IAPR TECHNICAL PAPER SERIES
FEDERAL AND PROVINCIAL GOVERNMENT FISCAL BALANCES
IN CANADA’S MAJOR CITIES
Ronald D. Kneebone
Department of Economics
University of Calgary
Technical Paper No. TP-06002
Institute for Advanced Policy Research
University of Calgary
Calgary, Alberta
Canada
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Correspondence: Ronald D. Kneebone, Department of Economics, University of Calgary
kneebone@ucalgary.ca
Federal and Provincial Government Budget Balances
in Canada’s Major Cities
Ronald D. Kneebone*
Department of Economics and
Institute for Advanced Policy Research
University of Calgary
2500 University Drive NW
Calgary, Alberta, Canada
T2N 1N4
February 2006
Abstract
This paper presents a methodology for determining the distribution of federal and provincial
government expenditures and revenues to sub-provincial areas. The approach is used to determine the
size of federal and provincial fiscal balances in each of Canada’s nine major cities. Calculations are
presented identifying the sensitivity of those balances to income and age distributions. The
implications for cities of the recent efforts by federal and provincial governments to eliminate deficits
and reduce their debts are also identified and discussed.
1. Introduction
It is increasingly common to hear the suggestion that large cities are “engines of economic
growth” within a national economy. This is claimed to be so because major cities are magnets
for immigrants, new industries, the highly-educated, and the highly-skilled. In 2002, 90% of all
international in-migrants settled in one of Canada’s nine major cities.1 Forty-six percent of those
immigrants held a bachelor, master, or doctorate degree; this compares to the Canadian average
of 16%.2 Over the period 1996-2002, Canada’s nine largest cities contained 51% of Canada’s
population but were home to 65% of all net new jobs created in the country. Over the same
*
Thanks to Donna Waagenaar and Kate White for valuable research assistance. I remain responsible for any errors
or omissions. Comments welcome.
1
Citizenship and Immigration Canada (2002). The nine major cities are Toronto, Montreal, Vancouver, OttawaGatineau, Calgary, Edmonton, Quebec, Hamilton, and Winnipeg.
2
Data on education attainment of international immigrants is from Citizenship and Immigration Canada (2002).
Data on the average education attainment of all Canadians is from CANISM II Table 2820004.
period, medium-sized cities accounted for an average of 9% of the population and 8% of new
employment while small-sized cities and other urban areas accounted for 20% of the population
but less than 13% of new employment. Rural areas, while accounting for over 20% of the
population contributed only 15% of the new jobs created in Canada over that period.3 Canada’s
major cities, then, hit well above their weight when it comes to creating new employment.
Governments, via their tax policies and the design and size of their spending programs, are
generally considered to have an effect on economic growth. Whether the effect is positive or
negative depends on the size and the design of government spending and revenue programs.
Given the potential role of government budget policies to affect, for good or ill, the engines of
economic growth, it would be useful to have data on how much revenues governments collect
and how much spending governments expend in major cities.
In Canada, detailed information on how federal and provincial government revenues and
expenditures are distributed across the country is available only at the provincial level. Thus,
while Statistics Canada reports detailed data on federal government finances within each
province, this is as fine as the geographic breakdown of federal finances go; there is no further
geographical breakdown within each province. Similarly, Statistics Canada reports provincial
government spending and revenues only at the aggregate provincial level and not by regions
within each province. Trying to identify how the fiscal choices of federal and provincial
governments affect areas of the country at the sub-provincial level is therefore difficult.
The purpose of this paper is to describe and apply a methodology that allows one to allocate
federal and provincial government spending and revenues to sub-provincial areas. The method is
based on the assumption that government spending and revenue collection are driven by “rules.”
For the most part these rules define how the characteristics of individuals determine the amount
of tax they pay and the amount of government transfers they receive. For example, high-income
individuals pay more in income tax than low-income individuals and whether one receives a
public pension is dependent on age. Other rules are related not to the income and age
characteristics of individuals but to economic and other characteristics of provinces and regions.
Thus, federal government spending is also based on rules that guide the equalization program,
the allocation of spending for regional economic development programs, province-specific
arrangements with respect to immigration funding, etc. Those rules dictate, for example, that
federal spending in Manitoba will, all else equal, be greater than that in Ontario because the
former receives equalization payments while the latter does not. Government revenue and
spending may also be based on political rules that differentiate regions along lines of political
advantage.
Fiscal rules have thus determined the observed amount of revenue collected by and the observed
amount of spending expended by the federal government and by each provincial government.
Rules have also determined the observed allocation of federal revenue and spending across
provinces. I take these fiscal outcomes as given. My goal in this paper is to allocate to cities
within each province what Statistics Canada reports as the amount the federal government and
3
Population and employment by region are from CANSIM II Table 2820066.
2
each provincial government spends in, and collects in revenue from, that province.4 This will be
accomplished by making use of the income, demographic, and other characteristics of subprovincial regions to allocate federal and provincial government spending to those regions. This
approach will therefore identify the implications of the fiscal rules which guide federal and
provincial government revenue and spending programs for the allocation of federal and
provincial budgets to sub-provincial areas. These calculations, then, are best viewed as
providing a set of data which can act as a foundation to discussions identifying what the current
sets of fiscal rules mean for how federal and provincial budgets affect cities.
In recognition of the importance attached to major cities as economic growth nodes, the subprovincial areas on which I focus are Canada’s nine largest cities by population. From largest to
smallest these are Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa, Winnipeg,
Quebec City, and Hamilton.5 Section two of the paper reviews the reasons for why fiscal
balances vary by region. In section three, I describe the methodological details regarding the
process by which federal and provincial budget categories are allocated to sub-provincial areas.
Section 4 of the paper presents the results while in section 5 some implications of the results are
discussed. Section 6 concludes.
2. Why Budget Balances Vary by Region
Canada is a federal state. This means that the responsibilities for providing government goods
and services are divided amongst different levels of government. The power to raise revenue via
taxation, borrowing, and the imposition of user fees is also one that is shared by different levels
of government in Canada. The level of government spending and the amount of revenue
collected by any government may vary by geographic location. Thus, within its jurisdiction a
government may collect more in revenue from region A than it does from region B. Similarly, it
may spend more in region B than it does in region A. If so, the result will be a crosssubsidization wherein the citizens of region A subsidize the higher level of government services
provided to the citizens of region B.
The amount of revenue a government collects from a tax source is given by the product of the tax
rate times the tax base. For many types of taxes, the size of the tax base varies with the state of
the economy. The amount of revenue collected from the personal income tax, for example,
varies with the size of the income tax base; taxable income. An economic expansion produces
4
It is worth stressing that this means, all else equal, federal government spending in Winnipeg will be greater than
that in Toronto because Manitoba receives equalization payments while Ontario does not.
5
As I discuss in greater detail below, I make use of the availability of city-specific data on income and age
distributions, employment, social assistance and unemployment insurance recipients, etc, to allocate federal and
provincial revenues and spending to these nine large cities. Almost all of these data are available only for the
metropolitan area of Ottawa-Gatineau which spans the Ontario-Quebec border. This is problematic since the federal
and provincial government data I am seeking to allocate to cities is reported on a provincial basis. To handle this
problem, I assume that 76% of the population of Ottawa-Gatineau is located on the Ontario side of the provincial
border. This is based on census data from 2001. I further assume that the income, demographic, and other
characteristics of the metropolitan area of Ottawa-Gatineau are also representative of these characteristics for just
the Ontario part of that metropolitan area; Ottawa. The ranking of cities by size reflects the population of Ottawa as
76% of the population of Ottawa-Gatineau.
3
growth in taxable income while an economic contraction causes taxable income to fall. Personal
income tax revenue will thus rise and fall with expansions and contractions in the economy even
with no change in the tax rate. Tax revenue collected by applying a tax rate on the selling price
of certain goods and services (indirect taxes) will similarly rise and fall with the state of the
economy since the consumption of taxed goods and services is sensitive to income. Not all taxes
may be as sensitive as income and consumption taxes to the state of the economy. The base of
the property tax, for example, is suspected of being insensitive to the state of the economy.
It is typically the case that the size of the tax base also varies with the distribution of income in
that jurisdiction. For many types of taxes this is also true of the tax rate. This is so with respect
to the income tax, for example, because the income tax rate typically rises with taxable income.
Thus high-income earners pay a higher tax rate than moderate-income earners who in turn pay a
higher tax rate than low-income earners (who are often exempt from income taxation
altogether).6 The more skewed is the distribution of income toward the high-end the more
income tax revenue will be collected. Indirect taxes apply the same tax rate regardless of the
consumer’s income but the amount of indirect tax revenue collected in a region is nonetheless
sensitive to both the average income in the region and the distribution of income in the region.
Thus, for example, high-income earners likely purchase more gasoline -- and pay more gasoline
tax -- than low-income earners because they are more likely to own a vehicle and because they
are more likely to own a larger, less fuel-efficient vehicle.
Many tax bases and tax rates are also applied differently depending on the taxpayer’s age. The
income tax, for example, contains an income exemption for those over a certain age. Similarly,
many user fees vary according to the user’s age. Thus the age distribution of the population
within its jurisdiction will affect the amount of revenue collected by a government.
Governments also collect taxes from businesses. Consequently, the amount of revenue collected
depends on the size of the industrial sector. What’s more, since different tax rates are often
applied to different types of business (thus, for example, large corporations are charged a
different corporate income tax rate than small business) the revenue collected from such taxes
will vary with industrial composition.
Finally, of course, the amount of tax revenue collected within a region is affected by the tax rate
applied. While it is rare for a government to apply different tax rates in different parts of its
jurisdiction this is not unheard of. For example, by offering region-based tax incentives
governments sometimes apply a different tax rate in different regions.
The fact that the amount of tax revenue that a government collects from within a region varies
with the state of the economy, with the income and age distribution, and with the industrial
composition within that region means that should one region within a government’s jurisdiction
have an income or age distribution that differs from the other, and/or should one region have a
different industrial mix than the other, then that government will collect more in revenue from
6
This is true even in Alberta where, in 2001, the provincial government introduced a constant marginal tax rate of
10% applicable to all taxable incomes. While the marginal tax rate is constant across taxable incomes, the large
income exemption (equal to $14,799 in 2006) causes the amount of revenue collected from the tax to vary with
income distribution.
4
one region than the other. How sensitive to regional differences is the tax revenue collected by
one government relative to another is dependent upon the mix of tax types used by each
government. Governments relying heavily on income taxation will find tax revenue varies
considerably across regions within its jurisdiction. Governments relying more heavily on
indirect taxes, user fees and property taxes will find this to be less of an issue.
For reasons similar to those discussed with respect to government revenues, expenditures on
government-provided goods and services may also vary between regions within a government’s
jurisdiction. This is so because such expenditures depend on the state of the economy (thus
federal government expenditures on Employment Insurance and provincial and municipal
government expenditures on social assistance rise and fall as the economy contracts or expands),
on income distribution (social assistance), on age (pensions, education), and on industrial
composition (current transfers to business). Expenditures on government-provided goods and
services also depend on population and on other demographic characteristics (transportation
infrastructure, police). Due to regional differences in these economic, demographic and political
characteristics, the expenditures of a government may vary across regions within its jurisdiction.
The extent to which expenditures on government-provided goods and services vary across
regions within its jurisdiction depends on the expenditure responsibilities of that government.
No government in the Canadian federation is immune to the problem that by the nature of the
design of its tax laws and by the design of its spending programs – what we might call its fiscal
rules – it may collect more revenue and/or spend more on programs in one region of its
jurisdiction than in another. Thus, it is quite likely the case that the federal government collects
more in revenue and spends more providing government services in some provinces than in
others because of differences across provinces in income, income distribution, age, population,
industrial composition and politics. It is also likely the case that every provincial government
collects more in revenue and spends more providing government services in some regions of the
province than in others. Finally, it is also likely the case that every city government collects
more in revenue and spends more providing government services in some areas of that city than
in others. Thus the government of the city of Calgary may collect more in tax revenue and spend
less providing government services in the south-west quadrant of the city than in the north-east.
In general, however, the problem of a government’s fiscal rules causing a cross-subsidization of
one region by another is smaller for municipal governments than it is for provincial governments
or for the federal government because of the nature of the tax bases and the spending
responsibilities allocated to that level of government.7
7
Another issue to consider when evaluating the geographic distribution of taxes and government spending arises
due to differences in what economists refer to as the statutory incidence and the economic incidence of a tax and a
government spending program. The incidence of a tax or spending program indicates who actually pays the tax or
receives the benefit of the spending program. The statutory incidence is an indication of who is it that the legislature
designing the tax or spending policy intended would pay the tax or receive the benefit of the spending program.
Thus the statutory incidence of the corporation income tax is on corporations. Unfortunately, who in fact pays the
tax or receives the benefit of the spending program often differs from what was intended by the legislature. Thus tax
burdens are often said to be shifted onto others. It is generally recognized, for example, that corporations shift the
burden of the corporation income tax onto buyers of their product and on to their employees. Thus the economic
incidence of the corporation income tax differs from its statutory incidence. To the extent the economic incidence of
a tax may fall on those outside the geographical location relevant for the statutory incidence, consideration of
economic incidence may change one’s conclusion about the burden of taxation borne by those in that region. In this
5
3. Methodological Details
Statistics Canada provides time-consistent data describing the amounts of tax collected, and the
levels of spending on government-provided goods and services provided, by each of the federal,
provincial and local levels of government in each province.8 Table 1 identifies, for the federal
and provincial governments, the categories of revenue and expenditure data that are available.
Unfortunately, these data are not further disaggregated to show the amount of revenue collected
from, and the level of government-provided goods and services provided to, citizens of each city
within each province. However data is available, on a city-by-city basis, which measures those
variables I previously described as being determinants of the level of taxes paid and governmentprovided goods and services received in a region. That is, Statistics Canada publishes data
describing for Canada’s nine largest cities the distribution of income, the age distribution of the
population, and the state of the local economy as measured by the number of citizens collecting
Employment Insurance, social assistance, and other types of income support. Using this
information, it is possible to infer what portion of province-wide federal and provincial
government revenue and spending is paid by and received by the citizens of each of those nine
cities. For example, knowing what fraction of Toronto’s population is aged 65 years or older,
and comparing this to the fraction of Ontario’s population aged 65 years and older, one can infer
what portion of province-wide spending on pensions is received by those living in Toronto. In
what follows I describe in more detail how provincial and federal government spending is
allocated to each of the nine cities.
Revenues:
a.
Taxes on Individuals
Most taxes paid by individuals depend on income. Thus, the amount of tax revenue collected
from a region depends on the average income in that region. But the amount of tax revenue
collected also depends on the distribution of income within that region. This is so because many
tax rates are progressive in the sense that high income earners pay a larger average tax rate than
low income earners. This is particularly true of direct taxes, such as the personal income tax.
Thus, to determine the fraction of all direct taxes paid in a province that is paid by those living in
a particular city in that province, we need a measure of the distribution of income in the city and
in the province.
study, and in other studies of fiscal imbalance, the fact that economic incidence can differ from statutory incidence
is ignored. This is not to say the issue is unimportant. Careful consideration of economic incidence in a study of
fiscal imbalance would be, however, a task well outside the scope of this study.
8
The statistical universe of the Canadian government sector can be defined in different ways. In this study, I focus
on what Statistics Canada defines as the federal, provincial and local levels of government. This means I include the
budgets of non-autonomous pension plans of each level of government (the pension plans they maintain for their
employees), the budgets of universities & colleges and health & social service institutions in provincial budgets, and
the budgets of school boards in local government budgets. Excluded from consideration are the budget of the
Canada Pension Plan and the budgets of government business enterprises.
6
Table 1: Federal and Provincial Government Revenues and
Expenditures by Category
Federal Government Revenues and
Expenditures
Provincial Government Revenues and
Expenditures
Total Revenue
Total Revenue
Direct Taxes from Persons
Direct Taxes from Corporate & Government
Business Enterprise
Direct Taxes from Non-Residents (withholding taxes)
Contributions to Social Insurance Plans
Indirect Taxes
Customs Import Duties
Excise Duties
Excise Taxes & Miscellaneous Indirect Taxes
Air Transportation Tax
Other
Other Current Transfers from Persons
Investment Income
Current Transfers from Provincial Governments
Direct Taxes from Persons
Direct Taxes from Corporate & Government
Business Enterprise
Contributions to Social Insurance Plans
Indirect Taxes
Amusement Tax
Corporation Tax (not on profits)
Gasoline Tax
Motor Vehicle Licences & Permits
Other Licences, Fees & Permits
Miscellaneous Taxes on Natural Resources
Real Property Tax
Retail Sales Tax (includes Liquor & Tobacco)
Profits of Liquor Commissions
Gaming Profits
Payroll Taxes
Miscellaneous
Investment Income
Current Transfers from Federal Government
Current Transfers from Local Governments
- Total Current Expenditure
Net Current Expenditures on Goods & Services
Current Transfers to Persons
Family and Youth Allowances
Child Tax Benefit/Credit
Pensions, WWI and WWII
War Veteran’s Allowances
Grants to Aboriginal Persons & Organizations
Goods and Services Tax Credit
Employment Insurance Benefits
Old Age Security Payments
Scholarships & Research Grants
Miscellaneous and Other
Current Transfers to Business
Agricultural
Other
Current Transfers to Provincial Government
Contributions to Crop Insurance Act
To Provincial Universities
Current Transfers to Local Governments
Interest on Public Debt
- Total Current Expenditure
Net Current Expenditures on Goods & Services
Current Transfers to Persons
Worker’s Compensation Benefits
Grants to Benevolent Associations
Social Assistance - Income Maintenance
Social Assistance - Other
Miscellaneous
Current Transfers to Business
Current Transfers to Federal Government
Current Transfers to Local Governments
Interest on Public Debt
= Saving
= Saving
+ Capital Consumption Allowances
+ Net Capital Transfers
- Acquisition of Non-Financial Capital
+ Capital Consumption Allowances
+ Net Capital Transfers
- Acquisition of Non-Financial Capital
= Net Lending (Surplus (+) or Deficit (-))
= Net Lending (Surplus (+) or Deficit (-))
Sources : Statistics Canada CANSIM II Tables 384004, 3840007, 3840009, 3840010, and 3840011.
7
Statistics Canada reports the average income tax paid by taxpayers in each province by income
quintiles (Source: CANSIM II Table 2020501). While that information is not available for
individual cities Statistics Canada does report the distribution of earned income by city and by
province for 11 income ranges (Table 2020101). By grouping adjacent income ranges so that
they approximate quintiles we can obtain a measure of the fraction of all income earners in each
province and city reporting incomes in the lowest to highest quintile.9 Knowing the fraction of
all provincial income earners in each quintile who live in each city, and knowing the fraction of
all income tax paid by provincial taxpayers in each quintile, we obtain a calculation of the
fraction of all income taxes paid in each province by citizens in each city.10
While indirect taxes are not progressive in the sense that high income earners pay a higher tax
rate than low income earners, the amount of indirect tax revenue collected in a region is
nonetheless sensitive to both the average income in the region and the distribution of income in
the region. Thus, for example, high income earners likely purchase more gasoline (both because
they are more likely to own a vehicle and because they are more likely to own a larger, less fuelefficient vehicle) than low income earners and hence pay more gasoline tax. For this reason,
indirect taxes paid in a province are identified as being paid by those living in a particular city in
proportion to a measure that takes into account how the distribution of incomes in that city
differs from that in province as a whole. In particular, I assume that city taxpayers pay the same
fraction of all indirect taxes paid in the province as they pay of all direct taxes.
This same measure is used to allocate to city taxpayers all contributions made in the province to
pension plans and paid in the form of payroll taxes. This is appropriate since such payments also
vary with income and with income distribution. They vary with income distribution because
they are subject to a maximum contribution that is binding at a moderate income level. The
greater the number of high income earners, the greater the number of those paying the maximum
contribution and the more taxes collected from a region via this source.
b.
Taxes on Corporations
I assume that high value-added corporations employ high-income earners. Thus I allocate
corporate taxes to the location where high income earners live, and presumably to the location at
which the lion’s share of value added occurs. The share of all corporate taxes paid in a province
9
To obtain approximate income quintiles for each city, I grouped the first two income ranges (<$5,000 and $5,000$9,999), the third and fourth income ranges ($10,000-$14,999 plus $15,000-$19,999), the fifth, sixth, and seventh
income ranges ($20,000-$24,999 plus $25,000-$29,999 plus $30,000-$34,999), the eight and ninth income ranges
($35,000-$39,999 plus $40,000-$44,999), and the tenth and eleventh income ranges ($50,000-$64,999 plus
>$60,000). Averaging over all nine cities over the entire period for which these data are available (1980-2003),
these groupings gathered city populations into quintiles comprising 24%, 16%, 22%, 17%, and 21% of total city
populations.
10
An alternative approach, recently employed in IMF (2003), is to rely on information provided by the Canada
Revenue Agency (CRA) on personal taxes paid according to the age and sex of tax-filers. Unfortunately, this agesex breakdown is available only for federal and provincial income taxes in aggregate and only for Canada as a
whole. As my goal is to allocate federal and provincial revenues to each city separately, these aggregate data are not
useful. These data are also available for only five years (1998-2002) which limits their usefulness for identifying
longer-term trends in how the federal and each provincial government allocate their budgets across sub-provincial
regions.
8
is allocated to cities according to provincial share of high income earners (those earning $60,000
or more) living in that city.
c.
Investment Income
Governments earn income from financial assets they own and Statistics Canada identifies the
income earned on those assets.11 I assume that government assets are owned equally by all
citizens. Consequently, when the government chooses to keep that investment income rather
than distribute it to the owners of the assets (citizens), it is equivalent to imposing an equal tax
on each citizen. Thus investment income is allocated to each city in proportion to that city’s
share of the province’s population.
d.
Government Transfers Received
I assume that the transfer received by one level of government from another is paid for out of tax
revenue. I assume citizens of any city pay the taxes used to finance these transfers in proportion
to the amount of income tax they pay.
Expenditures:
a.
Net Current Expenditure on Goods and Services
At the provincial government level, net current expenditure on goods and services are driven
mainly by wages, salaries, and capital outlays related to health care and education. The
importance of spending on providing health and education suggests that provincial government
net current expenditures on goods and services ought to be reasonably well determined by an
estimated relationship with demographic and income variables. To investigate this conjecture, I
estimated a pooled regression of real per capita spending on goods and services against variables
measuring its own value lagged one period; real per capita total income; the proportions of the
provincial populations aged 15-44 years, 45-64 years, 65-74 years, and 75 years and older; a
linear time trend; and a constant term.12 In addition to the variables listed above, the regression
also included province-specific dummies identifying those years in which spending was reduced
as part of that province’s deficit control measures.13 In the regressions the proportion of the
provincial population aged 75 years and over was found to be largest (and positive) of the
estimated coefficients on the demographic variables. This most likely reflects the impact on
provincial health care spending of increases in the size of that demographic group; a conjecture
supported by Di Matteo (2004) who reports that the 75 years and above age group exert the
largest (and positive) influence on provincial government spending on health care. It is worth
noting, however, that the two younger age groups (15-44 years and 45-64 years) together exert a
11
In government financial accounts the royalty incomes earned on non-renewable natural resources is treated as a
return on investment. Non-renewable natural resources are, thus, treated as capital assets.
12
Allowing for fixed effects produced provincial constants that were not significantly different from one another.
Thus a pooled model was estimated. Regression results are available on request.
13
The dummy variables were set to unity for years 1994-96 in Alberta (corresponding to the first Klein
government), 1991-98 in Manitoba (corresponding to years of majority government under Filmon), 1996-2001 in
Ontario (corresponding to the first Harris government), and 1995-97 in Quebec (corresponding to the first Parizeau
government). The coefficients on these dummy variables were all negative and statistically significant.
9
larger (and positive) influence on provincial net current expenditures than does the 75 year and
above group.14 Thus, all else equal provincial net current expenditures will increase with the
proportion of the population aged 15-64 years. Using the estimated coefficients from these
regressions and data on the income and demographic variables for each of the nine cities, I
produced estimates of provincial government real per capita spending on goods and services for
each city. Multiplying by city population and the price index yielded nominal values of
provincial government spending in each of the nine cities.15
At the federal level, spending on health and education occurs via transfers to the provinces and
not via net current expenditures on goods and services. There is, therefore, little reason to expect
that federal net current expenditures on goods and services ought to be sensitive to demographic
or income variables.16 For that reason, I allocated the value of federal net expenditures on goods
and services made in each province to cities within those provinces on a per capita basis. An
exception is made for the city of Ottawa. Over the period 1986-2002, federal per capita net
current expenditure on goods and services averaged $1,127 in Ontario and $1,055 in the rest of
Canada. Throughout this period, the Ontario figure was consistently higher than the average for
the rest of the country and the difference was fairly constant. I assume that the difference
between the Ontario value and the value for the rest of Canada reflects the concentration of
federal employees in the Ottawa region.17 In each year I therefore subtracted from the nominal
dollar amount of federal net current expenditure on goods and services in Ontario an amount
equal to the difference between that value and the average for the rest of Canada. This reduced
amount is allocated to cities in Ontario (Toronto, Ottawa, and Hamilton) on a per capita basis.
The amount subtracted from the Ontario figure is then added to the Ottawa figure. In this way
the amount of federal net current expenditures allocated to Ottawa is “grossed up” to reflect the
concentration of federal employees and federal spending in that city.
b.
Current Transfers to Persons
The revenue and expenditure accounts identify 10 types of current transfers to persons by the
federal government and 5 types by the provincial government. Statistics Canada reports, in
Table 2020404, the number of recipients in the nine cities and in each province of various types
of government transfers. The proportion of provincial recipients living in each city is used to
allocate the following government transfers to that city: From the federal government, Old Age
Security Payments, the Child Tax Benefit/Credit, the GST Credit, and Employment Insurance
14
Di Matteo (2004) also reports that younger age groups exert positive influences on provincial health care
spending. In his study these influences are smaller than those found in my regressions. This is to be expected since
my regressions include the influence of demographics on not only health care expenditures but also provincial
expenditures on basic and advanced education, police, recreation, and other categories of current expenditures.
15
An assumption implicit in this approach is that the demand for health and education spending – which is measured
by the regression – is met by the supply of those services in that city. This will be most true when the good and
service has few economies of scale and is therefore such that the providing government does not gain from
centralized provision.
16
I nonetheless examined this possibility by regressing federal net current expenditures on goods and services
against the same income and demographic measures used in the provincial regressions. Income and demographic
variables exhibited no statistically significant relationship with the dependent variable.
17
In 2002, 31% of all federal government employees were located in the Ottawa-Gatineau metropolitan area.
Source: CANSIM II series v134914 and v134831.
10
Benefits and from the provincial government, Social Assistance.18 The remaining types of
government transfers are allocated to cities in the following ways. Federal government transfers
in the form of Family and Youth Allowances are allocated to cities in proportion to each city’s
share of the provincial population aged 0-14 years. Federal government transfers in the form of
WWI and WWII Pensions, and War Veteran’s Allowances are allocated to cities in proportion to
the city’s share of the provincial population aged 75 years and old and the city’s share of the
provincial population aged 65 years and older, respectively. All other federal transfers to
persons (Grants to Aboriginal Persons & Organizations, Scholarships & Research Grants, and
Miscellaneous) are allocated to cities in proportion to the city’s share of provincial population.
Finally, provincial government transfers to persons in the form of Grants to Benevolent
Associations and Miscellaneous Grants are allocated by population while Worker’s
Compensation Benefits are allocated in proportion to the city’s share of provincial employment.
c.
Current Transfers to Business
I assume a city’s share of these transfers is proportional to that city’s share of the value of all
business income generated in the province. This is turn is assumed to be proportional to the
city’s share of provincial employment. An exception to this rule occurs at the federal
government level where current transfers to agricultural business are not allocated to cities.
d.
Government Transfers to Other Levels of Government
Most of the transfers one level of government makes to another are conditional on population.
Thus the Canada Health and Social Transfer (CHST) paid by the federal government to
provincial governments is a per capita transfer. The size of transfers from the provincial
government to local governments is typically related to the population of the region governed by
the local government. A city’s share of all transfers is thus assumed to be proportional to that
city’s share of the province’s population. There are two exceptions to this rule. At the federal
government level, those transfers to provincial governments due to the Crop Insurance Act are
not allocated to cities. Federal transfers to provincial universities are allocated to cities in
proportion to the percentage of the university student population in a province attending a
university (or universities) located in a city. Data on university enrolments come from the
Association of Universities and Colleges of Canada (www.aucc.ca).
e.
Interest on Public Debt
Governments are obligated to pay interest on the debt they incur. The amount of interest
payments flowing to a city reflects the amount of each government’s debt held by citizens of that
city. I assume that the amount of government debt held rises with income. Thus interest
payments on public debt are assumed to accrue to citizens of a city in an amount proportional to
that city’s share of those in the province earning $50,000 or better.
18
This data source also presents data on the number of recipients of Workers Compensation Benefits by city
suggesting that this too could be allocated by the proportion of provincial recipients living in each city. However,
these data are available from 1993 only. For that reason, I use an alternative allocator, based on employment, as
described below.
11
Government Saving:
A government’s saving is given by what it collects in tax revenue, what it receives in the form of
transfers and what it earns in investment income minus its expenditures on goods, services,
transfers and interest. Savings are used to finance Capital Consumption Allowances and the
Acquisition of Non-Financial Capital. I assume that these expenditures accrue to cities in
proportion to the city’s share of the provincial population. After accounting for Capital
Consumption Allowances and the Acquisition of Non-Financial Capital, we are left with the Net
Lending of the government. This is also known as the government’s surplus (if the value is
positive) or deficit (if its value is negative). If Net Lending is positive, it is used to retire debt. If
Net Lending is negative, the government is borrowing new debt.
4. The Results
The allocation of federal and provincial government spending in a province to the sub-provincial
level relies on five key characteristics of sub-provincial areas: Income distribution, age
distribution, population, employment, and the dependence on social transfers in the form of
social assistance, tax credits, and Employment Insurance. Averaging over the nine major cities,
36% of federal government expenditure was allocated on the basis of city-specific data on
income distribution, 17% on the basis of city-specific data on age distribution, and 24% on the
basis of city-specific data on social assistance recipients. The rest was allocated mainly on the
basis of the city’s share of provincial population (21%) with smaller adjustments due to the city’s
share of provincial employment (2%) and university enrolment.19 The corresponding figures for
provincial government expenditures are 27% for income distribution, 39% for age distribution,
5% on the basis of social assistance and EI recipients, 23% on the basis of population, and 6% on
the basis of employment. Interestingly then, a city’s income distribution affects the amount of
federal expenditures allocated to that city more than does its age distribution while the opposite
is true for provincial budgets. The sensitivity of provincial budgets to the age distribution stems
mainly from the importance of health care and education spending in provincial budgets. On the
revenue side, city-specific data on income distribution plays the key role in determining the
amount of revenue collected in a city: 95% of federal revenues were allocated on the basis of a
city’s income distribution while 89% of provincial revenues were so allocated. The rest was
allocated on a per capita basis. In general then, a city’s income distribution will be the largest
single determinant of how much of the provincial deficit, and how much of the federal
government’s deficit with the city’s province, is allocated to that city. Calculations supporting
this conjecture are provided below.
4.1
The Nine Major Cities in Aggregate
As the discussion in the previous section indicates, how any government’s set of fiscal rules
affects spending and revenue collection in a particular city will depend on the demographic and
income characteristics of that city. Figures 1 and 2 compare income and age distributions in the
nine large cities versus in the rest of the country for 2002.
19
The share of university enrolment affected only the allocation of federal expenditures, in the form of transfers to
universities, to cities. This adjustment affected an average of less than 1% of federal expenditures.
12
Figure 1: Income Distribution, 9 Major Cities and
Rest of Canada, 2002
>$60,000
50,000-59,999
45,000-49,999
40,000-44,999
35,000-39,999
30,000-34,999
Rest of Canada
25,000-29,999
Cities
20,000-24,999
15,000-19,999
10,000-14,999
5,000-9,999
< $5,000
0
2
4
6
8
10
12
14
16
18
20
Figure 1 shows that the percentage of the population in the nine large cities earning low incomes
is considerably lower than in the rest of the country and the percentage earning mid to high
incomes is considerably higher. As a consequence, income-dependent government spending will
be lower and income-sensitive tax revenue will be higher in the nine cities than in the rest of the
country. Particularly important here is the difference in the percentage of people earning high
incomes. Across the five provinces in my sample, in 2003 58.6% of all personal income tax
revenue was collected from those in the highest income quintile. This compares to the 1.4% of
all personal income tax paid by those in the lowest income quintile, 5.1% in the second quintile,
12.1% in the third, and 22.8% in the fourth.20 The share of income tax paid by income quintiles
differs by province reflecting different provincial tax regimes. The shares have also increased
over time in a way which has increase progressivity and so increased the relative tax burden of
taxpayers in large cities. Thus, across the five provinces, the top quintile of income earners paid
50.8% of all income taxes in 1980, 53.6% in 1990 and 58.6% in 2003. It is interesting to note
that Dyck (2003) shows that during the 1990s, Canadian governments -- particularly the federal
government -- chose to meet the need for increased revenue by lowering the percentage of taxes
paid by those in lower income brackets and increasing the burden carried by those in higher
brackets. The revenue implications of the fiscal retrenchments of the 1990s were therefore borne
most heavily by those in higher income brackets. Given that in major cities income distributions
are more heavily skewed toward high income earners, Dyck’s results suggest a source for any
growing fiscal imbalance suffered by taxpayers in major cities were the fiscal retrenchments of
the 1990s.
20
The tax burden increases even within the top income quintile. See, for example, Martineau (2005) who reports
that for Canada as a whole, the top decile of tax filers paid 52.6% of federal income taxes in 2002.
13
Figure 2 shows that the percentage of the population in the nine large cities who are over age 65
and under age 19 is lower than in the rest of the country. These two age groups, which are often
summed to produce a “dependency ratio”, draw government expenditures in the form of
education spending and in the form of pensions. They are also groups associated with relatively
low tax collections. Those aged 65 years and over, for instance, pay less than 12% of all taxes
despite completing 18% of all tax returns. The 35 to 49 age group, which makes up a larger
share of the population in the nine major cities than in the rest of the country, pay 42% of all
taxes despite completing only 31% of all tax returns.21 With respect to government spending, we
noted earlier that provincial government net current expenditures are positively related with the
fraction of the population which is middle-aged. The nine large cities, because they have
relatively more people in that age group, receive more in the way of current expenditures on
things such as health care, education, and policing. On the other hand, because large cities have
relatively fewer of those aged 65 years and other, they will receive less in the way of age-related
transfer payments.
Figure 2: Age Distributions, 9 Major Cities and
Rest of Canada, 2002
Rest of Canada
65+ years
Cities
50-64 years
35-49 years
20-34 years
0-19 years
0%
5%
10%
15%
20%
25%
30%
Figure 3 compares the percentage of the population collecting social assistance or unemployment
insurance in the nine large cities versus the rest of the country. The nine large cities consistently
enjoy the benefits of a lower percentage of their populations collecting social assistance or
unemployment insurance than the rest of the country. The implication for fiscal balances,
however, is that the nine large cities receive relatively smaller amounts of government
expenditure in the form of income-support.
21
Statistics on taxes paid by age group refer to the 2002 tax year and measure provincial plus federal taxes net of
deductions, non-refundable tax credits, and donations allowed. See Canada Revenue Agency web site, Interim
Basic Table 4, www.cra-arc.gc.ca
14
18%
Figure 3: Social Assistance and EI Rates, 9 Major Cities and
Rest of Canada
Rest of Canada
16%
Cities
14%
12%
10%
8%
6%
4%
2%
0%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
The time series shown in Figure 3 suggest that reforms to the federal Employment Insurance
program (with legislation passed in 1996) and provincial social assistance programs (most of
which followed the replacement of the cost-sharing Canada Assistance Program with the Canada
Health and Social Transfer in 1997) may have differentially affected the nine large cities.
Taken together, Figures 1 through 3 suggest that governments will tend to collect more in
revenue and spend less on government programs in the nine large cities than elsewhere. Table 2,
which presents calculations showing the size of the federal government’s deficit and the size of
the relevant provincial government’s deficit with the nine major cities, the rest of the country,
and in total, confirms that. Thus, in 2002 for example, the federal government realized a total
budget surplus of $8,970 million. This surplus was not evenly distributed across regions: The
federal government realized a $20,667 million surplus with the nine large cities and an $11,697
million deficit with the rest of the country. In those years when the federal government was
running large deficits nationally (1986-1995), those deficits were relatively small in the nine
major cities and particularly large in the rest of the country. The aggregate budget deficit of the
ten provincial governments is more evenly divided between the large cities and the rest of the
province. In 2002 for example, the ten provincial governments ran a budget deficit of $12,013
million and this was almost evenly divided between the nine large cities ($5,799 million) and the
rest of the country ($6,214 million).22
22
Not all provinces contain one of the nine major cities. Calculating the total provincial deficit in the rest of the
province for only those five provinces which contain one of the nine major cities gives a truer picture of the role
played by large cities in determining provincial government budget balances. In 2002, for example, the five
provinces containing the nine large cities ran a total deficit of $9,909 million with 58% of this ($5,799 million) the
result of deficits with the major cities. We look more closely at the results for individual cities in section 5.
15
Table 2: Federal and Provincial Government Deficits by Region, 1986-2002
(millions of 2002 dollars)
Federal Government Deficit with:
Provincial Government Deficit with:
Nine
Cities
Rest of
Canada
Total
Nine
Cities
Rest of
Canada
Total, All
Provinces
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2,937
-359
-1,679
847
4,293
6,450
4,630
8,620
5,020
3,065
-5,155
-17,404
-19,201
-21,552
-27,177
-24,363
16,052
18,159
20,415
19,867
21,823
24,353
25,444
25,339
25,055
24,692
20,245
11,549
12,196
13,409
8,075
10,434
18,989
17,800
18,736
20,715
26,115
30,803
30,073
33,958
30,075
27,757
15,090
-5,856
-7,005
-8,144
-19,102
-13,929
2,569
1,137
-2,816
608
4,155
12,008
17,160
14,582
8,551
5,054
3,727
2,648
5,188
-3,183
-4,946
4,547
4,252
3,491
4,587
2,962
2,392
4,807
6,500
4,620
4,018
4,240
40
226
3,651
549
-2,826
2,233
6,820
4,628
1,771
3,570
6,547
16,815
23,660
19,202
12,569
9,294
3,766
2,874
8,839
-2,633
-7,772
6,780
2002
-20,667
11,697
-8,970
5,799
6,214
12,013
Note: Negative values indicate a budget surplus (revenues collected > expenditures made in that
region).
To gain insight into the role played by income distributions, age distributions, employment
patterns, the distribution of EI and social assistance recipients, and university attendees in
affecting federal and provincial government budget balances with the nine large cities, Table 3
presents calculations, for the year 2002, based on alternative assumptions about how those
balances are allocated to the nine large cities.
Table 3: Federal and Provincial Government Deficits in the Nine Major
Cities in 2002, Alternative Allocation Assumptions
(millions of 2002 dollars)
Estimated Deficit from Table 1
Naïve Estimate of Deficit
Deficit Explained by City-Specific Characteristics:
o Income Distribution Increases Revenue Collected by:
o Age Distribution Decreases Spending by:
o All other Factors Increase Revenue or Decrease Spending by:
Federal Provincial
-20,667
5,799
-14,203
7,630
-6,464
-1,831
6,001
7,419
55
-3,499
408
-2,089
The first row repeats the estimated values of the federal and the provincial government sector
fiscal deficits with the nine major cities for 2002 reported in Table 2. The second row is what I
call a naïve estimate of the size of these two deficits with the nine major cities. It is calculated
by assuming all federal and provincial revenues and expenditures are allocated to the major cities
16
simply on the basis of their share of provincial population.23 For example, I assume here that the
$10,671 million of personal direct tax revenue collected by the federal government in Alberta in
2002 is allocated to Calgary in proportion to the city of Calgary’s share of Alberta’s population
(32%). Performing similar calculations for all revenue and expenditure categories and for all
nine major cities we find that the federal government’s deficit with the nine major cities in 2002
would have been -$14,203 million rather than the -$20,667 million reported in Table 2. The
difference between these calculations, -$6,464 million, is the size of the federal deficit with the
nine large cities explained by the revenue and expenditure effects of city-specific characteristics
with respect to age and income distributions, and by the disproportionate number of citizens in
those cities who attend university, are employed, and who collect federal Employment Insurance.
Similar calculations made with respect to the aggregate provincial government sector shows that
had all provincial revenues and expenditures been allocated to the nine large cities simply on the
basis of population the provincial deficit with the nine cities would have been $7,630 million
rather than the $6,794 million reported in Table 2. The difference between these calculations, $836 million, is the size of the provincial government sector deficit with the nine large cities
explained by the revenue and expenditure effects of city-specific characteristics with respect to
age and income distributions, and by the disproportionate number of citizens in those cities who
are employed, and who receive provincial social assistance.
The fourth row in Table 3 measures the impact on the deficit of the income distributions of the
nine major cities. These values represent the difference between tax revenues used to produce
the deficit figures reported in Table 2 and the revenue which results when one assumes all
revenue allocated on the basis of a city’s income distribution is instead allocated on a simple per
capita basis; that is, if those revenues were instead collected via a head tax. This recalculation
shows that in 2002 the income distributions of the nine major cities were such to cause the
federal government to collect an additional $6,001 million in tax revenue relative to what it
would have collected had federal tax revenue been raised solely via a head tax. Thus, the
sensitivity of the federal tax system to income distribution accounts for a considerable
reallocation of federal revenues -- $6,001 million -- toward the nine large cities. A similar
adjustment to provincial revenues produces the result that in 2002 the sensitivity of provincial
tax regimes to income distribution is such to cause a considerable reallocation of tax revenue -$7,419 million -- toward the nine large cities. All told, then, the sensitivity of the tax system to
the distribution of income is responsible for causing taxpayers living in the nine large cities to
pay $13,420 million more in federal and provincial taxes than they would if the tax system were
instead based on a head tax.
In a similar way, we can gain insight into the influence of age distribution on the sub-provincial
allocation of government budgets by comparing the calculations in Table 2 with those that result
from assuming age-sensitive government expenditures were instead made on a per capita basis.
The implications of these adjustments are reported in the fifth row of Table 3. In 2002 the
sensitivity of federal spending to age distribution accounts for the nine large cities receiving $55
million less in federal spending than would have been the case had all spending been allocated
23
The exception is Ottawa which receives a per capita share of federal spending in Ontario plus an adjustment
which reflects the concentration of federal employees in the nation’s capital. This adjustment was discussed in
Section 3.
17
on a per capita basis. A similar adjustment to provincial expenditures produces the result that in
2002 the sensitivity of provincial spending programs to the age distribution is such to cause a
reallocation of $3,499 million of program spending toward the nine large cities. Thus, the age
distribution of the nine major cities is such to have opposite effects on the amount of federal
government ($55 million less) and provincial government ($3,499 million more) program
expenditures spent in those cities. All told, then, the sensitivity of federal and provincial
spending programs to the age distribution is responsible for causing taxpayers living in the nine
large cities to receive $3,554 million more in government program spending than they would if
age-sensitive spending was instead allocated on a per capita basis.
The last row in Table 3 reports the influence of the remaining city-specific characteristics on the
federal and provincial government balances with the nine large cities. The fact that the nine
large cities have a disproportionate number of citizens who attend university, are employed, and
who collect federal Employment Insurance has the effect of increasing the amount of revenue
paid to (or reducing the expenditures received from) the federal government by $408 million.
The influence of these factors on the relationship of the nine cities with provincial governments
is larger and opposite in sign. The fact that the nine large cities have a disproportionate number
of citizens who attend university, are employed, and who collect provincial social assistance has
the effect of decreasing the amount of revenue paid (or increasing the expenditures received) by
$2,089 million.
Some of the reason for why the federal deficit might be larger in the nine major cities may reflect
population differences between the nine large cities and the rest of the country. Serendipitously,
however, the nine large cities are populated with almost exactly half of the country’s total
population so this consideration plays little role in explaining the distribution of the federal
budget balance.24 Thus, the general message does not change, as illustrated in Table 4 (below)
where real per capita values are presented. Most of any federal budget deficit is due to the
federal government running a small deficit in the nine major cities and a large deficit with the
rest of the country. Most of any federal surplus (negative values) is due to the federal
government running a large surplus with the nine major cities and despite a large deficit with the
rest of the country.
24
In 2002, for example, 50.6% of all Canadians lived in one of the nine major cities.
18
Table 4: Federal and Provincial Government Deficits by Region, 1986-2002
(2002 dollars per capita)
Federal Government Deficit with:
Provincial Government Deficit with:
Nine
Cities
Rest of
Canada
Total
Nine
Cities
Rest of
Canada
Total, All
Provinces
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
238
-28
-131
65
322
477
338
621
357
215
-356
-1,184
-1,288
-1,427
-1,772
-1,561
1,166
1,310
1,459
1,403
1,520
1,677
1,735
1,711
1,679
1,644
1,338
760
800
877
526
677
728
673
699
759
943
1,099
1,060
1,184
1,037
947
510
-196
-232
-268
-622
-449
208
90
-220
46
312
889
1,253
1,051
607
354
257
180
348
-211
-323
291
309
252
328
209
167
331
443
312
269
282
3
15
239
36
-184
145
261
175
66
131
236
600
834
669
433
317
127
96
293
-87
-253
219
2002
-1,303
754
-286
366
401
383
Note: Negative values indicate a budget surplus (revenues collected > expenditures made
in that region). Per capita values for each region need not sum to the total.
A final comment on the results reported in Table 4 is worth noting. In 1993 the federal
government realized a large overall deficit equal to $1,184 per person. By 1997, that deficit had
been replaced by a small surplus of $196 per person. This budgetary turnaround was achieved
by turning a $621 per person deficit into a $1,184 per person surplus in the nine big cities; a
turnaround of $1,805 per person obtained through a combination of tax increases and spending
cuts. In the rest of the country the federal budgetary turnaround was achieved by reducing a
$1,711 per person deficit into $760 per person deficit; a turnaround of $951 per person obtained
through a combination of tax increases and spending cuts. Thus, taxpayers in the nine large
cities carried a significantly larger burden of the federal government’s efforts to eliminate its
deficit.25 Over the same period from 1993 to 1997, the provincial government sector in
aggregate reduced its deficit from an average of $669 to $96 per person. As was true of federal
efforts are deficit reduction, the provincial effort was mainly the result of some combination of
tax increases and spending cuts borne more heavily by those living in the nine large cities (who
endured a fiscal adjustment of $871 per person) than those in the rest of the country (who
endured a fiscal adjustment of $297 per person).
A problem with the calculations presented so far is that they make no adjustment for the fact the
provincial or federal government is running an overall budget imbalance. This is important
25
This confirms my earlier speculation, based on Dyck (2003), that suggested that because the federal government
chose to close its deficit with tax increases skewed toward taxpayers with relatively high incomes then taxpayers in
large cities would bear the heaviest burden of those deficit elimination efforts. This issue is discussed further in
section 5.
19
because the deficit run by a government in any region may be large because that government has
chosen to run a large overall budget deficit across all regions in its jurisdiction. Thus, regional
balances will fluctuate over time with changes in the overall budget balance of the government in
question. Table 5 presents calculations showing budget balances in the nine large cities after
adjusting the government’s overall budget to be in balance. This is accomplished by adjusting
the amount of revenue collected in the region by an amount equal to the size of the government’s
overall budget imbalance times the share of taxes collected in that region. The assumption, then,
is that the deficit of the government in question is eliminated by an increase in tax revenue.26, 27
Table 5: Federal and Provincial Government Imbalances with Nine Cities,
Balanced Budget Assumption, 1986-2002
(2002 dollars per capita)
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Federal
Government
Imbalance
-607
-794
-939
-794
-725
-727
-814
-652
-778
-823
-903
-975
-1,039
-1,136
-1,100
-1,081
-996
Provincial
Government
Imbalance
-507
-348
-347
-255
-143
-99
-86
29
-90
-118
46
79
-6
-92
28
54
8
Looking at the results for the federal government we find that over the period 1986-2002, had the
federal government adjusted tax rates in order to maintain a balanced budget, the result would
have been that the nine major cities would always have experienced large real per capita
surpluses with the federal government (that is, they would have contributed more to the federal
government in revenue than they received in expenditures) whereas the opposite would have
26
To be precise, the share of the federal budget imbalance allocated to each city in the form of additional tax
revenue was determined by the share to federal direct taxes, indirect taxes, and contributions to social insurance
plans collected in that city relative to the total amount of those taxes collected nationally. Note that this approach
does not mean that the federal budget imbalance with each province is adjusted to be zero but only that the federal
budget imbalance in aggregate becomes zero. The share of the provincial budget imbalance allocated to each city in
that province in the form of additional tax revenue was determined by the share to provincial direct taxes, indirect
taxes, and contributions to social insurance plans collected in that city relative to the total amount of those taxes
collected in that province.
27
One could alternatively assume the deficit is closed by cutting program spending. In that case the size of the
adjustment borne by any region would be proportional to that region’s share of total program spending.
20
been true for the rest of Canada.28 Had the provincial governments of those five provinces
containing one or more large cities adjusted tax rates in order to maintain balanced budgets
taxpayers in the nine large cities would have experienced small imbalances, both positive and
negative, with the governments of those five provinces.
Figure 4 presents calculations similar to those presented in Table 3 for each year over the period
1986-2002. The calculations differ from those in Table 3 in that the values are measured in per
capita terms and they reflect the implications for revenues of forcing the federal and provincial
governments to maintain balanced budgets. The solid bars measure the amount additional
revenue taxpayers in the nine large cities paid to the federal (grey bars) and to provincial
governments (black bars) as a result of the distribution of income in the nine large cities. The
figure shows that the distribution of income in the nine large cities has had the effect of causing
the nine cities to pay more in revenue than they would if all taxes were collected on a per capita
basis. The per capita amount of this influence is roughly the same for federal as it is for
provincial taxes. Until 1997 the trend was downward but since that time the influence of income
distribution has been more or less steady. The halt in the downward trend coincides with the
efforts of governments to balance their budgets via tax increases borne mainly by taxpayers in
higher income tax brackets; a pattern noted earlier as being identified by Dyck (2003). Given the
greater preponderance of those in high income tax brackets residing in the nine large cities, these
efforts at deficit elimination were borne most heavily by taxpayers in those cities.
Figure 4: Influence of Age and Income Distributions, Nine
Cities
800
600
Income Distribution, Federal
Income Distribution, Provincial
Age Distribution, Federal
Age Distribution, Provincial
400
200
0
-200
-400
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
28
The value for the rest of Canada would be opposite in sign to the result for the nine large cities and close in
absolute magnitude. As these are per capita values, the calculation for the rest of Canada would not necessarily be
exactly equal in absolute value. However, since the nine large cities contain roughly half of Canada’s population,
the values would be close in absolute value.
21
The hatched bars show how much program spending is reduced in the nine cities due to the age
distribution of the populations of the nine cities. The white and grey hatched bars shows how
spending on federal government programs is influenced by age distributions are barely visible.
The same cannot be said of the effects of age distributions on provincial government spending.
Due to their age distributions, spending on provincial government programs (white and black
hatched bars) is higher in the nine cities than would be the case if such spending were allocated
solely on a per capita basis. This reflects the greater preponderance of their populations in the
15-64 year age group; the age group we previously indicated as exerting a positive influence on
provincial net current expenditures.
4.2
Deficits by Major Cities
Aggregating the calculations across all nine large cities has the potential to hide variations across
cities. For that reason, in this section I examine each of the nine cities individually. In the
discussion which follows, all values will be measured in real, per capita dollars in order to
facilitate comparisons across cities. Two alternative calculations of the federal and of the
provincial government fiscal balance are presented for each year in each city; the fiscal balance
and an adjusted fiscal balance which shows the impact of adjusting the amount of tax revenue
collected in a city in a way that causes the federal or provincial government to have balanced its
aggregate budget. These latter calculations, then, are like those presented in Table 5 for the nine
major cities in aggregate but are calculated for each city individually.
My approach to allocating federal revenues and expenditures to the large cities in a province
involves allocating to those cities federal revenues and expenditures that are observed to be spent
in that province. Thus, the general magnitude of federal spending in any city within a province,
when reported on a per capita basis, will be similar across all cities in that province. For that
reason, it will prove useful to examine the results for individual cities by examining them on a
province-by-province basis.
Differences between cities within a province will appear due to the fact those cities differ in
terms of income and age distribution, due to differences in the number of social assistance and
unemployment insurance recipients, due to differences in university enrolment, and due to
differences in employment shares. The most important differences between cities within a
province arise due to differences in income and age distributions. Table 6 (below) shows real
per capita amounts, averaged over the period 1986-2002, of the effect of income and age
distributions on the amount of balance budget-adjusted revenue collected from, and expenditures
spent in, each city. The calculations in Table 6 (below), then, are similar to those presented in
Figure 4 but are presented for individual cities and are averages for the period 1986-2002.
Reference to this table will be made as I discuss each city. It should be noted that the impact of
age and income distributions on provincial government revenues and expenditures are
comparable only across cities within a province since it is only in this case that we compare the
impacts of age and income distributions of the same fiscal regime.
22
Table 6: Effects of Income and Age Distributions, Adjusted for Balanced
Budgets, Average 1986-2002
Additional Revenue Collected in City Due to
the City’s Income Distribution
Toronto
Montreal
Vancouver
Calgary
Edmonton
Ottawa
Quebec
Hamilton
Winnipeg
9 Cities
Reduction in Expenditures in City Due to
City’s Age Distribution
to Federal
Government
to Provincial
Government
to Federal
Government
to Provincial
Government
532
369
385
660
331
613
896
285
699
425
442
483
371
459
246
503
1,312
239
919
428
10
4
7
11
5
8
4
-3
9
6
-267
-155
-590
-285
-180
-351
-441
311
-320
-292
Real per capita dollars. Calculations reflect adjustments to revenue to ensure a balanced budget
for the federal government and for each provincial government.
4.2.1
Federal and Provincial Deficits in Ontario’s Major Cities
Figures 5, 6, and 7 each graph four calculations for the years 1986-2002 for Toronto, Ottawa,
and Hamilton, respectively. All calculations are presented in per capita terms and are measured
in 2002 dollars. The bars measure the size of either the federal or the Ontario government’s
deficit (defined as expenditure minus revenue) with that city. Thus, a bar extending above
(below) the zero line indicates that the citizens of that city receive more (less) by way of
government expenditures than they pay in taxes. The solid grey and the hatched white and grey
bars measure the federal government’s fiscal imbalance while the solid black and the white and
black hatched bars measure the provincial government’s fiscal imbalance. The solid bars
measure the size of the fiscal imbalance without adjustment for the fact the government in
question may be running a budget deficit or surplus. The hatched bars adjust the size of the
fiscal imbalance with the city by forcing the government under consideration to balance its
budget.
Looking first at Figure 5, we observe that the federal government has in every year during the
period 1986-2002 collected more in revenue from the citizens of Toronto than those citizens
received in the form of federal transfers or other expenditures. This imbalance, indicated by the
solid grey bars, has varied over time, falling almost to zero in 1993 but growing to over $3,000
per person in 2000. The low value in 1993 was driven by the fact the federal government in that
year was running a $34 billion deficit. Thus, the fact the federal government was collecting
relatively little by way of taxes from all Canadians (by comparison to its level of spending) was
responsible for the citizens of Toronto sending less tax revenue to the federal government than
was usual. The rapid growth in the federal government’s imbalance with Toronto after 1993
reflects the fact the federal government was during this period rapidly reducing its overall budget
deficit and would, beginning in 1997, realize budget surpluses thereafter.
23
Figure 5: Toronto
Federal
Adjusted Federal
Provincial
Adjusted Provincial
1,500
500
-500
-1,500
-2,500
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-3,500
The hatched white and grey bar adjusts these figures to account for the federal government’s
overall budget imbalance. They show what the federal government’s fiscal imbalance with the
city of Toronto would have been had it raised taxes sufficiently to always maintain an overall
budget balance. By this measure the citizens of Toronto have throughout this period paid an
average of $2,267 per person more in taxes to the federal government than they received in the
form of federal transfer payments or other benefits attributed to federal spending.
The solid black and the white and black hatched bars present these same measures but with
respect to fiscal balances with the Ontario provincial government. During the 1990s the citizens
of Toronto received more by way of provincial government transfers and other benefits
attributed to other types of provincial spending than they paid in provincial taxes. This reached a
peak of $1,589 per person in 1992. This surplus was, however, only the result of the fact the
provincial government was running an overall provincial deficit. The hatched white and black
bars correct for the overall provincial budget imbalance and shows what the provincial
government’s fiscal relationship with the citizens of Toronto would have been had it increased
provincial taxes sufficiently to maintain a balanced budget. This adjustment shows that the
province, after adjusting for its overall budget imbalances, has more or less, maintained a
balanced budget with the citizens of Toronto.
From Table 6 we observe that the distribution of income in Toronto is such that on average of the
period 1986-2002 each citizen paid $532 more in federal taxes, and $442 more in provincial
taxes, than they would if all taxes were head taxes. The age distribution in Toronto is such to
increase provincial government expenditures by $267 per capita beyond what it would be if all
provincial government spending was allocated on a purely per capita basis.
24
Figure 6 presents calculations for the city of Ottawa. Ottawa benefits from the fact it is home to
a large percentage of all federal government employees. In consequence it receives a sizeable
injection of federal spending due to the fact it is the nation’s capital. As a result, whereas in
Toronto the federal government collected more in revenue than it spent in every year, in Ottawa
the per capita difference is noticeably smaller and in the early to mid 1990s went in the opposite
direction; during the period 1991-96 the federal government raised less tax revenue in Ottawa
than it spent. Adjusting these calculations in a way to cause the federal government to realize
balanced budgets in aggregate (the white and grey hatched bars) the federal government
maintained surpluses with Ottawa far smaller than those with Toronto.
Figure 6: Ottawa
1,500
500
-500
-1,500
Federal
Adjusted Federal
-2,500
Provincial
Adjusted Provincial
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-3,500
The difference in the federal government’s balance with Ottawa versus Toronto is due mainly to
the fact Ottawa benefits from the fact it is home to a large percentage of all federal government
employees. Table 6 shows that differences in income distributions explains, on average, only
$81 of the per capita difference in the federal government’s imbalance with Toronto versus
Ottawa and that differences in age distributions have negligible effect.29
Adjusting for provincial budget imbalances (shown by the white and black hatched bars) by 1995
provincial government balances with Ottawa turned positive in 1995 and remained so until 2001.
29
It is interesting to note that the difference due to income distributions has grown over time. On average over the
last 5 years of the sample period (1998-2002) citizens of Ottawa each paid $461 more in federal taxes than each
citizen in Toronto. This widening gap is due to an increase in the proportion of Toronto citizens in the lower income
ranges and a decrease in that proportion in Ottawa.
25
In Toronto these imbalances were less frequently positive and significantly smaller. As was the
case with respect to federal revenues, differences in income distribution contribute to the
difference in the provincial governments balance with the citizens of Ottawa versus those with
Toronto but again, this effect has proven to be fairly small on average. On average over the
sample period the income distribution of Ottawa was such to cause citizens in that city to pay an
additional $61 in provincial taxes than the average citizen in Toronto. The influence of age
distributions contributed to each citizen in Ottawa receiving $84 more in provincial spending
than the average citizen in Toronto.
After adjusting for federal budget imbalances (the hatched white and grey bars), Hamilton has
averaged a fiscal deficit with the federal government of -$1,852 per capita. This compares to an
average federal fiscal imbalance in Toronto of -$2,267 in Toronto. Thus, on average over the
period 1986-2002, the federal government collected $415 per person less in revenue (or spent
$415 more per person) in Hamilton than in Toronto. The reason for this difference stems from
how Hamilton’s income distribution differs from Toronto’s. Table 6 reports that on average over
the period 1986-2002 differences in income distributions caused each citizen in Hamilton to pay
$247 more in federal taxes than each citizen in Toronto.
Figure 7: Hamilton
Federal
1,500
Adjusted Federal
Provincial
Adjusted Provincial
500
-500
-1,500
-2,500
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-3,500
The difference between Hamilton and the other cities in Ontario is also apparent in the measures
of the imbalance-adjusted provincial figures (the hatched white and black bars). It was noted
earlier that in Toronto the provincial government has maintained a (more or less) zero balance
since 1990 while in Ottawa the province typically spent more than it collected in revenue. In
Hamilton, on the other hand, the provincial government has regularly collected more in revenue
than it has spent; opposite to the result for Ottawa and in contrast to the provincial government’s
rough balance with Toronto. As a result of its income distribution, the average Hamiltonian paid
26
$203 less in taxes to the provincial government than the average citizen of Toronto and $264 less
than the average citizen of Ottawa. On the other hand, due to that city’s age distribution, the
average citizen of Hamilton received $578 less in provincial spending than the average citizen in
Toronto and $662 less than the average citizen in Ottawa.
4.2.2
Federal and Provincial Deficits in Alberta’s Major Cities
Figures 8 and 9 each graph these same four calculations for the years 1986-2002 for Calgary and
Edmonton, respectively. Concentrating on the hatched bars showing the budgetary deficit after
adjusting the federal and provincial budgets to be balanced, Figure 8 shows that the government
of Alberta has maintained a more or less balanced budget with the citizens of Calgary,
particularly since 1994. The federal government, on the other hand, has regularly run a
substantial surplus with the citizens of Calgary; the federal government has on average collected
$2,057 more in tax revenue from each citizen of Calgary than it has expended on federal
programs. While this average amount is slightly less than the federal imbalance with Toronto
($2,267), it is interesting that the annual imbalance has grown in Calgary since 1999 (by $298
between 1999 and 2002) whereas it has been shrinking in Toronto (by $554 between 1999 and
2002). These opposing trajectories reflect two things. First, since 1999 the federal government’s
surplus with Alberta has grown by $1,019 million while its surplus with Ontario has shrunk by
$3,842 million. Second, over this period Calgary’s distribution of income has become more
skewed toward the high-end causing federal tax payments to increase whereas the opposite has
been true in Toronto.
Figure 8: Calgary
2,000
1,000
0
-1,000
-2,000
Federal
Adjusted Federal
-3,000
Provincial
Adjusted Provincial
27
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-4,000
Still concentrating on the hatched bars, the government of Alberta has run a more or less
balanced budget with the citizens of Edmonton just as it has with Calgary. The federal
government balance with Edmonton is, however, somewhat different from that with Calgary.
The average per capita federal surplus with Edmonton over the period 1986-2002 was $1,754; a
surplus similar to Hamilton’s ($1,852) and $303 less than Calgary’s.
Figure 9: Edmonton
2,000
1,000
0
-1,000
-2,000
Federal
Adjusted Federal
Provincial
Adjusted Provincial
-3,000
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-4,000
As reported in Table 6, the difference in the federal government’s balance with Edmonton versus
Calgary is due mainly to differences in the two city’s income distributions. Calgary’s income
distribution is such to have caused that city to pay an average (over the period 1986-2002) $329
per capita more in federal tax revenue than citizens in Edmonton.
4.2.3
Federal and Provincial Deficits in British Columbia’s Major City
British Columbia contains just one of Canada’s nine major cities; Vancouver. The calculations
for Vancouver appear in Figure 10. Like Ontario and Alberta, British Columbia is typically a
“have province” in the sense that is receives no federal equalization payments. In my sample,
British Columbia received equalization payments in only three years; 1999 ($125 million), 2001
($240 million), and 2002 ($71 million).30 In common with cities in the other “have” provinces,
the federal government realized a surplus with the citizens of Vancouver (that is, citizens of
Vancouver contributed more by way of federal tax revenue than they received by way of federal
program spending). This surplus averaged $337 per capita in raw terms and $840 per capita after
adjusting the data to show the effect of causing the federal government to maintain a balanced
budget.
30
The dollar amounts are equalization entitlements for the identified year. The actual amount received may differ
slightly from this amount and it may be received in a later year than identified. Source: www.fin.gc.ca
28
Figure 10: Vancouver
2,000
1,500
1,000
500
0
-500
-1,000
Federal
Adjusted Federal
-1,500
Provincial
Adjusted Provincial
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-2,000
On a per capita basis, and after adjusting the federal budget to cause it to be in aggregate balance,
Vancouver averaged the smallest fiscal deficit with the federal government over the period 19862002 amongst the six major cities in “have” provinces. The average person in Vancouver paid
$840 more in taxes to the federal government than he or she received by way of federal program
expenditures (an average fiscal deficit of -$840). This average fiscal deficit with the federal
government was considerably smaller than the deficit experienced by citizens in Toronto ($2,267) or even that experienced by citizens in Hamilton (-$1,852).
The distribution of income in Vancouver is such that over the period 1986-2002 the citizens of
that city paid an average of $147 less in federal taxes than citizens of Toronto and $275 less than
citizens in Calgary. The main source of the large difference in the size of the federal
government’s fiscal surplus with Vancouver as opposed to Toronto, Calgary and other cities in
the so-called “have” provinces stems mainly from the difference in the federal government’s
average fiscal surplus with British Columbia ($31 per capita) versus Ontario ($1,108 per capita)
and Alberta ($1,007) over the period 1986-2002.
After adjusting for provincial government budget imbalances (the white and black hatched bars)
the provincial government realized substantial deficits with the citizens of Vancouver. On
average, citizens of Vancouver received $269 per capita more by way of provincial government
spending than they paid in provincial taxes. As reported in Table 6, the distribution of income in
Vancouver is such that, on average over the period 1986-2002, citizens of Vancouver paid $371
per capita more in provincial tax revenue than they would have paid had taxes been collected via
a head tax and the city’s age distribution is such that citizens received $590 per capita more in
29
provincial government spending than would have been the case if all provincial government
spending were allocated on a per capita basis.
4.2.4
Federal and Provincial Deficits in Quebec’s Major Cities
Quebec is the first “have-not” province to be considered. As a result of the equalization program
and other province-specific transfers, on average over the period 1986-2002 the federal
government collected from each person in the province of Quebec $1,345 less in tax revenue
each year than it spent. This compares to the previously cited $1,108 and $1,007 fiscal
imbalances in the opposite direction with each citizen in Ontario and Alberta, respectively. As a
consequence of these large provincial differences, the federal government will have considerably
larger fiscal deficits with the cities of Montreal and Quebec than it did with the six cities
previously considered, all of which are in “have” provinces.
Figures 11 and 12 present my four calculations for the cities of Montreal and Quebec City,
respectively. The solid grey bars indicate that the federal government, until 1997 in Quebec and
until 2000 in Montreal, regularly ran substantial deficits with those cities. On average over the
period 1986-2002, the federal government collected $1,094 less in tax revenue than it spent in
Montreal and collected $856 less in tax revenue than it spent in Quebec. The fact that the size of
these imbalances fell dramatically after 1997 reflects the dramatic reduction in the federal
government’s imbalance with the province of Quebec after that date. The fact this adjustment
affected the city of Quebec sooner than the city of Montreal reflects differences in the income
and age distributions of these cities.
Figure 11: Montreal
2,500
Federal
2,000
Adjusted Federal
Provincial
1,500
Adjusted Provincial
1,000
500
0
-500
30
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-1,000
The white and grey hatched bars show that even after adjusting the amount of tax revenue
collected in the two cities in proportion to their shares of all federal taxes collected in Canada,
the federal government typically continued to spend more than it collected in revenue in both
cities. In Montreal this was true in every year. The federal government achieved a balance with
citizens in the city of Quebec in 1996 and more or less maintained that balance to the end of the
sample period. The source of the difference in the federal balance with these two cities is
differences in income distribution. As reported in Table 6, the distribution of income is such to
cause the average person in the city of Quebec to pay $527 per person more in federal taxes than
the average person in Montreal.
Figure 12: Quebec City
2,500
Federal
2,000
Adjusted Federal
Provincial
1,500
Adjusted Provincial
1,000
500
0
-500
-1,000
-1,500
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-2,000
Over the sample period, the government of the province of Quebec typically reported budget
deficits. This is reflected in the solid black bars showing that in the province’s two major cities
the provincial government typically spent more than it collected in revenue. Adjusting revenues
to cause the provincial government to maintain a budget balance (the white and black hatched
bars) shows that since the early-1990s the province has maintained a more or less balanced
budget relationship with Montreal but maintains a sizeable budget surplus with the city of
Quebec (where it collects more in tax revenue than it spends). This difference is due mainly to
the effects of income distribution on provincial revenues. The distribution of income in Quebec
City is such that taxpayers there pay $829 per person more in provincial taxes than does the
average taxpayer in Montreal. This difference is in spite of the impact of relative age
distributions. As reported in Table 6, the difference in age distributions is responsible for the
average resident of the city of Quebec receiving $286 more by way of provincial government
spending than the average citizen on Montreal.
31
4.2.5 Federal and Provincial Deficits in Manitoba’s Major City
Winnipeg is the only major city in Manitoba. Like Quebec, Manitoba is a so-called “have not”
province and so is a recipient of federal equalization payments. As a result of the equalization
program and other province-specific transfers on average over this period the federal government
collected from each person in the province of Manitoba $3,235 less in tax revenue each year than
it spent. This compares to $1,345 in Quebec, the other “have not” province in this sample. On a
per capita basis, then, Manitoba is easily the largest net recipient of federal expenditures amongst
the five provinces considered here. As a consequence of this large provincial imbalance, the
federal government will have a considerably larger fiscal deficit with the city of Winnipeg than
any of the other major cities.
Figure 13 presents calculations of the size of federal and provincial government imbalances with
the city of Winnipeg. The size of the federal government’s real per capita deficit with Winnipeg
(the solid grey bars), at an average of $2,698 over the period 1986-2002, is easily the largest
amongst the nine large cities. Indeed, it is more than twice the size of the federal government’s
average deficit with Montreal ($1,094) over this period and more than three times its average
deficit with the city of Quebec ($856). Adjusting the data to reflect a balanced aggregate budget
for the federal government reduces the average size of this imbalance to $2,269 per capita. As
reported in Table 6, the federal deficit with Winnipeg is despite the fact that Winnipeg’s income
distribution is responsible for that city paying $699 per capita more in federal taxes than would
be the case if federal revenues collected in Manitoba were allocated to Winnipeg on a strictly per
capita basis.
Figure 13: Winnipeg
4,000
Federal
Adjusted Federal
Provincial
Adjusted Provincial
3,500
3,000
2,500
2,000
1,500
1,000
500
0
-500
-1,000
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-1,500
The white and black hatched bars show Winnipeg’s relationship with the government of the
province of Manitoba after adjusting the latter’s revenues in a way to cause it to be in balance.
32
By this measure, the province has maintained a more or less constant surplus with the city of
Winnipeg. Citizens of Winnipeg have on average paid $288 per capita more in provincial taxes
than they have received by way of provincial expenditures. This imbalance reflects Winnipeg’s
income distribution causing the city to pay $919 more in provincial taxes per capita than it would
it taxes were paid on a strict per capita basis and it arises despite the fact the city’s age
distribution is such that the province spends $320 per person more than would be the case if
spending were allocated on a per capita basis.
5. Discussion
A possible implication of the fact major cities have different demographic and economic
characteristics from smaller centres and rural areas is that federal and provincial fiscal balances
may respond differently to fiscal policy initiatives. In this section I consider the differential
impact on cities of the major policy initiative of Canadian governments during the 1990s; deficit
reduction.
Since the early 1990s, all governments in Canada have been focussed on deficit elimination and
debt reduction. Figure 14 presents calculations showing how the size of the federal
government’s deficit with the nine major cities has changed over time and how it has changed
relative to its deficit with the rest of Canada.
$2,000
Figure 14: Federal Deficit by Region
2002 dollars per capita
$1,500
$1,000
$500
$0
-$500
-$1,000
Cities
Rest of Canada
-$1,500
-$2,000
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
The figure shows what has already been reported; that the federal government maintains much
smaller deficits with citizens in the nine large cities than it does with citizens in the rest of the
33
country. Indeed, since 1996 the federal government has been in budget surplus with respect to
citizens in the major cities (that is, it collects more in revenue than it spends) while citizens in the
rest of the country continue to pay less in federal taxes than they receive by way of transfers and
other forms of government spending. In the figure, the vertical dashed lines identify the period
1993-2000, a period when the federal government’s aggregate budget deficit was declining
(1993-97) or its surplus was climbing (1997-2000). During this period of budget adjustment, the
federal government’s effort was borne most heavily by citizens in the nine major cities. By the
end of this period, the average citizen in the nine major cities was paying more in taxes, or
receiving less in terms of government services, an amount equal to $2,393. The average citizen
in the rest of Canada was paying more in taxes, or receiving less in terms of government
services, an amount equal to $1,186; almost exactly one-half the burden borne by the average
citizen in one of the nine major cities. This result confirms the speculation made earlier in
reference to the work of Dyck (2003); that by meeting the need for increased revenue by
lowering the percentage of taxes paid by those in lower income brackets and increasing the
burden carried by those in higher brackets the federal government ensured that the fiscal
retrenchments of the 1990s were borne most heavily by those in higher income brackets. The
fact that in major cities income distributions are more heavily skewed toward high income
earners explains why taxpayers in the major cities carried the greater burden of the federal fiscal
retrenchments of the 1990s.
Table 7 (below) examines how the burden of the federal government’s budget adjustments has
varied across the nine major cities and the rest of Canada. The table reports the cumulative
contribution to federal government debt. Two time periods are considered; the period 1985-1996
during which the federal government accumulated debt and the period 1996-2002 when the
federal government was running an overall budget surplus and so was reducing its debt. The
total amount, measured in millions of 2002 dollars, of federal debt arising from an imbalance of
federal revenues collected and spending expended in a region is reported in the first column.
The second column reports per capita values, measured in 2002 dollars.
The “All of Canada” figures measure the cumulative contribution to federal debt from all regions
of the country. From the end of 1985 to the end of 1996 the federal government increased its
debt by $270,112 million; an amount equal to $9,122 per person. Since the end of 1996 to the
end of 2002, the federal government has reduced its debt by $63,006 million; an amount equal to
$2,521 per person. The source of debt accumulation, and the burden of the adjustment toward a
lower level of debt, has not been borne evenly across regions of the country. During the period
1985-1996 taxpayers in the nine large cities contributed just $28,669 million to the federal debt
with the rest, $241,443 million, coming as a result of the federal deficit in the rest of the country.
On a per capita basis, citizens in the nine major cities each contributed an average of $1,808 to
the federal debt while citizens in the rest of the country each contributed an average of $15,960.
Whereas citizens of the nine major cities contributed relatively little to the accumulation of debt,
during the period 1996-2002 they were the main source of debt reduction. During this period,
citizens of the nine major cities contributed to a reduction in federal debt of $130,365 million
($8,219 per capita) while citizens in the rest of the country continued to receive more from the
federal government by way of transfers and expenditures than they paid in taxes. Over this
period, the federal debt fell despite the fact that outside of the major cities citizens contributed
$67,359 million ($4,342 per capita) to the federal debt.
34
Table 7: Cumulative Contributions to Federal Debt
Total
Per Capita
270,112
-63,006
9,122
-2,521
28,669
-130,365
1,808
-8,219
241,443
67,359
15,960
3,947
-50,883
-74,404
-12,827
-15,674
59,204
1,791
18,064
533
707
-13,737
1,008
-6,737
-5,337
-17,869
-6,822
-19,072
1985-1996
1996-2002
-3,726
-15,684
-4,286
-16,798
1985-1996
1996-2002
-995
-6,626
-1,398
-6,075
1985-1996
1996-2002
10,694
-1,278
16,395
-1,848
-4,203
-10,125
-6,961
-15,143
23,210
7,567
34,755
11,106
All of Canada
1985-1996
1996-2002
Nine Cities
1985-1996
1996-2002
Rest of Canada
1985-1996
1996-2002
Toronto
1985-1996
1996-2002
Montreal
1985-1996
1996-2002
Vancouver
1985-1996
1996-2002
Calgary
1985-1996
1996-2002
Edmonton
Ottawa
Quebec
Hamilton
1985-1996
1996-2002
Winnipeg
1985-1996
1996-2002
The remainder of the table reports the results for each of the nine major cities. As noted
previously, differences across cities will reflect differences in federal balances across provinces
as well as differences in each city’s unique economic and demographic characteristics. Thus, it
is not surprising to find that citizens of Winnipeg received more by way of federal spending than
they paid in federal taxes because that is true for the province of Manitoba as a whole. The
interesting differences in this table are how balances changed in each city between the federal
debt accumulation period (1985-1996) and the federal debt reduction period (1996-2002).
Relative to the earlier period, all cities in the latter period reduced the size of their contributions
to federal debt accumulation (or increased the size of their contribution to federal debt
35
reduction). The biggest adjustment was in Winnipeg where taxpayers each contributed $23,649
less to the federal debt than they did in the earlier period. Also high on the list were the
taxpayers in Quebec City and Montreal who each contributed $18,243 and $17,531 less to the
federal debt than they did in the earlier period, respectively. These relatively large adjustments
by taxpayers in Quebec and in Manitoba reflect in part the reduction in the real value of
equalization payments between these two periods.
During the federal debt reduction period, taxpayers in Calgary contributed more, on a per capita
basis, than taxpayers in any other city. While taxpayers in Toronto contributed less to debt
reduction during this period than taxpayers in Calgary (and in Edmonton), it is interesting to note
how small is the change in Toronto’s contribution to federal debt reduction in the latter as
opposed to the earlier period.
In Table 8 (below) presents calculations on the cumulative contribution to provincial government
debt by citizens in the nine major cities, by citizens in the rest of the province, and by citizens in
the province as a whole. Panel (a) presents these calculations, in millions of 2002 dollars, for the
identified region as a whole while panel (b) presents them, in 2002 dollars, in per capita terms.
Table 7 reports that with respect to federal government debt, six of the nine major cities proved
to be contributors to federal debt reduction over the period 1985-2002. In Table 8 we see the
opposite is true; with respect to provincial government debt six of the nine cities proved to be
sources of debt accumulation.
Not unexpectedly given its population, Toronto proved to be responsible for a large amount
(one-third) of the total amount of debt accumulated by the Government of Ontario over the
period 1985-2002. On a per capita basis, however, citizens of Ontario outside of three major
cities were the largest contributors to provincial debt. Hamilton is remarkable in that citizens
there have since 1985 been responsible for virtually none of the total amount of provincial debt
accumulated.
In Alberta, the provincial government accumulated debt from 1985 to the end of 1993 and has
been shedding it ever since. Over the entire 1985-2002 period, the provincial government has
reduced its debt by $4,489 million. In total and on a per capita basis the rest of Alberta was
responsible for a greater share of debt accumulated during the 1985-1993 period while Calgary
and Edmonton shared responsibility more or less equally. During the period of debt reduction
(1985-2002) Calgarians contributed $8,958 per person (8,023 million in total) to provincial debt
reduction while Edmontonians contributed $7,672 per person ($6,994 million in total) and
citizens in the rest of the province contributed $8,145 per person ($8,218 million in total).
The government of the province of Quebec has accumulated debt throughout the period 19852002. It is interesting to note that the citizens of Quebec City have since 1994 contributed to a
reduction in provincial government debt even while citizens of Montreal and the rest of the
province continued to contribute to debt accumulation. On a per capita basis, citizens in the rest
of the province have each contributed $14,695 to provincial debt while citizens in Montreal
($8,823) and Quebec City ($3,282) have each contributed far less.
36
Table 8: Cumulative Contributions to Provincial Government Debt
(a) Millions of 2002 Dollars(a)
ROP*
Ontario
ROP
Alberta
Montreal
Quebec
ROP
PQ
Vancouver
ROP
BC
Winnipeg
ROP
1986
Toronto Ottawa Hamilton
-1,356
-239
-150
3,079
1,334
Calgary Edmonton
854
1,149
1,996
3,999
1,269
551
4,656
6,477
-55
682
627
545
848
Manitoba
1,393
1987
-1,573
-230
-243
5,346
3,300
1,299
1,754
3,092
6,145
1,573
581
7,853
10,007
-317
1,134
816
862
1,506
2,368
1988
-3,341
-616
-553
7,494
2,983
1,248
2,036
4,009
7,293
1,511
742
9,849
12,102
-913
967
55
776
1,810
2,587
1989
-4,167
-775
-664
9,229
3,622
1,800
2,853
5,064
9,718
2,036
825
12,612
15,473
-1,310
315
-995
901
2,251
3,152
1990
-2,883
-823
-697
11,860
7,457
2,366
3,333
5,701
11,400
3,206
1,399
14,947
19,551
-1,491
66
-1,425
1,243
2,669
3,912
1991
751
-251
-203
17,547
17,844
3,347
4,167
6,411
13,924
6,553
1,616
18,176
26,345
97
773
871
1,582
3,067
4,650
1992
7,262
982
748
25,510
34,502
4,294
5,350
7,394
17,038
9,505
2,557
22,376
34,438
2,038
1,405
3,442
2,084
3,635
5,720
1993
12,973
1,777
1,073
32,140
47,962
5,253
5,743
7,750
18,747
14,082
2,776
25,665
42,523
3,302
618
3,921
2,423
3,982
6,405
1994
16,598
2,537
1,410
37,576
58,121
4,791
5,305
7,260
17,356
17,792
3,441
29,981
51,215
3,887
-561
3,326
2,193
4,197
6,390
1995
19,331
3,423
1,677
42,104
66,536
4,133
4,711
6,584
15,428
20,343
3,127
33,380
56,850
4,425
-1,280
3,145
1,837
4,360
6,198
1996
20,807
4,413
1,580
43,799
70,599
3,013
3,639
5,486
12,138
23,259
2,964
35,722
61,945
5,376
-2,012
3,364
1,683
4,338
6,021
1997
22,237
5,273
1,252
44,736
73,498
1,653
2,407
4,285
8,345
25,294
2,736
37,216
65,246
7,027
-2,356
4,670
1,504
4,214
5,718
1998
24,321
6,035
977
46,281
77,615
944
2,043
4,062
7,049
26,114
2,583
39,006
67,702
10,212
-859
9,353
1,341
4,261
5,603
1999
22,036
5,935
320
45,293
73,583
272
1,252
3,335
4,860
26,158
1,895
40,475
68,528
12,542
-212
12,330
978
4,412
5,390
2000
22,232
6,273
174
44,515
73,194
-2,304
-1,217
635
-2,886
25,609
1,463
41,595
68,667
13,656
-1,155
12,501
556
4,463
5,019
2001
23,371
6,509
189
44,860
74,929
-2,677
-1,613
-34
-4,324
27,180
1,490
43,751
72,421
16,363
-733
15,631
175
4,512
4,687
2002
24,540
6,389
67
45,736
76,732
-2,770
-1,251
-468
-4,489
29,580
2,099
47,011
78,690
18,576
-281
18,295
-443
4,468
4,025
* Rest of Province
(b) 2002 Dollars Per Capita(a)
ROP
Ontario
ROP
Alberta
Montreal
Quebec
ROP
PQ
Vancouver
ROP
BC
Winnipeg
ROP
Manitoba
1986
Toronto Ottawa Hamilton
-377
-276
-261
700
141
Calgary Edmonton
1,238
1,443
2,113
1,645
410
894
1,556
965
-38
438
209
842
1,908
1,276
1987
-435
-266
-420
1,198
342
1,878
2,197
3,300
2,523
506
941
2,612
1,475
-216
722
268
1,327
3,391
2,157
1988
-900
-695
-941
1,649
303
1,805
2,547
4,272
2,971
486
1,196
3,256
1,769
-607
606
18
1,197
4,080
2,347
1989
-1,111
-866
-1,124
1,986
358
2,565
3,541
5,351
3,895
648
1,325
4,138
2,233
-861
193
-311
1,385
5,088
2,856
1990
-789
-916
-1,177
2,500
724
3,319
4,113
5,952
4,476
1,006
2,207
4,848
2,792
-973
39
-433
1,899
6,068
3,538
1991
113
-328
-379
3,649
1,711
4,599
5,089
6,595
5,371
2,023
2,536
5,838
3,729
-9
448
258
2,405
6,997
4,191
1992
1,702
916
1,150
5,249
3,264
5,812
6,455
7,502
6,471
2,915
3,947
7,146
4,845
1,139
790
992
3,150
8,274
5,140
1993
3,077
1,704
1,669
6,559
4,487
7,023
6,904
7,740
7,028
4,288
4,271
8,158
5,943
1,867
338
1,099
3,651
9,015
5,731
1994
3,933
2,448
2,204
7,620
5,372
6,450
6,404
7,142
6,426
5,393
5,251
9,502
7,121
2,193
-298
905
3,312
9,420
5,689
1995
4,566
3,308
2,624
8,484
6,076
5,653
5,728
6,390
5,642
6,148
4,789
10,558
7,875
2,483
-664
833
2,789
9,714
5,489
1996
4,901
4,262
2,473
8,761
6,370
4,329
4,517
5,252
4,374
7,008
4,550
11,271
8,548
2,981
-1,025
868
2,562
9,533
5,308
1997
5,219
5,084
1,968
8,888
6,546
2,771
3,145
4,044
2,949
7,605
4,218
11,702
8,969
3,820
-1,190
1,183
2,298
9,194
5,033
1998
5,673
5,806
1,550
9,134
6,828
1,986
2,746
3,754
2,431
7,844
3,995
12,245
9,279
5,414
-433
2,348
2,058
9,270
4,926
1999
5,184
5,712
562
8,882
6,395
1,261
1,894
3,035
1,646
7,857
2,995
12,706
9,357
6,562
-107
3,074
1,523
9,538
4,718
2000
5,225
6,023
345
8,640
6,264
-1,457
-728
569
-961
7,699
2,370
13,052
9,333
7,103
-584
3,095
905
9,599
4,374
2001
5,457
6,236
367
8,624
6,298
-1,842
-1,143
-30
-1,414
8,146
2,410
13,708
9,791
8,392
-370
3,833
349
9,661
4,071
2002
5,690
6,130
189
8,701
6,340
-1,935
-768
-405
-1,440
8,823
3,282
14,695
10,569
9,435
-141
4,445
-554
9,506
3,483
37
Finally, Vancouver and Winnipeg offer an interesting contrast. The citizens of Vancouver are
almost solely responsible, both in total and in per capita terms, for the accumulation of provincial
government debt in British Columbia. In Manitoba, on the other hand, citizens of Winnipeg
have contributed relatively little to provincial debt accumulation.
6. Conclusion
Any fiscal policy affects the economy and citizens along a variety of dimensions. An increase in
taxes on high-income earners, for example, is intended to raise revenue from those best able to
afford a reduction in disposable income but it also affects middle-aged people more than young,
white-collar workers more than blue-collar, etc. In a similar way government spending on health
care, while aimed at aiding the ill also tends to benefit the old more than the young, the poor
more than the rich, and women more than men.31 The calculations presented in this paper show
how such choices can also be differentiated by their impact on those living in large cities as
opposed to elsewhere.
The calculations suggest that the difference in how the federal and provincial budgets affect
citizens in Canada’s nine large cities versus elsewhere has a lot to do with how the major cities
differ from the rest of Canada with respect to their economic and demographic characteristics.
While mayors of large cities like to emphasize that citizens of their cities pay more to provincial
and federal governments than do citizens in the rest of the country32 they are less keen to
highlight the reason for this “fiscal imbalance,” namely, that citizens of large cities have higher
incomes and are younger than the average citizen in smaller centres and in rural areas. There is
nothing new in the observation that fiscal balances will vary across regions as a result of
differences in economic and demographic characteristics. Kneebone (2005), for example, draws
attention to this fact in his comment on the complaint of Ontario Premier Dalton McGuinty that
his province pays an inordinate amount of taxes to the federal government. Poschmann (2005)
makes the same point in commenting on the causes of federal imbalances across all provinces.
The failure to emphasize the influence of age and income distributions, and other characteristics
that differentiate one region from another on fiscal balances is at the heart of criticisms of studies
that purport to uncover unfair treatment by the federal government of citizens in some provinces
as opposed to others. The contribution of this paper has been to provide estimates of how federal
and provincial fiscal balances vary across cities, to offer insights into the sources of these
differences, and to show how they have caused one government policy – deficit reduction – to
have an impact on major cities different from that in other areas of the country.
An interesting question I have not explored is the potential for the local governments of major
cities to suffer the consequences of a vertical fiscal externality. A vertical fiscal externality
arises within federations when a level of government fails to consider the effects of its tax and
expenditure choices on the other levels of government. In the context of the calculations
presented in this paper, such an externality may arise if the federal government and the city’s
provincial government collect in taxes significantly more than they expend in a city. If taxpayers
31
In fiscal year 2001, 56.6% of public sector health expenditures in Canada were expended in the treatment of
females. See Health Canada (2001).
32
In Calgary, for example, the Mayor sent a pamphlet emphasizing this point to every home.
38
judge themselves to be over-taxed, resistance to local government taxes may increase. In this
way, resistance to local taxation may be increasing in the size of federal and provincial
government fiscal imbalance with city taxpayers. Investigation of this issue is left to future
research.
References
Health Canada (2001) Health Expenditures in Canada by Age and Sex, 1980-81 to 2000-01,
August.
Di Matteo, L. (2004) What Drives Provincial Health Expenditure? Canadian Tax Journal,
Volume 52, No. 4.
Dyck, D. (2003) Fiscal Redistribution in Canada, 1994-2000, Department of Finance Working
Paper 2003-22.
IMF (2003) Canada: Selected Issues, IMF Country Report No. 03/34, January.
Kneebone, R. (2005) McGuinty’s Complaint, Institute for Advanced Policy Research, Policy
Brief #0503, May.
Martineau, P. (2005) Federal Personal Income Tax: Slicing the Pie, Statistics Canada, Analytical
Paper, April.
Toronto Board of Trade (2002) “Strong City Strong Nation: Securing Toronto’s Contribution to
Canada”, June.
Poschmann, F. (2005) The Fiscal Background to a Fiscal Gap, C.D. Howe Institute Working
Paper, September.
39