Introduction

Let me present my argument sharply. There is no problem of vertical fiscal imbalance in the present Canadian federation; the question embedded in the mandate of the Sub-Committee on Fiscal Imbalance of the Standing Committee on Finance of the House of Commons is wrongly posed. The equalization program is not achieving exactly what Section 36 of the Constitution says it should, but it has been increased in scale and some further renewal and adjustment is underway. Challenging problems of horizontal imbalance – unequal fiscal capacity across provinces – are being addressed through growth in this fundamental feature of our system of fiscal federalism.

There is an ongoing shift in the balance of expenditures, as between provincial and federal governments, and provinces certainly face major pressures in their health, education and social services programs. But there is no case for these expenditures in any one province to be financed to a greater extent than they are now by taxpayers resident in other provinces. Provincial governments that have cut taxes can also raise them.

Decentralization within the federation has been substantial, and there seems no point in pressing for further general reduction in the relative scope of the federal government; the argument for further transfers of tax points is, it seems to me, a non-starter. The long-term solution to the current transitory imbalances is greater inter-jurisdictional cooperation to achieve more effective subsidiarity, greater harmonization to achieve policy coherence in cross-scale responsibilities, more responsive adaptation to changing circumstances and emerging challenges, and greater awareness among citizens of the degree of joint effort and mutual accommodation already built into our system. We should recognize and respect a fundamentally strong and successful federation when we see it.

The sub-committee’s question and mandate

The mandate of the sub-committee poses the question, “What long-term solutions can be found to the fiscal imbalance between the two levels of government?” The premise implicit in that question – that there is some problem of structural fiscal imbalance – is invalid. This formulation of your mandate violates the first rule of policy analysis, which is to get the question right; be sure that the question is well posed and is not framed in a way that in itself rules out relevant options and important lines of analysis. If we start from the question of whether there exists a vertical fiscal imbalance in Canada at this time, I would have to say definitely not. A vertical fiscal imbalance must be a structural feature, not simply a transitory outcome of discretionary decisions made with respect to tax and spending choices.

There are other respects in which it seems to me the mandate established for the sub-committee is perhaps a bit unfortunately phrased. It is important to remember, as the Breau Task Force Report said in 1981, that the federal structure of Canada involves two orders of government, each autonomous and independent. “The distinguishing feature of a federal system of government is that it provides for a division of governmental powers between two orders of government, the existence of which is guaranteed by a written constitution specifying the powers of each. It is in this sense that each order of government may be said to be autonomous. In a federal system, each order of government has a life of its own: neither is subordinate to the other.” [Breau, p. 29] Revenue is not “shared” between the provinces and the federal government, though powers of taxation might be reallocated. Therefore, it is misleading to talk as if decisions were taken to “share” revenues as between two levels, a senior and a junior, of government. Questions of fiscal balance relate to the consequences of discretionary decisions independently taken by autonomous governments independently accountable to their own electorates.