Module 1 Flashcards
What is a fiscal imbalance?
Fiscal imbalance in a federation can be characterized into two types: vertical fiscal imbalance and horizontal fiscal imbalance.
Vertical fiscal imbalance exists when the revenue raising authority of one level of government (for example, federal versus provincial) is too low relative to its responsibility for service delivery. In Canada, vertical fiscal imbalance is address through programs such as the Canada Health transfer and the Canada Social transfer.
Horizontal fiscal imbalance occurs when regions of the federation differ in their ability to deliver services at a comparable level of taxation and other revenue-raising activities. Horizontal fiscal imbalance is addressed through Equalization and Territorial Formula Financing.
Exam Questions
9 Unique characteristics of government and its reporting implications
- Government’s goal is to provide services and redistribute resources, not make a profit/ Net cost of services and affordability of services should be reported. & The net economic resources (net assets) available to use in providing future services should be reported.
- Most government tangible capital assets are different in nature than those held by a business. Government tangible capital assets represent service capability, rather than future cash inflows. /Financial assets and non-financial assets should be reported separately on the statement of financial position. /The net financial resources/net debt of the government and the net economic resources (accumulated surplus/deficit) measures should both be reported on the statement of financial position as they represent different perspectives of the government’s financial position.
- Government capital spending may not focus on maximizing financial return because government objectives are broader. ex) the process of building the capital such as providing employment or regional development / capital spending and its effect on net debt must be highlighted in the F/S
- The principal source of revenue for governments is taxation.
Ability to tax = ability to spend / Net debt needs to be reported because it represents the government’s future revenue requirements based on past transactions and events to be met from future taxes and is an indication of additional spending. - Senior governments hold assets acquired in right of the Crown.
Practical issues regarding the measurement and valuation of these assets prevent their financial statement recognition but disclosure of the existence of these assets is key to understanding the government’s total economic resources. - Governments operate in a non-competitive environment. Net cost of services and affordability of services are the financial measures required. EX) Welfare and defence
- A government’s budget portrays public policy, establishes estimates of revenue, expense, expenditure and financing requirements and is an important part of the government accountability cycle. A comparison of actual-to-budget amounts demonstrates public accountability for government finances.
- Some governments have debt capacities unparalleled by most other organizations in Canada. Some governments’ only limits on their borrowing are the ability of their tax base to bear the debt burden and the financial community’s assessment of that ability. Debt and net debt are crucial to highlight in government financial statements.
- Governments are held to a higher standard of accountability than a business or a non-for-profit organization.
How does the public sector, and more specifically governments, differ from the private sector?
Governments differ from the private sector in the following ways:
- Governments’ goals are to provide social services and redistribute resources - or more precisely, to improve social welfare, not to make a profit. Operating and capital spending reflect these broader objectives.
- Governments’ tangible capital assets are different in nature than those held by the private sector, and they represent future service capability rather than future cash flows.
- Most of government’s revenues are from taxation
- Governments hold Crown assets with market values that are difficult or impossible to determine.
Identify nine unique characteristics of government and their reporting implications.
- Goal- The government’s goal is to provide services to the public and to redistribute the economic resources, not to make a profit.
- Tangible capital assets- Most government tangible capital assets are different in nature than those held by a business. Government tangible capital assets are used to offer service provision, not to generate cash inflows.
- Objectives of the government- Government capital spending may not focus on maximizing financial return because government objectives are broader.
- Taxation- The main source of revenue for governments is taxation.
- Crown assets- Senior governments hold assets acquired in right of the Crown. Its value is difficult or impossible to determine and estimate.
- Competition- Governments operate in a non-competitive environment
- Budget- A government’s budget portrays public policy; establishes estimates of revenue, expense, expenditure, and financing requirements; and is an important part of the government accountability cycle.
- Debt capacities - Some governments have debt capacities unparalleled by most other organizations in Canada.
- Accountability- Governments are held to a higher standard of accountability than a business or a non-for-profit organization.
Can governments increase efficiency by privatizing or contracting out their activities?
While privatization or contracting out may result in lower costs for activities, this is not always the case. The advisability of privatizing or contracting out activities depends on the nature of the good or service to be provided and the available technology. 제공될 재화와 용역의 성질과 과 필요한 기술 수준에 달려 있다.
- Outputs are easily contractible and contract specifications easily enforced.
- There is a large number of available producers.
- the process for the activity or goods being produced does not create accountability concerns.
- Privatization or contracting out does not unduly increase risks.
- the activities or goods being produced do not require a large capital investment specific to the activity or good being produced.
- Privatization or contracting out could result in distributional consequences. The distributional consequences should be taken into account in any analysis that considers such options.
Are medical premiums (fixed monthly rates) an efficient tax?
In theory, fixed monthly medical premiums have no impact on behaviour as they do not encourage or discourage citizens from consuming health care services. In that sense, medical premiums are an efficient tax, as are all head taxes. However, it is possible that people who are in arrears with their medical payments will not seek necessary medical assistance, which may result in worse health outcomes later.
While head taxes are efficient, they are also regressive. Income-testing medical premiums reduces and may eliminate regressivity, but the tax is then no longer a head tax, reducing its efficiency. It is more like an income tax.
Do medical premiums encourage any rationing on the part of the consumer?
If medical-care rationing is an issue, then user fees are more efficient because they discourage frivolous use. On the other hand, user fees also decrease equity by discouraging legitimate use by those who cannot afford the fees. If those with unpaid bills are discouraged from using the system, but those with unpaid bills could also be the neediest.
Are fixed monthly medical premium rates administratively efficient to administer (compared to the most obvious alternative)?
Collecting, administering, and income testing medical premiums is a time-and resource-intensive task. Factoring the needed revenue into the income structure is simpler and does not require a separate administrative unit. The costs of premium collection include those faced by the government collection agency, those faced by employers who pay them on behalf of their employees, and the time lost by individuals in filling out income-testing forms and/or making payments.
Why do some governments choose this fixed monthly rates of medical premiums?
Governments may choose premiums or fees due to election promises not to raise taxes. (premiums instead of taxes) Voters may be more accepting of the premiums if they perceive that the way in which revenue is raised affects how it is allocated - that is, if general revenue is less likely to go to health care than medical premiums.
Politicians and journalists frequently capitalize on such perceptions. However, the government has the authority to allocate general revenues to health programs, and a medical premiums collection system distinct from the income tax system is therefore not necessary to support health programs.
B.C. is the only Canadian province that collects health premiums separately from its tax system for persons enrolled in the provincial health plan. The premiums are income tested so that low-income individuals are exempt from paying premiums.
Briefly discuss the argument that using the private sector to finance the capital costs of infrastructure used to deliver government-funded services such as residential care is beneficial.
Governments with good bond ratings have no difficulties raising funds to finance capital investments and face low interest rates. Therefore, the argument that it is beneficial to use the private sector to finance residential care facilities is weak for governments with good bond ratings. Residential care facilities are assets with future service benefits and if residential care is fully funded by the government, then government will fund capital costs either through government borrowing or through a larger fee payment paid to a contractor that finances the facilities. On the other hand, governments with poor bond ratings would likely benefit from outsourcing capital investments into residential care facilities because they face higher interest rates or borrowing constraints. Outsourcing capital financing also could be beneficial if the outsourcing shifts some of the risks associated with the ownership of infrastructure (carrying costs) to the private sector.
Discuss the use of public-private-partnerships for the delivery of residential care services to seniors. In your answer provide economic arguments for when contracting out is more likely to be successful.
Contracting out residential case services is more likely to be beneficial if: 1) there is sufficient competition in the market; 2) service quality is easily contractible; and 3) required capital investments are moderate and could relatively easily be transferred to other uses. Residential care requires specialized skills, although it would be reasonable to expect competition for this market given that it does not exhibit the characteristics of a natural monopoly (we should expect fairly constants returns to scale in this industry, not the increasing returns to scale one would expect for utilities and other high capital investment industries). The required capital investment is significant, but given population demographics, residential care organization experiencing business failure could easily sell their facilities to another business for the same purpose, so that asset specificity should not be an issue. The most important concern is regarding the delivery of service quality.
It is likely to be quite difficult to contract and monitor service quality, and to contractually enforce service quality standards. Along the same lines, it will be more difficult to ensure that the service provider is accountable to the government. This could give rise to important political issues and potential legal costs if service providers provide substandard service quality that leads to resident abuse, injuries, illness or premature death.
Briefly describe two measures (responsibilities, duties, or other measures) that the Government of Canada’s Values and Ethics Code for the Public Service Code imposes on public servants to prevent conflict of interest situations.
According to the Government of Canada’s Values and Ethics Code for the Public Service:
Public servants have the following overall responsibilities:
* In carrying out their official duties, public servants should arrange its private affairs in a manner that will prevent real, apparent, or potential conflicts of interest from arising,
* If a conflict arise between the private interests and the official duties of a public servant, the conflict should be resolved in favour of the public interest.
Public servants also have the following specific duties:
- They should not have private interests, other than those permitted pursuant to these measures, that would be affected particularly by government actions in which they participate.
- They should not solicit or accept transfers of economic benefit
- They should not step out of their official roles to assist private entities or persons in their dealings with the government where this would result in preferential treatment to the entities or persons.
- They should not knowingly take advantage of, or benefit from, information that is obtained in the course of their official duties and that is not generally available to the public.
- They should not directly or indirectly use, or allow the use of, government property of any kind, including property leased to the government, for anything other than officially approved activities.
There will be instances where other measures will be necessary. These include the following:
- Avoiding or withdrawing from activities or situations that would place the public servant in real, potential or apparent conflict of interest with his official duties and
- Having an asset sold at arm’s length or placed in a blind trust where continued ownership would constitute a real, apparent, or potential conflict of interest with the public servant’s official duties.
Discuss whether vertical fiscal imbalance is on the rise in Canada, including ways in which provincial governments may address vertical fiscal imbalance challenges other than reliance on transfer programs.
Canadian provinces are responsible for health, education, and social services. The Canada Health Transfer and the Canada Social Transfer are transfers from the federal government to provinces and territories to assist in financing these activities. While health care costs have been increasing and are expected to increase further with an aging population, transfer payments from the federal government to the provinces and territories were reduced in the 1990s so that the federal government could meet its goals of balancing the budget. If provinces and territories are finding that transfers from the federal government are too low, there is nothing preventing them from increasing their own taxes. One concern with this solution is that the federal transfers allow provinces to maintain similar quality standards in these programs. If federal transfers were to become a smaller proportion of total program costs, horizontal fiscal imbalance could become more pronounced and program standards may begin to vary sharply among the federation’s jurisdictions.
Discuss whether vertical fiscal imbalance is on the rise in Canada, including ways in which local governments may address vertical fiscal imbalance challenges other than reliance on transfer programs.
Canadian local governments are responsible for a large part of the nation’s infrastructure, especially water and sewer systems. Water and sewer systems are reaching the end of their useful life in many parts of the nation. Local governments do not have the same ability as senior governments to run deficits to finance their investments and usually need to seek electoral support to finance major investments. The Federation of Canadian Municipalities has been advocating for more local government funding from senior governments for many years so that the issue of the aging infrastructure could be addressed. While local governments are limited in their ability to borrow, infrastructure projects could be undertaken through public-private partnerships, with the private partner undertaking the financing of infrastructure projects and the government increasing taxes.
However, this solution is not always feasible, may not be in the best interest of taxpayers, and local governments could be left with the debt burden should a project fail. Local governments can also increase taxes for infrastructure projects but may face powerful resistance from local taxpayers. Because of their shorter term of office and the complexity and magnitude of the infrastructure for which the local government is responsible, they have less latitude in addressing vertical fiscal imbalance than provincial governments do and infrastructure may be left to deteriorate to unacceptable levels.
State theoretical and historical justifications for government existence.
Market and macro-economic failures and others due to the inherited and market induced differences and individual access to resources.
Market failures in the private sectors incurred recently through global financial crisis. Economic performance can be skewed because of macro economic/ market failure
