Canada’s federal transfer payment system badly needs a tune-up – The Conversation

Federal transfer payments are at the heart of the Canadian federation. They ensure critical public services are equitably funded right across the country and account for roughly one-fifth of total provincial revenues. For lower-income provinces, they rise to as high as one-third of the total.

While reaching agreements and enacting reforms is never easy as recent federal-provincial wrangling over health transfers demonstrates kicking the can down the road is no way forward.

But thats precisely what the federal government has been doing missing opportunities to seriously explore reforming the federal transfer payments system.

Recent reports suggest that the federal government quietly extended the current equalization formula first adopted 15 years ago until 2029. This is yet another example of the failure of the government to seriously examine whether our system of federal transfers needs a tune-up in the face of growing challenges.

Many of these challenges especially an aging population, mounting health-care pressures, climate change, economic uncertainty and energy transitions are already having an effect on government finances in Canada.

They will only become significantly more pressing over time. Local governments are playing an increasing role in delivering services and infrastructure but with limited resources. They should be incorporated more fully in the conversation about the future of fiscal federalism.

Thats because getting reform right is critical.

To appreciate this, consider the challenge posed by an aging population alone. Statistics Canada projects the share of Canadians over 65 will increase from less than one-fifth today to nearly one-quarter by 2050.

Health-care spending could rise by the equivalent of roughly three per cent of GDP. For context, if funded entirely from tax increases, that would require increasing the GST by approximately 10 percentage points.

With the share of Canadas population participating in the labour force falling rapidly, the implications for economic growth and the potential for even wider fiscal inequalities among provinces are no less dramatic. Overcoming this will involve all levels of government in Canada.

An issue that hits closer to home for some Canadians is that of perceived fairness.

A striking example of grievances about the fairness of fiscal federalism is the debate about the federal equalization program, which has faced criticism from wealthier provinces since its inception in 1957. Those criticisms are especially prominent in Alberta today.

In the lead-up to the upcoming Alberta election on May 29, Alberta is strongly expressing its concern that the federal government extended the formula another five years. It offered a detailed suggestion for reform.

Modernizing our fiscal arrangements is necessary to overcome some of these considerable challenges. Our governments should be willing to have important conversations on this issue.

To be sure, the latest federal budget made some adjustments. It detailed more than $46 billion in boosted federal health transfers to provinces and territories.

Much of this is allocated equally across provinces, according to their population. Some, however, is allocated as fixed payments independent of how large a province is. This provides considerably more support to smaller provinces that face disproportionate challenges from the aging population.

But much more is needed in many other areas, and all governments must work together.

This is especially true for challenges that transcend the ability of any individual government to address, many of which like climate change are becoming more significant by the day.

These issues will place a lot of strain on Canadas highly decentralized system of government. Who should do what, and who should pay for what, are central questions that we need to get right and that we need to adapt when necessary.

A list of specific reforms that Canada should adopt would be helpful, but it isnt obvious what those are.

From changes to equalization to tax point transfers, health-care funding, municipal infrastructure support and a more fundamental rethinking of the system of fiscal federalism that we have today, there are many details to work out and trade-offs to consider.

Historically, mounting pressure led governments to pursue deep dives into our fiscal systems and enact evidence-based reforms. From the Rowell-Sirois Commission in the late 1930s to the 2006 OBrien Report on equalization, this has been a common approach.

Canadas intergovernmental and fiscal arrangements have confronted and successfully overcome unique social, political, economic and fiscal pressures over more than 150 years. Today, governments can work together with academics, practitioners and indeed all Canadians to do just that once again.

Avoiding the challenges wont make them go away.

Charles Breton of the Institute for Research on Public Policy, Colleen Collins of the Canada West Foundation and Steve Orsini of the C.D. Howe Institute contributed to this article.

If so, youll be interested in our free daily newsletter. Its filled with the insights of academic experts, written so that everyone can understand whats going on in the world. With the latest scientific discoveries, thoughtful analysis on political issues and research-based life tips, each email is filled with articles that will inform you and often intrigue you.

Get our newsletters

Editor and General Manager

Find peace of mind, and the facts, with experts. Add evidence-based articles to your news digest. No uninformed commentariat. Just experts. 90,000 of them have written for us. They trust us. Give it a go.

Get our newsletter

If you found the article you just read to be insightful, youll be interested in our free daily newsletter. Its filled with the insights of academic experts, written so that everyone can understand whats going on in the world. Each newsletter has articles that will inform and intrigue you.

Subscribe now

CEO | Editor-in-Chief

It helps you go deeper into key political issues and also introduces you to the diversity of research coming out of the continent. It's not about breaking news. It's not about unfounded opinions. The Europe newsletter is evidence-based expertise from European scholars, presented by myself in France, and two of my colleagues in Spain and the UK.

Get our newsletter

Head of English section, France edition

Read the original here:

Canada's federal transfer payment system badly needs a tune-up - The Conversation