After allowing for the requisite set of policies relating to the high-profile environmental dossier and the generous sprinkling of electoral sweeteners that characterize minority budgets, Finance Minister James Flaherty’s 2007 budget was fundamentally and rather incredibly an exercise in the fiscal implementation of a prin- cipled political philosophy of federalism. And the philoso- phy in question was that expounded in Stephen Harper’s instantly classic December 19, 2005, Quebec City speech, which embraced 1) ”œopen federalism,” 2) a respect for the constitutional division of powers, and 3) a recognition of, and a commitment to redress, the fiscal imbalance in the Canadian federation. It is hard to recall any major policy initiative, let alone a budget, where the term ”œfiscal federal- ism” in its several meanings is so apt a characterization as it is for Budget 2007.

Accordingly, the aim of this article is to critically assess the Flaherty budget from this generalized fiscal-federalism perspective, dealing initially with the political/constitution- al aspects of ”œopen federalism” and then focusing in turn on vertical fiscal imbalance or VFI ( the Canada Social Transfer, the Canada Health Transfer, and a brief reference to the infrastructure and labour market transfers), on horizontal fiscal imbalance, or HFI (the new equalization programs) and, finally, on the tax back guarantee and its relationship to fiscal balance. Throughout the ensuing analysis of the above areas, emphasis will also be directed to the actual and potential fault lines that are likely to complicate the manner in which the Flaherty budget chose to implement open fed- eralism and fiscal rebalancing.

In terms, first, of political federalism, the underlying philosophy in the budget is to respect the constitutional division of powers. For example, while the new equal-per- capita VFI transfers are notionally associated with spending areas, they are in reality unconditional transfers. In particu- lar, they are not intended to launch new federal programs in areas of provincial jurisdiction. As the Budget Plan notes, this is ”œconsistent with the recognition that the provinces and territories are best placed to deliver services in their areas of responsibility, such as health care, PSE [post-second- ary education] and labour market training.”

Beyond this, Budget 2007 resurrects aspects of the Meech Lake Accord and even SUFA (the Social Union Framework Agreement) in terms of how Ottawa will hence- forth approach the exercise of the federal spending power. Specifically, any new shared-cost programs in areas of provincial jurisdiction will, first, require the consent of the majority of the provinces and, second, allow provinces the right to opt out of cost- shared programs with compensation if they offer similar programs with com- parable accountability structures. This specifically fulfills a pledge made by the Prime Minister in his ”œopen feder- alism” campaign speech at Quebec City on December 19, 2005.

And to facilitate transparency, the federal government will report on the nature of federal spending in each budget. For example, 29 percent of the new spending in 2006-07 fell within federal jurisdiction (exclusive or con- current) and 71 percent qualified under the label ”œrestoring fiscal bal- ance/funding to provinces and territo- ries.” Percentages for the following two years are projected to be 45-55 and 32-68 respectively, implying that fed- eral spending respects provincial/terri- torial jurisdiction (i.e., the percentages sum to 100 so that there is, according to these figures, no federal spending that invades provincial jurisdiction). This would probably be reading too much into the spending-power limita- tion. Rather, what the budget does say on this issue is ”œto the extent that new initiatives have been introduced in areas of primary provincial and territo- rial responsibility, it has been done in a respectful manner, at the request of the provinces and territories.” This caveat aside, even if provinces chal- lenge Ottawa’s definition of what falls within federal jurisdiction, this trans- parent commitment to respect provin- cial jurisdiction in the implementation of federal budgetary policy is an impressive step in embracing the pre- cepts of open federalism.

Yet, Ottawa recognizes that it needs to go further here and is offering to explore with the provinces ways to formalize this commitment to limit the exercise of the federal spending power in areas of exclusive provincial- territorial constitutional responsibility. Ideally, the exercise of the spending power would ultimately have a specif- ic constitutional basis: in the interim, it could be constrained by a federal- provincial legislated framework.

It is important to recognize that the development of such an acceptable legal framework may well lead to an increased federal role in areas of provincial jurisdic- tion. This is what the vast majority of Canadians apparently want: a post-budg- et Globe and Mail/CTV poll indicates that 32 percent strongly agree and 35 percent somewhat agree that the federal govern- ment should be involved in areas of provincial jurisdiction. Thus, an accept- able spending power framework must embody mechanisms that would allow the provinces to protect their jurisdiction when they so wish and also embody mechanisms for (some or all) provinces to delegate authority to Ottawa in those areas where the majority of provinces desire more uniformity in programs. The 2004 proposal by the provinces to trans- fer pharmacare to Ottawa for all provinces except Quebec is an example of an initiative that would clearly benefit from the existence of a facilitating frame- work. In my earlier writings, and more fully and formally in Marc-Antoine Adam’s Policy Options article (March 2007), section 94 of the Constitution Act, 1867 was highlighted as a possible mech- anism to embrace these dual aspects of the exercise of the spending power.

By way of a bridging comment to the discussion of VFI and HFI, I have long argued that provincial powers under the constitution are the key to influencing how a society lives, works and plays and will increasingly embody the essence of nationhood in this globalizing world. Hence, the federal government’s respect for areas of provincial responsibility will go a long way toward ensur- ing that ”œQuebecers form a nation within a united Canada.” To make this a real- ity, however, requires that the provinces have revenues suf- ficient to adequately exercise their constitutional powers. Enter VFI and HFI.

By far the most impres- sive initiative on the vertical fiscal imbal- ance front was the reworking of the CST to incorporate new PSE funding. Figure 1 (reproduced from the budget) reveals the arcane manner in which the CST was heretofore funded. Each province’s cash transfer is the difference between the $500 per capita ceiling and the notional value in 2006-07 of the 1977 transfer of equalized tax points. Since all that is actually transferred is the cash, the reworking of the CST (see figure 2) jetti- sons the equalized tax point transfer and converts the CST into equal per capita cash transfers of $289. The obvious ben- eficiaries at the provincial level are the rich provinces in terms of the tax points ”” Ontario and Alberta ”” each of whose per capita cash transfer increases to $289. Saskatchewan is the clear loser here, suffering about a $50 per capita decrease in CST cash transfers (which is cushioned somewhat by a transition arrangement). In fiscal year 2008-09, CST funding for PSE will increase by $800 and the total CST will then be esca- lated by 3 percent annually. Although the CST funds are notionally allocated to PSE, to social programs and to support for children (see figure 2), they are effec- tively unconditional grants, another way in which the budget implementation respects the division of powers.

This appears to be the beginning of converting, where feasible, virtually all of the vertical transfers into equal per capita cash transfers. As a result of Budget 2007 there will also be new, equal per capita cash transfers for major com- ponents of infrastructure transfers and labour market transfers. The good news here is that this means that, progressive- ly, all equalizing components of vertical transfers will disappear and all equaliza- tion will be done via the formal equaliza- tion formula. Now if Ottawa would only heed this principle and remove the regionally equalizing components of employment insurance, i.e., Ottawa would ensure that similarly situated individuals are treated similarly under EI, no matter where they may reside.

The major VFI outlier here is the CHT. The operations of the CHT resemble those of the earlier CST (figure 1), except that the tax-transfer clawbacks for Ontario and Alberta are much larger. For example, Ontario loses close to $1 bil- lion dollars and, proportionally, Alberta loses much more. Arguably, in the run- up to the budget, redressing this shortfall was Premier McGuinty’s strongest case in terms of pushing for fairer transfer treatment from Ottawa. And while the budget fully recognizes the validity of the case for equal per capita transfers for the CHT, it argues that this will occur only in 2014-15, i.e., when the 2004 10-Year Plan to Strengthen Health Care will expire. The underlying reality is that immediate conversion of the CHT into an equal per capita transfer would have required well in excess of $1 billion per year ”” money that the Harper govern- ment did not have ”” or at least did not have after it decided to allocate $9.2 bil- lion to debt reduction in the current (2006-07) fiscal year. This, combined with the generous increase in equaliza- tion (another of Ontario’s concerns, since its citizens pay roughly 40 percent of the cost of equalization, while the province receives no revenue benefit), will serve to balance out Ontario’s gains in terms of other VFI transfers (especial- ly the CST) and ensure that Ottawa- Ontario fiscal relations will likely remain somewhat strained.

In terms of the future evolution of Canada’s vertical balance transfers, the recent substantial increases in the value of VFI cash transfers, and the annual automatic escalation of these val- ues, will begin to create concerns for the provinces. Not too far in the future the mere freezing of these transfers for one year would generate more than a billion budgetary dollars of fiscal flexibility for Ottawa. This being the case, the provinces will begin to search for ways to protect these cash transfers from a future ”œ1995 budget.” One obvious way to pro- tect them is to convert a portion of the cash transfers into tax point transfers. Were this to occur, my preferred option for implementing the tax transfer would be via GST tax points. This would require that the remaining PST provinces con- vert these into GSTs (an initiative that would enhance efficiency in its own right) and would then require a federal- provincial agreement to transfer one or more percentages/points of the GST to the provinces. Suppose that it was agreed that two of the six GST tax points were to be so transferred (one of which could be the second GST point the Harper promised in the 2005-06 electoral cam- paign but which still remains in federal hands). The provincial distribution could take two quite different forms. At one extreme, Ottawa would collect the two percentage points of the GST in the provinces’ names and then transfer the proceeds on an equal per capita basis to the provinces. This would maintain the equal-per-capita cash transfers for addressing VFI that are a cornerstone of the Budget 2007 approach to vertical transfers. The alternative would be to transfer the tax points to the provinces on a derivation basis, i.e., on the basis of the GST revenues actually arising from within the boundaries of each province. Presumably, these tax transfers would be equalized by the then-existing equaliza- tion program. Were this to be the pre- ferred option, the GST would be an appropriate tax to decentralize, since consumption (or GST-related spending) is allocated across provinces much more equally than is personal or corporate income, and as a result would require correspondingly smaller equalization payments. The key issue here is not about the choice between these two alternative approaches to increased tax transfers but, rather, it is that given the past behaviour of Ottawa, the provinces will need to find effective ways to ensure that the cash transfers become immune to federal freezes or cuts. But this issue only arises because Ottawa has made important strides in improving the transparency and removing the fiscal imbalance associated with the opera- tions of Canada’s system of vertical fiscal transfers.

Having thus broached the issue of equalization, or HFI, I now turn to it in more detail. Budget 2007 adopts the O’Brien report as the basic equaliza- tion model. This embraces a 10- province standard; 50 percent inclusion of natural resources; a fiscal capacity cap ensuring that no equalization-receiving province can have overall revenues (including 100 percent of resource revenues) above any of the non-receiving provinces, i.e., above Ontario; and a series of other modifica- tions (e.g., reducing the number of tax bases from 33 to 5, adopting a market- value base for residential property taxes, and allowing a two-year lag before the revenue data enter the formula).

However, there are three other equalization programs in play. Nova Scotia and Newfoundland and Labrador can fall back on the 2005 off- shore accords they negotiated with Paul Martin, whereby their equalization would be calculated via the former five- province standard formula, with any energy clawbacks being fully restored via the offshore accords. There is no fiscal capacity cap under these accords. The other equalization program is to calcu- late equalization on the assumption that all non-renewable revenues are excluded from the formula. Several resource pro- ducing provinces might benefit from this option, although, as is the case for the O’Brien model, the fiscal capacity cap applies. The rationale for this zero- resource-inclusion option is that it allows Harper to make the case that he has lived up to his electoral commit- ment, although Saskatchewan and Newfoundland and Labrador will be quick to remind him that a confiscatory fiscal capacity cap was not part of his electoral promise to keep non-renewable resource revenues out of the formula.

Before delving into the complex details of the new equalization regime, it is appropriate to recall that Paul Martin’s 2004 wholesale reworking of equalization, in tandem with his 2005 negotiation of the two offshore accords, left Canada’s equalization pro- gram shambles. Indeed, the challenges on this front facing Flaherty could not have been more daunting ”” to address and redress what surely must be the most intractable distributional tug of war that Canadian federalism has ever experienced. Short of enlarging the degrees of freedom by bringing more policy levers into play (e.g., integrating VFI with HFI as I suggested in the March 2007 issue of Policy Options), there are simply not enough instru- ments within HFI to address the com- peting provincial demands on equalization. Therefore, it should come as no surprise that several provinces have found the HFI proposals wanting.

Focusing first on the aggregate level, the shift to the 10-province stan- dard, aided by the new definition for the property tax base, have generated substantial increases in overall equal- ization. However, the distribution of these gains across provinces is both complex and surprising. For example, the Budget 2007 tables note that the increase in overall formula-driven equalization from 2006-07 to 2007-08 is $1.486 billion, and over the two year period 2006-07 to 2008-09 it is $1.636 billion. Incredibly, the comparable increases in Quebec’s equalization over these same fiscal years are $1.621 bil- lion and $2.123 billion, respectively, or nearly one-third more than the total increase in the latter case!

This anomaly occurs because there are declines in equalization for selected other provinces, which bring the overall equalization increase to below the Quebec increase. Newfoundland and Labrador’s case is particularly illustrative. Its formula- generated equalization falls by nearly $500 million over this two-year period, but since it is operating under its off- shore accord, the accord almost fully offsets this shortfall by returning to the province all the energy-related clawbacks it suffers under the formal equalization program. Thus, while Newfoundland and Labrador’s total equalization-type payments remain basically unchanged, the component coming from the formal equalization program has fallen substantially, which is part of the reason why Quebec can receive an increase larger than the overall formula-related increase. The fact that, as a result of the accord, Newfoundland and Labrador is able to achieve a per capita fiscal capacity well above that of Ontario will be addressed shortly.

In the interim, two further observa- tions about Quebec seem relevant. The first is that one of Charest’s earliest moves on the federalism front was to champion the formation of the Council of the Federation, replete with its initial priority of restoring vertical fiscal bal- ance. However, Quebec gradually shift- ed its preference from VFI to HFI, and for an obvious reason. For each dollar of new VFI transfers Quebec would be entitled to its population share, say 24 cents. However, the fact that high ener- gy prices could convert Saskatchewan, Newfoundland and Labrador and British Columbia into ”œhave” provinces (along with Alberta and Ontario) meant that Quebec’s share of each new equal- ization dollar could (and did) top 70 cents. Follow the money!

The second relates to Quebec’s almost immediate conversion of $700 million of its equalization money into a personal income tax cut. Understandably, the optics of this ini- tiative did not play well in the rest of Canada, let alone in the context of the Quebec election. But in a philosophical sense this is exactly the role that equal- ization is supposed to play ”” to allow provinces to have comparable public services at comparable tax rates. Quebec has long preferred to have above average services (universal day care, parental leave) and they clearly have above average tax rates. Given that high taxes are more problematic competitively in a comparative provin- cial context, Quebec’s move (absent the timing) is the obvious option, espe- cially since Premier Charest announced in his previous budget that his prom- ised tax cut would have to await Ottawa’s restoration of fiscal balance.

Would Canadians have preferred that Quebec was claiming to be utilizing its notional increase for PSE in the feder- al budget to reduce its income taxes?

Returning to Newfoundland and Labrador and to Premier Danny Williams’ displeasure, or perhaps more aptly his righteous indignation over the budget, the issue appears to be the fol- lowing. Newfoundland and Labrador assumed that its negotiated accord would apply in full to any new equaliza- tion regime. Budget 2007 does not take this view: under the new program the provisions of the accords would apply but would be trumped by the confisca- tory fiscal capacity cap once Newfoundland and Labrador’s overall per capita revenues exceeded those of Ontario. Rather, the Accord applies in full only under the earlier context of the five-province standard. Actually, this is still an enormous break for Newfoundland and Labrador since, as noted above, the fiscal capacity cap does not apply in this context. In turn, this means that under Budget 2007 Newfoundland and Labrador is the only equalization-receiving province that will have a fiscal capacity comfortably above those of Ontario and Saskatchewan and probably above that of British Columbia as well.

What, then, is the problem? It is that for the accord to be extended for a full eight-year term beyond 2011-12, Newfoundland and Labrador must qual- ify for equalization in at least one of fis- cal years 2010-11 and 2011-12. Under some realistic scenarios of energy prices and production, Newfoundland and Labrador would not qualify for equaliza- tion under the five-province standard in either of these years and, therefore, would be forced into one of the new two equalization programs embraced by the budget, both of which contain the con- fiscatory fiscal capacity cap. Yet, even here all is not lost since the budget notes that the accords do have provisions for ”œtransitional payments during the extended eight-year period for each province should it no longer otherwise qualify for equalization payments.” Nonetheless, the Newfoundland and Labrador premier has committed him- self to campaigning against Prime Minister Harper in the next federal elec- tion in the cause of allowing the off-shore accords to apply fully in the con- text of the new 10-province standard. And history tells us that Premier Williams has had success in raising the standard by lowering the flag.

Conceptually, Nova Scotia should fall into the Newfoundland and Labrador camp. And some of its rhetoric has. But at a practical level, its case is very different. Simply put, Nova Scotia does not have (at least not yet) enough energy revenues to bring the confiscatory fiscal cap into play. This means that the province will be better off opting for one of the two new versions of equalization (the 10-province standard with 100 per- cent or with zero percent resource inclu- sion). While Ottawa will allow provinces to move back and forth annually between these two new versions, opting into the new regimes from the offshore accords is permanent; one cannot go back to the accords. However, within a week of the budget, the federal Department of Finance issued a news release announcing that it will allow Nova Scotia to be covered by the new for- mula for 2007-08 and then allow the province the flexibility of deciding which system it will choose in 2008-09. It still remains the case that if`Nova Scotia could secure the full operation of its accord within the new formulas (absent any caps), it would be its preferred route to take.

British Columbia’s case is different again. Its major concern with the new equalization programs is the redefin- ing of the property tax to place it progressively on a market-value base. This, along with the recent increase in its economic fortunes, will likely make it a ”œhave” province. And if it were to qualify for equalization, the fiscal capacity cap would quickly reduce any equalization to zero.

This brings the focus to Saskatchewan, which again finds its energy revenues largely ”œnationalized,” that is, effectively clawed back under the operations of the confiscatory fiscal cap and directed to the coffers of Ottawa and the other recipient provinces. To be sure, it is the case that Saskatchewan qualifies for $226 million in equaliza- tion in 2007-08, but this is because the data entering the new formulas are, fol- lowing the O’Brien model, four-year averages lagged two years. What this means is that the impact of US$60-per- barrel oil has not yet been fully reflected in the formula calculations. Indeed, as the budget data for 2008-09 reveal, the province’s equalization already falls to zero. In order to highlight the implica- tions of the confiscatory fiscal cap for Saskatchewan, it is instructive to consid- er the following conceptual exercise. Based on a series of calculations prior to the budget, at a price of oil in the neigh- bourhood of $20 a barrel (and a comparable price for natural gas) Saskatchewan’s equalization would, in ballpark figures, be about $900 million and its resource revenues would (coincidentally) also be about $900 million. This would put Saskatchewan’s overall revenues at the point where the Ontario cap is about to become binding. At an energy price in the cur- rent range of US$60 a barrel, Saskatchewan’s energy rev- enues will have increased by $900 million, i.e., they go from $900 million to $1.8 billion. But because the cap is confiscatory, Saskatchewan’s equalization falls from $900 million to zero ”” dollar for dollar with the rise in energy revenues. However, once all the equalization is clawed back, Saskatchewan is by definition now a ”œhave” province, so that any further resource revenue increases will simply be pocketed by Saskatchewan (i.e., the equalization clawback will be zero, since there is nothing left to claw back) and the province’s revenues can now become larger than those in Ontario. The major fiscal and allocative issue at stake here is that there are several hundred million dollars in resource revenue increases where the province does not reap any direct resource revenue benefit because of the confiscatory cap. Why would the province continue to collect royalties? Why not reduce them to zero and require the energy companies to make compensatory con- tributions to hospitals and universities, etc.? Note that the current situation is precisely the opposite: Saskatchewan has to take money from hospitals and universities to repair the substantial road damage, arising, for example, from the operations of the energy companies.

Budget 2007 will argue that this is fair treatment for Saskatchewan because it would otherwise violate a ”œprinciple” of the new scheme, namely, that an equalization-receiving province cannot have an overall fiscal capacity above that of the poorest non-receiving province (Ontario). This is a peculiar principle because not only are the other provinces that are in a similar position (Nova Scotia and Newfoundland and Labrador) exempted from the principle, but Ottawa is going to considerable lengths to provide transition arrangements. Not surprisingly, Saskatchewan will lobby for its own (onshore) accord, but this will likely be in vain, since Ottawa adopted this scheme in full knowledge of its impact on the province ”” a law of intended consequences, as it were. My guess is that we are headed to the courts here. The issue will be whether section 36 of the Constitution can be utilized to justify removing (for the better part of a decade now) a province’s largest resource base from Saskatchewan’s energy sector than does the province itself.

But it should not come to this. There is room to compromise. Why not replace the 100 percent clawback with a two-thirds clawback until the provinces’ equalization is exhausted?

This caveat aside, and contrary to the claims of Budget 2007, horizontal fiscal balance has not been restored. Moreover, equalization is no longer as effective in playing its traditional role as an essential part of the glue that binds the federation from east to west. From my perspective, the likelihood is that other concerns with respect to equalization will come to the fore and further complicate the challenges sur- rounding the restoration of horizontal balance. One of these is the growing importance and value of hydro-elec- tricity rents/royalties. The potential rents here are huge and long-lived. The O’Brien report comments on hydro rents as follows: ”œIf a comprehensive rent base for provincial resources was developed in the future, then hydro- electric rents should be calculated and imputed whether they are left in the hands of hydro consumers or accrue to the provincial government.” While this approach would be correct on eco- nomic grounds and would also be appropriate in terms of equity, the O’Brien report deems it to be too con- troversial to merit recommendation.

Yet the issue is not likely to disappear. If hydro rents continue to be largely ignored, then other provinces (e.g., Saskatchewan and Newfoundland and Labrador, and perhaps British Columbia) may consider setting up Crown corporations to collect and manage resource rents and to under- take the full range of expenditures required to collect these rents ”” roads, communications, royalty collection services, regulatory oversight and the like ”” with the resulting ”œnet” royal- ties forwarded to the provinces as a ”œdividend,” as is the case with the hydro Crowns.

The second issue is arguably even more far reaching. Section 36(2) of the Constitution speaks in terms of ”œreasonably comparable levels of pub- lic services.” In our equalization pro- gram, we have interpreted this as, in effect, ”œreasonably comparable levels of per capita revenues.”

This does not follow. It takes more revenues in Toronto or Vancouver or Calgary to provide a given level of serv- ices (e.g., a welfare worker, a school teacher, a medical procedure, a police officer, and so on) than it does in most other areas of the country. In general, the revenues required for the provision of a given public good or service gener- ally rise with the province’s level of income. In economic terms, higher incomes get capitalized in wages, rents, etc., which in turn increase the cost of providing a given level of public servic- es. Calculations I made utilizing data for 2004-05 indicate that if one deflates per capita-equalized provincial rev- enues by an index of average provincial wages, Ontario’s and British Columbia’s ”œeffective” per capita revenues are lower by several hundred dollars per capita than those of all of the traditional equalization-receiving provinces.

Moreover, one of the reasons given as to why the Americans have no equalization program is that any rev- enue differentials across states are fully capitalized, so that there is ”œnothing to equalize.” To be sure, full capitalization is inappropriate. But so is zero capital- ization: linking the provision of public services directly with revenues per capi- ta surely leads to overequalization.

None of this is intended to mask the fiscal superiority of Alberta. This province can afford wages and salaries (for nurses and doctors, for example) that will pose challenges for all the other provinces. In my own work, I have proposed that after some threshold ”” say 110 percent of per capita national average revenues ”” we begin to ”œrevenue test” the vertical balance transfers by reducing the vertical transfer (e.g., the CHT and CST) by 20 cents for every revenue dollar above this threshold. (Readers will recognize that this proposal is inconsistent with my earlier praise for the new equal-per-capita CST). This propos- al has not attracted many supporters, but some such compensatory mecha- nism may well be welcomed by all of the provinces, especially Alberta, since this would free up its ability to exercise its own spending power.

The final comment with respect to the budget’s approach to restoring fiscal balance relates to the tax back guarantee. Over the recent past, unanticipated sur- pluses were directed toward federal debt repayment. The provinces were quick to point out that this was tilting the exist- ing fiscal imbalance even further in Ottawa’s favour, since Ottawa would benefit from reduced debt servicing charges in future years. The Budget 2007 solution is the legislation of a tax back guarantee, which will ensure that as the federal government reduces its debt it will be required to use the interest sav- ings to lower personal income taxes. The value of this guarantee amounts to $1.1 billion in 2007-08 and $1.3 billion in 2008-09. Among the Budget 2007 reduc- tions in personal income taxes financed by this guarantee are the working income tax benefit, the $2,000 child credit, the increase in the spousal credit and increasing the age threshold from 69 to 71 for converting RRSPs to annu- ities and the like. This means that unex- pected surpluses (or even anticipated ones) that end up reducing the outstand- ing value of the federal debt will not privilege Ottawa relative to the provinces in terms of budgetary flexibil- ity. In this sense, the guarantee is indeed part of the overall (vertical) fiscal balance issue and driven by the overarching open federalism philosophy.

Budget 2007 is a remarkable docu- ment in that it embraces a political philosophy of federalism (i.e., ”œopen federalism”), and then proceeds to implement the fiscal and budgetary provisions required to make this polit- ical philosophy a reality. In an impor- tant sense, Budget 2007 goes well beyond being an economic blueprint and begins to don the mantle of a political blueprint for the federation ”” a true ”œfiscal-federalism blueprint.”

As should be clear from the above analysis, this praise for Budget 2007 as a political and federal blueprint does not necessarily translate into high marks for the manner in which select- ed aspects of this framework were implemented. Nor does it mean that a majority of Canadians will embrace this underlying philosophy of federal- ism. Indeed, as the budget itself notes, the missing key ingredient is a trans- parent and legally (preferably eventu- ally a Constitutional) based framework for the exercise of the federal spending power, one that is flexible enough to ensure the integrity of sections 92 and 93, and other areas of provincial juris- diction should the provinces collec- tively or individually so desire, and at the same time allow a majority of provinces to delegate powers upward when they want to pur- sue national standards in pro- gram design. Beyond proposals proffered earlier, something along the lines of a generalized CPP (concurrency with provin- cial paramountcy) for selected section 92 heads of power might work: Ottawa could leg- islate in these areas and oppos- ing provinces could opt out by exercising their legislative para- mountcy. This would mirror the operations of the other CPP (the Canada pension plan). The intriguing result of all of this is that, looking back, it will have been the 2007 federal budget that put the federal spending power on the nation’s policy agenda.

As a final comment, I want to move beyond my earlier criticism of selected aspects of the principles and practices of Budget 2007 and to render a thumbs up to its major accomplish- ment, namely, to remove the fiscal basis of our federation from its earlier state of disarray and to strive to reposi- tion Canadian fiscal federalism within a framework of principles ”” fiscal, institutional and political.

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