Financial equalization (Canada)

from Wikipedia, the free encyclopedia

The Canadian financial equalization system ( English financial equalization , Equalization Program , French péréquation financière ) is a financial system that provides domestic transfer payments from the central government to the provinces and territories .

General

The Canadian Constitution provides for direct financial equalization through the Constitutional Act of 1982 , in which the central government makes funds available to the provinces and territories in order to achieve sufficiently comparable public services with sufficiently comparable taxation. Thus enshrined in the Constitution revenue sharing system is aimed at harmonizing the standards of living of, overcome by the use of the term "sufficient" ( English Sufficient but) (permanent) existing differences between the provinces. Although the goal of financial equalization is specified within the framework of the constitution, the central government pays the funds to the provinces without any specific purpose ( English unrestricted ), which is then given the free use of the payments. The growth of this cash flow is legally prescribed by the three-year moving average of Canada's economic growth based on gross domestic product . The "Law on the financial compensation" ( English Federal-Provincial Fiscal Arrangements Act ) of 1985 mentions on the rules of transfer payments also with issues of tax harmonization , as well as intergovernmental financial and economic policy .

The significant transfer payments from the central government to the provinces take place through a significant redistribution of central tax revenues to the provinces. The equalization payments are designed in such a way that the provinces achieve average financial strength if they levy the average tax rate . The tax autonomy of the provinces is almost unlimited and only finds its limits in the financial resilience of the citizens. The spread between the tax rates of individual types of tax in the provinces / territories is relatively high. On the one hand, the provinces have a considerable amount of their own taxing power , which allows them to act largely independently of the central government in terms of financial policy. On the other hand, the municipalities are dependent on corresponding federal transfers and - for the most part - on the provinces for an average of 40% of their income.

species

Canada's central government applies financial equalization between provinces and territories through three different equalization systems:

  • Canadian Health Transfer ( English Canada Health Transfer , CHT, French Transfert canadien en matière de santé , TCS): The compensating currents within the CHT are the biggest level of Canadian financial equalization system represents the payments are long-term and predictable. Source of funding for health care in the provinces and Represent territories. The payments are based on a per capita calculation, with the allocation of funds being linked solely to the number of inhabitants in the respective province or territory. In 2007, the Canadian government began implementing a long-term plan to provide comparable treatment for all residents, regardless of where they live. Since the 2014/15 budget year, payments to citizens have been made exclusively in cash . Up to the 2016/17 financial year, payments were increased by 6% in accordance with the adopted legal acts . In the following years, the growth of this equalization system results from the moving three-year average of the nominal growth of the gross domestic product of the Canadian economy, with guaranteed growth of 3% per year being assured.
  • Canadian Social Transfer ( English Canada Social Transfer , CST; French Transfert canadien en matière de programmes sociaux , TCPS): Through the CST, the Canadian central government distributes funds for the promotion of post-secondary education , social support and services, as well as early childhood development , early learning and childcare . As with the CHT, the amount of the payments to a province or to a territory depends solely on the number of inhabitants of the respective province or territory. This follows the plan to be able to offer the same social support to all residents of Canada. For the budget year 2014/15 and the following years, the relevant legal acts provide for an annual growth of this compensation level of 3%.
  • Equalization of the territories ( English Equalization and Territorial Formula Financing , TFF): With the Equalization Program (EP) and the Territorial Formula Financing (TFF), the third payment flow within the financial equalization system is divided into mechanisms for provinces ( English Equalization Program ) and territories (TFF) ).

The flat-rate grants without proof of use ( English unconditinal grants ) make up the majority of the transfer payments, while the purpose-related grants ( English conditional grants ) only make up 3.3% of the provincial income.

functionality

Since the beginning of the financial equalization in 1867, there were not earmarked ( English unrestricted ) contributions from the central government to the provinces, which consisted of a fixed amount and a population-dependent portion. The modification of 1907 stipulated that the donations decrease relatively with increasing population.

In Canada there is only a vertical financial equalization system from the central government to the provinces / territories, but not, as in Germany, a horizontal state financial equalization between the provinces / territories. The calculation of the compensation authorization of a province follows the analysis of the fiscal options ( English fiscal capacity ) of each province, which is determined by the ability to raise revenue. Before any adjustments, the compensation entitlement per inhabitant is calculated from the difference between a province's own fiscal capacity and the average fiscal capacity of all provinces. Adjustments ultimately lead to an increased complexity of the financial equalization system. Provinces receive the larger compensation amount that arises with two alternative calculation methods. If the compensation entitlement is higher when all income from natural financial sources is excluded in the calculation than if 50% of the income from natural financial sources is not taken into account, a province receives the higher amount that results from both methods.

This compensation is based on an average comparison of taxpayers per inhabitant in five reference provinces, to be determined separately for each individual tax type. Thereafter, since 2000/2001, only two provinces have been able to generate revenue surpluses (which are not offset), namely Ontario at CA $ 367 and in particular Alberta , which has the most natural resources , at CA $ 2,883. All other provinces showed deficits, the smallest in British Columbia (- CA $ 206) to Newfoundland (- CA $ 2,134). These revenue differences are balanced out so that all eight needy provinces are brought to the same revenue level of 95% of the national average.

While the proportion of income from the financial equalization system is relatively small in the provinces, the territories are dependent on it. With an average of 23.9% (2005) of all income, the central government transfer payments are significant. Canadian fiscal equalization tends to weaken economically strong provinces and prop up weak ones.

economic aspects

When it comes to borrowing , the central government and the provinces are not subject to any restrictions, while the municipalities are only allowed to borrow for their own investments and require approval from their provincial government for this.

In country bonds (such as the popular provincial bonds) it must be remembered that an issuer risk exists because in the Canadian provinces of default ( English default ) is possible as the example of the province of Alberta has shown in the 1935th The financial equalization does not ensure the financial stability of provinces / territories. This default risk of an investor can be covered by the default guarantee of a bond insurer , which in turn is subject to a default risk.

Individual evidence

  1. ↑ NordLB (ed.), Canadian Provinces & Territories: Fixed Income Research , February 2017, p. 5
  2. ↑ Hans-Peter Schneider, Financial Autonomy of Federal Member States and Municipalities: An International Comparison , 2006, p. 16
  3. ↑ Robin W. Boadway / Paul Alexander R. Hobson, Intergovernmental Fiscal Relations in Canada , 1993, p 128
  4. ↑ Tanja Kirn, Incentive Effects of Financial Equalization Systems , 2010, p. 234
  5. ↑ Hans-Peter Schneider, Financial Autonomy of Federal Member States and Municipalities: An International Comparison , 2006, p. 19
  6. ↑ NordLB (Ed.), Canadian Provinces & Territories: Fixed Income Research , February 2017, p. 4 ff.
  7. ↑ NordLB (ed.), Canadian Provinces & Territories: Fixed Income Research , February 2017, p. 5
  8. ↑ NordLB (ed.), Canadian Provinces & Territories: Fixed Income Research , February 2017, p. 5
  9. ^ Wilhelm Gerloff, Handbuch der Finanzwissenschaft , Volume, 1956, p. 775
  10. ↑ Nomos (Ed.), Jahrbuch des Föderalismus , Volume 2, 2001, p. 64
  11. ↑ Hans-Peter Schneider, Financial Autonomy of Federal Member States and Municipalities: An International Comparison , 2006, p. 21
  12. ↑ NordLB (ed.), Canadian Provinces & Territories: Fixed Income Research , February 2017, p. 5
  13. ↑ Hans-Peter Schneider, Financial Autonomy of Federal Member States and Municipalities: An International Comparison , 2006, p. 21
  14. ↑ NordLB (ed.), Canadian Provinces & Territories: Fixed Income Research , February 2017, p. 8
  15. ↑ Hans-Peter Schneider, Financial Autonomy of Federal Member States and Municipalities: An International Comparison , 2006, p. 20
  16. ↑ Ameta Karabegovic / Fred McMahon, Economic Freedom of North America , 2005, p. 16
  17. ↑ Hans-Peter Schneider, Financial Autonomy of Federal Member States and Municipalities: An International Comparison , 2006, p. 22 f.
  18. ↑ NordLB (ed.), Canadian Provinces & Territories: Fixed Income Research , February 2017, p. 3