Source: Author’s calculations using Statistics Canada data.
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In all other provinces, the federal government spent more than it collected. In
most cases, the difference between the two was considerable.
The largest gap was in
Prince Edward Island, where federal per capita revenues averaged $5,208, compared to $10,315
in spending. Quebec was the only province where the margin by which federal spending
surpassed revenues was modest. It is worth noting that per capita federal expenditures are lowest
in the four most populous provinces.
It is also important to note that, as shown in Figure 2, federal revenues exceeded
expenditures for Canada as a whole in 2004. Because there was a federal surplus that year, total
revenues collected in the provinces and territories exceeded total expenditures. Indeed, federal
revenues collected in the provinces and territories equal expenditures only when the federal
budget is balanced. This fact implies that, when focusing on a specific province, data on federal
revenues and expenditures do not give a complete picture of the extent to which that province
benefits from, or pays into, confederation. When the federal government does not spend all that
it collects, there is an effective net transfer of funds out of all provinces to the federal
government and territories.
Because federal surpluses are not large compared to the overall budget, this issue
is not significant today. In the past, however, large federal deficits have had a notable effect on
the balance of net federal expenditures. When the federal government is in deficit, it collects
taxes and borrows money, spending the total – less certain foreign expenditures – in the
provinces and territories. Thus, in a deficit situation, the total amount spent in the provinces and
territories exceeds the total value of revenues collected there.( 2 ) This can have a significant
effect on the perceived level of net federal expenditures in any given province; deficits create the
impression that more provinces are net beneficiaries from federal spending because total federal
expenditures are, by definition, higher than total federal revenues.
Because the federal government made the transition from an era of large deficits
to consistent surpluses during the mid- to late 1990s, all data on the trends in federal revenues
and expenditures by province over this period need to be interpreted with caution. For example,
the Ontario government has argued that its net contribution to confederation rose from $2 billion
in 1995 to $20.8 billion in 2004. While this can be verified by reading the Provincial Economic
Accounts, focusing solely on those two figures fails to account for the fact that the federal
government moved from a deficit of $31.7 billion to a surplus of $5.7 billion over that
same period.
(2)
As shown in Michael Holden, A Closer Look at Ontario’s $23-billion Gap, PRB 05-15E,
Parliamentary Information and Research Service, Library of Parliament, Ottawa, 10 May 2005, the
move from federal deficits to surpluses – and not higher per capita revenues or lower per capita
expenditures – was the primary reason why the net flow of federal revenues from Ontario rose from
$2 billion in 1995 to an estimated $23 billion.
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FEDERAL GOVERNMENT REVENUES BY PROVINCE
A. Overview
The federal government collects revenues by levying taxes and fees on a wide
range of activities. The most important of these is direct taxes on persons (personal income
taxes), followed by indirect taxes – most notably the goods and services tax (GST). Other major
sources of federal revenue are corporate income taxes, and employee contributions to social
insurance plans (payroll taxes) such as Employment Insurance (EI) and the Canada Pension Plan
(CPP).
Income taxes and other direct taxes are not only the most important source of
revenue for the federal government, but their importance has been increasing over time. In the
early 1980s, direct taxes on persons typically accounted for about 40% of total federal revenues,
although, as shown in Figure 3, that total was somewhat lower in 1981. By 2004 that figure had
risen to 47%. For its part, the share of federal revenues coming from business taxes tends to
fluctuate with the health of the economy. In 2004, about 15% of federal revenues came from
taxes on corporations – about the same level as 20 years earlier. In the early 1990s, however, the
economic downturn had a significant effect on business taxes, which accounted for only 8% of
federal revenues in 1992.
F igure 3 – F e de ral R e ve nue s by Type
2004
D irect (incom e) taxes on
persons
1981
10%
36%
Contributions to social
insurance plans
31%
6%
D irect (corporate) taxes on
businesses
23%
47%
Indirect taxes (G ST , etc.)
O ther
8%
9%
15%
15%
Source: Author’s calculations using Statistics Canada data.
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The share of federal revenues from other major sources has been falling gradually
over time. In 2004, indirect taxes made up about 23% of federal government income, slightly
lower than in the 1980s. This share will fall further when the recent cut in the GST is reflected
in the data. The decline in revenues from contributions to social insurance plans has been more
significant, due in large part to cuts in EI contributions over the past ten years. Payroll taxes
accounted for less than 9% of total federal revenues in 2004, compared to nearly 16% in 1994.
B. Revenue Collection by Province
In terms of federal government revenue collection by province, it is important to
note that the federal government collects tax revenue in the provinces, not from the provinces.
This distinction may appear subtle, but it has important implications. To say that the federal
government collects taxes from provinces suggests either that the level of federal taxes people
pay is related to their province of residence, or that the fiscal capacity of individual provincial
governments is affected by how much federal tax is collected in their jurisdiction.
Neither of these statements is true, however. In fact, from the point of view of
federal revenue collection, the very notion of “provinces” is irrelevant. Federal taxes do not
differ by province; all Canadians pay federal tax at the same set of rates regardless of where they
live.( 3 )
Federal government revenues collected by province and by type are shown in
Figure 4. Alberta and Ontario are the only two provinces where per capita federal revenues are
higher than the national average – in the case of Alberta, by a significant margin.
The
Canadian government collected an average of $7,864 per capita in Alberta in 2004, compared to
$6,254 nationally. In Ontario, an average of $6,961 was collected. Revenues in all other
provinces were below the national average.
(3)
Residents of Quebec receive a rebate on a portion of their federal taxes. This is discussed below, under
“Federal Transfers to Provinces.”
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Figure 4 – Federal Revenues by Province
and by Type, 2004
$ per capita
Other
9,000
Indirect taxes (GST, etc.)
Contributions to social insurance plans (EI, CPP, etc.)
8,000
Corporate taxes
Direct (income) taxes
7,000
6,000
National
average:
$6,254
5,000
4,000
3,000
2,000
1,000
0
NF PEI NS NB QC ON MB SK AB
Source: Author’s calculations using Statistics Canada data.
BC
Two specific revenue categories largely account for the higher revenue collection
in Alberta and Ontario than in the other provinces: direct taxes on persons, and business taxes.
In the case of taxes on persons, the federal government collects more money in Alberta and
Ontario simply because incomes are highest in those two provinces. As mentioned above,
federal tax rates do not vary from province to province. All else being equal, an individual
earning $50,000 will pay the same federal income tax regardless of where he or she lives. But if
residents of one province are richer than residents of another, the federal government will collect
more money in the wealthier province – essentially because, in that province, people with higher
incomes are more numerous and more of their incomes are taxed at higher marginal tax brackets.
The situation is similar in the case of business taxes. Alberta and Ontario are the
leading provincial economies on a per capita basis, and thus the amount of federal revenues
collected from corporations is higher in those provinces than elsewhere in the country. In the
case of Alberta, the value is significantly higher than elsewhere in Canada, owing in part to
income generated from the oil and gas sector. Federal business tax revenues in Quebec in 2004
were also well above the national average.
Compared to personal and corporate direct taxes, there is considerably less
variation in per capita indirect federal tax revenues across the provinces. Even so, Alberta
remained well above the other provinces. At $1,727, federal indirect taxes per person in Alberta
in 2004 were $220 higher than in British Columbia, the next-highest province.
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Finally, the least variation in federal revenues across the provinces is in personal
contributions to social insurance plans. Again, the federal government collected the most per
person in Alberta ($558) in 2004, but the difference between that total and the lowest amount
collected in any province – Saskatchewan – is relatively low, at $110.
C. Trends in Revenue Growth
While individuals and corporations in Alberta and Ontario have consistently been
the largest per capita contributors to federal coffers, it is in the Atlantic provinces that federal
revenue has seen the highest long-term growth. From 1981 – the earliest year for which
comparable data are available – to 2004, the fastest rate of real per capita federal revenue growth
was in Prince Edward Island, where it averaged 3.2% per year. Newfoundland and Labrador was
next highest at an average of 2.7% per year, compared to the national average of 0.7% per year
over the same period. At the other end of the spectrum, real per capita federal revenues from
Alberta and Saskatchewan have fallen since 1981, although, as explained below, data from the
early 1980s for those provinces are distorted by the effects of the energy crisis.
The general trend in federal revenue growth since 1981 can be divided into
three distinct stages. During 1981-1989, there was generally strong, but uneven, economic
growth in Canada. By contrast, 1989-1996 was a time of economic retrenchment and recovery.
Finally, there was a return to stronger economic expansion in 1996-2004.
Figure 5 – Federal Revenue Growth by Province
5
% (average per year)
4
3
2
1
0
-1
Can
NF
PEI
-2
1981-1989
-3
1989-1996
-4
1996-2004
NS
NB
QC
ON
-5
Source: Author’s calculations using Statistics Canada data.
MB
SK
AB
BC
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From 1981 to 1989, real per capita federal revenue growth averaged about 0.9%
per year. This total, however, masked considerable variation within the country. Revenue
growth was relatively high in Prince Edward Island, owing in part to the relocation of federal
government offices (and jobs) to the province. By contrast, there was a precipitous drop in real
federal revenues in Alberta and Saskatchewan, in the aftermath of the energy crisis. Rising
energy prices had created an economic boom in (and higher federal revenues from) those
provinces in the late 1970s and early 1980s. When prices collapsed in the mid-1980s, both
provinces experienced a significant economic downturn, and federal revenues fell back from
their peak levels.
The year 1989 represented the peak of a business cycle in Canada. The early to
mid-1990s were characterized by economic recession, fiscal retrenchment, and structural
adjustments precipitated, in part, by the Canada-U.S. free trade agreement. These factors were
exacerbated by high interest rates and a high Canadian dollar in the early 1990s. As a result,
federal revenues were low in most provinces, especially Ontario, which was hit hardest by the
recession. While real per capita revenues grew by an average of 0.1% per year over that period,
revenues in Ontario fell by 1.1%. There were pockets of strength, however. Revenues in
Prince Edward Island and Newfoundland and Labrador remained higher, continuing their trend
during 1981-1989. Revenues also recovered in Saskatchewan and Alberta.
The 1996-2004 period saw the strongest growth in real per capita federal
revenues, averaging 1.2% per year in spite of several tax cuts over the same period. Surging oil
and gas sectors in Newfoundland and Labrador and Alberta resulted in particularly strong
revenue growth in those provinces. By contrast, sluggish economic growth in British Columbia
in the late 1990s dampened federal revenue growth there.
FEDERAL GOVERNMENT EXPENDITURES BY PROVINCE
Federal government expenditures can be divided into two groups:
program
spending and debt-servicing costs. Program spending, in turn, consists of three main types of
expenditure: net expenditures on goods and services; transfers to persons; and transfers to
provincial governments.
All told, these four categories account for almost 96% of
federal government expenditures. The remainder includes some small amounts for business
subsidies, transfers to non-residents and some payments to local governments.
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Figure 6 – Real Per Capita Federal
Expenditures by Type
2,500
in 2004 $
2,000
1,500
1,000
Net expenditures on goods and services
Transfers to persons
Transfers to provincial governments
Debt-servicing costs
500
0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Source: Author’s calculations using Statistics Canada data.
Of the four major types of spending, the category of federal transfers to persons is
the largest and the only one to have seen significant growth (in real per capita terms) since the
early 1980s. Transfers to persons include payments under federal programs such as EI, the CPP
and Old Age Security (OAS).
The next-largest category is federal expenditures on goods and services. This
item primarily covers basic government activities – the salaries of civil servants; the day-to-day
operation of government departments; and military installations and operations. It also includes
the purchase of supplies and materials from private companies.
Transfers to provincial governments is the third-largest category of federal
spending and, as shown in Figure 6, has been the fastest-growing since 1997, after a significant
drop in the mid-1990s. These transfers include Equalization entitlements and cash payments
under the Canada Health Transfer (CHT) and Canada Social Transfer (CST). Although data are
available only up to 2004, recent funding commitments for health care and Equalization
payments ensure that this category of federal spending will continue to grow rapidly into the near
future.
Finally, the fourth major type of federal spending is debt-servicing costs. As
stated above, debt-servicing costs – the interest the federal government must pay on its
outstanding bonds, treasury bills and other debt instruments – differs completely from federal
program spending. Program spending yields an immediate benefit whereas interest payments
are, in effect, the price the government pays today for having spent beyond its means in the past.
As Figure 6 shows, debt-servicing costs have fallen since the mid-1990s; the decline is due to
lower interest rates and debt repayment since that time.
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A. Net Expenditures on Goods and Services
On a per capita basis, federal government spending on goods and services is
highest in the Atlantic provinces, particularly in Nova Scotia and Prince Edward Island. In those
two provinces, this category of federal spending totalled $3,583 and $2,474 per capita in 2004,
respectively, significantly higher than the national average of $1,437. Spending on goods and
services was also slightly higher than average in Ontario, home to the national capital and most
federal government offices.
4,000
3,500
Figure 7 – Federal Expenditures
on Goods and Services, 2004
$ per capita
3,000
National average:
$1,437
2,500
2,000
1,500
1,000
500
0
NF PEI NS NB QC ON MB SK
Source: Author’s calculations using Statistics Canada data.
AB
BC
At the other end of the spectrum, at about $1,000 each, per capita federal
spending on goods and services in British Columbia, Alberta and Saskatchewan was markedly
lower than in the rest of the country.
As mentioned above, federal spending on goods and services includes the
operation of federal government and military offices, as well as the wages and salaries of
government employees.
The distribution of these government operations is influenced by
two considerations: the logical location of certain government activities; and the desire for an
active federal government presence across the country, including regional development offices.
The most obvious example of the first of these considerations is the location of
the bulk of the federal civil service in Ottawa. Since that city is the national capital, it is logical
that there be a significant degree of federal spending on goods and services there. Indeed,
this category of federal expenditure is the only one in which Ontario exceeds the national
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average. Similarly, Halifax – with its large, natural, ice-free harbour – is a logical choice for the
location of the Atlantic navy base. This is a major reason why federal spending on goods and
services is highest in Nova Scotia.
Other examples include the location of the
Canadian Wheat Board offices in Winnipeg and the National Energy Board in Calgary.
The second consideration for federal direct expenditures is the desire to have a
visible federal government presence across the country. A number of federal government offices
are located outside of the National Capital Region not because of a functional need, but rather to
ensure that federal employment is not exclusive to a single part of the country. As a result,
there are federal offices across Canada.
In particular, a number of operations are located in Atlantic Canada. Among
these is the data processing and national call centre for the Canada Firearms Centre, located in
Mirimachi, New Brunswick. Similarly, the GST processing centre and Veterans Affairs Canada
are located in Prince Edward Island. In addition, the federal government operates regional
development offices in every province in Canada. The head office of the largest of these, the
Atlantic Canada Opportunities Agency (ACOA), is located in Moncton, New Brunswick. The
presence of these offices, combined with the fact that the Atlantic provinces themselves are the
smallest in Canada, is a major reason why federal spending on goods and services is highest in
that part of the country.( 4 )
Looking at the growth in per capita federal spending on goods and services, the
general trend is that spending is rising faster in Quebec and points east, while it is falling in
Ontario and points west. To some degree, this pattern reflects the effect of population growth
trends across Canada. Federal government offices typically do not grow or shrink in line with
prevailing population trends in their region. The National Energy Board is unlikely to expand
simply because the population of Calgary is growing. Neither will employment or spending be
cut at the Canada Firearms Centre because of population decline in northern New Brunswick.
However, since the population of Alberta is growing rapidly, federal spending on
goods and services in the province is falling on a per capita basis. For it not to do so, the federal
government would have to physically relocate operations to that province. Conversely, since the
population of New Brunswick is flat or falling, the value of per capita federal expenditures on
goods and services in that province is rising.
(4)
It is worth noting that this federal government presence has a considerable effect on wages and
employment in the region, which, in turn, has contributed to higher taxes and an increase in
federal government revenues from Atlantic Canada.
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2.5
%
Figure 8 – Growth in Federal
Expenditures on Goods and Services –
1981-2004
Average annual growth in real per capita spending
2.0
1.5
National average growth:
0.0%
1.0
0.5
0.0
NF
PEI
NS
NB
QC
ON
MB
SK
AB
BC
-0.5
-1.0
Source: Author’s calculations using Statistics Canada data.
Indeed, while per capita federal spending on goods and services has fallen in
Alberta and Ontario, total spending growth in those provinces is well above the national average.
Conversely, even though growth in per capita federal spending on goods and services has been
relatively high in Atlantic Canada, growth in total spending in that region has not. With the
exception of Prince Edward Island, stable or declining populations in the region are contributing
to the growth in this category of per capita expenditure.
Demographic trends do not account for the slower growth in federal expenditures
on goods and services in British Columbia and Saskatchewan, however. The population of
British Columbia is among the fastest-growing in Canada, while that of Saskatchewan is in
decline. Nonetheless, it is in those two provinces that growth in per capita federal spending on
goods and services has been slowest since 1981.
B. Federal Transfers to Persons
As mentioned above, federal transfers to persons are primarily payments under
social insurance plans such as EI, the CPP and OAS. The amount of money paid under these
programs is closely related to income and unemployment. As such, provinces with relatively
low incomes or high levels of unemployment tend to receive the largest per capita shares of
federal transfers to persons.
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Indeed, the six lowest-income provinces – the four Atlantic provinces, Manitoba
and Saskatchewan – receive the largest federal transfers to persons on a per capita basis. Of
these, per capita transfers in 2004 were highest in Newfoundland and Labrador ($3,466),
Prince Edward Island ($3,271), and New Brunswick ($2,915).( 5 ) Not surprisingly, transfers were
lowest in the two wealthiest provinces – Ontario ($1,744) and Alberta ($1,799).
Figure 9 – Federal Transfers to Persons, 2004
4,000
3,500
$ per capita
National average:
$2,047
3,000
2,500
2,000
1,500
1,000
500
0
NF PEI NS NB QC ON MB SK AB
Source: Author’s calculations using Statistics Canada data.
BC
It should be noted that when examining federal expenditures in the provinces,
data on transfers to persons should be treated with caution.
As stated earlier, the
federal government collects revenues from Canadians, taxing all at the same rate regardless of
where in the country they live. In a similar fashion, federal transfers to persons are largely
independent of where in the country people choose to live. EI is the only program of any
significance where regional considerations are incorporated into eligibility requirements.
Even in the case of EI, however, program eligibility does not vary by province,
but rather by sub-provincial unemployment rates. For example, because the unemployment rate
in Halifax in late 2006 was about the same as the unemployment rate in Vancouver,
EI thresholds and payment durations in the two cities are identical.( 6 )
(5)
Although they remain higher than elsewhere in the country, per capita transfers in the Atlantic provinces
have been falling since 1993, led by Newfoundland and Labrador and Prince Edward Island.
(6)
It could be argued, and often is, that the seasonal labour provisions of EI, which include fishing but not
farming, implicitly favour the Atlantic provinces.
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Rather than a transfer from wealthy provinces to poorer provinces, federal
transfers to persons represent an implicit transfer from richer individuals to poorer individuals.
Those that are wealthier pay a higher proportion of their gross income in taxes, and those that are
poorer are eligible for, and receive, a greater proportion of federal support programs.
Calculating the value of federal transfers to persons in any given province can
create the impression that the provinces themselves benefit, to varying degrees, from the
transfers. This impression is reinforced by analyses which imply that some provinces do not
receive their “fair share” of these funds. However, as discussed above, eligibility for federal
personal transfers does not vary by province. In fact, for the purposes of federal transfers to
persons, provincial borders are largely meaningless. Indeed, if one were to redraw provincial
borders as a hypothetical exercise, the distribution of federal transfers to persons “by province”
could be altered dramatically, without affecting a single person.
Moreover, if an individual receiving CPP payments, for example, were to move
from one province to another, his or her payments would be unaffected. However, federal
expenditure data would record a decrease in transfers in the individual’s former province of
residence and an increase in payments in the new province of residence.
Because transfers to persons consist primarily of social programs, their value has
tended to fluctuate countercyclically with economic growth. In a period of strong economic
growth, such as the late 1980s and late 1990s, personal transfers tend to fall, while in times of
recession, such as in the early 1990s, they tend to rise.
The same trends are reflected in Canada’s largest provinces. Compared to the
national average, federal transfers to persons in Ontario, Quebec, British Columbia and Alberta
have been relatively stable, rising in times of economic downturn, falling during an economic
recovery and otherwise stable.
In the remaining provinces, two different trends are evident. In the Atlantic
provinces, federal transfers to persons have been falling relative to the national average,
reflecting in part the fact that economic growth in that region outpaced the rest of Canada
through the 1990s.
On the other hand, federal transfers to persons in Saskatchewan and
Manitoba have risen since the early 1980s, reflecting in part the fact that incomes in those
two provinces have not risen at the same rate as elsewhere in Canada.
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C. Federal Transfers to Provinces
The third-largest, and fastest-growing, category of federal spending is transfer
payments to the provincial governments. This category of federal spending consists of
two distinct types of transfer: those for which all provinces qualify; and those which only certain
provinces receive. The Canada Health Transfer (CHT) is the most significant example of the
former and the Equalization Program, the latter.
Federal transfers to provinces have the widest variation of any category of per
capita federal spending. These transfers are much higher in Atlantic Canada, Manitoba and
Saskatchewan than in the other four provinces. In 2004, transfers were highest in
Prince Edward Island at $3,068 per capita. At the other end of the spectrum was Ontario, which
received $910 per person.
As shown in Figure 10, this wide range is largely a reflection of the effect of
Equalization payments. Only certain provinces qualify for Equalization, and payments vary
significantly from one province to the next. In 2004, for example, eight provinces qualified for
the transfers, with per capita payments ranging from $141 in British Columbia to $1,927 in
Prince Edward Island.( 7 ) In the case of Prince Edward Island, Equalization payments represented
a little more than half of total federal transfers to the provincial government that year. Alberta
and Ontario received no Equalization payments in 2004.
Figure 10 – Federal Transfers to Provinces, 2004
3,500
$ per capita
National
average:
$1,278
3,000
2,500
2,000
1,500
1,000
500
Equalization payments
Other transfers to provinces
0
NF PEI NS NB QC ON MB SK
Source: Author’s calculations using Statistics Canada data.
(7)
AB
BC
Equalization payments are made on a fiscal year basis (April-March), while all other data in this paper
refer to a calendar year. To make them comparable, the equalization figures presented here have been
adjusted to reflect an estimate of the Equalization payments in calendar year 2004.
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However, even programs such as the CHT have an Equalization component that
contributes to the wide range among federal transfers by province. The CHT consists of a
combination of tax points (transferred from the federal government to the provinces in 1977) and
annual cash payments. The total transfer (cash plus the annual value of the tax points) is
distributed on an equal-per-capita basis. However, since some provinces are richer than others,
they are able to collect more money per capita at any given tax rate. In other words, the value of
tax points is higher in richer provinces. Since the overall CHT is an equal-per-capita transfer,
this means that the cash component – the only actual transfer that takes place each year –
is consequently lower in rich provinces.
A final issue worth mentioning is unique to Quebec. As Figure 10 shows, Quebec
receives the smallest amount in non-equalization federal transfers to provinces.
This is a
holdover from a federal initiative in the 1960s when all provinces were given the option of
federal program funding in the form of tax abatements on personal and corporate income taxes,
or in the form of cash payments.( 8 ) Quebec was the only province to accept the tax abatement
option.
This decision continues to apply today. A portion of the federal government’s
transfer payments to the Quebec government comes not in the form of direct cash payments to
the province, but indirectly via the tax abatement – essentially a rebate on federal taxes for
Quebec residents. The provincial government then levies higher taxes (compared to other
provinces) to capture that rebate itself. Since the tax abatement is considered to be part of the
federal government’s support for programs such as the CHT and CST, federal cash transfers to
Quebec are correspondingly lower.
Critics of the extent to which the federal government redistributes wealth across
the provinces usually point to transfers to provinces to make their case. It is not hard to see why,
given that this category of federal spending not only has the widest variation from one province
to the next, but also directly affects the ability of individual provincial governments to provide
services.
Even so, federal transfers to provinces are ultimately based on similar factors as
transfers to persons: personal incomes, wealth and economic strength. This is particularly true
of the Equalization Program. The purpose of Equalization is to compensate provinces with a
(8)
A tax abatement is a special deduction made after federal taxes have been calculated.
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relatively weak capacity to generate own-source revenues. This allows those provinces to
provide reasonably similar levels of services at comparable levels of taxation.
In effect,
therefore, Equalization compensates poorer provinces for not having access to the same amount
of taxable income and wealth as richer provinces.
It should also be noted that, as in all other areas of federal expenditure, programs
such as Equalization are funded using federal revenues, collected from all taxpayers at the same
rate. As such, it bears mentioning that Equalization does not transfer money from one provincial
government to another; the revenue-generating capacity of provincial governments that do not
qualify for Equalization is entirely unaffected by Equalization payments to other provinces.
D. Federal Interest Payments on the National Debt
The final major category of federal spending is debt-servicing costs. According
to Statistics Canada, the federal debt and the interest payments on that debt are assumed to be
shared equally by all Canadians. As a result, for the purpose of federal expenditures, per capita
debt-servicing costs are identical in each province – $1,046 in 2004.
The combination of debt repayment and lower interest rates has considerably
reduced per capita debt-servicing costs in recent years. Those costs peaked at $1,578 in 1995.
By 2004, federal spending in this area had fallen by nearly 34%.
Unlike any type of federal program spending, such as those described above,
interest payments on the debt do not provide any direct benefit to the provinces. In essence, they
represent the present-day cost of the federal government having overspent to fund programs and
provide services in the past.
The fact that debt-servicing costs are assumed to be distributed evenly across the
country, while federal program spending is not, has interesting implications for total federal
expenditures by province. Specifically, in provinces where total federal spending is relatively
low, debt-servicing costs represent a larger share of that spending. For example, even though
interest payments on the national debt were about $1,046 per capita in all provinces in 2004, that
figure represented 10.1% of per capita federal expenditures in Prince Edward Island, but 20.5%
of expenditures in Alberta.
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Figure 11 – Federal Debt-Servicing Costs
and Program Spending, 2004
12,000
$ per capita
10,000
8,000
6,000
4,000
2,000
Federal program spending
Debt-servicing costs
0
NF PEI NS NB QC ON MB SK AB
Source: Author’s calculations using Statistics Canada data.
BC
This has two implications for any discussions on federal revenues and
expenditures by province. First, if debt-servicing costs are flat across the provinces and total
federal expenditures are not, this suggests that the variation in federal program spending
(on goods and services, transfers to persons, transfers to provinces and others) is, in fact, wider
than the variation in expenditures (see Figure 11). In other words, debt-servicing costs, which do
not represent a “beneficial” expenditure, make up a higher proportion of federal expenditures in
provinces where federal spending is already lower than average.
Although the effect is not large, it is easily demonstrated. In Prince Edward Island,
total federal expenditures in 2004 were about 170% of the national average. Federal program
spending, however, was 184% of the national average. At the other end of the spectrum, total
federal spending in Alberta was just under 84% of the national average, while program spending
was even less, at 81% of the average.
The second implication is that the decline in debt-servicing costs in recent years
makes it appear as if total federal expenditures are growing more slowly in provinces where
federal spending was already low to begin with. This was the case in Ontario where, from 1995
to 2004, total federal expenditures grew at rates below the national average, while growth in
federal program spending – in effect the only useful form of federal expenditure – was actually
above the national average.
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CONCLUSION
There is an obvious redistributive effect to net federal government expenditures in
Canada; the federal government collects more tax revenues in certain provinces and spends more
in others. However, the analysis presented above shows that in many cases, the difference in net
federal spending from one province to the next is not the result of a decision by the federal
government to favour certain provinces. Rather, it is, to a large degree, a reflection of federal
policies aimed at redistribution from the rich to the poor; specifically, progressive taxation that
collects more money from wealthier individuals and program spending geared towards those
who are poorer (or towards provinces where incomes are lower).
This changes the viewpoint on balance-sheet federalism.
If federal net
expenditures are largely influenced by the redistribution of interpersonal wealth, then it follows
that the distribution of net federal expenditures across the provinces is largely unintentional; it
merely reflects concentrations of relative wealth across Canada.
According to some, this means that a province that is a net beneficiary from
confederation is simply one where the poor, the unemployed and the retired are more common.
The fact that individuals reside within a certain provincial boundary does not influence the
amount of federal taxes they pay or support they receive, although it does affect the total sum for
the province if one were to look only at the bottom line in Statistics Canada tables.( 9 )
Moreover, provinces themselves are not uniformly prosperous or poor. There are
wealthy regions within the poorest province and poor regions in the wealthiest province.
Although data are not available to conduct such an analysis, it would be no less valid to focus on
net federal expenditures in sub-provincial regions: is northern Ontario a net beneficiary from
confederation? Is Toronto?
Indeed, one could hypothetically redraw the map of Canada in such a way as to
greatly reduce the variation in net federal expenditures from one province to the next. This could
be done largely without any noticeable effect on the average Canadian. At the same time,
however, a cursory glance at the Provincial Economic Accounts would lead to the conclusion
that the situation had become more equitable. Clearly, a more nuanced view on federal revenues
and expenditures in the provinces is needed.
(9)
Richard Bird, Fiscal Flows, Fiscal Balance, and Fiscal Sustainability, Andrew Young School of
Policy Studies, Georgia State University, January 2003.