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Analysing Vertical Fiscal Imbalance in a Framework of Fiscal Sustainability

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  • Chris Matier
  • Lisa Wu
  • Harriet Jackson

Abstract

Recent studies on vertical fiscal imbalance (VFI) in Canada subscribe to a definition of VFI that is based on the mismatch in structural budget balances between the federal and provincial/territorial levels of government. In this framework, projected budget balances illustrate the path of VFI. Using a measure of fiscal sustainability developed in Auerbach (1997), this paper constructs an indicator of VFI that is based on the amount of fiscal room available, subject to a government’s intertemporal budget constraint, given underlying fiscal projections. VFI exists in this framework if one level of government has fiscal room available to reduce taxes or increase program spending -- and satisfy its intertemporal constraint -- while the other level of government must increase taxes or reduce spending in order to satisfy its intertemporal budget constraint. Fiscal projections underlying the VFI indicator are based on a framework used in the generational accounting literature and in King and Jackson (2000). Based on the definition of VFI and fiscal projections presented in this paper, there does not appear to be a vertical fiscal imbalance between the federal and provincial/territorial governments in Canada. Des études sur le déséquilibre budgétaire vertical (DBV) réalisées récemment au Canada souscrivent à une définition de ce déséquilibre qui se fonde sur l’inégalité des soldes budgétaires structuraux du gouvernement fédéral et des gouvernements provinciaux et territoriaux. Dans ce cadre, les soldes budgétaires projetés des gouvernements fédéral et provinciaux et territoriaux illustrent le cheminement du DBV. Grâce à une mesure de la viabilité financière développée par Auerbach (1997), ce document présente un indicateur du DBV qui se fonde sur la marge de manœuvre budgétaire disponible, prenant en compte la contrainte budgétaire intertemporelle d’un gouvernement, étant donné un ensemble de projections budgétaires sous-jacentes. Dans ce cadre, il y a DBV lorsqu’un ordre de gouvernement dispose d’une marge de manœuvre budgétaire pour réduire ses impôts ou accroître ses dépenses de programmes, et satisfaire sa contrainte intertemporelle, tandis que l’autre ordre de gouvernement doit accroître ses impôts ou réduire ses dépenses pour satisfaire sa contrainte budgétaire intertemporelle. Les projections budgétaires à la base de l’indicateur du DBV se fondent sur un cadre utilisé dans les études comptables intergénérationnelles de même que King et Jackson (2000). Selon la définition du DBV et les projections budgétaires présentées dans ce document, il ne semble pas y avoir de déséquilibre budgétaire vertical entre le gouvernement fédéral et les gouvernements provinciaux et territoriaux au Canada.

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Bibliographic Info

Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2001-23.

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Handle: RePEc:fca:wpfnca:2001-23

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Cited by:
  1. Sharma, Chanchal Kumar, 2007. "Rescuing the concept of vertical fiscal imbalance," MPRA Paper 39343, University Library of Munich, Germany, revised 2010.
  2. Sharma, Chanchal Kumar, 2010. "Beyond Gaps and Imbalances: Re-Structuring the Debate on Intergovernmental Fiscal Relations," MPRA Paper 32145, University Library of Munich, Germany.

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