Academic journal article Canadian Journal of Regional Science

Regional Dimensions of Federal Fiscal Activities, 1992-97

Academic journal article Canadian Journal of Regional Science

Regional Dimensions of Federal Fiscal Activities, 1992-97

Article excerpt

This paper evaluates the degree of horizontal redistribution generated by federal fiscal activity from the perspective of independent fiscal systems. By focusing on direct federal spending and the sources of its financing, it provides useful insights into the provincial dimensions of federal fiscal activity. Our results show that, on average during the 1992-97 period, the price per dollar of federal spending paid in each province is closely related to the relative economic position of a province. On average, a one percentage point change in provincial income relative to the national average is associated with a change of about two cents in the difference from the national average price.

Dans cette note de recherche, on evalue le degre de redistribution horizontale generee par l'activite fiscale federale de la perspective de systemes fiscaux independants. En mettant l'accent sur les depenses directes federales et les sources de son financement, nous fournirons des apercus interessants concernant les dimensions provinciales de l'activite fiscale federale. Nos resultats demontrent qu'en moyen pendant la periode 1992-97, le prix par dollar de depense federale encouru dans chaque province est relie etroitement a la position relative economique d'une province. En moyen, un changement d'un pour cent dans le revenu provincial par rapport au moyen national est associe a un changement d'environ deux cents dans la difference par rapport au prix moyen national.

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The period of fiscal restraint that characterised federal budgetary policy during most of the 1990s was accompanied by major changes in federal-provincial fiscal arrangements. While total federal spending remained virtually unchanged from 1992 to 1997, federal transfers to provincial and local governments fell by over $6 billion (19.8 %). As a result, the share of these transfers in total federal spending dropped from 17.0 % to 13.6 % during the same period. Federal fiscal restraint has aggravated regional grievances as each province claims that is not receiving "fair treatment" from the federal government.

The debate on fiscal federalism has traditionally been focused on intergovernmental transfers. This narrow focus may not be warranted since these transfers account for a small share of total federal spending. It seems that federal fiscal restraint provided the background for a shift in the federal approach to redistribution among provinces (hereafter called horizontal redistribution), a shift that involves a more direct delivery of federal programs to individuals across the country and lower financial support for provincially-delivered programs. In our view, this change in federal policy requires a different approach to the measurement of horizontal redistribution. First, we need to replace the traditional focus on federal intergovernmental transfers with an analysis of the regional distribution of all federal revenues and expenditures. Second, we need to make more transparent the role of the federal government in horizontal redistribution by concentrating on the programs it delivers directly and the taxes it collects in each province for federal purposes only. The main purpose of this paper is two fold:

* we develop the appropriate methodology for measuring the degree of horizontal redistribution generated by the direct fiscal activity of the federal government, which removes the noise generated by intergovernmental fiscal relations whereby the federal government takes from a province with one hand and gives back with the other.

* we provide estimates of horizontal redistribution for the average of 1992-1997 using the above methodology. Since this period marks the change in direction in federal policy, these estimates will serve as a marker for evaluating the dynamics of this new federal policy as they unfold through time.

Separating the direct component of the federal fiscal activity from intergovernmental grants and the revenue used to finance them shows that the federal government produces horizontal redistribution by "subsidising" the residents of poorer provinces for the provision of federal programs delivered and "taxing" those of the richer provinces on the public good they received from the federal government. …

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