Financing Confederation Revisited: The Economic State of the Federation

Robin Boadway examines the development of fiscal arrangements and considers the substantial fiscal decentralization that has occurred in Canada over the past 20 years. Boadway makes the case that the fiscal arrangements have played an important role in improving the performance of the Canadian economy with respect to both equity and efficiency. But he also observes that over this period our federation has become the most decentralized federation in the world. Looking forward, he sees major challenges facing the fiscal arrangements. The equalization system and the political will to maintain it are in peril at the same time as disparities are likely to increase. The federal government has effectively lost control of the spending power, which has historically been one of the most powerful instruments at the hands of the federal government for managing the federation. This has left the federal government with no effective mechanism for managing the economic union. The income tax system is becoming disharmonized as provinces are engaged in competitive reductions in income tax progressivity. Attempts to arrive at cooperative solutions by federal-provincial negotiation have not been successful. Boadway believes that the decentralized Canadian federation could evolve into one in which the provinces behave “cooperatively” with respect to the national objectives of equity and efficiency. However, he sees little evidence that this is happening, and argues that an overall vision is needed. Unfortunately, Canada does not have an institution like the former Economic Council that is currently capable of developing such a vision.