According to the CBC, the federal government is planning to deal with the fiscal imbalance in the next federal budget. While part of the package is expected to deal with problems in the Equalization program, the federal government is also apparently considering increases in transfers to the provinces for social programs and infrastructure.

As recent history has proven, shelling out more federal dollars will do little to stop the demands for more money by the provinces. To end the seemingly never-ending “fiscal imbalance” debate, the federal government should eliminate its health and social transfers to the provinces, concurrently reduce federal taxes, and allow the provinces to make up the lost revenues through higher provincial taxes. Such reforms would constitute a genuine solution to the current problems and offer a more rational and productive fiscal framework for the future.

Provincial governments already rely heavily on federal transfers, albeit to varying degrees. The percentage of provincial revenues provided by federal transfers varies from a low of 10.4 per cent in Alberta to a high of 58.7 in Newfoundland and Labrador. In other words, even the provinces that depend relatively less on the federal government still receive between one and two dollars out of every 10 from Ottawa. The rumoured plan to increase transfers would only further increase provincial reliance on the federal government.

Despite these substantive transfers, much has been made by the provinces of the “fiscal imbalance.” The driving force behind the imbalance is the difference in federal and provincial spending growth. The provinces have incurred much larger spending increases than the federal government due in part to pressures in three of the largest programs provided by the provinces: health, education, and social assistance.

To address provincial concerns regarding the imbalance the federal government has dramatically increased its funding of provincial programs through transfer payments such as the Canadian Health Transfer (CHT) and Canadian Social Transfer (CST). Unfortunately, this has done little to quell the provinces’ appetites for more transfers.

In addition, increased transfers have increased the federal government’s role in provincial areas of responsibility. The recent federal document Restoring Fiscal Balance in Canada clearly acknowledged that K-12 education, health, municipalities, social assistance, and social services were exclusive areas of provincial jurisdiction.

If the federal government is serious about addressing the fiscal balance and respecting provincial jurisdiction it should start by removing itself from these provincial areas of responsibility. More specifically, it should eliminate $31.3 billion in provincial cash transfers designated for health (CHT) and social programs (CST) in 2007/08.

The reduction in federal spending would need to be offset with an equivalent reduction in taxes. The litmus test for which taxes to cut should be based on the degree to which it improves Canada’s economy.

To make Canada’s tax system more efficient and competitive, the federal government should use the $31.3 billion saved on decreased spending to reduce personal income and business taxes, and eliminate capital gains taxes altogether. To compensate for the revenue loss from the elimination of transfers, provinces can increase their own taxes.

Eliminating these federal transfers would actually improve Canada’s most cherished social programs. Clearer lines of accountability and responsibility for critical areas such as health, education, and social assistance would be re-established. When one level of government is responsible for raising revenues and providing programs, the confusion amongst Canadians about which government is responsible for the performance of these programs is eliminated. Without federal interference, the provinces would also be free to experiment with how best to provide these services.

The federal government has a real opportunity to deal with the current fiscal balance. Unfortunately, increasing federal transfers is not the answer and will only lead to more politicking by the provinces. Meaningful decentralization is the only way to put the fiscal imbalance debate to rest once and for all.