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tend to have more capacity to raise revenues than lower-level governments, particularly through income taxes and international taxes. The regional and local governments, being smaller, tend to be responsible for regionalized or local public goods that are supported by local voting populations.
In Canada and certain other countries, a potential mismatch of funding results in the central government having a greater ability to collect taxes and the regional or local governments having greater spending responsibilities. To compensate for the gap, central or provincial governments make substantial transfers to provincial or local governments to enable them to meet their responsibilities. Weighed against this procedure is the need for political accountability wherein governments responsible for spending decisions raise the revenue they require from their voting public. (In Canada, the provinces provide funding to the municipalities to support education, social services, and capital spending, although differences exist from jurisdiction to jurisdiction.)
In Canada, the federal government has made substantial payments to the provinces and territories to enable them to pay for social programs in the fields of health, education, and welfare. As well, the federal government provides equalization payments to the poorer provinces and territories to provide them with the fiscal capacity to supply public goods and services that are comparable to those provided by the wealthier jurisdictions. The grants typically take the form of cash, and are sometimes based on certain conditions agreed to by the recipient; the grants may also arrive in the form of tax point transfers, which involve an equivalent-value transfer of tax room to the recipient jurisdiction. Provinces typically make transfer payments to local governments in the form of cash grants.
Figure 1.7 shows that federal-provincial transfers have been highly variable over the years, with a sharp reduction in 1997, when the federal government reduced transfers in order to balance its budget. Provincial transfers to municipalities have been declining over the years, falling from 20 percent of the GDP to about 15 percent in 2009.
In general, the provinces have recently experienced pressures similar to those faced by the federal government with respect to revenue shortfalls and rising indebtedness. Municipalities have little debt, in part because of provincial requirements, but they too have felt themselves to be under fiscal pressure. Unlike the United States, where balanced.
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