Fiscal imbalance in Canada

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Fiscal imbalance (in French, déséquilibre fiscal) is the term used in Canada to describe a monetary imbalance between the Canadian federal government and the provincial governments.

According to the fiscal imbalance theory, the federal government has achieved an important surplus by cutting its contributions towards provinces, leaving them with responsibilities much too expensive for their resources. A major work having developed the theory is the "Seguin Report", commissioned by then Parti Québécois (PQ) Premier of Quebec Bernard Landry. It was completed under the now former Liberal Quebec Minister of Finance Yves Séguin. The federal government run by the Liberal Party of Canada until January 2006 denied that this imbalance exists arguing [1], in part, that both the federal and provincial governments have access to the same major sources of revenue and that both orders of government face significant spending pressures and limited resources. However, the Conservative Party of Canada recognizes the imbalance. Following their victory in the 2006 federal election in January, they intend to find a solution during their mandate.

A similar situation existed during the 1920s and the Great Depression when the new welfare state severely burdened the provinces, but the federal government continued to run surpluses. This resulted in the 1937-1941 Rowell-Sirois Commission. The most important result of this commission was that the restrictions on how provinces could raise money were removed, and the expensive Unemployment Insurance program was transferred from the provinces to the federal government.

In these past few years, the fiscal imbalance has been a major issue identified by all parties of the National Assembly of Quebec. The Parti libéral du Québec (PLQ) proposes to work with the federal government to solve the problem by increasing federal transfers to Quebec. Yves Séguin, of the PLQ, proposes transferring control of the Goods and Sevices Tax (GST), a value-added tax, from the federal government to the Quebec government. The PQ holds that independence for Quebec will solve the imbalance, with all powers to impose taxes brought back to the Quebec government. The PQ proposes until then to struggle to convince the federal government to give back money to Quebec.

All major federal parties but the Liberals recognize a monetary imbalance between the federal government and the provinces, and speak of plans to reduce it. The Bloc Québécois, a sovereigntist party at the federal level, is probably the strongest denouncer of the situation. Prime Minister Paul Martin and his federal Liberals prefer to speak of a fiscal "pressure" on provinces, therefore not admitting directly a responsibility of the Canadian government. In accepting an amendment to the Throne Speech after the 2004 federal election, the federal Liberals did officially acknowledge the reality of the situation.

The federal Liberals assert that it is impossible for a true fiscal imbalance to exist as the provincial governments have access to all the same sources of revenue as the federal government. Unlike in earlier years, the problem is not structural but political. The provincial governments are unwilling to risk their popularity by raising taxes and instead want the extra money to come from the federal government. The federal Liberals also partially blame the situation on the tax cuts introduced by many of the provincial governments.

The potential solutions advocated by most of the provincial premiers is that the transfer payments from the federal government to the provinces be substantially increased. This has gradually occurred as the federal government has regularly increased its transfer for health care spending. The Bloc Québécois supports Yves Séguin's suggestion that the GST be given to the provinces. Gordon Campbell, the premier of British Columbia, has proposed that the federal government take over from the provinces responsibility for programs that provide pharmaceutical products to low-income people, the elderly and people with disabilities.