Executive Summary

A new approach to Territorial Formula Financing

The Panel considered all the ideas and options presented during its consultation process and developed a comprehensive new approach to TFF. The Panel’s recommendations are:

1. Replace the fixed pool under the New Framework with a formula-driven approach, providing three separate gap-filling grants to the territories.
   
   

   It’s important to have a program that reflects the differences among the territories and fills the gap between their expenditure needs and their own fiscal capacity.

   While a legislated, fixed pool provides greater financial certainty for the federal government and a predictable and growing source of funds for the territories, the downside impact on the territories outweighs the benefits. It’s important to have a program that reflects the differences among the territories and fills the gap between their expenditure needs and their own fiscal capacity.

2. Address concerns with the adequacy of Territorial Formula Financing through an adjustment to the Gross Expenditure Bases for each of the territories to create New Operating Bases.

The Panel recommends that the current Gross Expenditure Bases (GEBs) for the territories be adjusted to reflect the 2005–06 New Framework funding levels for TFF. The Panel also recommends that these adjusted bases be renamed the New Operating Bases.

3. Simplify the TFF formula by measuring revenue capacity using a Representative Tax System (RTS).

Using a Representative Tax System (RTS) approach simplifies the process, eliminates many of the previous adjustment factors, and is preferable to broader macro measures. The contentious tax effort adjustment factor would also be eliminated. It provides reasonable comparability among the territories and also adds administrative simplicity, greater transparency, and sound incentives.

4. Further simplify the measurement of revenue capacity by establishing a Revenue Block that includes seven of the largest own-source revenues for the territories.

Seven tax bases should be used to determine the territories’ fiscal capacity: personal income tax, corporate income tax, payroll tax, gas and diesel, tobacco, and alcohol tax revenues. This not only simplifies the formula, but also covers up to two-thirds of the territories’ own sources of revenues.

5. Improve the incentives for the territories to raise their own revenues by including only 70 percent of territories’ measured revenue capacity in the formula.

Economic development is crucial to the future of the territories. Under this recommendation, the territories would be able to keep more of the financial benefits of economic development without seeing a corresponding drop in TFF funding.

6. Exclude resource revenues from the calculation of revenues included in Territorial Formula Financing.

Unlike the provinces, the authority for developing and managing natural resource developments in the territories lies with the federal government. Since the 1980s, the Government of Canada has been engaged in discussions to devolve this authority to the territories. In principle, the Panel believes that, just like the provinces, the territories should see direct benefits from the development of resources in the territories. Each of the territories is in a different stage of discussions regarding devolution and resource revenue sharing. Yukon is the only territory with an agreement in place. Excluding resource revenues provides the flexibility necessary to accommodate future agreements and support resource development in the territories.

7. Use the New Operating Bases as approximate measures of expenditure needs.

The Panel saw no evidence to suggest that the New Operating Bases, adjusted on an annual basis, aren’t an adequate approximation of expenditure needs in the territories. While several suggestions were made on how to develop comprehensive measures of expenditure needs and costs in the territories, the Panel believes this would be a complex and extensive process and may not result in a better approximation than the recommended New Operating Bases.

8. Undertake a review of significant expenditure needs and higher costs of providing public services in Nunavut.

While the Panel does not recommend an extensive study of expenditure needs in the territories, the case for assessing expenditure needs and higher costs of delivering public services in Nunavut is substantially different. Compared with the rest of Canada, initial evidence points to serious disparities in outcomes for health, education, and social well-being in addition to an urgent need for adequate housing. The Panel’s recommendations for adjusting the funding bases for TFF and providing annual escalators are designed to address the adequacy of TFF for the territories. However, these adjustments are not sufficient to address the challenges and gaps in Nunavut. The Panel recommends that more work be done to assess expenditure needs in Nunavut as a starting point for addressing those needs on an urgent basis. The review should be done jointly by the Government of Nunavut and the Government of Canada. Any additional funding necessary to address Nunavut’s needs should be provided through targeted programs rather than through adjustments to the TFF formula.

9. Adjust the New Operating Bases annually by the relative growth in population in the territories and growth in provincial and local spending (PAGE).

Continuing the current approach with a legislated TFF program, and mechanisms for Parliamentary review, is a better match for Canada’s federation.

Instead of escalating the total amount of TFF by a set percentage of 3.5 percent (as is now the case with the New Framework), the Panel recommends returning to the Population-Adjusted Gross Expenditure (PAGE) escalator that takes into account comparable growth in spending in the provinces as well as relative changes in territorial population compared with the rest of Canada.

10. Improve stability and predictability by using three-year moving averages.

Without a fixed pool, there can be substantial year-over-year changes in TFF entitlements. Using three-year averages smoothes out those changes and provides more stability to both the federal and territorial governments.

11. Address issues of governance, accountability, dispute resolution, and renewal through an expanded and more transparent process.

The Panel does not support the idea of establishing a separate, independent permanent commission to address TFF issues. Continuing the current approach with a legislated TFF program, expanded accountability, annual reporting requirements, and mechanisms for Parliamentary review, is a better match for Canada’s federation. It also should provide a more open process where issues involving both the territories and the federal government can be identified and addressed.

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