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Article Excerpt
Large cities are frequently described as the "engines of economic growth" within a national economy. The reason: major cities are magnets for immigrants, new industries, the highly educated, and the highly skilled. In 2002, 90 percent of all international immigrants settled in one of Canada's nine major cities. (1) Forty-six percent of those immigrants held a bachelor's, master's, or doctoral degree; this compares to the Canadian average of 16 percent. (2) Over the period 1996-2002, Canada's nine largest cities contained 51 percent of Canada's population but were home to 65 percent of all net new jobs created in the country. Over the same period, by comparison, medium-sized cities accounted for an average of 9 percent of the population and 8 percent of new employment, while small-sized cities and other urban areas accounted for 20 percent of the population but less than 13 percent of new employment. Rural areas, while accounting for over 20 percent of the population, contributed only 15 percent of the new jobs created in Canada over that period. (3) Canada's major cities, then, hit well above their weight when it comes to creating new employment.
A timely question, certainly for big city mayors and their constituents, is whether the fiscal policies of the provincial and federal levels of government take into account the vital role of big cities as engines of economic growth. Do cities give (in taxes) more than they get (in various government spending programs)? If so, is this unfair and a reason for complaint?
Governments, via their tax policies and the design and size of their spending programs, are generally considered to have an effect on economic growth. Whether the effect is positive or negative depends on the size and the design of government spending and revenue programs. Given the potential role of government budget policies to affect, for good or ill, the engines of economic growth, it would be useful to have data on how much revenues governments collect and how much governments spend in major cities.
In Canada, however, detailed information on how federal and provincial government revenues and expenditures are distributed across the country is available only at the provincial level. While Statistics Canada reports detailed data on federal government finances by province, there is no further geographical breakdown within each province. Statistics Canada similarly reports provincial government spending and revenues only at the aggregate provincial level and not by sub-provincial regions or population centres.
Drilling Deeper: This paper describes and applies a methodology that allows one to allocate the amounts of federal and provincial government spending and revenues that Statistics Canada reports for provinces to sub-provincial areas.
The method is based on the fact that government spending and revenue collection are determined by the characteristics of individuals, firms, and regions. For example, high-income individuals pay more in income tax than low-income individuals, while public pension eligibility is dependent on age, and healthcare spending varies with age. Thus, we can infer the location of provincial and federal government spending and revenue collection efforts from the income, age, and other characteristics of populations and industries within sub-provincial areas. For example, knowing what fraction of Toronto's population is aged 65 years or older, and comparing this to the fraction of Ontario's population aged 65 years or older, one can infer what portion of province-wide spending on public pensions goes to recipients living in Toronto.
The assumption implicit in this approach is that federal and provincial government revenue collection and spending mechanisms work in an impartial way that ignores city boundaries. The amount of revenue identified as having been collected by the federal government from citizens living in Vancouver, for example, will reflect the characteristics of individuals and firms in that city. If this amount is found to be large, it is because the age, income and other characteristics of the individuals and firms are such that an impartial application of federal tax legislation causes them to pay large amounts of tax. The result of this exercise, then, will be to produce estimates of what one might call a "neutral benchmark" of the amounts federal and provincial governments spend and collect by way of revenue in major cities.
The Limits and Purposes of the Study's Estimates: It is important to stress that the exercise provides estimated, rather than observed and recorded inflows and outflows of government revenues. Straightforward measures do not exist of the amounts federal and provincial governments collect by way of revenue and spend in cities. My neutral benchmark, therefore, cannot take into account such items as one-off spending programs in particular cities, or special tax allowances for certain regional industries, etc. Yet, it would only be by comparing my estimates of a neutral benchmark against such observed amounts that any claim of unfair treatment of a city by the federal or provincial government could possibly be made. Since such a comparison cannot be done, no claims of "unfairness" can be made on the basis of these estimates alone.
To what purposes can these estimates be put? One is to illustrate to those who point to fiscal imbalances as evidence of unfairness that such claims are not necessarily warranted. As stressed by Kneebone (2005) and Poschmann (2005) in reference to the debate over fiscal imbalances at the provincial level, in making tax collection and spending sensitive to income, demographic, and other characteristics of individuals, firms, and regions, governments must inevitably cause certain regions within their jurisdiction to pay relatively more in taxes and/or receive relatively less by way of government-provided goods and services.
Such imbalances are neither unusual nor unexpected. To a large extent, they reflect the influence of a progressive tax system and the design of government programs that transfer income to the aged and the disadvantaged. As a result, they are difficult to criticize without finding fault with these transfer programs. This point is worth emphasizing to provincial premiers with respect to federal fiscal imbalances with provinces and it is worth emphasizing to mayors with respect to federal and provincial imbalances with dries.
A second purpose to which these estimates can be put is to draw attention to the spatial aspect of federal and provincial revenue collection and spending. While a good deal of attention has been paid to how federal spending and revenue collection varies across provinces, few attempts have been made to drill down deeper to the level of cities. (4) If the design of a government's tax and expenditure program causes a persistent net imbalance, then the resulting regional fiscal stimuli, either positive or negative, should be recognized as a by-product of those elements of tax and expenditure design aimed at redistributing income, addressing age-related concerns, and efforts to balance provincial government spending capacities via equalization.
If the design of tax regimes and spending programs matter for economic growth and if their impact is felt across regions of the country in a way detrimental to economic growth in some regions, then the trade-off between efficiency and equity that all policymakers must balance may need to be considered along the regional as well as the personal dimension. While recognizing the estimates generated in this study are only measures of a neutral benchmark and not measures of actual fiscal balances, they nonetheless provide insight into the potential for redistributive fiscal policies to have implications for regional economic growth.
A third purpose to which these estimates might be put is to consider them for their possible explanatory power in the political sphere. The existence of a concentration of net fiscal inflow into one region of the country and a corresponding fiscal outflow from another might explain why politicians could favour changes to tax or spending policies that either reinforce or mitigate such imbalances. Some analysts have suggested, for example, that the first two budgets of the Harper government contained measures designed to lessen the fiscal burden borne by those taxpayers living in the major cities; a constituency from which that government received relatively little support in the 2006 federal election. (5) The neutral benchmark derived here provides insight into how changes in legislation might be used by federal and provincial governments to favour taxpayers in large cities as opposed to other sub-provincial regions.
A Focus on Nine Major Cities: The focus of this paper will be on the derivation of measures of federal and provincial government budget balances in Canada's nine major cities. From largest to smallest these are Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa, Winnipeg, Quebec City, and Hamilton. (6) In Section 2 of the paper I provide the methodological details behind the calculations. Section 3 summarizes the results for each of the nine cities and strives to show how the calculations are affected by the income and demographic distributions of their populations. Finally, in Section 4, I discuss the meaning of the calculations and how they should be, and how they should not be, interpreted.
Highlights of The Major Findings for Cities: Based on the characteristics of city-dwellers and firms in large cities, governments will tend to collect more in revenue and spend less on government programs in the nine large cities than elsewhere. This is confirmed by estimates compiled for the period under study, 1986-2002. Among the highlights:
* In 2002, the federal government realized a $23.464 billion surplus with the nine large cities and a $14.494 billion deficit with the rest of the country. In those years when the federal government was running large deficits nationally (1986-1995), those deficits were relatively small in the nine major cities and particularly large in the rest of the country.
* In 2002, the 10 provincial governments ran a budget deficit of $12.013 billion. Of this amount, only $1.459 billion was realized in the nine large cities, while the rest ($10.554 billion) realized in the rest of the country.
* Looking at Ontario cities during the period 1986-2002, and making adjustments for federal deficits, residents of Toronto paid an average $2,285 more in federal taxes per capita than they received by way of federal services and transfers each year. Ottawa residents paid $1,986 more in federal taxes than they received in federal programs. Hamiltonians paid $1,816 more per capita than they received.
* Citizens of Calgary paid $2,223 more in federal tax revenue per capita than received in federal programs each year during the 1986-2002 period. Edmontonians paid $1,915 more per capita than they received.
* Citizens of Vancouver paid $918 more in federal taxes per capita each year during the period than they received.
* By comparison, the federal government collected $2,007 less per capita than it spent in Winnipeg, collected $736 less in tax revenue than it spent in Montreal, and collected $373 less in tax revenue than it spent in Quebec City.
* On average during the period 1986-2002, and adjusting for provincial deficits, all nine major cities paid more in taxes to provincial governments than they received in provincial spending.
The Methodology:
Statistics Canada provides time-consistent data describing the amounts of tax collected, and the levels of spending on government-provided goods and services provided, by each of the federal, provincial and local levels of government in each province. (7) Table I identifies, for the federal and provincial governments, the categories of revenue and expenditure data that are available.
Unfortunately, these data are not further disaggregated to show the amount of revenue collected from, and the level of government-provided goods and services provided to, citizens of each city within each province. However, Statistics Canada does publish data describing for each of Canada's nine largest cities the distribution of income, the age distribution of the population, and the state of the local economy as measured by the number of citizens collecting Employment Insurance, social assistance, and other types of income support. Using this information, it is possible to...
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