July 31, 2001

The argument stating that the money is in Ottawa while the needs are in the provinces doesn’t withstand the test of the facts, or take into account the reality that sound fiscal management by the federal government through balanced budgets or better will benefit all current and future generations of Canadians.

The provinces have the exact same ability as the federal government to increase taxes to meet their needs. Provinces also have exclusive access to certain tax bases such as resource royalties, gaming and liquor profits and property taxes – some of which are increasing rapidly.

Total provincial revenues – that is their own-source revenues plus federal transfers – have substantially exceeded federal revenues for more than two decades. In 1999-2000, total provincial revenues amounted to about $181 billion, including $27 billion in federal cash transfers, compared to about $166 billion in total federal revenues. And total provincial revenues will continue to exceed federal revenues for the foreseeable future.

However, the fact that all provinces have chosen to reduce taxes suggests that they have sufficient revenues to manage their spending pressures.

Surpluses

Last year, federal and provincial governments both posted record budgetary surpluses. The federal surplus was at least $15 billion, while the provinces together recorded a surplus of about $11 billion.

These unprecedented surpluses resulted primarily from the record economic growth of 2000. With the current slowdown, both orders of government are forecasting much smaller surpluses this year and next.

Increased funding to the provinces under last September’s health accord – through which they will receive $21.1 billion over 5 years – and the implementation of the federal government’s $100 billion tax reduction plan will further restrain the federal budgetary balance.

The federal government also has to contend with the additional fiscal constraints of a higher debt burden and higher debt-interest payments than the provinces – a very volatile expense that requires careful planning. Last year, for example, the federal government paid $42 billion in interest costs, compared to about $23 billion for all the provinces combined.

Provinces face spending pressures in the areas of health care and education. And the federal government has made significant investments in these areas. Since balancing the budget, 70% of all new federal spending initiatives have been related to health care and education, including research and development and skills upgrading.

Federal cash transfers to the provinces – which helps them deal with their spending pressures – are expected to grow at an annual average rate of 5.5% over the next five years. That is almost three times faster that the expected growth in federal revenues.

Meanwhile, the federal government must cope with its own spending pressures. For example, elderly benefits – the second largest area of federal spending after transfers to the provinces – are expected to grow substantially when the baby boomers start to retire.

It is imperative that the federal government continues to meet its obligations without compromising the sound management practices that have helped maintain lower interest rates across the country – to the benefit of provincial governments, businesses and consumers.