Backgrounder on Territorial Formula Financing
What is Territorial Formula Financing?
Territorial Formula Financing (TFF) is an annual unconditional transfer from the federal government to each territorial government. It enables territorial governments to provide a range of public programs and services to their residents that are comparable to those offered by provincial governments, at comparable levels of taxation.
TFF helps territorial governments finance essential public services in the North, such as hospitals, schools, infrastructure and social services. The program takes into account the high cost of delivering public services in the North and the challenge territorial governments face in order to offer these services to small, isolated communities.
TFF is funded entirely by the federal government using taxes paid by Canadians all across the country, leaving territories complete discretion as to how they use the funds to provide public services to their residents.
How is Territorial Formula Financing Calculated?
The TFF program is legislated as Part I.1 of the Federal-Provincial Fiscal Arrangements Act. This legislation describes the formula used to calculate the annual amount for each territory; it was last updated in 2013.
Each territory’s TFF payment is based on the difference between a proxy for the expenditures required to provide public services comparable to those offered by the provinces (known as the territory’s gross expenditure base or “GEB”) and its capacity to raise revenues (known as the territory’s eligible revenues). The following figure describes this gap filling calculation:
Eligible revenues are calculated by determining how much revenue a territory could have raised if it had taxed particular revenue sources at the national average tax rate. The measure will change year-to-year depending on territorial economic circumstances.
The GEB calculation for a given year starts with the GEB amounts for each territory that were last set in the legislation. For the 2016–17 TFF amounts announced in December 2015, the calculation started with the 2013–14 GEB amounts set as part of the 2014 TFF legislative renewal.
The GEB starting level is then adjusted using the Population Adjusted Gross Expenditure (PAGE) escalator for every year since 2013–14. The annual PAGE is the product of:
- The index of provincial and local government spending growth in Canada; and,
- The relative population growth between each territory and Canada.
Accordingly, the formula calculated the GEB for 2016–17 by applying the compounded growth path of the PAGE for 2014–15, 2015–16 and 2016–17 to the legislated 2013–14 GEB amount:
GEB2016-17 = GEB2013-14 x PAGE2014-15 x PAGE2015-16 x PAGE2016-17
This approach differs from other major transfers where the respective growth path is applied only to the transfer’s value of the previous year. This also means that the growth path used in the payment calculation can differ one year to the next.
The legislation, in combination with the associated regulations (Part 1.1 of the Federal-Provincial Fiscal Arrangements Regulations, 2007), sets out specific data sets that are used in the calculation of each territory’s eligible revenues and GEB for a given year. Statistics Canada provides many of these data series, including the population and provincial-local government spending data used in the calculation of the PAGE escalator.
How is Statistics Canada’s Data Revision Affecting Territorial Formula Financing?
On December 1, 2015, Statistics Canada released revised public sector statistics as part of its integration of Government Finance Statistics under the 2015 Comprehensive Revision to the Canadian System of Macroeconomic Accounts. This long-term review introduced improved data collection methodologies and allowed the public sector statistics to conform to international standards.
As a result of this review, there was a downward revision to the growth in provincial government spending between 2011–12 and 2014–15.
These statistics factor directly into the PAGE escalator (based on a three-year moving average with a two-year data lag). Even though there were no changes to the legislated formula to calculate TFF payments, the recent data revision resulted in payment amounts being calculated for 2016–17 that were about $88 million lower than territorial expectations.
What is the Government of Canada Doing?
The Government of Canada will be proposing legislative changes to Parliament that will address the underlying source of the issue created by the data revision and will improve the stability and predictability of TFF payments.
Specifically, the legislative formula used to calculate a territory’s GEB will be changed so that the starting point of the calculation is the previous year’s GEB. The change effectively removes the requirement that prior years be recalculated based on incoming data revision, thereby mitigating the impact of the latest data revision as well as future ones.
Using 2016–17 as an example, the formula used to calculate each territory’s GEB will be changed to:
GEB2016-17 = GEB2015-16 x PAGE2016-17
As a result of this change, the Government of Canada will provide an additional $67 million in TFF payments for 2016–17 and ensure higher TFF amounts for future years. For 2016–17, Yukon will receive an additional $17 million, the Northwest Territories will receive an additional $24 million, and Nunavut will receive an additional $26 million.
Moving forward, federal and territorial officials will continue to engage in discussions that will be required to implement the legislative changes and to identify improvements that could be made to TFF leading up to the renewal of the legislation in 2019.