Lessons from Spain, Germany and Canada
Studies in Fiscal Federalism and State–local Finance series
Edited by Núria Bosch and José M. Durán
Chapter 5: Fiscal Equalization: The Canadian Experience
1 Robin Boadway 1 INTRODUCTION The Canadian federation has many of the features of a textbook system of ﬁscal federalism. There is a high degree of ﬁscal decentralization of both expenditure and revenue-raising responsibilities, with provincial budgets comparable in size to that of the federal government. The provinces, which are very diverse in size, have a signiﬁcant degree of autonomy in designing and delivering their spending programs, and a responsibility for providing some of the most important public services, including those in health, education and welfare. They share with the federal government access to the major tax bases, such as income, sales and payroll taxes. Some tax harmonization exists between the federal government and the provinces, mainly in the areas of personal and corporate income taxes and sales taxes (value-added taxes). Despite the high degree of ﬁscal decentralization, there is some vertical ﬁscal gap. Over 20 percent of provincial spending is ﬁnanced by transfers to the provinces. These transfers are mainly very general rather than being targeted to speciﬁc provincial expenditures. There is some asymmetry in the ﬁscal arrangements, mainly with respect to Quebec, which has more revenue-raising autonomy and assumes some spending and regulatory responsibilities that the other provinces do not. More speciﬁcally, the federal–provincial transfer system is relatively simple. It has two main components. The ﬁrst component is the equalization system, which consists of unconditional transfers to those provinces whose ﬁscal capacity is below a national norm. Fiscal capacity is determined by a so-called...
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