Fiscal Federalism: Why Municipal Leaders Should Care
All those who follow public policy in Ontario are familiar with the main thrust of Don Drummond’s report on Ontario’s fiscal situation, released earlier this year. But few policy wonks have spent much time with Chapter 20, which may be the most important part of the report.
This chapter on Intergovernmental Relations provides devastating, evidence-based confirmation that a good portion of the blame for Ontario’s fiscal woes is on the steps of the federal government. Drummond begins by noting that in 2009-10, with 39 per cent of the Canadian population, Ontario contributed 39 per cent to federal revenues, but benefited from only 34 per cent of federal spending – a gap worth about $12.3 billion or 2.1 per cent of Ontario’s GDP. The report concludes that this, among other factors, demonstrates the “perverse structure of Canadian fiscal federalism.”
It is not a coincidence that the size of the federal fiscal drain from Ontario and the size of the Ontario deficit are very similar. A drain of fiscal resources from Ontario may have at one time been justified. It was the burden of prosperity that Ontarians gladly paid in the 1970s and ’80s. Today, Ontario’s fiscal capacity is below the national average due to surging oil prices. However, despite receiving equalization this year, Ontario, along with Alberta and B.C., are the only net fiscal contributors to the federation.
This is no longer sustainable.
The operation of fiscal federalism and federal spending decisions that take money out of Ontario at a time when its fiscal capacity is below average is indeed “perverse” and should offend Canadians’ sense of fairness.
Over the past decade, the federal government has diverted two to four per cent per year of Ontario’s GDP for the purpose of regional redistribution. We are now seeing the long-term impact of federal policy on Ontario’s economy. Ontario has the largest deficit in the country. This is not because of higher than average spending. In fact, Ontario spends less per capita than any other province. In 2009, Ontario spent just $9,030 per capita, well below B.C., which spent $9,689. Newfoundland and Labrador ($13,466) and Saskatchewan ($11,848) were the biggest spenders, and despite surging resource royalties and above-average fiscal capacity, both continue to be significant beneficiaries of federal spending. With resource revenues and generous federal spending decisions, it is not surprising that they spend more than other provinces.
The Finance Canada data presented in the Drummond report is clear: Ontario has less ability to deliver the same level of public services as other provinces because of federal decisions. The impact from federal policies that drain funds from Ontario will be felt in municipalities, with more pressure in Ontario than in other provinces for downloading to municipal governments.
The Ontario government, more so than others, will be squeezed when it comes to paying for public transit, waste water infrastructure, social services – or just about anything else. Policies, cultural habits in Ottawa and allocation formulas established long ago are no longer justifiable – and they are doing long-term damage to Ontario’s economy and municipalities.
The data in the Drummond report makes this increasingly clear.
I suspect that most Ontarians would be genuinely surprised to find out that federal transfers continue to redistribute money away from Ontario, rather than toward it. The fact that Ontario receives a small equalization cheque probably leads some to mistakenly conclude that Ontario now benefits from federal transfers. But we don’t – Ontario’s taxpayers continue to spend way more on equalization than they get back.
The Drummond report makes a pointed case for federal action.
Without this key ingredient, Ontario faces an even steeper climb out of its fiscal hole – and municipalities in Ontario will have to carry a larger burden than in other provinces.
Municipal leaders, often the most trusted and credible public officials in their communities, have to put the case to their federal counterparts.
The federal government may be ready to act – but they may need a little prodding at the local level first.
Matthew Mendelsohn is the Director of the Mowat Centre in the School of Public Policy & Governance at the University of Toronto and a former Ontario deputy minister.
This article first appeared in the June 28, 2012 edition of AMO Watch File.
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