The Black Hole of Public Administration

Chapter 7 Fiscal Imbalance as Governance Failure

CHAPTER 7 FiscalImbalanceasGovernanceFailure Fallacy isn’t error, of course, but it can be treacherous. —Thomas Schelling Preamble The first version of this paper was written in 2004, not as a vindication of the vertical fiscal imbalance hypothesis but as a critical comment on the disingenuity of the federal government (politicians and bureaucrats) in dealing with the issue. Recent federal-provincial transfers and the new financial circumstances of the federal government may have changed the nature of the imbalance (at least between the federal government and the provinces) but not the indictment of the federal government apparatus and its disingenuity up to the recent past in this file. The government of the Rt. Hon. Stephen Harper may or may not sway the dogmatic views of the bureaucracy on this issue. Introduction In a high-risk world of turbulence and rapid change, where the social needs may evolve rather rapidly, and the fiscal resources dry up or grow exponentially depending on international 277 278 The Black Hole of Public Administration circumstances, the possibility of a mismatch between evolving fiscal responsibilities and statutorily defined fiscal resources at the different levels (federal, provincial, local) of governments in Canada is obvious. The very existence of a well-established and permanent equalization payments program, and other forms of intergovernmental transfers designed to rebalance the fiscal equation,ifandwhentheneedarises,wouldappeartobetheliving proof that such is the case. In addition the chronic intrusions of the Canadian federal government into policy areas, falling clearly under provincial and local government jurisdictions (like postsecondary education and infrastructure), reveal that there are federal financial surpluses to allocate to these sorts of uses, and as a result provincial and local governments may not have been allocated a sufficiently large share of the limited fiscal resources to handle these needs themselves. In the spring of 2002, this issue was raised starkly by the Séguin Commission,astudygroupcreatedbythePartiQuébécoisQuebec government, under the chairmanship of Yves Séguin, a former (Liberal) Revenue Minister in Quebec. The Séguin Commission was struck to explore whether there were fiscal imbalances in the Canadian federation. The Commission report (backed by carefully prepared projections by the Conference Board of Canada) concluded that indeed there was a fiscal imbalance that favoured the federal government. The official reaction of the Canadian federal government for some time afterwards was both brusque and outraged. Senior federal ministers and officials stated bluntly that the idea of a federal-provincial fiscal imbalance was a myth: not only did it not exist, it could not exist. Our argument is that: (1) the Canadian federal government (under the federal Liberal Party) has been quite disingenuous in denying the very possibility of a fiscal imbalance; while there may be legitimate differences of opinion about the size of such an imbalance, and about the sorts of remedies that might be 279 Fiscal Imbalance as Governance Failure called for, there is no serious ground to claim that it is a logical impossibility in Canada; and (2) fiscal imbalance is only one of many clear indicators of governance failure in Canada: that is, a révélateur of a good deal of disconcertation in the governing of Canadian affairs. Consequently, a permanent resolution of the problem requires more than a temporary reshuffling of the financial deck. It calls for a reform of the governance of the Canadian socio-technical federal system. Fiscal federalism and the limits to fiscal predation The economic logic underpinning federalism is that a multi-level governance structure may yield higher efficiency by assigning the different tasks involved in governing and managing the public household to the level of government that is able to do the job most effectively, most efficiently and most economically. It is on the basis of this logic that constitutions determine the different rolesofthefederal,regionalandlocalgovernments,assignvarious responsibilities to them, and determine the fiscal resources to be allocated to each level to do these jobs. This allocation is often guided by a philosophy of subsidiarity that aims at devolving responsibilities to the lowest level of government (i.e., the one closest to the citizen) that can handle the task effectively, since needs may differ from place to place. Fiscal federalism is the label used to refer to the wide array of processesandnegotiatedarrangementsthatdefinesomeworkable sharing of resources and responsibilities among jurisdictions, and therefore a viable fiscal regime. This is a complex...