Canada’s fiscal federalism, which has devolved authority and revenue responsibilities to provinces and territories, has been a topic of debate due to perceived unfairness. Traditional analytical methods have their limitations, lacking clear goals, focusing solely on provincial-level analysis, and being static. To address these issues, CANCEA utilized their Prosperity at Risk (PaR) model and the Needs Consumption Affordability Ratio (NCAR) to assess fiscal federalism in a new way.
The NCAR measures a household’s ability to meet basic needs as a proportion of their discretionary income. The analysis shows that as federal-provincial transfers decrease, lower-income households in larger/richer provinces benefit, while lower-income households in other provinces face increased pressure. Different scenarios, such as changes in transfers, tax revenue, and infrastructure spending, have varying impacts on NCARs.
The results suggest that the current fiscal federalism system has led to unequal treatment of households across provinces. Low-income households in some provinces effectively support those in other provinces, raising questions about fairness. However, achieving greater equalization would require significant changes in government policies and decentralization.
By providing a new analytical approach that focuses on individual households, this research sparks a conversation about the roles and responsibilities within the federation. It highlights the potential for restructuring fiscal federalism in a revenue-neutral manner to benefit many Canadian households.
The findings emphasize the need to address the disparities and inequalities within Canada’s fiscal federalism system. Collaborative efforts between federal and provincial governments should prioritize improving the prosperity of all Canadian households without solely relying on increased funding or constitutional changes.