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Canadian flags with dark sky.

David P. Lewis/Getty Images/iStockphoto

One of the key challenges of the upcoming budget season will be to counter the trend toward very different levels of public and social services and taxes across the country.

Canada is one of the most decentralized federations in the world. Public services (notably health, education at all levels and social services, such as elder care) are delivered and financed primarily by the provincial governments whose fiscal capacity varies greatly.

The Constitution states that provinces should have sufficient resources to provide "reasonably comparable services at reasonably comparable levels of taxation."

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Most Canadians would likely agree with the principle that a child in a less well-off province, such as P.E.I., should have the same educational opportunities as a child in booming Alberta, and that a senior in New Brunswick should have access to the same quality of health care and as a senior in British Columbia.

The federal government helps the provinces finance services through cash transfers – notably the Canada Health Transfer and the Canada Social Transfer, which are allocated on an equal per person basis, as well as equalization. These transfers make up one-fifth of total provincial revenues, ranging from under 10 per cent in Alberta to 40 per cent in New Brunswick.

While transfers help equalize access to health, education and social services across Canada, current arrangements fall short of what is needed. And that shortfall will increase significantly if nothing is done.

There are large gaps between the fiscal capacity of the provinces, partly long-standing and partly due to the differing regional impacts of the resource boom and the manufacturing crisis. Provincial GDP per person, a proxy for the ability of provinces to finance services, ranges from 77 per cent of the national average in P.E.I. to 127 per cent in Alberta.

Six provinces, which together make up 75 per cent of the national economy, now qualify for equalization payments. This amounts to 0.8 per cent of GDP and is determined on the basis that these provinces have less-than-average fiscal capacity, as calculated under a complex formula. Only B.C., Alberta, Saskatchewan and Newfoundland and Labrador do not qualify. (All provinces except Alberta have qualified at some time in recent history with B.C., Saskatchewan and Newfoundland and Labrador all moving between "have" and "have-not" status.)

Despite equalization, rates of taxation vary quite a bit across the country. Alberta has no provincial sales tax and a flat-rate personal income tax of 10 per cent. Provincial sales taxes elsewhere range from 7 to 8 per cent, but go as high as 9 per cent in P.E.I. and 10 per cent in Nova Scotia and Quebec. Three provinces – Ontario, Quebec and Nova Scotia – have top personal income tax rates of over 20 per cent, significantly higher than in Alberta, B.C. and Saskatchewan.

Spending per person on services also varies quite significantly. For example, in Ontario, health-care spending per capita is just 91 per cent of the national average (perhaps partly because provinces with older populations spend more than the average) and spending on postsecondary education is just 81 per cent of the national average.

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Provinces do, of course, make their own fiscal choices. Sales and income taxes are relatively high in Quebec partly because the province has chosen to deliver a high-quality, low-cost child care and early learning program, and to maintain a more affordable postsecondary education system.

That said, there is a real danger that significant differences in vital public services will emerge as provinces with relatively high deficits, such as Ontario, cut already stretched services. The combined provincial-local deficit will, at 2.5 per cent of GDP, be much higher in 2013 than the federal deficit of 1.3 per cent of GDP.

To give the federal Conservatives their due, they increased transfers to the provinces following the deep unilateral cuts and ad-hoc changes imposed by the former Liberal government. However, all cash transfers combined amount to a modest 3.1 per cent of GDP, and these will not grow in line with social-spending pressures.

Total payments under the equalization program are capped at the moving average of GDP growth, as will , from 2017-18, payments under the Canada Health Transfer.

Meanwhile, most forecasters expect that provincial spending, especially on health care, will rise at a significantly faster rate than GDP due to rising health-care costs and an ageing population.

A recent IMF survey of Canada reports that the issue of medium- to long-term fiscal sustainability , or our ability to maintain services at current levels of taxation, is entirely a provincial problem.

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The IMF calculates that the provinces will collectively have to raise taxes or cut spending by 2.4 per cent of GDP to achieve long-term fiscal sustainability, whereas the federal government will soon be running surpluses in excess of 1 per cent of GDP.

The federal government argues it is up to the provinces to figure out how to finance the rising cost of health care and other social programs. But we should stick to the principle that all Canadians should have access to "reasonably comparable services at reasonably comparable level of taxation."

Andrew Jackson is the Packer Professor of Social Justice at York University and Senior Policy Adviser to the Broadbent Institute.

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