A better funding model

How many levels of government does it take to fix a sewer pipe? In some cases, the answer is three.

While this may seem ludicrous, the reality is the federal and provincial governments are heavily involved in many municipal spending decisions. Though the image of having your local federal MP, a provincial cabinet minister and your mayor all smiling and cutting the ribbon to a new project together projects harmony, this type of overlap significantly reduces political accountability.

For example, who are you going to blame if the pipe springs a leak? Worse still, who are you going to blame if the sewer contract goes to a company facing fraud and conspiracy charges?

This isn't a hypothetical. This scenario has occurred recently in Quebec. The federal public safety minister of the day reportedly answered that oversight of municipal contracts is not a federal responsibility.

In order to strengthen political accountability and government efficiency in Canada ,it is necessary to ensure that one level of government, not three, is responsible for providing and generating revenue in each spending area.

While the above anecdote may seem like an isolated incident, it isn't. Infrastructure projects funded by all three levels of government take place throughout the country. Moreover, provincial governments are systemically reliant upon federal funding in many areas.

The problem is the federal government generates too much revenue, which reduces the ability of provinces to garner sufficient revenue to fund services they need. There is a limit to how much revenue governments can efficiently collect, so excessive federal intake crowds out provincial revenues.

While nearly two-thirds of government expenditures are on health care, education and social services, the federal government controls over 43 per cent of government spending, leaving the provinces only a shade over 40 per cent. Municipalities, which provide most of the services we rely on daily, control less than 16 per cent of government spending. This top-heavy arrangement necessitates these transfers.

While transferring money from the federal government to lower levels seems like an elegant solution, it obfuscates decision-making and reduces efficiency.

Consider health care, for instance. Premiers love to blame the federal government for the shortcomings of health care, despite health care being a provincial responsibility. Since they can always blame the federal government for not transferring enough money to provincial governments, premiers have less incentive to deliver services efficiently.

Disentangling spending areas would also have a salutary effect on electoral politics, allowing voters to see more clearly who is responsible for what services and expenses. When one area such as health care dominates the political debate at two different levels of government, it muddies the waters and allows other issues to fall by the wayside. A voter whose top two issues are health care and national defence could wind up voting for a federal candidate whose position on foreign policy he doesn't support, simply because he is afraid that the federal government will reduce health transfers, for example. Canadians should only have to vote once to express a policy preference.

In order to create fiscal balance in Canada, the federal government should terminate direct spending in areas of provincial jurisdiction (with rare exceptions) and cease fiscal transfers with two exceptions.

First, federal fuel-tax revenue should be transferred to the municipalities on a per capita basis. Second, the GST revenue should be distributed to the provinces on a per capita basis. These two measures would provide stable funding from efficient taxes, while creating a degree of equalization. But unlike the current equalization system, it would contain no perverse incentives that reward provinces for poor performance.

Though decentralizing wouldn't solve all of Canada's problems, it would lead to more efficient government services and it would allow for greater policy experimentation to help determine best practices. Most importantly, it would bring taxation and expenditure decisions in key areas closer to voters and consumers.

Transparency is a cornerstone of good governance. Create transparency, and good government is likely to follow.

Steve Lafleur is a policy analyst with the Frontier Centre for Public Policy (www.fcpp.org).

-- Troy Media

Republished from the Winnipeg Free Press print edition November 19, 2012 A13