Fiscal Federalism and Political Decentralization
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Fiscal Federalism and Political Decentralization

Lessons from Spain, Germany and Canada

Edited by Núria Bosch and José M. Durán

This book analyzes political decentralization and fiscal federalism in Canada and Germany, both traditional federal countries, and in Spain, a unitarian country engaged in the last two decades in a process of decentralization. Three key issues required for a well designed financing system are analyzed in depth, namely: tax assignment, equalization grants – i.e. redistribution of money from the wealthy regions or the national government to poorer regions, and the role of local governments in the administration of taxes.
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Chapter 5: Fiscal Equalization: The Canadian Experience

Robin Boadway


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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