5.5 The Financial Role of the Federal Government

An anomaly in the Canadian federal system is that the federal government has the largest share of revenues related to economic growth, such as income tax, while the provinces have the main responsibility for the most important and expensive services in Canada, especially health and education. This creates a significant imbalance for provinces in their revenues in comparison to pressures on spending. The federal government has been an important provider of revenue for many provinces, with some provinces receiving as much as 40 percent of their total revenue in the form of transfers from the federal government. For the last 60 years, our national fiscal arrangements have reflected the belief that all Canadians are entitled to a basic standard of services. If provinces had to rely on their own resources to finance services such as health or education, poorer provinces would be hard pressed to provide services at nearly the same level as the richer provinces, so the federal government, which has greater taxing power, has used some of its funds to provide extra assistance to those provinces. The money comes through a number of different avenues, some related to specific services such as health care or social assistance, and others giving provincial governments the ability to spend the funds on whatever their priorities were. However, economic times are tougher, the federal government tends to reduce its transfers to provinces to deal with its own financial pressures.  This creates budget problems for the provinces, which have to decide whether to cut their own spending, levy higher taxes to make up the shortfall, or transfer the problem to hospitals, school systems, and municipalities by in turn reducing provincial grants to those bodies.

Reductions in federal funding also reduce the ability of the federal government to influence programs and services in Canada. In education, the federal role has always been quite limited, but provinces are even less inclined to look at federal proposals or national programs when there are cuts in the financial support they are receiving from Ottawa.

For all these reasons, financial relationships between the provinces and the federal government are both important and controversial. Again, there is no agreement on how much money the federal government should provide to provinces, or on how these transfers should be made.