Ottawa’s large cash payments that support provincial government services are a strain on the Canadian federation, according to a series of research reports released today by the C.D. Howe Institute.

The four reports take very different perspectives, but all conclude that repairs begin with federal and provincial tax reforms — including provincial tax increases.

In “The Fiscal Background to a Fiscal Gap”, Finn Poschmann, associate director of Research at the C.D. Howe Institute, says that because some provinces are economically stronger than others and the federal government’s revenue, spending and transfers are all geared to income, federal fiscal policy creates a persistent net drain for those provinces. On a simple accounting that adjusts for federal deficits and surpluses, for example, Ontario has seen a net annual outflow in the $20 billion neighbourhood for the past decade and more. Such large regional and intergovernmental fiscal flows put sharp political strain on the nation.

Michael Smart, associate professor of economics at the University of Toronto and a research fellow at the C.D. Howe Institute, claims in “Federal Transfers: Principles, Practice, and Prospects” that the federal government is unable to commit to a stable set of fiscal arrangements for the long term. A burst of extraordinary bilateral fiscal arrangements has destabilized public finances in Canada, undermining accountability and incentives for all levels of government. It is time, therefore, for Canadians to push for major reforms to fiscal arrangements.

According to Bev Dahlby, professor of economics and fellow, Institute for Public Economics at the University of Alberta, the important “fiscal imbalance”, if there is one, lies in governments’ tax and expenditure mixes. In “Dealing with the Fiscal Imbalances: Vertical, Horizontal, and Structural”, Dahlby says the solution lies with tax reforms, starting with value-added taxes for provinces that have retail sales taxes, and a lower federal GST.

Whether there is political will to implement such reform, isn’t clear, the Institute says.

Professor Ken McKenzie, director of the Institute for Advanced Policy at the University of Calgary and the EnCana Scholar at the C.D. Howe Institute, wrote “Reflections on the Political Economy of Fiscal Federalism in Canada” to tackle that very question. He begins by noting that growing federal transfers set the stage for perpetual fiscal imbalances and continuing political instability. He is convinced that a politically and economically sustainable alternative is to increase provinces’ own-source revenue.