Reforming the Federal Fiscal Stabilization Program

Abstract

The federal Fiscal Stabilization Program is meant to provide financial support for provinces that suffer extraordinary declines in revenues. However, the program only provided $248 million payment to Alberta in 2015-16 in the face of a $8.8 billion decline in revenues, and no support for Saskatchewan and Newfoundland and Labrador that have also suffered significant revenue reductions in recent years. We discuss the rationale for a Fiscal Stabilization Program, and three principles that should be adopted in re-designing it: · Payments should be based on declines in a province’s own-source revenues from an average of its past years’ own-source revenues · The program should preserve incentives for provinces to maintain prudent fiscal policies by only covering losses that exceed some percentage of “normal” own-source revenues (a deductible) and then only covering a fraction of eligible losses (co-insurance). · Formulas determining payments should be simple and transparent with no adjustment for changes in provincial tax policies that may affect own-source revenues. We propose some alternative formulas, consistent with these principles, for calculating the fiscal insurance payments and show the support levels that they would have provided to the provinces since the mid-1980s.