Adaptability, accountability and sustainability: Intergovernmental fiscal arrangements in Canada

Transfers from Canada’s federal government to provinces, territories and local governments account for about one-fifth of the revenues of those governments, and about one-third of federal programme spending. While central governments in federations typically raise more, and sub-central governments typically raise less, than they spend directly, large gaps and transfers to bridge them strain the federal principle that governments at each level are sovereign in their respective spheres. Transfers can help achieve national-scale public goods, address spillovers among provinces, and support minimum standards for public services and other programmes across the country – yet Canada’s present system does not consistently reflect these purposes. The potential of large transfers to undermine accountability and foster unsustainable fiscal policies should inspire caution about their current size, and discourage expanding them. Demographic change will dampen the growth of government revenues in Canada and push programme spending up, particularly at the provincial level. Responding effectively will require a mix of tax increases and spending restraint from provinces and ideally partial pre-funding of programmes such as drug treatments and long-term care. Such reforms are likelier if the federal government limits growth in intergovernmental transfers, and reduces its draw on common revenue bases – the consumption base in particular – that the provinces will likely need to exploit more in the future.