July 10, 2014 | By Noah Zon
Principles for Allocating Transfer Payments in the Canadian Federation
Two thirds of the federal government’s budget each year are redistributed to provinces and territories, organizations and people through transfer payments. The regional allocation of these transfers has a major influence on fiscal federalism in Canada that extends far beyond the Equalization program. This paper proposes some core principles to guide the allocation of these transfers, and looks at how existing transfers measure up.
Only about one-third of the funds that Canadians send to the federal government go directly towards federal operations and programs. The other two-thirds are redistributed through transfers to provinces and territories, people, and organizations. The effect of these transfers on regional redistribution, with revenues collected in some areas of the country and spent in other areas, is significant. In fact, the combined redistribution through these transfers is greater than the formal redistribution undertaken through the Equalization program.
While the Equalization program is often a focus of heated debate, the approaches used to determine each province’s allocation of other transfers are often undertaken on an unprincipled basis. The published formulae often lack transparency or are sometimes unavailable entirely. The uneven distribution of billions of dollars of federal spending too often comes without a clear, public explanation for why some provinces get more and others get less.
Unprincipled allocation of federal fiscal transfers is corrosive to the federation. It contributes to mistrust between governments and citizens and makes collaborative intergovernmental action more difficult. A lack of transparency in allocations makes it all the easier for residents of all provinces to believe that somehow they are getting shortchanged. This contributes to heightened inter-regional tension.
It does not have to be this way. In fact, the federal government made a commitment to moving towards principled allocations of federal fiscal transfers in their 2007 budget.1 As a result of that commitment, the federal government moved toward principled allocations in the Canada Social Transfer and the Canada Health Transfer. But the progress made then stalled—and in some cases has been reversed.
Unprincipled allocation is felt by people in real ways. It is felt by workers in Ontario who have access to fewer funds for job training. It is felt by people with disabilities in Quebec, where the province receives less than an equal per capita share of Labour Market Agreement for Persons with Disabilities funding to provide employment supports to those who need it. It is felt by people in British Columbia who have less access to social housing.
The path forward is both clear and achievable. We propose four guiding principles to determine the appropriate approach for allocating federal transfer payments throughout the federation. Allocations should be:
- Clear and transparent
- Fair to Canadians regardless of where they live
- Consistent with the policy objectives of the transfer
- Predictable, with the flexibility to adapt to changing circumstances.
Allocations consistent with these principles could take a variety of forms. Comparative experience in federations highlights four different kinds of principle-based allocations that can be used, depending on circumstances:
- Per capita
- Per client
Our review of comparative experience found that other federations overwhelmingly use these approaches. In Canada we also use all of them, but not consistently and with too many exceptions. We also found that in other federations governments regularly reported on which approach they used and why—because using the wrong principle-based approach in the wrong situation (for example, adopting a per capita approach when a per client approach should be used) undermines transparency and policy goals.
Because the federal government does not consistently use principle-based approaches, Canadians in different parts of the country have different access to essential public services funded with their federal tax dollars. In particular, funds for training, infrastructure and housing defy logic and deprive some Canadians—in all these cases, Ontarians—of equitable access to programs and services.
There is no reason why the federal government should not move immediately to a principle-based approach for all fiscal transfers. There is also no reason that it should not report publicly on its allocation decisions and their rationale. Since the federal commitment in 2007 to move to a principle-based approach, it has failed to do so. There is no explanation for this that we can see.
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- Finance Canada. 2007. Budget 2007. http://www.budget.gc.ca/2007/pdf/bp2007e.pdf [↩]