Montreal — To provide provinces adequate protection against short-term economic shocks, key changes need to be made to the country’s fiscal stabilization program, says a new study from the Institute for Research on Public Policy.
“There is effectively no fiscal stabilization in Canada today,” argues the study’s author, Trevor Tombe, associate professor of economics and research fellow at the University of Calgary’s School of Public Policy. With growing pressure on the federal government to better support provinces suffering from economic downturns, Tombe calls for concrete and timely changes to Canada’s stabilization program: “It has been nearly a quarter-century since stabilization was last reviewed and substantively reformed. It is time to look at it again.”
In the short term, changes need to be made to the $60 per capita cap on stabilization payments, which was implemented in 1987 in an arbitrary fashion. This cap should either be eliminated or be changed to what it would have been if it had been indexed to GDP or to inflation over time. Once the cap issue is resolved, stabilization payments should be adjusted retroactively. This would give way to more substantive stabilization payments to provinces that are still feeling the brunt of sudden and drastic drops in revenues.
In the longer-term, however, a more fundamental reform should be considered. Tombe proposes two options: The first would be to more closely integrate the fiscal stabilization and equalization programs by using similar indicators of provincial fiscal capacity and smoothing mechanisms. Among other benefits, this would extend the stabilization properties of equalization to higher-income provinces. The second would be to calculate fiscal stabilization payments on the basis of declines in provinces’ economic performance, rather than in their revenues – a simpler and more transparent approach, which could lessen broad public misunderstanding about transfer programs.
Tombe concludes that, although the short-term changes are needed to ensure that fiscal stabilization remains relevant, they should not forestall a more comprehensive review of the program.
An (Overdue) Review of Canada’s Fiscal Stabilization Program, by Trevor Tombe, can be downloaded from the Institute’s website (irpp.org).
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