The Fraser Institute: Publications: Fraser Forum: September 1998

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September Questions & Answers and September Graph

by Joel Emes

Q : How much does the federal government transfer to other levels of government?

A: In the 1997/98 fiscal year, the federal government transferred an estimated $35 billion in cash and tax transfers to the provincial, territorial, and municipal governments (see table 1). The main transfer programs are: equalization, territorial financial agreements, and the Canada Health and Social Transfer (CHST). The CHST replaced Established Program Financing (EPF), and the Canada Assistance Plan (CAP) at the beginning of the 1996/97 fiscal year. Equalization payments are intended to enable the provinces to provide their residents with reasonably comparable levels of public services at reasonably comparable levels of taxation. These payments are unconditional, which allows each province to direct the money to its highest spending priority. The CHST is a block fund which covers the federal government's share of spending on insured health services, post-secon- dary education, and social assistance programs. This month's graph shows the composition of federal transfers to other levels of government.

Table 1: Estimated Federal Transfers to the Provinces, Territories, and Municipalities, 1997/98 (in $ millions, unless otherwise indicated)
	General Purpose Cash Transfers			Specific Purpose Cash Transfers	Tax Transfers
	Equalization Payments	Territorial Financial Agreements	Other	CHST	CHST	Other	Total Cash Transfers	Total Cash and Tax Transfers	Cash Transfers Per Person (dollars)	Total Transfers Per Person (dollars)
NF	933	n/a	7	277	141	82	1,217	1,439	2,177	2,576
PE	185	n/a	4	60	36	18	249	303	1,815	2,211
NS	1,144	n/a	23	427	277	96	1,595	1,967	1,684	2,078
NB	883	n/a	20	334	218	83	1,236	1,537	1,625	2,020
QC	1,278*	n/a	110	3,871	2,534	2,994	5,259	10,787	707	1,450
ON	0	n/a	192	4,063	5,019	0	4,255	9,274	371	809
MB	1,030	n/a	24	500	364	88	1,554	2,006	1,361	1,757
SK	238	n/a	12	424	302	103	674	1,079	660	1,056
AB	0	n/a	27	927	1,201	0	954	2,156	334	754
BC	0	n/a	37	1,562	1,604	0	1,599	3,203	406	812
NT	0	843	3	38	29	0	884	913	13,117	13,547
YT	0	277	3	17	12	0	297	309	9,464	9,852
TOTAL	5,692	1,120	461	12,500	11,737	3,464	19,773	34,974	653	1,155
Source: Canadian Tax Foundation, Finances of the Nation, 1997, table 8.1; Statistics Canada, Provincial Economic Accounts, cat. 13-2. *3,878 before subtracting the “Alternative Payments for Standing Programs” and the “Youth Allowance Recovery.”

Q: How are equalization payments determined?

A: Equalization payments are calculated as the difference between each provinces' tax take and the average take of the five “representative” provinces: BC, Saskatchewan, Manitoba, Ontario, and Quebec. The first step in determining equalization payments is to find the average tax rate for Canada for each of the revenue sources in table 2. Next, the per person yield for each revenue source in each province is calculated using these average tax rates. The equalization from each revenue source is calculated by finding how much the average per person yield in the representative provinces differs from the per person yield in each province. These positive and negative differences are summed; the provinces with a net deficiency get equalization payments equal to the sum multiplied by provincial population. Ontario, Alberta, and BC are often described as the “have” provinces because, as a result of their relative prosperity, they are the source for the other provinces' equalization payments.

Table 2: Revenue sources used in determining equalization payments
Personal income taxes Business income revenues Capital tax revenues General and miscellaneous sales taxes Tobacco taxes Gasoline revenue Diesel fuel revenue Non-commercial vehicle licenses Commercial vehicle licences Alcoholic beverage revenues Hospital and medical insurance premiums	Race track taxes Forestry revenues NORP oil revenues Old oil revenues Heavy oil revenues Mined oil revenues Domestically sold natural gas revenues Exported natural gas revenues Sale of Crown leases Other oil and gas revenues Mineral resources—asbestos	Mineral resources—coal Mineral resources—other Potash revenues Water power rentals Payroll taxes Provincial-local property tax revenues Lottery revenues Miscellaneous provincial-local taxes and revenues Shared revenues: preferred share dividend
Source: Canadian Tax Foundation, Finances of the Nation, 1997, table 8.5.

Q: How have federal transfers to the provinces changed over the last few decades?

A: Federal transfers as a percent of total provincial revenue fell for all provinces between 1965 and 1995, and for most provinces between 1990 and 1995 (see table 3). Table 3, however, tells only part of the story. Table 4 shows that federal transfers as a percent of provincial GDP increased in every province between 1965 and 1995, and increased in four provinces between 1990 and 1995. The reason that the relative size of federal transfers to total provincial revenues has declined while federal transfers relative to provincial GDP has increased is that the size of provincial governments has increased at a faster rate than federal transfers have. Note: Tables 3 and 4 do not show the most recent data available because the Provincial Economic Accounts, upon which the tables are based, have been revised and new data is currently only available from 1992 to 1996. Using the “old” 1965–1991 data with the “new” 1992–1996 data would result in incorrect inferences.

Table 3: Federal Government Transfers to the Provinces and Territories as a Percent of Total Provincial or Territorial Government Revenue
	1965	1970	1975	1980	1985	1990	1995	1990- 1995	1965- 1995
								% point change
NF	60.8%	56.4%	52.8%	48.7%	49.4%	46.5%	43.0%	-3.5%	-17.9%
PE	54.3%	59.4%	59.6%	55.4%	49.6%	45.7%	39.7%	-6.0%	-14.6%
NS	45.8%	44.1%	49.7%	46.9%	40.3%	38.2%	40.3%	2.0%	-5.5%
NB	49.7%	43.7%	49.7%	44.8%	42.9%	39.4%	35.1%	-4.3%	-14.6%
QC	21.7%	25.1%	25.3%	24.2%	24.3%	18.6%	19.9%	1.3%	-1.8%
ON	16.0%	18.4%	22.1%	18.0%	16.9%	12.7%	15.4%	2.8%	-0.6%
MB	30.9%	30.4%	38.9%	39.2%	31.0%	29.8%	29.7%	-0.1%	-1.2%
SK	22.8%	28.1%	25.1%	18.0%	20.3%	24.5%	19.2%	-5.3%	-3.6%
AB	19.0%	22.2%	15.8%	7.7%	12.2%	13.2%	11.6%	-1.6%	-7.4%
BC	15.3%	18.2%	18.6%	16.2%	18.8%	13.0%	11.5%	-1.5%	-3.8%
YT & NT	69.2%	78.9%	86.2%	77.7%	79.9%	79.8%	80.0%	0.2%	10.8%
YT	n/a	n/a	n/a	63.2%	74.3%	75.9%	75.4%	-0.5%	n/a
NT	n/a	n/a	n/a	82.6%	81.8%	81.0%	81.7%	0.7%	n/a
Source: Statistics Canada, Provincial Economic Accounts, cat. 13-213; and calculations by the author.

Table 4: Federal Government Transfers to the Provinces as a Percent of Provincial GDP
	1965	1970	1975	1980	1985	1990	1995	1990-1995	1965-1995
								% point change
NF	13.9%	16.1%	18.0%	16.5%	17.4%	16.8%	15.2%	-1.6%	1.3%
PE	11.8%	17.0%	23.6%	20.7%	17.3%	16.1%	12.9%	-3.2%	1.1%
NS	6.7%	8.8%	12.8%	13.5%	9.5%	9.7%	10.2%	0.6%	3.5%
NB	8.2%	10.4%	13.7%	14.1%	12.7%	11.7%	10.2%	-1.4%	2.0%
QC	2.5%	4.1%	5.0%	5.4%	6.1%	4.6%	5.1%	0.5%	2.6%
ON	1.4%	2.5%	2.9%	2.5%	2.6%	2.0%	2.4%	0.4%	1.1%
MB	3.3%	5.0%	6.6%	7.3%	6.5%	7.3%	7.7%	0.5%	4.4%
SK	3.0%	5.0%	4.8%	3.9%	4.4%	7.0%	4.7%	-2.3%	1.7%
AB	2.0%	3.3%	2.9%	1.6%	2.6%	2.7%	2.1%	-0.6%	0.1%
BC	1.7%	2.6%	2.9%	2.6%	3.6%	2.6%	2.6%	-0.1%	0.8%
Source: Statistics Canada, Provincial Economic Accounts, cat. 13-213; and calculations by the author.

September Graph

Joel Emes is Research Economist at The Fraser Institute. He has an M.A. in Economics from Simon Fraser University.

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