Ch. 2 Flashcards
Hard v. soft budget constraints
Limits: when you don’t set limits, run-away demand will occur. If the budget constraint is hard, this demand is constrained. If the budget constraint is soft, demand for inputs becomes unconstrained (from the point of view of financing). Run-away demand will appear.
Blame: Provinces blame Ottawa for their budgetary issues when they should be more responsible and stop asking for more money.
Moral Hazard
Incentive: In economics, moral hazard occurs when an entity has an incentive to increase its exposure to risk because it does not bear the full costs of that risk.
Economies of Scale as a Public Good
- Duplication of effort: Less duplication of effort at all the different levels of government.
“First Generation Theory”
4 reasons for assigning power to a central government.
Public Choice School
- Competition: Competition among jurisdictions protect citizens from people in government who seek to benefit themselves.
- Horizontal: horizontal competition (i.e., other jurisdictions)
- Vertical: vertical competition (i.e., other levels of gov)
Charles Tiebout (1956)
Public choice school: Residents paying taxes in one jurisdiction can move to another to support a different set of programs and services that they prefer.
Subsidiarity
Decision-making: Subsidiarity is an organizing principle that matters ought to be handled by the smallest, lowest or least centralized competent authority. Political decisions should be taken at a local level if possible, rather than by a central authority.
Method for determining equalization payments
GDP
3 largest intergovernmental transfers
- Health: Canada Health Transfer (CHT) $ 32 B
- Territorial: Territorial Formula Financing (TFF) $20 B.
- Social: Canada Social Transfer (CST) $13 B
70 cents
70 cents of all government payments to individuals are now federal.
1/3
Intergovernmental transfers: roughly 1/3 of dollars raised by fed taxes finances intergovernmental transfers.
equalization program
- Top-up: top-up the revenue of provinces with lower-yielding tax bases.
- Est. 1957
Canada Assistance Plan (CAP)
- Cost-share: Fed gov paid for half of relevant welfare program expenditures in each province.
Bank of Canada
- Monetize debt: Power to monetize debt.
- Credit access: Gave the Federal Gov superior access to credit over provinces.
- Subsidize: good candidate for subsidizer of provincial programs.
Provincial tax collection agreements
- Regain control: Provinces regain control over tax revenues.