Local Government Financing in Canada

It is my pleasure to be here at the Liberal International Executive Committee, representing the Liberal Party of Canada.

As countries emerge out of the current global economic crisis many governments will be looking to cut spending and balance their budgets. They will be saying that we must live within our means to come out of the recession stronger than ever.  In the 1990s, Canada went through this process and will be doing so again.  There are many lessons learned from our experience from a decade ago that could help steer through these troubling times.

I was a part of the Liberal government that was elected in 1993, so I am intimately aware of the decisions that must be made during times of crisis. We decided that Canada could no longer prosper under these conditions and we needed to tackle our fiscal catastrophe. We launched a government wide review of all programs and services, from defence to social assistance. We analysed the efficiency and effectiveness of programs and services and cut out those of low priority and those not producing sufficient results for our citizens.

We had to make a lot of tough choices. We cut program spending in all areas of government. Very little was spared but over a three-year period (1994-1997), we eliminated the budgetary deficit. We were able to put Canada on a path to financial sustainability and prosperity.  From 1997 to 2003, Canada had an average annual growth in employment of 2.3 percent and an average annual rate of growth in its standard of living of 2.8 percent. This was the strongest growth rate among G7 countries. And until 2007-08 Canada ran budget surpluses each year.

Although, this was the right thing to do for Canada, to put our country on the right fiscal path, it came at a cost. The cost came in part  to the many cities and communities and the people within them that had to bear the brunt of our decisions.

I raise this because, as liberals, we hold dear our belief in liberty, equality, and social justice.  And we ask ourselves, do the decisions we make hold to those ideals? As a former mayor, I am keenly aware of the issues that cities face and their importance to the health of our nations.

Cities in Canada like in many parts of the world are intimately local and internationally important.  They are home to 80% of Canadians and they receive approximately 90% of immigrants to our country. And as Professor Richard Florida correctly points out, “cities are a country’s crucibles of competitiveness in the creative age. They promote economies of scale, incubate new technology and match human capital to opportunities, ideas to places and innovations to investment.”

Because of the offloading or downloading from other levels of government in the 1990s, cities had to deliver more social services than ever before but their sources of revenue had neither evolved nor increased.

Downloading did have some positive aspects. We realized that municipalities were able to deliver some services in a more effective and efficient manner simply because they know the demographic and geographic realities of their municipalities. But, their challenge lies in paying for those services, not in their delivery.

In Canada, municipalities rely on property taxes for more than half of their income.  This results in only 8% of all taxes collected by governments in Canada finding their way into municipal coffers.

What is needed is a new way to fund our cities; to make them more economically viable so they can fund the services that their citizens need.

Some of the ways to do this would be to allow cities to have a local sales tax dedicated to infrastructure or a visitor-specific or vehicle-specific selective sales tax. Or that the federal government give municipalities’ access to our value added tax known as the goods and services tax, or GST.  This could be done by giving a certain percent directly to municipalities to fund their needs. There could also be sharing of income tax revenue raised by the federal and provincial governments.

Another innovative idea, which was started under Liberal Prime Minister Paul Martin, is the Gas Tax Fund. Now permanent, this fund uses federal gas tax revenues to support environmentally sustainable municipal infrastructure projects. In essence, it uses revenue from a non-renewable resource to help make our cities more environmentally sustainable.

When we righted the fiscal ship successive Liberal governments made significant investments in infrastructure, and were able to significantly increase the tax base for municipalities through the gas tax transfer and GST rebates, yet Canadian cities and communities still face daunting challenges. More needs to be done.

I raise this because we need to be aware of the pitfalls that come with digging ourselves out of a financial hole.   Be innovative, and constructive in finding solutions. But always find the right balance – as liberals so often do – between the ability to live within our means but also to provide a society for our citizens that upholds our belief in liberty, equality, and social justice.

Thank you.