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[3] Thus interregional redistribution is a third reason for concern about regional issues. High debt and interest rates [note; written early 1999] have tightened the efficiency constraint on public spending programs [4] The last reason to be concerned about regional diversity is probably the most important. Study of Canadas regions is the best starting point for understanding the changing conditions and growth pattern of the country in general EQUALIZATION &THE CANADIAN CONSTITUTION:

THE CONSTITUTION ACT, Part III Equalization and Regional Disparities 36(1) [Commitment to promote equal opportunities] Without altering the legislative authority of Parliament or of the provincial legislatures, or the rights of any of them with respect to the exercise of their legislative authority, Parliament and the legislatures, together with the government of Canada and the provincial governments, are committed to:

a) promoting equal opportunities for the wellbeing of Canadians;

b) furthering economic development to reduce disparity in opportunities; and c) providing essential public services of reasonable quality to all Canadians.

36(2) [Commitment respecting public services] Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient resources to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

IMPLY SHARING: AN INTERPROVINCIAL EQUALIZATION SCHEME FOR CANADA (Paul Boothe and Derek Hermanutz (CD Howe Institute, July 1999)) Canadas system of federal-provincial transfers is broken and needs fundamental reform, argues a CD Howe Institute Commentary that is critical of the existing equalization and Canada Health and Social transfer (CHST) programs.

In Simply Sharing [the authors] maintain that the existing equalization and CHST programs are seriously flawed. For example, the current scheme:

transfers income from poor Canadians in rich provinces to rich Canadians in poor ptovinces;

treats some provinces inequitably outside the formal equalization process;

hinders economic development in less well off regions;

blurs accountability, with Canadians not knowing which level of government to hold responsible for the taxes they pay and the programs they receive.

The authors argue that the existing transfer scheme is much larger than is necessary currently more than twothirds of the money raised to fund federal-provincial transfers ends up back in the province it came from. A smaller, more effective program would begin with Ottawa transferring income tax room equal to the total of federal-provincial transfer programs to the provinces. Provinces would allocate a portion of these revenues to a new interprovincial equalization fund. By design, initial contributions and withdrawals from the fund would ensure that the transfer of taxes left provincial budget balances unchanged, so that all governments would be no worse off at the outset. Future transfers among the provinces would be calculated using a simple equalization formula based on differences in provincial personal income, an arrangement that would avoid many of the existing schemes problems.

Among the advantages of such a scheme, the authors say, are that equalization-receiving provinces would no longer face incentives that distort their economic development efforts. With transfers made directly between provinces rather than through Ottawa, voters would find it easier to relate the taxes they pay each level of government to the programs they receive. In addition, the federal budget would be insulated from swings in provincial fortunes that, through their impact on federal-provincial transfers, have affected Ottawas bottom line in the past.

Main Findings of the Commentary Canadas current system of intergovernmental transfers is outdated and no longer serves the federation well.

The current system has problems related to equity, efficiency, declining political viability, and sustainability.

One result is that resources go from low-income families in some provinces to high-income families in other provinces.

Equity problems for governments also occur: provinces receive different amounts of federal support for welfare, health care, and postsecondary education. In effect, these transfers are a separate equalization scheme, outside the formal program.

The current system impedes efficiency-enhancing migration by individuals to provinces where employment opportunities are better.

The existing scheme reduces incentives for equalizationreceiving provinces to stimulate certain kinds of economic development. It also encourages them to set tax rates higher than they otherwise would.

The current system makes it difficult for taxpayers to know who pays for what. For example, in fiscal year 1996/97 about 69 percent of the money Ottawa collected for transfers went back to the provinces from which it originated.

Because equalization is paid by the federal government but is based on provincial revenues, large changes in those revenues can force major fluctuations in federal expenditures. For example, pressure on the equalization program was a major factor leading to the infamous National Energy Program.

The recent federal-provincial review of equalization did little to address these problems. Neither the federal nor provincial governments used this opportunity to initiate an open, wide ranging discussion on the future of this critical program.

To that end, we suggest a fundamental reform of the transfer system. The proposed scheme would, first, transfer sufficient income tax points from Ottawa to the provinces to allow a set of net interprovincial equalization transfers. These transfers would be fiscally neutral for all governments, thus respecting the political bargain implicit in the current level and distribution of transfers. Next, the scheme would use a simple equalization formula based on a single macroeconomic indicator: adjusted personal income.

Such a scheme could address many of the problems of the current system. Key benefits would include increases in transparency and the accountability of governments for the transfers they make and receive. The federal government would no longer be funder of the scheme, as it is currently, but guarantor of the new interprovincial find.

Reforming intergovernmental transfers is worth the effort. By improving the incentives created by the transfer system as well as making it more transparent and accountable, Canadians can ensure that this important program will continue to support the federation in the future.

The Commentary:

Commentators have long recognized that intergovernmental transfers, especially those under the equalization program, are a key element of Canadian federalism. Canadas system for sharing among the provinces is held to be one of the worlds best examples of federalism at work.

Over the past decade, however, the intergovernmental redistribution system is waning. Concerns have been expressed that Ottawas ad hoc changes to key transfer programs have increased the element of interprovincial redistribution in transfers originally aimed at funding programs for health, postsecondary education, and social assistance. In addition, the transfer system has become so complicated that it is virtually impossible for taxpayers to know how their tax dollars are being spent and which politicians to hold accountable. Some analysts also suspect that the design of certain intergovernmental transfer programs encourages inefficiency and impedes economic adjustment.

Equity Equity concerns stem from the current transfer systems implications for the distribution of income among individuals. Academics have known for some time that the operation of transfer schemes that improve the distribution of income among governments can worsen its distribution among individuals.

Efficiency Efficiency concerns about the current equalization program involve two questions: To what extent does it prevent efficient interprovincial migration by individuals Does it distort the policy decisions of provincial governments Political Viability Much of the recent decline in support for equalization has resulted from Ottawas choosing to eliminate its deficit by reducing transfers to the provinces by much more than it has reduced spending on its own programs.

Transparency and Accountability Issues related to the transparency and accountability of the system are also a concern. The current system is so complex that only a few experts in government and academe understand it.

Sustainability To be sustainable over the longer term, intergovernmental transfers must be stable and reliable sources for recipients and affordable expenditures for contributors. The two characteristics are linked: transfer programs that prove unaffordable will, by their nature, also be unreliable.

4.9. The Federal Spending Power: Scope and Limitations The concept of the federal spending power is a relatively recent constitutional development. It arises from federal government initiatives immediately following the Second World War, and is closely linked with efforts to centralize the taxing power. By providing program funds for a variety of health, education and social development programs, either unilaterally or in cooperation with the provinces, the federal government substantially altered Canadas approach to issues that were essentially within provincial jurisdiction.

The spending power thus became the main lever of federal influence in fields that are legislatively within provincial jurisdiction, such as health care, education, welfare, manpower training and regional development. By making financial contributions to specified provincial programs, the federal government could influence provincial policies and program standards.

Until the 1960s, most of the provinces acquiesced in this expanded federal influence, but Quebec both raised objections and refused to accept certain contributions. With the election of a new provincial government in 1960, Quebecs objections crystallized, and during the early 60s other provinces also began to find the increased federal role objectionable. Accordingly, in 1964 the provinces were given the right to opt out of programs financed through the spending power with income tax abatements as compensation. Only Quebec took advantage of this provision.

In June 1969, the federal government presented to a Federalprovincial First Ministers Conference the paper federal-provincial Grants and the Spending Power of Parliament, which, for the first time, dealt with the evolving nature of the spending power.

Ordinarily, one thinks of the spending power of governments simply in terms of the spending they do on particular programmes, under the authority of legislation passed by their legislative bodies.

Constitutionally, however, the term spending power has come to have a specialized meaning in Canada: it means the power of Parliament to make payments to people or institutions or governments for purposes on which it [Parliament] does not necessarily have the power to legislate.

The federal paper noted that there was some disagreement among constitutional scholars as to the limits of the spending power. Some, such as Bora Laskin and GV LaForest [both later Supreme Court of Canada justices], argued that Parliament could make conditional or unconditional grants for any purpose, provided that the program did not amount to legislation or regulation within provincial jurisdiction. Others, including Quebecs Tremblay Commission, argued that Parliament had no power to make grants of any kind in areas within exclusive provincial jurisdiction. Yet others seemed to suggest that unconditional, but not conditional, grants could properly be made in areas within provincial jurisdiction.

The provincial governments had argued that the Government and Parliament of Canada ought not to be able to initiate cost-hared programs without obtaining a provincial consensus, because the operation of such programs fell to the provinces; that cost-shared programs forced the provinces to alter their spending and taxing priorities; and that the citizens of provinces that opted out were subjected to taxation without benefit.

The federal government, on the other hand, stressed the importance of the spending power in maintaining equal opportunity for individual Canadians (eg family allowances); in equalizing provincial public services (eg health, welfare, education and roads); in regional economic development; and in carrying out programs of national importance, such as Expo 67 [Montreal Worlds Fair in 1967].

In the result, the federal government tentatively advanced certain principles: (1) the federal spending power should be entrenched in the Constitution; (2) Parliament should have an unrestricted power to make unconditional grants to provincial governments for the purpose of supporting their programs and public services; and (3) Parliaments power to initiate cost-shared programs involved conditional grants in areas within provincial jurisdiction should require both a broad national consensus and per capita reimbursement of the people (not the government) of a province whose legislature decided not to participate.

The debate over the spending power continued on a muted but steady level through various constitutional negotiations in the 1970s and the 1980s.

In 1986, limitations on the federal spending power became one of Quebecs five conditions for support of the Constitution Act 1982.

As a result, the Meech Lake Accord of 1987 would have added a new section, section 106A, to the Constitution, immediately after the federal power to appropriate funds. Section 106A would have provided for reasonable compensation to the government of any province that chose not to participate in a cost-shared program in an area of exclusive provincial jurisdiction, provided the province carried on a program compatible with national objectives. [However, the Meech Lake Accord was not passed.] 4.10. A New Approach to Regional Development in Atlantic Canada In This Issue :

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