Canada is one of the most decentralized federations in the world. Public services (notably health, education at all levels, social services such as elder care, and local services) are delivered and financed primarily by provincial and municipal governments.
The Canadian Constitution states that the provinces should have sufficient resources to provide “reasonably comparable services at reasonably comparable levels of taxation.”
Most Canadians would likely agree with the principle that a child in a less well-off province such as PEI should have the same educational opportunities as a child in booming Alberta, and that a senior in New Brunswick should have access to the same quality of hospital and other health care services as a senior in British Columbia.
The federal government helps the provinces finance services through cash transfers – notably the Canada Health Transfer and the Canada Social Transfer which are allocated on an equal per person basis, as well as Equalization. These transfers amount to 3.1% of GDP and make up one fifth of total provincial revenues, ranging from under 10% in Alberta to 40% in New Brunswick.
While transfers help equalize access to health, education and social services across Canada, current arrangements fall short of what is needed, and the shortfall will increase significantly if nothing is done.
There are large gaps between the fiscal capacity of the provinces, partly long-standing, and partly due to the differential regional impacts of the resource boom and the manufacturing crisis. Provincial GDP per person, a proxy for the ability of provinces to finance services, ranges from 77% of the national average in PEI to 127% in Alberta.
Six provinces together making up 75% of the national economy now qualify for equalization payments amounting to 0.8% of GDP on the basis that they have less than average fiscal capacity as calculated under a complex formula. Only BC, Alberta, Saskatchewan and Newfoundland and Labrador do not qualify. (All provinces except Alberta have qualified at some time in recent history with BC, Saskatchewan and Newfoundland and Labrador all moving between “have” and “have not” status.)
Despite equalization, rates of taxation vary quite a bit across the country. Alberta has no provincial sales tax and a flat rate personal income tax of 10%. Provincial sales taxes elsewhere range from 7% to 8%, but go as high as 9% in PEI and 10% in Nova Scotia and Quebec. Three provinces (Ontario, Quebec and Nova Scotia) have top personal income tax rates of over 20%, significantly higher than in Alberta, BC and Saskatchewan
Spending per person on services also varies quite significantly. For example, health care spending per capita in Ontario is just 91% of the national average, perhaps partly because provinces with older populations spend more than the average, and Ontario spending on post secondary education is just 81% of the national average.
Provinces do, of course, make their own fiscal choices. Sales and income taxes are relatively high in Quebec partly because that province has chosen to deliver a high quality, low cost child care and early learning program and to maintain a more affordable post secondary educational system.
That said, there is a real danger moving forward that significant differences in vital public services will emerge as provinces with relatively high deficits such as Ontario cut already stretched services. The combined provincial/local deficit will, at 2.5% of GDP, be much higher in 2013 than the federal deficit of 1.3% of GDP.
To give the Conservatives their due, they increased transfers to the provinces following the deep unilateral cuts and ad hoc changes imposed by the former Liberal government. However, they have effectively decoupled federal transfers from social spending pressures.
Total payments under the equalization program are capped at the moving average of GDP growth, as will be, from 2017-18, payments under the Canada Health Transfer.
Meanwhile, most forecasters expect that provincial spending, especially on health care, will rise at a significantly faster rate than GDP due to rising health care costs and an ageing population.
The just-released IMF Survey of Canada reports that the issue of medium to long-term fiscal sustainability in Canada - our ability to maintain services at current levels of taxation – is entirely a provincial problem.
They calculate that the provinces would collectively have to raise taxes or cut spending by 2.4% of GDP to achieve long-term fiscal sustainability, whereas the federal government will soon be running surpluses in excess of 1% of GDP.
The federal government argues that it is up to the provinces to figure out how to finance the rising cost health care and other social programs.
But we should stick to the principle that all Canadians should have access to “reasonably comparable services at reasonably comparable level of taxation.”
Andrew Jackson is the Packer Professor of Social Justice at York University and Senior Policy Adviser to the Broadbent Institute. This post originally appeared on the Globe & Mail's Economy Lab.