The provinces are lousy at controlling spending

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Appeared in the Calgary Herald

Provincial cries for more federal money are as old as Confederation, and rarely have any substance to them. After all, it’s easier to demand that Ottawa ante up federal cash—to cry about some mythical “fiscal imbalance” rather than examine how provinces already spend taxpayer money. It’s also easier than raising provincial taxes and risking justifiable local taxpayer ire when people think such tax hikes unjustified.

First though, ponder the so-called fiscal imbalance—the claim that the federal government has all the money, little pressure to spend, and the provinces are starved for revenue but have programs that require spending above the combined effect of population growth plus inflation.

Space does not permit a detailed history of the byzantine nature of provincial and federal taxes and transfers, but here’s the short summary. At Confederation, the deal was that the provinces would drop their trade-inhibiting tariffs on each others’ exports. (Tariffs were then the main source of provincial revenue). In exchange, the provinces would receive limited transfers from the Dominion/federal government. The provinces would also receive the right to tax personal income.

As it happened, the provinces did just that. British Columbia was the first province to tax personal income (in 1876) followed by Prince Edward Island (1894); others waited until the twentieth century.

And of course, since 1867 provinces have had the ability to tax us in other, multiple ways—property tax, sales and consumption taxes, business taxes, et al.

On transfers, back in the 1970s the federal government cut yet another deal with the provinces; it reduced its tax take so the provinces could raise their taxes—which they promptly did. And more recently, on direct payments to provinces, the federal government has increased transfers to a budgeted $68 billion this fiscal year, up from $41 billion in 2005/06. Per person, albeit in nominal terms, that’s $1,897 this year compared with $1,301 ten years ago.

Simply put, there has been no shortage of tax room, tax-raising possibilities or federal transfers to the provinces. But all of that tax talk ignores the spending side of provincial budgets.

Sure, some might argue that the provinces have unique provincial responsibilities, health care and K-12 education to name the two most significant provincial expenses.

But the federal government also has unique responsibilities (defence, Old Age Security payments, Aboriginal matters, etc.). In a world increasingly characterized by terror and defence threats such as ISIS, the federal government can argue just as cogently that more money should be spent on defence and thus take priority over provincial desires.

Eyes should roll when the provinces claim they need extra taxes, via Ottawa or provincial tax hikes. To understand why, consider the provinces’ lack of attention to controlling spending. For example, take a look at education, often falsely claimed to have been “cut” and thus which demonstrates provincial profligacy.

As my colleagues demonstrated in a recent paper, the truth is the rather the reverse: Enrolment in public schools declined in nine of ten provinces between 2001/02 and 2011/12. But per pupil spending increased, even after accounting for inflation.

New Brunswick led the spending parade. It increased spending on public schools, beyond the combination of pupil enrollment plus inflation, by 56.4 per cent. It was followed by Alberta (55.3 per cent), Saskatchewan (53.1 per cent), Nova Scotia 47.4 per cent), Ontario (46.7 per cent), Newfoundland and Labrador (45.3 per cent), Prince Edward Island (36.1 per cent), Quebec (22.9 per cent), Manitoba (21.7 per cent) and British Columbia (19 per cent).

When provincial governments demand more money from Ottawa (or from provincial taxpayers), remember provincial education spending habits. On at least one core provincial responsibility, the provinces have been demonstrably poor at controlling their own expenditures within justifiable parameters. It would be a mistake to assume education is the sole example.

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