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PRB 06-39E

Federal Government Finances: An Examination of Federal Revenues and Expenditures in the Provinces

Michael Holden
Economics Division

14 February 2007

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Contents


Introduction

In the realm of federal-provincial relations, a considerable amount of time is spent debating the appropriate distribution of federal revenues and expenditures in the provinces. It is common to see analysts and commentators compare the value of federal revenues collected from within each province with the total value of federal spending in each. The objective of these analyses is to determine through this narrow focus whether or not provinces “gain” or “lose” by being part of Canada.

For these analysts, the test of whether or not a province benefits from federal revenues and expenditures rests more or less solely on the notion of net expenditures. If federal revenues collected exceed federal expenditures in a given province, then that province is said to be a net contributor to the federation because more federal money is flowing out than in. Conversely, if federal expenditures exceed revenues in any given province, that province is said to be a net beneficiary, because more federal money is flowing in than out.

Varying levels of economic prosperity, resource endowments, and strategic considerations make it inevitable that certain parts of a country – be they cities, regions or provinces – will benefit more from net federal spending than will other parts of the country. Indeed, if the federal government in Canada matched each dollar of revenue collected in a province with a dollar of spending, that level of government would be largely redundant; the provinces themselves already do just that. Given that some redistribution – whether implicit or explicit – is necessary, and even desirable, in a federal country, the issue becomes one of degree: what level of redistribution is necessary, desirable or fair?

The answer to this question is clearly subjective. Some provinces have argued that their net contribution to the federation is too high. The Ontario government’s campaign highlighting its “$23-billion gap” is a recent high-profile example, although some in Alberta also believe that the net flow of tax revenues out of their province is excessive. At the same time, however, some provinces that are net beneficiaries of federal spending argue that they do not receive enough support from the federal government. Recent debates over the generosity and distribution of the Equalization Program illustrate this point.

What is often missing in this debate is not only a clear sense of the sources and disposition of federal revenues, but also an explanation of why it is that comparatively more revenue is collected in certain provinces and comparatively more is spent in others. To some degree, of course, the explanation is obvious: the federal government collects more revenue in some provinces because they are richer and have stronger economies generating higher tax revenues; and it spends more in others because they are poorer, with weaker economic activity and lower tax revenues.

To leave the analysis at that, however, greatly oversimplifies the situation. Differences in wealth across the provinces offer, first of all, only a partial explanation of the redistributive effects of net federal spending. Secondly, and more importantly, much of what is interpreted as an interprovincial redistribution of wealth is, in fact, an interpersonal redistribution – an implicit transfer from richer Canadians to poorer Canadians – independent of provincial boundaries.

This paper provides a detailed overview of federal revenues and expenditures in the provinces, including an examination of the different revenue sources and types of federal spending by province. Unlike other analyses, which focus solely on where the money comes from and where it goes, this paper looks more closely at the reasons federal revenues and major categories of expenditure are greater in some provinces than in others.

Overview of Federal Revenues and Expenditures

In 2004, the most recent year for which these data are available, the federal government collected revenues from Canadians averaging $6,254 per person and made expenditures averaging $6,082 per person (see Figure 1).(1) In real terms, these figures are consistent with the federal record in recent years; there has been little movement in either revenues or expenditures since 1997. Real per capita expenditures, in particular, have been flat since that year, following a significant decline in the mid-1990s when the federal government was cutting spending in order to eliminate the deficit. Real per capita revenues, for their part, grew strongly in the second half of the 1990s, but have since fallen back somewhat, due to a combination of tax cuts and slower economic growth early in the decade.

While overall federal revenues and expenditures have been relatively steady in recent years, that consistency masks considerable variation across the provinces. Figure 2 provides an overview of per capita federal revenues and expenditures by province in 2004. That year, revenues exceeded expenditures in three provinces – Alberta, Ontario and British Columbia. In the case of Alberta and Ontario, the gap is significant. The federal government collected an average of $7,864 per person in Alberta, while spending an average of $5,101. In Ontario, the difference was not as large – $6,961 in revenues and $5,268 in expenditures.

In all other provinces, the federal government spent more than it collected. In most cases, the difference between the two was considerable. The largest gap was in Prince Edward Island, where federal per capita revenues averaged $5,208, compared to $10,315 in spending. Quebec was the only province where the margin by which federal spending surpassed revenues was modest. It is worth noting that per capita federal expenditures are lowest in the four most populous provinces.

It is also important to note that, as shown in Figure 2, federal revenues exceeded expenditures for Canada as a whole in 2004. Because there was a federal surplus that year, total revenues collected in the provinces and territories exceeded total expenditures. Indeed, federal revenues collected in the provinces and territories equal expenditures only when the federal budget is balanced. This fact implies that, when focusing on a specific province, data on federal revenues and expenditures do not give a complete picture of the extent to which that province benefits from, or pays into, confederation. When the federal government does not spend all that it collects, there is an effective net transfer of funds out of all provinces to the federal government and territories.

Because federal surpluses are not large compared to the overall budget, this issue is not significant today. In the past, however, large federal deficits have had a notable effect on the balance of net federal expenditures. When the federal government is in deficit, it collects taxes and borrows money, spending the total – less certain foreign expenditures – in the provinces and territories. Thus, in a deficit situation, the total amount spent in the provinces and territories exceeds the total value of revenues collected there.(2) This can have a significant effect on the perceived level of net federal expenditures in any given province; deficits create the impression that more provinces are net beneficiaries from federal spending because total federal expenditures are, by definition, higher than total federal revenues.

Because the federal government made the transition from an era of large deficits to consistent surpluses during the mid- to late 1990s, all data on the trends in federal revenues and expenditures by province over this period need to be interpreted with caution. For example, the Ontario government has argued that its net contribution to confederation rose from $2 billion in 1995 to $20.8 billion in 2004. While this can be verified by reading the Provincial Economic Accounts, focusing solely on those two figures fails to account for the fact that the federal government moved from a deficit of $31.7 billion to a surplus of $5.7 billion over that same period.

Federal Government Revenues by Province

A. Overview

The federal government collects revenues by levying taxes and fees on a wide range of activities. The most important of these is direct taxes on persons (personal income taxes), followed by indirect taxes – most notably the goods and services tax (GST). Other major sources of federal revenue are corporate income taxes, and employee contributions to social insurance plans (payroll taxes) such as Employment Insurance (EI) and the Canada Pension Plan (CPP).

Income taxes and other direct taxes are not only the most important source of revenue for the federal government, but their importance has been increasing over time. In the early 1980s, direct taxes on persons typically accounted for about 40% of total federal revenues, although, as shown in Figure 3, that total was somewhat lower in 1981. By 2004 that figure had risen to 47%. For its part, the share of federal revenues coming from business taxes tends to fluctuate with the health of the economy. In 2004, about 15% of federal revenues came from taxes on corporations – about the same level as 20 years earlier. In the early 1990s, however, the economic downturn had a significant effect on business taxes, which accounted for only 8% of federal revenues in 1992.

The share of federal revenues from other major sources has been falling gradually over time. In 2004, indirect taxes made up about 23% of federal government income, slightly lower than in the 1980s. This share will fall further when the recent cut in the GST is reflected in the data. The decline in revenues from contributions to social insurance plans has been more significant, due in large part to cuts in EI contributions over the past ten years. Payroll taxes accounted for less than 9% of total federal revenues in 2004, compared to nearly 16% in 1994.

B. Revenue Collection by Province

In terms of federal government revenue collection by province, it is important to note that the federal government collects tax revenue in the provinces, not from the provinces. This distinction may appear subtle, but it has important implications. To say that the federal government collects taxes from provinces suggests either that the level of federal taxes people pay is related to their province of residence, or that the fiscal capacity of individual provincial governments is affected by how much federal tax is collected in their jurisdiction.

Neither of these statements is true, however. In fact, from the point of view of federal revenue collection, the very notion of “provinces” is irrelevant. Federal taxes do not differ by province; all Canadians pay federal tax at the same set of rates regardless of where they live.(3)

Federal government revenues collected by province and by type are shown in Figure 4. Alberta and Ontario are the only two provinces where per capita federal revenues are higher than the national average – in the case of Alberta, by a significant margin. The Canadian government collected an average of $7,864 per capita in Alberta in 2004, compared to $6,254 nationally. In Ontario, an average of $6,961 was collected. Revenues in all other provinces were below the national average.

Two specific revenue categories largely account for the higher revenue collection in Alberta and Ontario than in the other provinces: direct taxes on persons, and business taxes. In the case of taxes on persons, the federal government collects more money in Alberta and Ontario simply because incomes are highest in those two provinces. As mentioned above, federal tax rates do not vary from province to province. All else being equal, an individual earning $50,000 will pay the same federal income tax regardless of where he or she lives. But if residents of one province are richer than residents of another, the federal government will collect more money in the wealthier province – essentially because, in that province, people with higher incomes are more numerous and more of their incomes are taxed at higher marginal tax brackets.

The situation is similar in the case of business taxes. Alberta and Ontario are the leading provincial economies on a per capita basis, and thus the amount of federal revenues collected from corporations is higher in those provinces than elsewhere in the country. In the case of Alberta, the value is significantly higher than elsewhere in Canada, owing in part to income generated from the oil and gas sector. Federal business tax revenues in Quebec in 2004 were also well above the national average.

Compared to personal and corporate direct taxes, there is considerably less variation in per capita indirect federal tax revenues across the provinces. Even so, Alberta remained well above the other provinces. At $1,727, federal indirect taxes per person in Alberta in 2004 were $220 higher than in British Columbia, the next-highest province.

Finally, the least variation in federal revenues across the provinces is in personal contributions to social insurance plans. Again, the federal government collected the most per person in Alberta ($558) in 2004, but the difference between that total and the lowest amount collected in any province – Saskatchewan – is relatively low, at $110.

C. Trends in Revenue Growth

While individuals and corporations in Alberta and Ontario have consistently been the largest per capita contributors to federal coffers, it is in the Atlantic provinces that federal revenue has seen the highest long-term growth. From 1981 – the earliest year for which comparable data are available – to 2004, the fastest rate of real per capita federal revenue growth was in Prince Edward Island, where it averaged 3.2% per year. Newfoundland and Labrador was next highest at an average of 2.7% per year, compared to the national average of 0.7% per year over the same period. At the other end of the spectrum, real per capita federal revenues from Alberta and Saskatchewan have fallen since 1981, although, as explained below, data from the early 1980s for those provinces are distorted by the effects of the energy crisis.

The general trend in federal revenue growth since 1981 can be divided into three distinct stages. During 1981-1989, there was generally strong, but uneven, economic growth in Canada. By contrast, 1989-1996 was a time of economic retrenchment and recovery. Finally, there was a return to stronger economic expansion in 1996-2004.

From 1981 to 1989, real per capita federal revenue growth averaged about 0.9% per year. This total, however, masked considerable variation within the country. Revenue growth was relatively high in Prince Edward Island, owing in part to the relocation of federal government offices (and jobs) to the province. By contrast, there was a precipitous drop in real federal revenues in Alberta and Saskatchewan, in the aftermath of the energy crisis. Rising energy prices had created an economic boom in (and higher federal revenues from) those provinces in the late 1970s and early 1980s. When prices collapsed in the mid-1980s, both provinces experienced a significant economic downturn, and federal revenues fell back from their peak levels.

The year 1989 represented the peak of a business cycle in Canada. The early to mid-1990s were characterized by economic recession, fiscal retrenchment, and structural adjustments precipitated, in part, by the Canada-U.S. free trade agreement. These factors were exacerbated by high interest rates and a high Canadian dollar in the early 1990s. As a result, federal revenues were low in most provinces, especially Ontario, which was hit hardest by the recession. While real per capita revenues grew by an average of 0.1% per year over that period, revenues in Ontario fell by 1.1%. There were pockets of strength, however. Revenues in Prince Edward Island and Newfoundland and Labrador remained higher, continuing their trend during 1981-1989. Revenues also recovered in Saskatchewan and Alberta.

The 1996-2004 period saw the strongest growth in real per capita federal revenues, averaging 1.2% per year in spite of several tax cuts over the same period. Surging oil and gas sectors in Newfoundland and Labrador and Alberta resulted in particularly strong revenue growth in those provinces. By contrast, sluggish economic growth in British Columbia in the late 1990s dampened federal revenue growth there.

Federal Government Expenditures by Province

Federal government expenditures can be divided into two groups: program spending and debt-servicing costs. Program spending, in turn, consists of three main types of expenditure: net expenditures on goods and services; transfers to persons; and transfers to provincial governments. All told, these four categories account for almost 96% of federal government expenditures. The remainder includes some small amounts for business subsidies, transfers to non-residents and some payments to local governments.

Of the four major types of spending, the category of federal transfers to persons is the largest and the only one to have seen significant growth (in real per capita terms) since the early 1980s. Transfers to persons include payments under federal programs such as EI, the CPP and Old Age Security (OAS).

The next-largest category is federal expenditures on goods and services. This item primarily covers basic government activities – the salaries of civil servants; the day-to-day operation of government departments; and military installations and operations. It also includes the purchase of supplies and materials from private companies.

Transfers to provincial governments is the third-largest category of federal spending and, as shown in Figure 6, has been the fastest-growing since 1997, after a significant drop in the mid-1990s. These transfers include Equalization entitlements and cash payments under the Canada Health Transfer (CHT) and Canada Social Transfer (CST). Although data are available only up to 2004, recent funding commitments for health care and Equalization payments ensure that this category of federal spending will continue to grow rapidly into the near future.

Finally, the fourth major type of federal spending is debt-servicing costs. As stated above, debt-servicing costs – the interest the federal government must pay on its outstanding bonds, treasury bills and other debt instruments – differs completely from federal program spending. Program spending yields an immediate benefit whereas interest payments are, in effect, the price the government pays today for having spent beyond its means in the past. As Figure 6 shows, debt-servicing costs have fallen since the mid-1990s; the decline is due to lower interest rates and debt repayment since that time.

A. Net Expenditures on Goods and Services

On a per capita basis, federal government spending on goods and services is highest in the Atlantic provinces, particularly in Nova Scotia and Prince Edward Island. In those two provinces, this category of federal spending totalled $3,583 and $2,474 per capita in 2004, respectively, significantly higher than the national average of $1,437. Spending on goods and services was also slightly higher than average in Ontario, home to the national capital and most federal government offices.

At the other end of the spectrum, at about $1,000 each, per capita federal spending on goods and services in British Columbia, Alberta and Saskatchewan was markedly lower than in the rest of the country.

As mentioned above, federal spending on goods and services includes the operation of federal government and military offices, as well as the wages and salaries of government employees. The distribution of these government operations is influenced by two considerations: the logical location of certain government activities; and the desire for an active federal government presence across the country, including regional development offices.

The most obvious example of the first of these considerations is the location of the bulk of the federal civil service in Ottawa. Since that city is the national capital, it is logical that there be a significant degree of federal spending on goods and services there. Indeed, this category of federal expenditure is the only one in which Ontario exceeds the national average. Similarly, Halifax – with its large, natural, ice-free harbour – is a logical choice for the location of the Atlantic navy base. This is a major reason why federal spending on goods and services is highest in Nova Scotia. Other examples include the location of the Canadian Wheat Board offices in Winnipeg and the National Energy Board in Calgary.

The second consideration for federal direct expenditures is the desire to have a visible federal government presence across the country. A number of federal government offices are located outside of the National Capital Region not because of a functional need, but rather to ensure that federal employment is not exclusive to a single part of the country. As a result, there are federal offices across Canada.

In particular, a number of operations are located in Atlantic Canada. Among these is the data processing and national call centre for the Canada Firearms Centre, located in Mirimachi, New Brunswick. Similarly, the GST processing centre and Veterans Affairs Canada are located in Prince Edward Island. In addition, the federal government operates regional development offices in every province in Canada. The head office of the largest of these, the Atlantic Canada Opportunities Agency (ACOA), is located in Moncton, New Brunswick. The presence of these offices, combined with the fact that the Atlantic provinces themselves are the smallest in Canada, is a major reason why federal spending on goods and services is highest in that part of the country.(4)

Looking at the growth in per capita federal spending on goods and services, the general trend is that spending is rising faster in Quebec and points east, while it is falling in Ontario and points west. To some degree, this pattern reflects the effect of population growth trends across Canada. Federal government offices typically do not grow or shrink in line with prevailing population trends in their region. The National Energy Board is unlikely to expand simply because the population of Calgary is growing. Neither will employment or spending be cut at the Canada Firearms Centre because of population decline in northern New Brunswick.

However, since the population of Alberta is growing rapidly, federal spending on goods and services in the province is falling on a per capita basis. For it not to do so, the federal government would have to physically relocate operations to that province. Conversely, since the population of New Brunswick is flat or falling, the value of per capita federal expenditures on goods and services in that province is rising.

Indeed, while per capita federal spending on goods and services has fallen in Alberta and Ontario, total spending growth in those provinces is well above the national average. Conversely, even though growth in per capita federal spending on goods and services has been relatively high in Atlantic Canada, growth in total spending in that region has not. With the exception of Prince Edward Island, stable or declining populations in the region are contributing to the growth in this category of per capita expenditure.

Demographic trends do not account for the slower growth in federal expenditures on goods and services in British Columbia and Saskatchewan, however. The population of British Columbia is among the fastest-growing in Canada, while that of Saskatchewan is in decline. Nonetheless, it is in those two provinces that growth in per capita federal spending on goods and services has been slowest since 1981.

B. Federal Transfers to Persons

As mentioned above, federal transfers to persons are primarily payments under social insurance plans such as EI, the CPP and OAS. The amount of money paid under these programs is closely related to income and unemployment. As such, provinces with relatively low incomes or high levels of unemployment tend to receive the largest per capita shares of federal transfers to persons.

Indeed, the six lowest-income provinces – the four Atlantic provinces, Manitoba and Saskatchewan – receive the largest federal transfers to persons on a per capita basis. Of these, per capita transfers in 2004 were highest in Newfoundland and Labrador ($3,466), Prince Edward Island ($3,271), and New Brunswick ($2,915).(5) Not surprisingly, transfers were lowest in the two wealthiest provinces – Ontario ($1,744) and Alberta ($1,799).

It should be noted that when examining federal expenditures in the provinces, data on transfers to persons should be treated with caution. As stated earlier, the federal government collects revenues from Canadians, taxing all at the same rate regardless of where in the country they live. In a similar fashion, federal transfers to persons are largely independent of where in the country people choose to live. EI is the only program of any significance where regional considerations are incorporated into eligibility requirements.

Even in the case of EI, however, program eligibility does not vary by province, but rather by sub-provincial unemployment rates. For example, because the unemployment rate in Halifax in late 2006 was about the same as the unemployment rate in Vancouver, EI thresholds and payment durations in the two cities are identical.(6)

Rather than a transfer from wealthy provinces to poorer provinces, federal transfers to persons represent an implicit transfer from richer individuals to poorer individuals. Those that are wealthier pay a higher proportion of their gross income in taxes, and those that are poorer are eligible for, and receive, a greater proportion of federal support programs.

Calculating the value of federal transfers to persons in any given province can create the impression that the provinces themselves benefit, to varying degrees, from the transfers. This impression is reinforced by analyses which imply that some provinces do not receive their “fair share” of these funds. However, as discussed above, eligibility for federal personal transfers does not vary by province. In fact, for the purposes of federal transfers to persons, provincial borders are largely meaningless. Indeed, if one were to redraw provincial borders as a hypothetical exercise, the distribution of federal transfers to persons “by province” could be altered dramatically, without affecting a single person.

Moreover, if an individual receiving CPP payments, for example, were to move from one province to another, his or her payments would be unaffected. However, federal expenditure data would record a decrease in transfers in the individual’s former province of residence and an increase in payments in the new province of residence.

Because transfers to persons consist primarily of social programs, their value has tended to fluctuate countercyclically with economic growth. In a period of strong economic growth, such as the late 1980s and late 1990s, personal transfers tend to fall, while in times of recession, such as in the early 1990s, they tend to rise.

The same trends are reflected in Canada’s largest provinces. Compared to the national average, federal transfers to persons in Ontario, Quebec, British Columbia and Alberta have been relatively stable, rising in times of economic downturn, falling during an economic recovery and otherwise stable.

In the remaining provinces, two different trends are evident. In the Atlantic provinces, federal transfers to persons have been falling relative to the national average, reflecting in part the fact that economic growth in that region outpaced the rest of Canada through the 1990s. On the other hand, federal transfers to persons in Saskatchewan and Manitoba have risen since the early 1980s, reflecting in part the fact that incomes in those two provinces have not risen at the same rate as elsewhere in Canada.

C. Federal Transfers to Provinces

The third-largest, and fastest-growing, category of federal spending is transfer payments to the provincial governments. This category of federal spending consists of two distinct types of transfer: those for which all provinces qualify; and those which only certain provinces receive. The Canada Health Transfer (CHT) is the most significant example of the former and the Equalization Program, the latter.

Federal transfers to provinces have the widest variation of any category of per capita federal spending. These transfers are much higher in Atlantic Canada, Manitoba and Saskatchewan than in the other four provinces. In 2004, transfers were highest in Prince Edward Island at $3,068 per capita. At the other end of the spectrum was Ontario, which received $910 per person.

As shown in Figure 10, this wide range is largely a reflection of the effect of Equalization payments. Only certain provinces qualify for Equalization, and payments vary significantly from one province to the next. In 2004, for example, eight provinces qualified for the transfers, with per capita payments ranging from $141 in British Columbia to $1,927 in Prince Edward Island.(7) In the case of Prince Edward Island, Equalization payments represented a little more than half of total federal transfers to the provincial government that year. Alberta and Ontario received no Equalization payments in 2004.

However, even programs such as the CHT have an Equalization component that contributes to the wide range among federal transfers by province. The CHT consists of a combination of tax points (transferred from the federal government to the provinces in 1977) and annual cash payments. The total transfer (cash plus the annual value of the tax points) is distributed on an equal-per-capita basis. However, since some provinces are richer than others, they are able to collect more money per capita at any given tax rate. In other words, the value of tax points is higher in richer provinces. Since the overall CHT is an equal-per-capita transfer, this means that the cash component – the only actual transfer that takes place each year – is consequently lower in rich provinces.

A final issue worth mentioning is unique to Quebec. As Figure 10 shows, Quebec receives the smallest amount in non-equalization federal transfers to provinces. This is a holdover from a federal initiative in the 1960s when all provinces were given the option of federal program funding in the form of tax abatements on personal and corporate income taxes, or in the form of cash payments.(8) Quebec was the only province to accept the tax abatement option.

This decision continues to apply today. A portion of the federal government’s transfer payments to the Quebec government comes not in the form of direct cash payments to the province, but indirectly via the tax abatement – essentially a rebate on federal taxes for Quebec residents. The provincial government then levies higher taxes (compared to other provinces) to capture that rebate itself. Since the tax abatement is considered to be part of the federal government’s support for programs such as the CHT and CST, federal cash transfers to Quebec are correspondingly lower.

Critics of the extent to which the federal government redistributes wealth across the provinces usually point to transfers to provinces to make their case. It is not hard to see why, given that this category of federal spending not only has the widest variation from one province to the next, but also directly affects the ability of individual provincial governments to provide services.

Even so, federal transfers to provinces are ultimately based on similar factors as transfers to persons: personal incomes, wealth and economic strength. This is particularly true of the Equalization Program. The purpose of Equalization is to compensate provinces with a relatively weak capacity to generate own-source revenues. This allows those provinces to provide reasonably similar levels of services at comparable levels of taxation. In effect, therefore, Equalization compensates poorer provinces for not having access to the same amount of taxable income and wealth as richer provinces.

It should also be noted that, as in all other areas of federal expenditure, programs such as Equalization are funded using federal revenues, collected from all taxpayers at the same rate. As such, it bears mentioning that Equalization does not transfer money from one provincial government to another; the revenue-generating capacity of provincial governments that do not qualify for Equalization is entirely unaffected by Equalization payments to other provinces.

D. Federal Interest Payments on the National Debt

The final major category of federal spending is debt-servicing costs. According to Statistics Canada, the federal debt and the interest payments on that debt are assumed to be shared equally by all Canadians. As a result, for the purpose of federal expenditures, per capita debt-servicing costs are identical in each province – $1,046 in 2004.

The combination of debt repayment and lower interest rates has considerably reduced per capita debt-servicing costs in recent years. Those costs peaked at $1,578 in 1995. By 2004, federal spending in this area had fallen by nearly 34%. Unlike any type of federal program spending, such as those described above, interest payments on the debt do not provide any direct benefit to the provinces. In essence, they represent the present-day cost of the federal government having overspent to fund programs and provide services in the past.

The fact that debt-servicing costs are assumed to be distributed evenly across the country, while federal program spending is not, has interesting implications for total federal expenditures by province. Specifically, in provinces where total federal spending is relatively low, debt-servicing costs represent a larger share of that spending. For example, even though interest payments on the national debt were about $1,046 per capita in all provinces in 2004, that figure represented 10.1% of per capita federal expenditures in Prince Edward Island, but 20.5% of expenditures in Alberta.

This has two implications for any discussions on federal revenues and expenditures by province. First, if debt-servicing costs are flat across the provinces and total federal expenditures are not, this suggests that the variation in federal program spending (on goods and services, transfers to persons, transfers to provinces and others) is, in fact, wider than the variation in expenditures (see Figure 11). In other words, debt-servicing costs, which do not represent a “beneficial” expenditure, make up a higher proportion of federal expenditures in provinces where federal spending is already lower than average.

Although the effect is not large, it is easily demonstrated. In Prince Edward Island, total federal expenditures in 2004 were about 170% of the national average. Federal program spending, however, was 184% of the national average. At the other end of the spectrum, total federal spending in Alberta was just under 84% of the national average, while program spending was even less, at 81% of the average.

The second implication is that the decline in debt-servicing costs in recent years makes it appear as if total federal expenditures are growing more slowly in provinces where federal spending was already low to begin with. This was the case in Ontario where, from 1995 to 2004, total federal expenditures grew at rates below the national average, while growth in federal program spending – in effect the only useful form of federal expenditure – was actually above the national average.

Conclusion

There is an obvious redistributive effect to net federal government expenditures in Canada; the federal government collects more tax revenues in certain provinces and spends more in others. However, the analysis presented above shows that in many cases, the difference in net federal spending from one province to the next is not the result of a decision by the federal government to favour certain provinces. Rather, it is, to a large degree, a reflection of federal policies aimed at redistribution from the rich to the poor; specifically, progressive taxation that collects more money from wealthier individuals and program spending geared towards those who are poorer (or towards provinces where incomes are lower).

This changes the viewpoint on balance-sheet federalism. If federal net expenditures are largely influenced by the redistribution of interpersonal wealth, then it follows that the distribution of net federal expenditures across the provinces is largely unintentional; it merely reflects concentrations of relative wealth across Canada.

According to some, this means that a province that is a net beneficiary from confederation is simply one where the poor, the unemployed and the retired are more common. The fact that individuals reside within a certain provincial boundary does not influence the amount of federal taxes they pay or support they receive, although it does affect the total sum for the province if one were to look only at the bottom line in Statistics Canada tables.(9)

Moreover, provinces themselves are not uniformly prosperous or poor. There are wealthy regions within the poorest province and poor regions in the wealthiest province. Although data are not available to conduct such an analysis, it would be no less valid to focus on net federal expenditures in sub-provincial regions: is northern Ontario a net beneficiary from confederation? Is Toronto?

Indeed, one could hypothetically redraw the map of Canada in such a way as to greatly reduce the variation in net federal expenditures from one province to the next. This could be done largely without any noticeable effect on the average Canadian. At the same time, however, a cursory glance at the Provincial Economic Accounts would lead to the conclusion that the situation had become more equitable. Clearly, a more nuanced view on federal revenues and expenditures in the provinces is needed.


Endnotes

  1. All figures in this paper, unless otherwise specified, refer to per capita dollars. All data are from Statistics Canada’s Provincial Economic Accounts.
  2. As shown in Michael Holden, A Closer Look at Ontario’s $23-billion Gap, PRB 05-15E, Parliamentary Information and Research Service, Library of Parliament, Ottawa, 10 May 2005, the move from federal deficits to surpluses – and not higher per capita revenues or lower per capita expenditures – was the primary reason why the net flow of federal revenues from Ontario rose from $2 billion in 1995 to an estimated $23 billion.
  3. Residents of Quebec receive a rebate on a portion of their federal taxes. This is discussed below, under “Federal Transfers to Provinces.”
  4. It is worth noting that this federal government presence has a considerable effect on wages and employment in the region, which, in turn, has contributed to higher taxes and an increase in federal government revenues from Atlantic Canada.
  5. Although they remain higher than elsewhere in the country, per capita transfers in the Atlantic provinces have been falling since 1993, led by Newfoundland and Labrador and Prince Edward Island.
  6. It could be argued, and often is, that the seasonal labour provisions of EI, which include fishing but not farming, implicitly favour the Atlantic provinces.
  7. Equalization payments are made on a fiscal year basis (April-March), while all other data in this paper refer to a calendar year. To make them comparable, the equalization figures presented here have been adjusted to reflect an estimate of the Equalization payments in calendar year 2004.
  8. A tax abatement is a special deduction made after federal taxes have been calculated.
  9. Richard Bird, Fiscal Flows, Fiscal Balance, and Fiscal Sustainability, Andrew Young School of Policy Studies, Georgia State University, January 2003.

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