Fixing fiscal federalism

Released October 2005

The Working Paper, Fixing fiscal federalism, concludes that greater success in closing regional disparities would mean higher prosperity across Canada and more and better opportunities for Ontario to invest in its own productivity and prosperity.

“There’s been extensive discussion about Ontario’s $23 billion federal fiscal gap – the difference between what Ottawa takes from the province in taxation, compared to what it spends in Ontario,” said Roger Martin. Martin is the Chairman of the Institute for Competitiveness & Prosperity and Dean of the Joseph L. Rotman School of Management at the University of Toronto. “This Working Paper assesses the gap from the perspective of competitiveness and prosperity both in Ontario and across Canada and clearly identifies where some of the challenges lie – and how they can be addressed. “

The Institute’s research shows that on a per capita basis, Ontario contributes $1,600 annually to the rest of Canada. That is in sharp contrast with an average contribution of $400 per capita across Ontario’s 14 peer US states. The Working Paper notes that this $1,200 difference contributes significantly to Ontario’s prosperity gap with these leading US states. It also assesses whether these transfers are effective in raising competitiveness and prosperity levels in the rest of Canada.

The Working Paper analyzes:

  • The structure of Canada’s fiscal federalism
  • The results of fiscal transfer policies in Canada and the United States
  • The impact of federal budget surplus surprises
  • The effect of Employment Insurance on persistent regional disparities in unemployment

Recommendations

The Institute calls for an overhaul of fiscal federalism to improve prosperity in the have-not provinces and Canada as a whole. It recommends:

  • Finding creative ways to shift current transfer spending to tax relief with the goal of stimulating business investment to enhance prosperity across all regions;
  • Designing better approaches for dealing with federal budget surplus surprises; and
  • Fixing the Employment Insurance system so that it actually functions as an insurance program
Topics: Government investment and innovation