As Table B.4 indicates, the federal verticalimbalance is negative in most years, and varies considerably over time.It is relatively low in the 1980s and early 1990s, largely reflecting the highbudget deficits of those years. When the federal government responded tothose deficits in the mid-1990s, the VFI took on more conventionalmagnitudes.
A similar picture is seen in the VFI for theprovinces, though in this case, the mirror image. Provincial expendituresare significantly in excess of own source revenues during the 1980s. Thedifferential falls rapidly in the mid-1990s, and is less than 10 percent by1999. Table 6 in the Appendix disaggregates provincial VFIs byprovince.
VFI Including IntergovernmentalTransfers
In this case, federal transfers are includedas part of federal government expenditures and also as part of provincialrevenues. Now the VFI calculated at each level of government simplyreflects the extent of deficit financing. The large positive values ofthe federal VFI in the 1980s shows the proportion of federal spending that hadto be financed by borrowing. The negative values in more recent yearsrepresent the government surplus. The same applies for theprovinces.
5. Horizontal FiscalImbalances
Different provinces have different fiscalcapacities for delivering public services to their residents — that is, there are Horizontal Fiscal Imbalances(HFIs). These can arise from both the revenue and the expenditure sidesof the budget. With respect to revenues, different provinces havedifferent tax capacities, that is, differences in the ability to raise revenuesusing a given tax effort. On the expenditure side, the need for publicservices of different types can differ across provinces because of differentdemographic make-ups of the provincial population. As well, costs of provisioncan differ. We begin by presenting some raw data to indicate per capitadifferences in public spending and revenues by province. However, thesecan be misleading since differences can arise not just because of differencesin fiscal capacity, but also because different provinces choose to providedifferent levels of public services. To address this problem partly, wepresent some data on tax capacity differences used to determine equalizationpayments from the federal government to the provinces. These representtruer measure of tax capacity than simple per capita revenue differencesbecause they abstract from difference in tax rates chosen by provinces.Unfortunately, similar data are not available on the expenditureside.
HFI of ProvincialExpenditures
Table B.5 shows per capita provincialgovernment expenditures as a proportion of the national average over allprovinces for the years 1961-1995.
Table B.5: Provincial Governments Per Capita Expenditures asa Percentage of Canadian Average
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