Budget 2006
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Archived - Chapter 6:
The Government’s Approach

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The previous chapters describe the key issues regarding fiscal relations in Canada today.

This chapter sets out the Government’s approach for meeting those challenges and the principles that will guide it. It is a multi-pronged approach, designed to ensure a return to balanced fiscal arrangements in which all governments have access to the resources they need to meet their responsibilities.

In particular, the Government is committed to a renewed relationship with provincial and territorial governments, based on collaboration in restoring fiscal balance and supporting the provision of quality services to Canadians—including areas of shared priority such as health, post-secondary education and infrastructure.

To that end, fiscal arrangements and intergovernmental collaboration and coordination mechanisms—the instruments that form the backbone of fiscal relations among governments—must be guided by principles that reflect Canada’s values and traditions and the challenges facing the country.

The Government is committed to a comprehensive solution to the challenge of restoring fiscal balance in Canada, guided by the following five principles discussed in detail below:

The Government believes the actions set out in this chapter encompass the most urgent and important concrete steps that need to be taken to restore and maintain fiscal balance in Canada. The Government also acknowledges that maintaining that balance will be an ongoing joint responsibility of both federal and provincial-territorial governments and that evolving circumstances may, in the future, warrant further adjustments.

To that end, the Government is also proposing discussions with Canadians, provinces and territories, academics and other stakeholders on a number of additional ideas for improving fiscal balance that may merit future consideration.

Accountability Through Clarity in Roles and Responsibilities

The Government of Canada is committed 
to the principle of
enhancing the accountability 
of governments 
through clarification of their
respective roles and responsibilities.

Governments need to be accountable to Canadians for their taxing and spending decisions. Clarity of roles and responsibilities is essential to ensuring that Canadians can hold governments accountable for their actions.

First and foremost, this requires ongoing respect for local autonomy and diversity and for the roles and responsibilities that other orders of government are best placed to perform, whether by virtue of their exclusive constitutional jurisdiction or because they have a comparative advantage in the delivery of programs and policies in particular areas.

In keeping with the Social Union Framework Agreement (SUFA) signed by the federal government and all provinces other than Quebec in 1999, the Government of Canada will limit the use of the federal spending power in areas of provincial responsibility to ensure that:

Accountability and clarity of roles and responsibility require that each order of government has access to the revenues required to fulfil its roles and responsibilities.

For the federal government, this means raising the revenues needed to fulfil its responsibilities in relation to maintaining sound federal finances, including ongoing repayment of the federal debt; ensuring the efficient functioning of the national economy; and implementing sound policies in the areas of defence, foreign policy, security, Status Indians on reserve, Equalization, Territorial Formula Financing (TFF), and financial support of shared priorities through transfers to provinces and territories.

This also requires that excess federal revenues be used primarily to reduce federal taxes rather than to launch new policies in areas where the federal government is not best placed to design or deliver programs.

Ensuring clarity and an appropriate matching of revenues to expenditure responsibilities for both orders of government enables Canadians to better hold their governments to account, thereby ensuring appropriate tax burdens and best "value for money" in the public services funded through those taxes. In addition:

The Government of Canada is proposing
action to enhance accountability
clarifying roles and responsibilities.

The Government is proposing immediate action to refocus federal efforts on supporting families with children by providing Canadians with greater choice in child care through direct transfers to families with children. Parents will be able to choose the child care option that best suits their family needs—whether that means formal child care, informal child care through neighbours or relatives, or a parent staying at home.

This proposal reflects recognition that the federal government is better placed to provide income support to families with children, and that provinces and territories are better placed to tailor child care services and support to the wide variety of needs among Canadian families. The Government’s child care proposal builds on the improved support to families with children that resulted from clarification of federal and provincial-territorial responsibilities as part of the 1998 National Child Benefit (NCB) (described below).

The Government will also take immediate action to refocus federal efforts toward the reforms and funding that are required to meet long-standing needs in core areas of federal responsibility, including:

The Government is also proposing major reductions to the federal tax burden through an immediate 1 point reduction in the goods and services tax (GST) to 6 per cent and additional personal income tax cuts.

Realignment of Roles and Responsibilities:
The National Child Benefit Model

Following discussions in the 1990s, the federal government and provinces and territories agreed on an approach for developing the National Child Benefit initiative.1

The NCB initiative, launched in 1998, is a joint approach under which the federal, provincial and territorial governments act together to reduce child poverty while lowering the "welfare wall" that discourages many parents on social assistance from taking a job because they may lose child-related benefits and services.

The NCB initiative has proven to be an innovative and progressive approach for investing in children. It integrates federal, provincial and territorial systems of income support for children into a national platform of income-tested child benefits available to families on social assistance and low-income working families.

Under the NCB initiative, the NCB supplement has replaced an increasing proportion of child-related basic income support provided under social assistance. Resulting provincial-territorial social assistance savings have been redirected to new or enhanced benefits and services for low-income families with children. Examples of provincial reinvestments include earned income supplements, child care subsidies and supplementary health coverage.

1 The Government of Quebec chose not to participate in the NCB because it wanted to assume control over income support for children in Quebec but has stated that it agrees with the basic principles of the NCB and has adopted a similar approach to the NCB.

The Government of Canada is proposing
to discuss ideas on how to further clarify
 federal and provincial-territorial roles
 and responsibilities.

In addition to its specific commitment to early action for refocusing federal efforts toward policies and programs it is best placed to deliver, the Government is also proposing to discuss ideas for further clarification of roles and responsibilities through realignments in federal and provincial expenditures in other areas. Particular focus could be given to areas, such as housing, where both federal and provincial-territorial governments provide similar kinds of support and especially those where current arrangements may generate fiscal pressures on provinces and territories and distort their spending priorities.

Fiscal Responsibility and Budget Transparency

The Government of Canada is committed
to the principle of ongoing fiscal responsibility
and transparent budget planning.

Fiscal responsibility is essential for governments to be able to provide quality services on a sustainable basis and to ensure intergenerational equity. Maintaining a fiscally responsible approach to budgeting, including a commitment to ongoing debt reduction, is especially important given the demographic challenges facing Canada—an aging workforce and low birth rate—and the resulting future pressures on health, publicly funded pensions, immigration and other social programs. The Government’s commitment to ongoing debt reduction also reflects the fact that while the federal debt-to-GDP ratio has declined significantly, it is still much higher than that of the provinces and territories.

Transparent fiscal planning rests on accurate, timely and complete information and analysis: these are fundamental to understanding a nation’s finances. Just as important, informed public debate on setting fiscal and budgetary priorities for the federal government further requires a high degree of public transparency in relation to that information.

The Government of Canada is proposing
immediate action to restore transparency to
budget planning and ensure ongoing
fiscal responsibility.

The Government is proposing immediate action to implement:

These actions will enable Canadians to openly debate national fiscal and budgetary priorities, based on a clear understanding of the federal government’s true fiscal position.

The Government of Canada is proposing
discussions on mechanisms for directing the use
of unplanned surpluses at fiscal year-end.

Budget transparency could be further enhanced through adoption of clear rules or mechanisms for directing unplanned surpluses. Such rules or mechanisms would give parliamentarians and Canadians an opportunity to have a say on the most appropriate possible uses for unplanned surpluses, rather than leaving such decisions to be taken in haste by the government of the day (in the weeks preceding the end of the fiscal year) or by default (through the further reductions in federal debt that automatically result when unanticipated fiscal manoeuvring room is not used to increase federal spending).

Accordingly, the Government is proposing to discuss ideas for appropriate rules or mechanisms to allocate unplanned surpluses, with a particular focus on the idea of allocating a portion of unplanned surpluses in excess of $3 billion a year to top up the existing investment funds of the Canada Pension Plan and Quebec Pension Plan (CPP/QPP). This idea is discussed more fully below.

Mechanisms for Allocating Unplanned Surpluses:
An Approach for Discussion

The Canada Pension Plan and Quebec Pension Plan are models of successful federal-provincial cooperation in an area of joint jurisdiction. They constitute a key pillar of Canada’s retirement income system, with most of Canada’s seniors counting on them for an important part of their income.

In the 1990s, the CPP and QPP faced a significant financial challenge, with large unfunded liabilities that made the Plan unattractive for new participants and put their financial sustainability at risk. After extensive public consultations, the federal and provincial governments—as joint stewards of the CPP—agreed to major reforms in 1997 that restored the long-term financial health of the Plan. Similar changes were also made to the QPP by the Government of Quebec.

The 1997 reforms also improved intergenerational fairness by pre-funding a larger proportion of future benefits, thereby reducing the extent to which younger and future generations are required to finance the benefits accruing to the generations currently in (or approaching) retirement.

Today, international economic organizations point to the CPP/QPP as examples of "best practices" in the area of retirement income security. Both the CPP and QPP are on track to achieve a significant degree of pre-funding (unlike public pension plans in most other countries, which continue to operate largely on a "pay-as-you-go" basis) and are acknowledged to be fiscally sustainable for at least the next 75 years.

Nevertheless, the fairness of the CPP and QPP could be further improved. While the 1997 reform agreement helped address some of the intergenerational unfairness that had built up in the CPP, current young workers will still have to pay a much higher contribution rate (9.9 per cent) than that paid by past generations for the same benefits, in order to make up for the fact that the contribution rate was unsustainably low for many years. For example, a young Canadian born in 1990 will earn a real rate of return of 2.1 per cent on his or her CPP investment, compared to a rate of return of 6.2 per cent for someone born in 1940. By committing to direct a portion of federal unplanned surpluses to the CPP/QPP, the Government could help to lower the future contribution rates and thus improve intergenerational equity in the Plan. For example, each $5 billion in unplanned surpluses directed to the CPP and QPP could generate an additional return to the Plans of $350 million a year, assuming an average rate of return comparable to what the CPP Investment Board has earned since its inception.

To that end, the Minister of Finance will undertake consultations with provinces and territories on the merits of allocating a portion of unplanned federal surpluses to the CPP/QPP or of other rules or mechanisms that may be proposed.

Predictable Long-Term Fiscal Arrangements

The Government of Canada is committed
to the principle of ensuring long-term funding support
for shared priorities and a transparent, principle-based
 approach to its transfers to provinces and territories.

Intergovernmental transfers are important tools to ensure that all governments have adequate revenues to meet their responsibilities. These transfers also help to ensure adequate support for shared priorities—such as health care and post-secondary education—that foster a strong economic and social union and equal opportunities for all Canadians.

Federal transfers for shared priorities need to support provinces and territories in their long-term policy planning and to allow them to remain accountable to their residents for the public services they provide and the taxes they raise to finance them. To do so, federal transfers need to be predictable and to grow in line with reasonable and fiscally sustainable projections of future expenditures in the areas supported by these transfers over the long term.

Federal transfers to provinces and territories, including support targeted on particular regional needs, also need to be based on transparent principles and formulas and to reflect decisions arrived at following open multilateral discussions between the federal government and all provincial and territorial governments.

The Government of Canada is proposing
to take immediate action to lay the foundations for
a return to predictable long-term fiscal arrangements
in Canada within the coming year.

The Government is proposing immediate action to lay the foundations for a predictable and long-term system of fiscal arrangements by:

The Government of Canada is committed
to further action over the coming year
to put in place predictable and equitable 
fiscal arrangements for the long term.

The Government is also committed to taking further action over the coming year, following consultations with provinces and territories, to put in place long-term fiscal arrangements that will provide equitable and predictable support for:

Consultations on the restoration of transparent and principle-based Equalization and Territorial Formula Financing transfers will be guided by a number of key reports and recommendations from independent third parties, notably:

Specifically, the Minister of Finance will undertake consultations with his provincial and territorial counterparts following release of the Expert Panel report, with a view to putting forward proposals by the fall of 2006 to provide provinces and territories with long-term certainty in relation to Equalization and TFF for 2007–08 and subsequent fiscal years.

In relation to post-secondary education and training, the Minister of Human Resources and Social Development will also undertake consultations with her provincial and territorial counterparts with a view to identifying appropriate roles and responsibilities for each order of government in support of post-secondary education and training. These consultations will serve as the basis for the development, within the next year, of proposals by the Government for long-term federal support for these priorities.

Fulfilling these commitments to further action will provide support for a sound, long-term foundation for key public services—in the areas of health care, post-secondary education, training and infrastructure—that Canadians see as shared priorities and will restore Canadians’ confidence in the fairness and integrity of fiscal arrangements.

The Government of Canada is proposing to discuss 
ideas on how to further reinforce the 
predictability and fairness of fiscal 
arrangements in Canada on an ongoing basis.

The Government’s commitment to restoring predictable, equitable and growing transfers that are based on clear principles will address the major concerns over the current fiscal imbalance in Canada and will restore Canadians’ confidence in the overall fairness and integrity of fiscal arrangements.

As noted in Annex 1, there have been many calls over the years for structural realignments of tax policies that would have the effect of reducing or eliminating joint occupancy of particular tax fields, including the 2002 Séguin Commission report, which specifically suggested the federal government cease imposing the GST in exchange for the elimination of certain cash transfers.

Such proposals have been motivated by a number of different considerations, including increased accountability; greater clarity of roles and responsibilities; increased economic efficiency from reductions in compliance and administrative costs, etc. It has also been argued that increasing overall occupancy of tax fields by provinces and territories could result in a more predictable source of revenue than federal cash transfers.

At times during earlier fiscal relations debates, there were also proposals—some of which were implemented at various times during the 1960s and 1970s —for "tax transfers." These tax transfers involved partial transfers of tax room from the federal to provincial-territorial governments, as a partial replacement for federal cash transfers or as part of broader federal-provincial agreements. In most cases, these tax transfers involved personal income taxes, but in some cases corporate income taxes and gaming revenues were also transferred to provinces and territories.

The Government acknowledges that maintaining fiscal balance and fairness will be an ongoing challenge and as part of its discussions, will consider ideas on how the predictability of funding arrangements can be maintained over the longer term. The Government will give particular attention to the implications of such ideas for:

The Government is also prepared to discuss ideas on how best to ensure that the level and distribution of its transfers to provinces will continue to be based on sound principles and to be seen as fair by Canadians in all parts of the country.

A Competitive and Efficient Canadian Economic Union

The Government of Canada is committed
to enhancing the competitiveness and efficiency
of Canada’s economic union.

To ensure growing living standards and enable Canadians to receive the quality public services they expect of their governments, the Government of Canada is committed to reducing or eliminating impediments to the competitiveness and efficiency of Canada’s economic union—notably by refocusing federal policies on taxation and support for research and innovation and through coordinated or joint action with provinces and territories to remove other tax-related or regulatory impediments to productivity growth.

The Government’s commitment to limit federal taxes to the levels required to raise the revenues needed to fulfill its responsibilities will also help promote competitiveness and efficiency by ensuring that overall taxes are not higher than required to meet the overall expenditure responsibilities of all governments.

The Government of Canada is proposing immediate
 action to promote greater competitiveness and
efficiency through productivity growth.

The Government is proposing immediate action to implement:

The Government of Canada is committed to further action, in collaboration with provinces and territories, 
 to address structural impediments to competitiveness
 and efficiency within Canada’s economic union.

The Government will collaborate with provinces and territories on finding ways to address remaining impediments within Canada’s economic union through coordinated or joint action:

The Government of Canada is proposing to discuss
ideas on how to further improve competitiveness and
 efficiency through coordinated changes in federal and
 provincial-territorial taxation policies, notably through
 increased tax harmonization.

The Government is proposing to discuss ideas for possible further coordinated action by federal, provincial and territorial governments to achieve greater harmonization of federal and provincial taxes, primarily by broadening or extending existing Tax Collection Agreements.

As discussed below, Canada’s tax system, unlike those in most other federal countries, is characterized by the joint occupancy of major tax fields by federal and provincial-territorial governments and by a significant degree of tax harmonization under long-standing Tax Collection Agreements in several major tax fields. As a result, federal and provincial-territorial governments both enjoy a significant degree of fiscal autonomy while also minimizing tax compliance costs on Canadians and the administrative costs of tax collection.

But significant gaps in tax harmonization remain. Accordingly, the Government is willing to explore options for further harmonization in the interest of reducing compliance and administrative costs that stand in the way of increased competitiveness and efficiency. In particular:

Building a Competitive and Efficient Tax System:
Tax Harmonization and Tax Collection Agreements in Canada

Unlike most other federal countries, both orders of government in Canada have access to all major sources of tax revenue and exercise substantial tax policy autonomy. As a result, most major tax fields are jointly occupied.

Joint occupancy of major tax fields offers significant benefits in terms of flexibility for each order of government to design tax systems that:

  • Allow for equitable sharing of the tax burden.
  • Provide a useful policy lever for economic development.
  • Support stability of total revenues through a diversified portfolio of revenue sources.

On the other hand, joint occupancy potentially entails higher compliance costs for Canadians and administrative costs for governments. In the absence of measures to ensure coordination and cooperation, it can also lead to inefficient tax design and uncompetitive overall tax levels, as well as to a loss of government accountability.

In response, Canada has built a system that preserves the benefits of joint occupancy and minimizes its costs through harmonization of federal and provincial-territorial tax policies and Tax Collection Agreements—helping to promote economic efficiency and reduce administrative costs while preserving a high degree of fiscal autonomy for both orders of government.

Effective Collaborative Management of the Federation

The Government of Canada is committed to ensuring
 effective collaborative management of key federal and
 provincial-territorial policies in areas where both orders of government will continue to play important ongoing roles.

Effective mechanisms for coordination and collaboration in federal and provincial-territorial policies are required in areas of joint jurisdiction—including the Canada Pension Plan, agriculture, immigration and the environment—to ensure that federal and provincial-territorial policies reinforce each other in the interests of Canadians, rather than working against each other.

The need for effective coordination and collaboration also carries over into areas of primarily federal responsibility, such as international relations, where:

Similar forms of coordination are also required in relation to criminal law, where federal actions can have important consequences for provincial-territorial responsibilities in relation to the administration of justice.

The Government of Canada is proposing immediate action to extend effective collaborative management to new areas and to meet its responsibilities for effective collaborative management of matters requiring early joint decisions by federal and provincial-territorial governments.

The Government is proposing immediate action to:

The Government of Canada is committed to 
enhancing the effective collaborative management
 of other key federal and provincial-territorial policies.

The Government is committed to working with provinces and territories to enhance effective collaborative management of other key federal and provincial-territorial policies, including:

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