Fiscal Imbalance and all that

[August1991]

We may or may not hear more about this in the future. I have a suspicion that this will be a "Meech Lake thingee", floating on the surface of a central Canadian lake, which even political-types will find boring.

Here's a sort-of-short, iconclastic take on it all.

The term fiscal imbalance was created in Quebec (le déséquilibre fiscal) by (I think) Yves Séguin, erstwhile Liberal finance minister. It has been the subject of endless Quebec newspaper articles, a Quebec National Assembly Commission and even has its own web site. (Bernard Landry asked Seguin to investigate the matter.)

The basic idea is that the provincial governments have too many spending responsibilities but the federal government has taken all the tax revenues. Hence, the provincial governments are in deficit while the federal government is in surplus. (There are variations on this theme: the federal government solved its budget problems by cutting transfers to the provincial governments, causing the fiscal imbalance.)

In fact though, the provincial governments can raise (almost) any tax they want. If the provincial governments are in deficit (all except Alberta), it is because they don't want to raise provincial taxes. For example, in Canada, sales tax (GST/PST combined) is around 15%. In Europe, VAT (sales tax) is around 25%. If provincial governments wanted more money, they could simply raise provincial sales tax (PST) from 7% to, say, 15%.

Could provincial governments raise taxes? Well, it has already been discussed in Quebec that if Harper cuts the GST to 6%, then the Quebec government should take up the slack and raise the PST by 1%. (I say: Why stop there? Why not raise the Quebec PST to 15% and then we'd have European VAT levels in Quebec?) It has also been discussed that the Quebec government could claw back Harper's $1200 federal family allowance cheque.

IOW, I frankly think the idea of a fiscal imbalance is nonsense. If the Quebec (or any provincial) government wants more money, it can increase taxes to get it. The fiscal imbalance argument is just an attempt to get someone else to take the heat for collecting money.

Worse, the idea of a fiscal imbalance puts Quebec into an impasse where the federal government can call Quebec's bluff. And Harper is apparently about to do just that.

According to the idea of fiscal imbalance, the provincial governments cannot raise enough tax revenue because the federal government has taken all the revenue space. So, if the federal government steps back, and lets the provincial governments have more space at the trough, this should solve the problem, no?

Well, no. It won't.

The Quebec government receives more money when the federal government does the taxing because the federal government taxes all Canadians, and not only people in Quebec.

The Quebec government is very unwise to raise questions about who taxes whom. [i have always thought Yves Séguin was a bit thick; someone who had mastered the image of probity, but that's all.] Government is truly about "other people's money".

IMV, the Quebec government should raise questions about how the federal government spends money, not how it taxes.

----

Last point (and a message to ROC). People in Quebec are a special tax group. They have nowhere else to go. Their government can tax them with impunity.

[geoffrey]

We may or may not hear more about this in the future. I have a suspicion that this will be a "Meech Lake thingee", floating on the surface of a central Canadian lake, which even political-types will find boring.

Here's a sort-of-short, iconclastic take on it all.

The term fiscal imbalance was created in Quebec (le déséquilibre fiscal) by Yves Séguin I think, erstwhile Liberal finance minister. It has been the subject of endless newspaper articles, a Quebec National Assembly Commission and even has its own web site.

The basic idea is that the provincial governments have too many spending responsibilities but the federal government has taken all the tax revenues. Hence, the provincial governments are in deficit while the federal government is in surplus. (There are variations on this theme: the federal government solved its budget problems by cutting transfers to the provincial governments, causing the fiscal imbalance.)

The provincial governments can raise (almost) any tax they want. If the provincial governments are in deficit (all except Alberta), it is because they don't want to raise provincial taxes. For example, in Canada, sales tax (GST/PST combined) are around 15%. In Europe, VAT is around 25%. If provincial governments wanted more money, they could simply raise provincial sales tax (PST) from 7% to, say, 15%.

In fact, it has already been discussed in Quebec that if Harper cuts the GST to 6%, then the Quebec government should take up the slack and raise the PST by 1%. I say, why stop there? Why not raise the Quebec PST to European VAT levels?) It has also been discussed that the Quebec government could claw back Harper's $1200 federal family allowance cheque.

I frankly the idea of a fiscal imbalance is nonsense. If the provincial governments want more money, they can increase taxes to get it.

Worse, the idea of a fiscal imbalance puts Quebec into an impasse where the federal government can call its Quebec's bluff, and Harper is about to do that apparently.

According to the idea of fiscal imbalance, the provincial governments cannot raise enough tax revenue because the federal government has taken all the revenue space. So, if the federal government steps back, and lets the provincial governments have more space at the trough, this should solve the problem, no?

Well, no. It won't.

The Quebec government receives more money when the federal government does the taxing because the federal government taxes all Canadians, and not only people in Quebec. The Quebec government is very unwise to raise questions about who taxes whom. [i have always thought Yves Séguin was a bit thick; someone who had mastered the image of probity. IMV, the Quebec government should raise questions about spending, not taxes.]

----

Last point. People in Quebec are a special tax group. They have nowhere else to go. Their government can tax them with impunity.

August,

Good post. Couple of problems I have with it though of course.

It's business in Quebec that cannot be taxed up the wazoo. There are alot of companies that could and would relocate elsewhere, Alcan being an example, and take alot of jobs with them if taxed excessively.

I somewhat agree with you though, Quebecois are kind of stuck where they are at. I wouldn't be worried about them heading to greener, English, pastures.

The European economy is not nearly as strong as ours due to their oppressive tax regime, and standard of living both fiscally and recreationally is limited by this.

[August1991]

It's business in Quebec that cannot be taxed up the wazoo. There are alot of companies that could and would relocate elsewhere, Alcan being an example, and take alot of jobs with them if taxed excessively.

Hein?

Alcan is in Quebec because of cheap electricity. It can't move to Alabama. Anyway, an aluminium smelter doesn't require alot of people. The electrodes kind of just sit there.

In short, the Quebec government has figured out quite well how far in what direction it can go to collect taxes before some people start to move outside of the Quebec government's reach.

In English Canada, Quebec's relation with Canada is often portrayed as a rip-off. IMV, the true injustice for Quebec lies in the dependance and wasteful government schemes this "fiscal imbalance" creates.

When a government has easy annual access to about $5 billion of other people's money, can you imagine how much nonsense will ensue?

[Charles Anthony]

Last point (and a message to ROC). People in Quebec are a special tax group. They have nowhere else to go. Their government can tax them with impunity.

Hein? Impunity??

You mean the government of Quebec has nowhere else to go -- except creating and flogging a chimeric fiscal imbalance story.

The government of Quebec may tax with impunity but certainly they face the wrath of their electorate more directly than does a rest-of-Canadian politician.

[theloniusfleabag]

Dear August1991,

Last point (and a message to ROC). People in Quebec are a special tax group. They have nowhere else to go. Their government can tax them with impunity.

I don't understand. They are Canadians, they can go anywhere they like. They can vote in a libertarian party. One would think Newfoundlanders would feel more 'trapped', yet they all moved to Ft. McMurray.

[myata]

Regardless of the role of Quebec in this matter, and maybe against my own wishes, the existence of the imbalance is reinforced every time I do my taxes (and I do them myself so I can see exactly where they're going). In all recent years (I confirmed it recently as I was growing curious myself about the issue), about 2/3 of total was going to federal, and only 1/3 - to the province. I.e., twice as much to the feds as to the province.

Then I asked myself what was the last service I received from Federal government - and I have trouble answering the question even after a prolonged contemplation. Sure, there's a passport - but haven't I already paid for it 80 bucks? SIN card - I struggle to recall last time I used it. Then there're all kind of transfers - infrastructure, housing and so on - but what if the moneys stayed in the province to begin with?

So from personal experience it appears that imbalance does exist - even if I personally would like to think otherwise. I think to begin with, the proportion should be changed to the opposite: 2/3 to the province - as provider of all essential services, 1/3 (or so) - to the Feds, for coordination, transfers, and federal activities like army or foreign policy.

[geoffrey]

I don't understand. They are Canadians, they can go anywhere they like.

Not practically. A francophone isn't going to do great in Calgary or Edmonton. They may survive in Toronto.

[Leafless]

I don't understand. They are Canadians, they can go anywhere they like.

Not practically. A francophone isn't going to do great in Calgary or Edmonton. They may survive in Toronto.

Now how do you figure that, geoffrey?

In all of Canada outside of Quebec their are only 113,175 Francophone's that speak French only.

Even in Quebec there are 3,831,350 Francophone's that speak French only.

The other 2,907,700 Francophone's are bilingual.

The remainder of Quebec's population 327,000 are English speaking, with a further 59,490 that don't speak English or French.

So basically we are talking 113,175 Francophone's outside of Quebec that possibly won't do well

in English Canada.

The other 3,831,350 Francophone's that speak French only in Quebec probably won't be seeking work outside their province.

So in effect we have the federal government turning Canada linguistically inside out to satisfy 113,175 Francophone's who speak French only outside of Quebec.

This would not make economic or cultural sense in any other country in the world other than Canada.

[Mad_Michael]

The issue of a 'fiscal imbalance' is a fundamental or inherent function of the Canadian constitution.

All of the strongest powers of taxation fall to the federal government, yet the vast majority of government or public services are actually provided/funded/operated by our local municipal or regional councils.

As such, one of the biggest functions of the federal government is to transfer big blocks of this money back to the provinces according to negotiated formulas (and federal 'strings' attached).

Of course, the provinces play the same game - sucking up property taxes from the local level and transfers from the federal government and then having to transfer big blocks of this money back to the local townships and municipalities that actually provide the schools, the road crews, the police, the court houses, fire departments, health clinics, public transit, etc. (all with provincial 'strings' attached).

Thus, the local city hall provides most of the actual government services most people use, yet the majority of the money (and thus real authority) over the issue is vested at the highest and most distant levels of government in Ottawa.

Unfortunately, the issue of 'fiscal imbalances' in Canada can never really be addressed. The reason is that there as so many of them, that it is a bit of a can of worms. Ontario and Alberta pay way more than their fair share of equalisation payments to the 'other provinces'. That's a 'fiscal imbalance'. Cities pay way more than their fair share in the proportion of taxes than rural areas do. That is another 'fiscal imbalance'.

Opening up the municipal vs provincial vs federal lines of taxation and program authority would be a wonderful thing, but, pretty much impossible due to all the vested interests in the present system. Thus, we are stuck with this silly system where we all have to beg Ottawa to give us some of our own money back.

[August1991]

All of the strongest powers of taxation fall to the federal government, yet the vast majority of government or public services are actually provided/funded/operated by our local municipal or regional councils.

What specific taxes can the federal government impose that a provincial government cannot?

Canada's provincial governments have in effect the same taxing powers as the federal government except for one - the provincial governments cannot directly impose taxes on people outside of their province.

When the federal government implements a shared-cost agreement (e.g. the Canada Health Transfer), it pays the federal part with taxes levied on all Canadians. Some provincial governments receive money from from taxpayers living outside of their province.

[geoffrey]

The other 3,831,350 Francophone's that speak French only in Quebec probably won't be seeking work outside their province.

That's my point. Quebec can tax the hell out of this group, knowing they aren't going to leave for greener pastures like Alberta or Ontario... because they can't.

[Saturn]

IOW, I frankly think the idea of a fiscal imbalance is nonsense. If the Quebec (or any provincial) government wants more money, it can increase taxes to get it. The fiscal imbalance argument is just an attempt to get someone else to take the heat for collecting money.

I'm bewildered to find a point in agreement with you. The "fiscal imbalance" is a pile of nonsense invented by Quebec politicians. It's a myth invented by separatists to justify separation. In fact the few Quebeckers I know (who don't know a thing about government finances but are probably representative of the majority in Quebec) are convinced that Quebec is paying the bills of ROC. LOL!

Worse, the idea of a fiscal imbalance puts Quebec into an impasse where the federal government can call Quebec's bluff. And Harper is apparently about to do just that.

Someone ought to do it at some point but I highly doubt that Harper will be the one to do it. He can only benefit from "fixing" the fiscal imbalance, not by exposing it as a lie.

[Saturn]

It's business in Quebec that cannot be taxed up the wazoo. There are alot of companies that could and would relocate elsewhere, Alcan being an example, and take alot of jobs with them if taxed excessively.

That's just another myth that has no base in reality. To say that Alcan can move elsewhere is like saying that oil sand companies can move out of Alberta. Utter nonsense.

[Saturn]

In English Canada, Quebec's relation with Canada is often portrayed as a rip-off. IMV, the true injustice for Quebec lies in the dependance and wasteful government schemes this "fiscal imbalance" creates.

The Quebec government is wasting massive amounts of money on trying to duplicate federal programs (in order to allow separation with as little disturbance as possible). Quebeckers pay significantly more taxes because of it. But it's also their choice to do it. I don't see how they can blame the feds or ROC that their plan for separation comes at a hefty price and they have difficulty funding it.

[myata]

What specific taxes can the federal government impose that a provincial government cannot?

Canada's provincial governments have in effect the same taxing powers as the federal government except for one - the provincial governments cannot directly impose taxes on people outside of their province.

No, that was a very legitimate question, so, again, why should Federal govt collect twice as much taxes as my provincial one, if I barely ever get any service from them?

Sure provinces can raise taxes, but the real question is why feds should keep theirs and roll in billions in annual surpluses. Here's a suggestion: every time Feds come up with a surplus (OK, consecutive surplus, to account for possible fluctuations), they pass a number of tax points to the provinces (in proportion to the size of the surplus, exact formula can be worked out). The opposite can happen too, but only by consensus of all provinces.

I just don't see how we can continue to shell in to the fed government which does not know where to put these money, while provinces are struggling to support essential services.

[geoffrey]

That's just another myth that has no base in reality. To say that Alcan can move elsewhere is like saying that oil sand companies can move out of Alberta. Utter nonsense.

I agree, Alcan is a poor example, without Quebec's energy subsidies, they wouldn't exist anywhere.

[August1991]

I'm bewildered to find a point in agreement with you.

Saturn, I suspect that you and I possibly agree on a lot more. Apparently though, you don't like Stephen Harper. That hatred (hatred is a passion by the way) may be the source of any differences.

The Quebec government is wasting massive amounts of money on trying to duplicate federal programs (in order to allow separation with as little disturbance as possible). Quebeckers pay significantly more taxes because of it.

True, there are Quebec immigration officers, a Quebec Revenue ministry (with Quebec income tax form), a Quebec statistics agency, a Quebec pension plan and even (like Ontario and Newfoundland) a Quebec police force. These are not the problem. For the most part, the costs of Quebec's "specificity" simply reduce the costs of unnecessary federal employees.

The real cost to Quebec (and Canada) is different from so-called "duplication". The real costs lie in giving the wrong decision to the wrong level of government. How much did Mirabel cost? How much did the sponsorship scandal cost? (How much did "bilingualism" across Canada cost?)

The Quebec government should take decisions of relevance to people in Quebec. Such decisions will be better and less costly for everyone.

[Saturn]

True, there are Quebec immigration officers, a Quebec Revenue ministry (with Quebec income tax form), a Quebec statistics agency, a Quebec pension plan and even (like Ontario and Newfoundland) a Quebec police force. These are not the problem.

These are precisely the problem. What's the benefit of having a separate pension plan, when it is exactly the same as the federal plan? What's the benefit of having a Revenue ministry, when the CRA can do the same job at a fraction of the cost? The same goes for the statistical agency. What's more efficient? Two entities of equal size that do exactly the same thing, or one entity that is that is 50% bigger and does the whole job?

For the most part, the costs of Quebec's "specificity" simply reduce the costs of unnecessary federal employees.

That's why Quebeckers pay far less federal taxes than the residents of other provinces do.

The real cost to Quebec (and Canada) is different from so-called "duplication". The real costs lie in giving the wrong decision to the wrong level of government. How much did Mirabel cost? How much did the sponsorship scandal cost? (How much did "bilingualism" across Canada cost?)

The Quebec government should take decisions of relevance to people in Quebec. Such decisions will be better and less costly for everyone.

That's why Quebec should separate and run itself as a country. If all decisions are better made by your provincial government, then it ought to be a federal one. The real costs to Canada is that we subsidize all these great decisions that cost far more than they are worth.

[August1991]

What's the benefit of having a separate pension plan, when it is exactly the same as the federal plan? What's the benefit of having a Revenue ministry, when the CRA can do the same job at a fraction of the cost? The same goes for the statistical agency. What's more efficient? Two entities of equal size that do exactly the same thing, or one entity that is that is 50% bigger and does the whole job?

By that logic, Canada should join the United States and let all tax collection be done by the IRS. Or alternativatively, we should abolish the provinces and centralize everything in Ottawa.

In fact, with the exception of the US, the richest countries in the world are small countries. Finland and Iceland come to mind.

[Riverwind]

By that logic, Canada should join the United States and let all tax collection be done by the IRS. Or alternativatively, we should abolish the provinces and centralize everything in Ottawa.

If Canada joined the US then a central tax agency would make more economic sense. However, Canada is not part of the US but Quebec is part of Canada. Therefore it makes zero sense for Quebec to have its own agencies to do the same thing that the federal one does.

[Saturn]

By that logic, Canada should join the United States and let all tax collection be done by the IRS. Or alternativatively, we should abolish the provinces and centralize everything in Ottawa.

If Canada were a part of the US, it would make sense to have the IRS do the tax collection and the Census bureau to do our census. Given that Canada is not part of the US, it makes no sense. Given that Quebec is part of Canada, it makes no sense for it to have national type agencies. If you want such agencies, you better split up and run yourself as a nation. You can then have a National Assembly in every village if you want. Until then, it's not our responsibility to pay for it.

In fact, with the exception of the US, the richest countries in the world are small countries. Finland and Iceland come to mind.

Fine, split Quebec up into 10 countries if you want. I don't care.

[sideshow]

By that logic, Canada should join the United States and let all tax collection be done by the IRS. Or alternativatively, we should abolish the provinces and centralize everything in Ottawa.

If Canada joined the US then a central tax agency would make more economic sense. However, Canada is not part of the US but Quebec is part of Canada. Therefore it makes zero sense for Quebec to have its own agencies to do the same thing that the federal one does.

Exactly. Sometimes I think certain elements in Quebec strive to be different just to be different. Who cares what language the tax is collected in?

[Saturn]

Exactly. Sometimes I think certain elements in Quebec strive to be different just to be different. Who cares what language the tax is collected in?

Some elements in Quebec are striving to ensure that Quebec can separate with little disturbance. If Quebec has its own pension plan, its own police, its own revenue agency, its own statistical agency, its own immigration system, etc. separation can be less painful. If it separates first and then has to build those agencies from scratch, things will be more difficult. Which is just fine as long as Quebeckers pay for these things. However, they are convinced that ROC is financially responsible to ensure that Quebec is well prepared for separation.