Should the Canadian Federation be Rebalanced?

Abstract

Recent changes in the federal-provincial transfer system have left the Canadian federation in a state of vertical fiscal imbalance. Given the tax room occupied by the federal government and the provinces, the magnitude of transfers is insufficient to sustain the relative levels of expenditure responsibilities into the future. Sooner or later some choice must be made between ceding further tax room to the provinces and increasing transfers. In this paper, we outline the cases for each of these two courses of action, and argue that federal tax room should be jealously guarded and the imbalance addressed by increasing transfers to the provinces. The argument is based both on tax harmonization considerations and on the importance of federal transfers as a means of accomplishing national efficiency and equity objectives.