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J. PETER MEEKISON

 

It is no exaggeration to say that the distribution of financial powers between the Dominion and the provinces has been by far the most troublesome of the many problems raised by Confederation. Every province has been embroiled–some of them many times–in financial disputes with the Dominion, and no Cabinet at Ottawa has been able to escape the constantly recurring nightmare of provincial dissatisfaction and the apparently insatiable demands on the Dominion treasury.

 

INTRODUCTION

 

The subject of fiscal federalism has been one of the predominant themes, and is perhaps the foremost theme, in the evolution and development of Canadian federalism. One can trace this theme continuously from the Confederation debates through to today and it is the fine red thread running through the literature and study of Canadian federalism. (Perry, 1997) Even when debates on constitutional reform and national unity dominated the newspaper headlines and commanded the attention of governments, the same governments continued to address policies pertaining to fiscal federalism, usually with less fanfare. It has also been pivotal to the centralization/decentralization debate which has been prominent throughout our history.

 

Before proceeding further, some understanding of what fiscal federalism means or entails is necessary. Any definition of federalism includes a reference to the division of legislative powers and the expectation that the two orders of government are autonomous within their respective spheres of jurisdiction. To fulfill their legislative obligations (fiscal needs), governments require revenues. Accordingly, one of the most fundamental decisions at the time of federating is the allocation of revenue sources, particularly taxation (fiscal capacity). The reality is that fiscal needs and capacity are rarely equivalent. Any equilibrium achieved is usually short- lived. When there is a difference, a vertical fiscal imbalance is said to exist.

 

Federal theory is also predicated on the assumption of the equality of the constituent units, at least as far as the division of powers is concerned. While this may be true in theory, the reality is that significant differences in fiscal need and capacity exist or materialize between the constituent units. The reasons for the differences are fairly well agreed upon and would include demographic considerations such as the size and age profile of the population; uneven distribution of natural resources; geographic factors such as land area, climate, soil; and location within the federation. The differences among the constituent units in fiscal capacity and need reflect a horizontal fiscal imbalance.

 

The third major component to this subject is the intergovernmental dimension. The focus here is on the agreements and understandings reached between governments and the processes which continue to evolve to make adjustments, to reach accommodation and to manage intergovernmental conflict. These three dimensions form the basis of most of the debate and literature on fiscal federalism. To one scholar, "the problem of finance is the fundamental problem of federalism."

 

The final introductory comment is that the constitution includes the division of powers and the allocation of taxing authority. As will be seen below, constitutions can and have been amended to make adjustments to problems of fiscal federalism. The courts in Canada have been called upon to interpret the constitution and to refine the meaning of particular provisions such as the interpretation of "direct taxation." Also within the constitutional framework governments are able to reach agreements which outline or identify some of the rules and practices of fiscal federalism.

 

VERTICAL FISCAL IMBALANCE

 

The best place to start an examination of vertical fiscal imbalance is with the division of powers and the taxing authority of the federal and provincial governments. (La Forest, 1981) Under the constitution the federal Parliament is given authority for "the raising of money by any mode or system of taxation," a sweeping power. The provinces have more limited legislative authority, "direct taxation within the province in order to the raising of a revenue for provincial purposes." Provinces also own the natural resources within their boundaries. Natural resource revenue has been an important, and occasionally contentious source of provincial revenue.

 

Among other things, the provinces exercised exclusive provincial legislative authority over policy areas such as health, education and social assistance. At that time these subjects were not considered to be of national importance and did not constitute a major part of public expenditure. Obviously, that reality has undergone a major transformation. These three policy areas today represent a very significant percentage of public expenditures. Both governments and the public see them as important. Indeed, Medicare, the term used to encapsulate our national health care system, is frequently cited as one of Canada's defining characteristics. Over the years, as these and other areas of provincial expenditure have increased, the gap between provincial fiscal need and fiscal capacity has widened, with resulting pressure on the federal government to assist in bridging the gap.

 

At Confederation the federal government was given responsibility for the "great subjects of government " and the fiscal capacity to provide for them. There is no question the federal government has the fiscal capacity to fulfill its constitutional obligations. Paralleling its increase in spending in its own subject areas, the federal government, through the exercise of its spending power, has made significant expenditures in areas of exclusive provincial jurisdiction. The federal spending power is of major importance in this analysis because it goes to the very core of the functioning of the federal system and ultimately to the question of vertical fiscal imbalance. (Watts, 1999)

 

Vertical fiscal imbalance has been a contentious issue ever since Confederation. The Constitution Act, 1867, included a series of constitutionally guaranteed federal grants and subsidies to the provinces, which were a subject of intense negotiation at that time. They were a harbinger of things to come. Twenty years after Confederation, at the first interprovincial conference, one recommendation that the provinces made was to secure an increase in these grants because they were insufficient to meet their needs. A constitutional amendment was eventually enacted in 1907 increasing the grants. While the sums involved are modest when compared to the intergovernmental transfers of today, the pressure by the provinces on the federal government to increase transfers to them began right after Confederation and continues to this day.

 

The federal spending power has been the principal mechanism by which the federal government has addressed or managed the issue of vertical fiscal imbalance. The chosen instrument has been the cost-shared or conditional grant program. While such programs have their origins at the turn of the century, it was not until the post WW II period that they mushroomed, particularly in the social policy areas of health, social assistance and post-secondary education. Spending also occurred in other areas such as transportation, e.g. the Trans Canada Highway. The point here is that cost sharing took place in areas of exclusive provincial jurisdiction. Some of the provinces, such as Quebec and Alberta were critical of what was seen as federal intervention into provincial affairs. (Tremblay, 1956) The federal response to such criticism has been to argue that the national government has an overarching interest in these matters. In some instances, to avoid a major federal-provincial dispute, especially with Quebec, the federal government has worked out alternative means of transferring the equivalent funds by way of the tax system.

 

In 1976 the federal government announced an entirely new approach to the funding of shared cost programs in post-secondary education, health and hospital care. This became known as Established Programs Financing (EPF). Under the new approach, conditions were removed because federal objectives had been achieved and the programs were seen as being mature. Federal funding commitments would be maintained through a combination of block grants and tax transfers, the latter being achieved by a reduction in federal income tax and a corresponding increase in provincial income tax. Once a tax transfer of this type is completed there is really no turning back. Provinces would be reluctant to give up these additional tax revenues, generally referred to as tax room. In 1984 the federal government reintroduced some limited conditions on health care funding, in the form of the Canada Health Act.

 

In the 1990s the federal and provincial governments were faced with the major challenge of deficit reduction. Federal transfers to the provinces were not spared from budget cuts and their reduction resulted in both criticism and a number of new policy developments. The paradox here is that for years provinces individually and collectively have questioned the federal government's spending power and have wanted it controlled. Despite these criticisms, the federal money still flowed and provinces expected it to continue more or less at the same level. It is fair to say that the provinces had grown dependent on the federal transfers. When the transfers were reduced, provinces were very critical of what was described as federal offloading. Provincial fiscal need remained and, if anything, increased as pressures on their budgets mounted. Many people were concerned about the fraying of Canada's social safety net or what has become known as the social union. (O'Hara, 1998) At the same time, some of the provinces began to question the justification of continuing federal conditions with such a significant reduction in their cash contributions. They also criticized the unilateral nature of the federal decision which modified previously negotiated agreements.

 

A major policy development was contained in the 1995 federal budget. At that time, the federal government announced its intention to replace EPF with a new program, the Canada Health and Social Transfer (CHST). The new CHST combined EPF and the Canada Assistance Plan into a single block funded program. The CHST is a reflection of the decentralizing trends currently in effect in Canadian federalism. The 1996 budget included a second major policy shift. The federal government voluntarily announced limits on the exercise of the federal spending power. It is no coincidence that this decision was made shortly after the narrow victory of the NO side in the October 1995 Quebec referendum. One can see clearly the linkages being forged between national unity policies and those of fiscal federalism. It should be remembered that the federal spending power had been on the constitutional reform agenda since 1968 and was one of Quebec's five conditions for accepting the Constitution Act, 1982. The 1996 budget commitment was one of a number of post-referendum initiatives taken by the federal government.

 

How did the provinces respond to this rapidly changing environment in fiscal federalism?

 

The provinces took the initiative and decided to develop their position on the social union and the federal spending power. They examined two approaches, the establishment of a new interprovincial framework agreement and a new federal-provincial framework agreement. In effect, the provinces wanted the rules of the game redefined and clarified. The questions associated with the thorny subject of national standards are critical to understanding this initiative. Who establishes them, how they are they established and enforced are of fundamental importance to both orders of government. The federal-provincial approach to maintaining the social union was the route governments eventually supported in February, 1999.

 

National unity considerations were present throughout the evolution of the new policy framework. The provinces, other then Quebec, linked their evolving position on social policy to the ongoing national unity debate by incorporating it into the 1997 Calgary declaration and at first Quebec did not participate in the interprovincial negotiations. Quebec was well aware of what was taking place. At the 1998 Premiers' Conference, Quebec agreed to join with the other provinces in the federal-provincial negotiations. When it came time to sign the final compromise agreement, Quebec found it too centralizing and rejected it. (Policy Options. April, 1999)

 

The new framework agreement is possibly one of the most significant and ambitious changes in policy-making in the area of fiscal federalism in decades. The only note of caution is that, while governments have charted a new course, it remains to be seen whether or not it will be followed. Years of engrained behaviour such as the ability to make unilateral decisions need to be abandoned and that takes time, energy and a willingness to embrace (or at least accept) the new course.

 

The incentive and motivation to forge a new framework agreement was a direct result of the federal reduction in transfer payments to the provinces. Now that the federal deficit has been brought under control and the government is reporting a surplus or fiscal dividend, the policy question becomes what to do with the surplus. The choices are: tax reductions, debt reduction and increased spending or some combination thereof. There are no end of suggestions for increased federal spending, much of it in areas of provincial jurisdiction. Some examples are a national day care program, post secondary education, highway and other infrastructure improvements and a pharmacare program. Whatever decisions are eventually made, the new framework agreement will soon be put to the test and its future may very well depend upon how, as opposed to what, decisions are reached. Since the specifics of the agreement relate more to processes they are dealt with later in the paper.

 

HORIZONTAL FISCAL IMBALANCE

 

Just as one can find vertical fiscal imbalance reflected in the Confederation financial arrangements, one can also find recognition of horizontal fiscal imbalance in the system of subsidies and grants. A prime example is Sec. 119, a special 10-year federal subsidy to New Brunswick. Of equal importance is the immediate questioning of the effects and impact of the Confederation financial settlement by the Maritime provinces. They felt they had been unfairly treated and called for adjustments. Their position is a recurring theme at various intergovernmental conferences and the subject of more than one Royal Commission. Other than making specific decisions to increase certain federal subsidies, no overall policy emerged until 1957.

 

The Rowell-Sirois Commission in its 1940 Report proposed a system of National Adjustment Grants. As the Commission noted, "the only true independence is financial security." The National Adjustment Grant proposal was the precursor of the modern equalization program. This particular recommendation has to be assessed in the context of their entire report. Since several of the provinces were highly critical of the Report's recommendations on fiscal federalism the principles reflected in the National Adjustment Grants was deferred for almost 20 years.

 

In 1957 the federal government introduced the equalization program which was totally unconditional. The formula was intended to recognize and make adjustments for differences in fiscal capacity by equalizing revenues from personal and corporate income taxes and succession duties. The question immediately arises, equalization of revenues to what standard? The federal government agreed to equalize revenues to the average of the top two provinces, which at that time were Ontario and British Columbia. In 1962, 50 per cent of natural resource revenues were factored into the calculation, eliminating Alberta and British Columbia from the list of beneficiaries. Since then, the formula under which equalization payments are calculated has undergone a number of revisions including the expansion of provincial revenues used to determine the payments. In the mid-seventies when Alberta's oil royalties mushroomed, thereby skewing the application of the formula, further refinements to the formula were made. Today there are over 30 revenue sources factored into the formula. The calculation is based on the revenue stream of five provinces and is referred to as the Representative Five-Province Standard. Alberta and the four Atlantic provinces are left out of the equation. What is clear is that the equalization formula has undergone continuous refinement since it first appeared.

 

Equalization payments are another example of the exercise of the federal spending power. The program started at a time when government revenues were increasing. Other than possible political repercussions, there was no protection to receiving provinces should the federal government reduce payments, or for that matter cancel the program. When natural resource revenues were incorporated into the equalization formula in 1962, Alberta and British Columbia were understandably critical of the change. The lesson was not lost on the other provinces and the question inevitably arose as to how some form of protection or guarantee could be established

 

The answer was some kind of constitutional guarantee or shield. The question first surfaced during the negotiations leading to the 1971 constitutional reform proposal known as the Victoria Charter. The question of equalization was included as part of a general discussion of regional disparities. Although the Victoria Charter addressed the subject of regional disparities and the obligations of both orders of government to tackle this problem, there was no reference to equalization. This omission was not an oversight but a direct result of strongly held differences of opinion. Recipient provinces wanted a constitutional guarantee that would obligate the federal government to make payments. The federal government was not willing to accede to this proposal. They were not prepared to write a blank check. Another criticism came from British Columbia which argued that regional disparities exist within provinces as well as between provinces. To British Columbia, the best way to meet these needs was payments to people not governments, a fundamentally different perspective.

 

During the negotiations leading to the Constitution Act, 1982, governments once more added regional disparities to the agenda. The end result was Section 36 of the Constitution Act, 1982 entitled, "Equalization and Regional Disparities." The first clause is similar to the regional disparities clause included in the Victoria Charter. The second clause reads as follows:

 

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

 

The clause establishes a non-constitutional obligation on the part of Parliament and the government of Canada to provide equalization payments. While there is nothing to prevent a province from challenging this narrow interpretation, the expectation is that the Supreme Court would not support the challenge. To do otherwise, the Supreme Court would have to direct that payments be made by Parliament, a difficult decision to enforce. While the level of contribution is unspecified, the language would suggest national averages. Finally payments are made to governments not individuals. Even if the clause is non-justiciable, it stands as a powerful reminder of what has become one of the cornerstones of the federal system – equalization.

 

Equalization has been referred to as the "glue" that holds the country together. (Boadway and Hobson, 1998) The wording of Sec. 36 makes it clear that provincial revenues, services and taxes are to be reasonably comparable. The philosophical rational is that Canadians, wherever they live, are entitled to and should receive essentially the same level of government services. The equalization program is the major program through which the federal government redistributes the wealth of the country. Funds are transferred from the "have" provinces of Ontario, British Columbia and Alberta to the other seven provinces – the "have-nots". For the most part, the policy and practices of equalization went unchallenged.

 

In recent years, as provincial governments endeavoured to get their deficits under control, their spirit of understanding and generosity was occasionally put to the test. In 1990 the unilateral decision on the part of the federal government to cap payments under the Canada Assistance Plan (CAP) to the three "have" provinces created considerable backlash from them over the equalization implications of that decision. The reality is that the funding formula of many of the shared cost programs contained an equalization provision. The cap on CAP was too much of a blunt instrument and the "have" provinces' reaction questioning the total cost of equalization was entirely predictable. When the federal government announced the CHST, the equalization distortion of the cap on CAP continued. The per capita grants to the provinces under the CHST vary widely, from $939 per capita in Quebec to $800 per capita in Alberta. The differential treatment was seen by the "have" provinces as discriminatory. The 1999 budget eliminated this problem when the government introduced equal per capita grants of $960 effective in 2001.

 

Although the public rejected the Charlottetown Accord in the 1992 referendum, the amendments to Sec. 36 proposed in the draft legal text warrant brief mention, if for no other reason than to demonstrate that, at least to Atlantic Canada, this section remains unfinished business. There is no reference to equalization in any of the federal documents or the 1992 Beaudoin/Dobbie Report. Nevertheless, when federal-provincial negotiations began , not surprisingly, equalization found its way onto the agenda. Two key amendments were suggested. The first was rewriting the clause to make judicial enforcement a distinct possibility. The revised wording was, "Parliament and the government of Canada are committed to making equalization payments so that the provincial governments…. " Being committed to making payments is much stronger than simply being committed only to the principle. The second proposed change was insertion of a new clause requiring the federal government to consult with the provinces before introducing legislation on equalization payments.

 

As the "glue" that holds Confederation together, the equalization program and the funding formula are under constant scrutiny and review. Criticisms are voiced and new approaches suggested. Current revisions will see other sources of revenue, such as proceeds from gaming, added to the already long list of government revenues. There are challenges on the horizon for the equalization program and the continuing evolution of the funding formula. Courchene argues that revisions to the equalization program must take into consideration North American and global markets. (Courchene, 1998) An example of a current criticism is the taxback problem. It "occurs when a province controls a large portion of a given tax base and receives equalization. Under the current scheme, increases in tax bases are matched almost one-for-one by decreases in transfers." (Boothe, 1998) What incentive is there for a province to develop its own sources of revenue if the net effect on the provincial budget is negligible?

 

One example of a new approach is the idea of modifying the equalization program from a representative tax system to one that incorporates a measure of fiscal need. (Brown, 1996) The Royal Commission on Aboriginal Peoples certainly endorsed the concept of a formula for Aboriginal governments combining fiscal capacity and fiscal need. (RCAP, 1996) Another example is a provincially funded equalization program. (Boothe and Hermanutz,1999) Without going into full detail, their idea is dependent upon the federal government's transferring personal income tax (PIT) points to the provinces (expanding the tax room) and the provinces taking over responsibility for the equalization program. Before pursing this idea further one would need to be certain that it did not violate Sec. 92 (2) which restricts provincial legislative authority for direct taxation "to the raising of revenue for provincial purposes." As well, it is doubtful that the federal government would give up such a significant degree of control over fiscal policy. As can be seen the debate over horizontal fiscal imbalance is an ongoing one and will continue to be so.

 

THE INTERGOVERNMENTAL DIMENSION: TAX COLLECTION AGREEMENTS

 

The third component of fiscal federalism is the intergovernmental dimension. Its first manifestation is the tax collection agreements. These agreements have evolved over the past 60 years and can be traced back to the 1941 First Ministers' conference convened to debate the Rowell-Sirois Report. While the agreements have changed over time, the central feature – a harmonized tax system – remains constant. Agreements are reviewed, renegotiated and renewed every five years. The equalization negotiations form part of this overall review.

 

Under the tax collection agreements, the federal government for an administrative fee, collects all personal and corporate income taxes on behalf of the provinces. It should be noted that Quebec, other than during WW II, collects its own taxes. Today, Alberta and Ontario collect their own corporate taxes. While it is generally taken for granted, the successful operation of the agreements is dependent on our highly sophisticated system of statistics and common data bases.

 

After WW II the provinces "rented" their taxes to the federal government. The main feature of renewal negotiations was the value of the rent, with the provinces demanding a greater share as their expenditure needs increased. It is worth noting that, as far as the taxpayer was concerned, there was only one tax collector, the federal government.

 

Beginning in 1962, the tax rental system was replaced by the tax collection agreement, a more transparent system. Income tax returns indicated the amount each order of government was collecting. Taxpayers then knew which government to hold accountable for any tax increases. The tax system was still harmonized, however, with provincial taxes being calculated as a percentage of federal taxes, a tax on tax. Since 1962, the tax collection agreements have become more complex. Governments have introduced tax credits for a variety of policies such as political contributions. They have established surtaxes. A recent decision by Alberta to move away from the tax on tax to a flat tax represents a major departure in how provinces determine their personal income taxes. Although the method of determining the provincial personal income tax will change, tax harmonization continues. Ontario has threatened to pull out of the tax collection agreements but has yet to do so. Among other things, it has been critical of the delay in finalizing the annual amount of taxes owed to the province. While change in how the tax collection agreement operates is inevitable, as is criticism of its administration, the fact remains that the harmonization of the income tax system has been a very successful venture in federal-provincial policy making. The system is efficient and effective.

 

The other area of tax harmonization that should be mentioned is that of blending the Goods and Services Tax (GST) and provincial sales taxes. (Mellon, 1998) With the advent of the GST, it was not long before the question of harmonization arose. At first it seems fairly straightforward, but nothing in the area of fiscal federalism is that easy to resolve. In 1996, Quebec became the first to harmonize the two sales taxes. This agreement was followed by one in 1997 in Atlantic Canada for a blended tax of 15%. (PEI eventually opted out.) One of the most contentious issues was price inclusive taxes as opposed to taxes added at the cash register, the latter being the route taken. In this instance, the blended tax meant the provincial tax was more extensively applied than before. Part of the regional federal-provincial agreement was a temporary compensation package. This part of the agreement was seen by some of the other provinces, such as Alberta, as far too generous. In reality it was another way of merely addressing both vertical and horizontal fiscal imbalance.

 

THE INTERGOVERNMENTAL DIMENSION: PROCESSES OF FISCAL FEDERALISM

 

It should be evident by this point that fiscal federalism involves more than the policies and agreements outlined above. The processes by which agreements are reached is an important consideration. These agreements are the result of years of constant interaction among federal and provincial governments and their elected and appointed officials. There has been more extensive and continuous networking in this policy area than in any other field of public policy. Negotiations, depending upon the circumstances, have involved First Ministers, Finance Ministers, other Ministers and their respective officials. This interaction has been continuous since 1941 leading to what Dupré (1985) refers to as "trust ties" amongst those involved in the process. This does not mean that matters negotiated have been conflict free, far from it, but what it does mean is that those involved get to know and trust each other. They have ongoing opportunities to exchange views and search for workable solutions. A great deal of information is exchanged and those involved in the processes experience and face common problems, whether they be fighting the deficit, inflation or tax relief. The personal relationships that develop have been an important factor in overcoming many of the irritants which arise and which have the potential of escalating into more serious problems.

 

To be sure, underlying the meetings are the recurring themes of vertical and horizontal fiscal imbalance and the provincial demand for more tax room. On the part of the federal government there are calls for greater recognition and credit for federal spending. When you add to these themes the cleavages between "have" and "have-not" provinces, regional alliances, national unity challenges, globalization pressures, budget cycles, electoral cycles and changes in government, one is confronted with an extremely complex matrix with a large number of variables and unknowns. Decisions are not made by majority votes of those in attendance but by consensus. Even that process of accommodation may simply give way to decisions being made by the federal government, the default position. If an agreement is not forthcoming and a decision is required, the federal government is occasionally left with, or assumes, that responsibility. Because the process ordinarily involves at least an annual meeting with finance ministers and officials, one knows that there will be future opportunities to raise concerns and propose changes. These are not one-time events.

 

Perhaps the best way to illustrate the importance of process is an analysis of the new Social Union Framework Agreement. That Agreement puts an entirely new focus on the processes and practices of certain key aspects of fiscal federalism. Space does not permit an exhaustive commentary on the agreement. Let me, however, refer to six key provisions all of which speak to process.

 

1) The federal government has voluntarily limited the exercise of its spending power. It has agreed not to introduce any new initiatives in the areas of health care, post-secondary education, social assistance and social services "without the agreement of a majority of provincial governments." While opting-out with compensation, one of Quebec's key conditions, is not specifically referred to, this possibility is implicit in the section on funding. Provinces will receive their share of funds if they "meet or commit to meet Canada-wide standards." This provision is a much more stringent threshold than the one found in the Meech Lake Accord.

 

2) Under the agreement, the federal government must give one year's notice before major changes are made to funding. New social transfers will contain due notice provisions. Unilateral federal action, such as the cap on CAP, has been a major cause of federal-provincial disputes. While not eliminated by this provision, at least there is an opportunity for provinces to influence public opinion and negotiate changes.

 

3) The agreement calls for "effective mechanisms for Canadians to participate in developing social priorities and reviewing outcomes." Some form of public consultation has now become part of the process. How public input will manifest itself is unknown at this time. It can range from Parliamentary committees to focus groups to non-governmental organizations participating in intergovernmental conferences. What has become more clear in the last few years is that the public wants more say in policy development. (Biggs, 1996; Jenson, 1999; O'Hara, 1998)

 

4) Each signatory government has agreed to "monitor and measure outcomes of its social programs and report regularly to its constituents on the performance of these programs." Governments have also agreed to work together on the "development of outcome measures" and to develop "indicators to measure progress on agreed objectives." Such activities may lead to constant program revision. (O'Hara, 1998)

 

5) The framework agreement refers both to dispute avoidance and resolution. While no specific process is spelled out the Agreement on Internal Trade of 1995 offers one model. (Howse, 1995)

 

The text includes reference to third parties, joint fact-finding, mediation, publicity and reporting on disputes. The agreement reflects a preference for intergovernmental resolution of disputes followed by the use of third parties, which could be other governments. Whatever emerges, settling dispute other than through the courts is uncharted territory and one filled with many pitfalls.

 

6) A theme running throughout the agreement is that of partnership, a term used in the 1997 Calgary Declaration. The 1999 framework agreement contains several references to joint planning, joint priorities, collaboration, consultation, flexibility and duplication. As is readily apparent from the evolution of Canada's social safety net, both orders of government have an interest in policy development. The agreement provides a framework for co-operation which reflects the mutual interest and growing interdependence of policy development. For example, the looming debate on productivity has obvious consequences for the country's ability to finance social programs.

 

Taken together these six and the other components of the framework agreement reflect an entirely new approach to the processes of policy development. As mentioned earlier, this agreement is going to require considerable effort on the part of governments to modify their approach to fiscal federalism and policy development. Success is by no means guaranteed, but the alternative is to return to a more ad hoc approach and the spectre of intergovernmental conflict.

 

While our many achievements in the evolution of Canada's social security net were a result of this latter method, circumstances today are very different than when it was developed. For one thing, it emerged incrementally over a number of years and at a time when the economy was more robust. Globalization, developments in technology, differences on how to spend the fiscal dividend, productivity concerns, the continuing uncertainty over national unity, rulings by the World Trade Organization and the exchange rate with the U.S. dollar all contribute to the need for and justification of a new and fresh approach to fiscal federalism. The Framework Agreement on the Social Union is a good start.

 

CONCLUSION

 

This brief analysis has concentrated on the three main features of fiscal federalism in Canada. These include vertical fiscal imbalance; horizontal fiscal imbalance; the intergovernmental processes, especially the tax collection agreements and the Framework Agreement on the Social Union. Vertical and horizontal imbalance is a fact of life in federations. These imbalances are not theoretical abstractions but very real circumstances that cry out for resolution. Governments respond to these two challenges in different ways. The search for solutions, of necessity, involves both orders of government in what are probably two of the most important issues confronting any government, the raising and spending of money. Accordingly, the questions examined are inherently political in nature. Economic considerations are also important and may be persuasive in shaping policy outcomes. Political considerations, however, tend to be predominant.

 

A highly complex web of intergovernmental processes has evolved over the years to grapple with these policy issues. Other than the Confederation subsidies and grants and the 1982 amendment on equalization, the Constitution is silent on the intergovernmental dimension of fiscal federalism. The irony is that, without such processes, it is unlikely that we would have achieved the level of agreement and harmonization now in existence.

 

The three facets of fiscal federalism addressed represent the core of this policy field. Before concluding, certain other important but peripheral policy areas warrant brief mention. One should also give consideration to the following: government borrowing, monetary policy, natural resource taxation, economic development initiatives, northern development policies and Aboriginal policies. Each of these has an impact on fiscal federalism, either directly or indirectly. Accordingly, one should at least be aware of them when plunging into the depths of fiscal federalism.

 

The subjects addressed in policy areas of fiscal federalism are often contentious and have a habit of recurring. Over the past sixty years agreements have been signed and policies modified to meet new circumstances which arise from both domestic and foreign pressures. The policies of yesteryear give way to the needs of today and tomorrow. Change is inevitable. Flexibility and adaptability are essential. On balance, the policies and processes of fiscal federalism have been a success story.

 

 

SELECTED BIBLIOGRAPHY

 

 

 

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Biggs, Margaret. Building Blocks for Canada's New Social Union. Working paper No. F|02|. Ottawa: Canadian Policy Research Networks, 1996.

 

Birch, A.H. Federalism, Finance and Social Legislation in Canada, Australia and the United States. London: Oxford University Press, 1955.

 

Boadway, Robin W. and Paul A.R. Hobson. Equalization: Its Contribution to Canada's Economic and Fiscal Progress. Kingston: John Deutsch Institute for the Study Economic Policy, Queen's University, 1998.

 

Intergovernmental Fiscal Relations in Canada. Canadian Tax Foundation Paper No. 96. Toronto: Canadian Tax Foundation, 1993.

 

Boothe, Paul. Finding a Balance: Renewing Canadian Fiscal Federalism. C.D. Howe Institute Benefactors Lecture, 1998. Toronto: C.D. Howe Institute, 1998.

 

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Boothe, Paul and Derek Hermanutz. Simply Sharing: An Interprovincial Equalization Scheme for Canada. Commentary No 128. Toronto: C.D. Howe Institute, July, 1999.

 

Brown, Douglas M. Equalization on the Basis of Need in Canada. Reflections Paper No. 15. Kingston: Institute of Intergovernmental Relations, Queen's University, 1996.

 

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Courchene, Thomas J. Renegotiating Equalization: National Policy, Federal State, International Economy. Commentary No. 113. Toronto: C.D. Howe Institute September, 1998.

 

"Fair-shares Federalism and the 1999 Federal Budget." Policy Options 20 (April, 1999): 39-46.

 

Dupré, J. Stefan. "Reflections on the Workability of Executive Federalism." In Intergovernmental Relations, ed. Richard Simeon, 1-32. Toronto: University of Toronto Press, 1985.

 

Howse, Robert. "Between Anarchy and the Rule of Law: Dispute Settlement and Related Implementation Issues in the Agreement on Internal Trade." In Getting There: An Assessment of the Agreement on Internal Trade, ed. Michael J. Trebilcock and Daniel Schwanen, 170-195. Policy Study No. 26. Toronto: C.D. Howe Institute, 1995.

 

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Institute of Intergovernmental Relations. Assessing Access: Towards a New Social Union. Kingston: Institute of Intergovernmental Relations, Queen's University, 1997.

 

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