Federal Fiscal Balances and Redistribution in Canada, 1992-96

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This article identifies the major methodological issues involved in the calculation of federal fiscal balances by province. Using data from the Provincial Economic Accounts (PEA) and National Income Accounts, we calculate four sets of balances for the period 1992-1996, namely basic balances, primary balances, balanced budget balances with tax increases and balanced budget balances with spending cuts, under different assumptions. For comparison purposes, we also include federal fiscal balances contained in the PEA based on the cash-flow approach. The results show that federal fiscal balances by province vary significantly from one method to another. In particular, the basic balances calculated using our approach yield substantially lower gains to the net beneficiary provinces and lower costs to the net contributor provinces than balances based on the cash-flow approach. Eliminating the interest on the public debt or the federal deficit increases the contributions by the "better off" provinces and reduces the gains to the net beneficiary provinces. We also calculate some indices of redistribution among provinces generated by the federal fisc and find that the degree of redistribution was modest under all methods of calculations.