Chapter 7 : Special report: local government in Canada

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Introduction

Canada has a population of 31.5 million as at October 2002 and an area of 9.97 million square kilometres. Canada is a constitutional monarchy. Canada has a federal system, comprising 10 provinces, three northern territories and about 3700 municipalities.

In 2000, Canada's gross domestic product (GDP) was C$1084 billion or C$34 624 per capita with a GDP growth of 1.5 per cent. Exports were valued at 43.1 per cent of GDP and imports at 38.1 per cent of GDP. Unemployment, as of December 2002, was 7.5 per cent.

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Governance structure

Federal

The Federal Parliament consists of the House of Commons and the Senate. The House of Commons is elected. Senators are appointed on a regional basis by the Governor General on the advice of the Prime Minister. The provincial governments are regarded as a more powerful and effective restraint on the government than the Senate.

Provincial

Provincial legislatures are unicameral. Canada is a highly decentralised federation and provinces enjoy a high level of autonomy and authority.

In 1999-2000, provincial territorial revenues were 22 per cent of GDP compared with 18.2 per cent of GDP for the Federal Government. Provinces have a wide range of revenue sources including sales tax (20.1%), personal income tax (23%), user fees (8.4%), corporate taxes (6.2%), investment income (12%) property taxes (7.4%) and other revenue (13%). Federal grants make up only 10.7 per cent of revenue (Peloquin 2002, p. 8).

In Australia, Federal grants (20%) and goods and services tax (24%) make up 44 per cent of the States' revenue.

The Canadian Federal Government and provinces share income tax. Provinces raise their own taxes and receive three major transfers - the Canadian Health and Social Transfer, and Equalisation. Territories also receive support through the Territorial Formula Financing transfer. There are also several smaller transfers. In 2001-02, provinces and territories received C$46.5 billion from the Federal Government in transfers. The equalisation transfer aims to equalise provincial fiscal imbalance and provide comparable levels of public services at comparable levels of taxation. In 1999-2000, eight of the 10 provinces received equalisation funding based on relative revenue-raising capacity (expenditure need is not taken into account). Ontario, the most populous province, and Alberta, which is rich in petroleum production, do not receive equalisation transfers, but there are significant wealth differences between provinces. In Australia, the Australian Government's financial assistance grants equalise by assessing both revenue-raising capacity and expenditure needs.

The provinces compete with each other and act as a de facto opposition to the Federal Government on many issues. However, local government issues are generally recognised as the domain of the provinces.

Local

The British North America Act 1867, now subsumed within the Constitution Act 1982, created the country of Canada (Tindal & Tindal 1995, p. 5). Subsection 92(8) of the Constitution Act 1867 placed municipalities under provincial jurisdiction and the section also empowered provincial governments to prescribe the sources of municipal revenue. Local governments are therefore 'creatures of the provinces'.

The present constitution, established by the Constitution Act 1982, determines the legislative and fiscal powers of the Federal Government and provinces, but not local government.

Local governments continue to receive their powers and responsibilities from the provincial legislatures and they have limited fiscal (taxing, spending and borrowing) and policy autonomy. Court decisions have consistently reaffirmed their subordinate status.

There are about 3700 local governments (Federation of Canadian Municipalities, personal communication) employing a total of 345 000 people (see Table 7.1). That equates to one employee per 91 of population, which is broadly comparable with Australia, (which has one employee per 133 of population).

The organisation of local government is complex. For instance, in some provinces
there are several tiers of local government: regional governments, county governments
and municipal governments. There are also special service districts in some unincorporated areas. Municipal local governments take various forms including cities, towns and villages. There are also innumerable specific purpose authorities.

In Ontario province alone there are at least 2000 of these bodies, including 'police commissions, health units, conservation authorities, public utilities commissions, parks boards and school boards' (Tindal & Tindal 1995, p. 2). Schools are usually provided locally by school boards, with the 'school trustees' being elected.

Attempts have been made to simplify municipal and provincial responsibilities, through
a process of 'disentanglement'. For example, in New Brunswick, the province provides many of the human services. The structure of local government in New Brunswick seems to be simpler - there are 103 municipalities, including seven cities, 27 towns and 69 villages covering 60 per cent of the population and 20 per cent of the land. This leaves very large areas of land that are unincorporated. In these areas, the province provides municipal services.

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Roles and responsibilities of the three orders of government

Federal

The Federal Parliament has the power 'to make laws for the peace, order and good government of Canada' in areas under its jurisdiction. These include defence, foreign affairs, regulation of trade and commerce, employment insurance and administration of the territories. All powers not specifically conferred on the provinces go to the Federal Government. Where powers are shared, if the laws in categories under shared power conflict, the national law prevails.

Table 7.1 illustrates that, in employment terms, each level of government in Canada has roughly the same number of employees. Table 7.2 shows the roles and responsibilities of the different levels of government in Canada.

Table 7.1 Public sector employment - Canada

Table 7.2 Roles and responsibilities in Canadian Government

Provincial

Provincial governments have responsibility for most of the domestic issues. This includes natural resources, education, most hospitals, social security, labour laws, property and civil rights, and creation of local governments (municipal, metropolitan or regional). Provincial power over municipal government is an express power of the provinces, not a residual power, nor a shared power.

Shared federal-provincial powers

Shared federal-provincial powers include immigration, agriculture, some aspects of natural resources, environment, pensions and some aspects of health care. In 1957, after extensive federal-provincial talks, Parliament passed legislation that established a national health-care system by giving grants to the provinces on the condition that provincial plans meet certain federal standards.

Local government

In Canada, as in Australia, local government has a key representational and regulatory role. Local government in Canada also provides a range of property services including transport and communications, planning and development and recreational and cultural services. But it also has responsibility for significant fire and police services, which is a major difference with Australia. As in Australia, Canadian local government provides a range of commercial services such as such as water and sewerage. However, in provinces such as Quebec, Ontario and Alberta, the range of local government commercial services is broader and can include electricity, phone and gas. The range and depth of local government services varies markedly by province. In New Brunswick, for example, people services, such as education, health, justice and social welfare, are provincial government responsibilities, while property services, such as policing, fire protection, recreation, land use planning, water and waste-water, local roads and recreational facilities, are municipal responsibilities.

In Australia, the range of services provided by local government in each State is fairly uniform, with the major exception being the water and sewerage services that are provided by local government in Queensland, regional New South Wales and Tasmania but by State governments elsewhere.

Local government funding arrangements

In both Canada (83%) and Australia (84%), local governments raise the majority of their revenue from their own sources. In each country, local government has a narrow tax base built mainly on property and related taxes, user fees and sales of goods and services and grants.

In Canada, local government accounts for about C$47 billion (10.6%) of government revenue and for C$48 billion (11.3%) of government expenditure. In 2000-01, about 17 per cent of its revenue was from tax transfers, with the provinces providing 16.6 per cent of the revenue through tax transfers and the Federal Government contributing about 0.4 per cent. In Canada, the high level of fiscal autonomy of the provinces enables them to directly finance local government. Most provinces apply equalisation principles using both revenue and expenditure needs in distributing money to local government, but it appears to be less systematic than in Australia (Peloquin 2002, p. 32).

By comparison, in financial terms, local government in Australia is much smaller. In Australia, in 2000-01 local government accounted for about A$17 billion (6.6%) of government revenue and for about $16 billion (6.3%) of government expenditure. This is about 2 per cent of GDP. Australian local government receives about 16 per cent of its revenue from tax transfers, with the Federal Government and States each providing about half of this revenue.

Table 7.3 shows that, in the four years to 2001, Canadian local government revenue increased by 18.2 per cent. Own-source revenue grew by 23.6 per cent, while sales of goods and services revenue increased by 27.4 per cent. By contrast, provincial government transfers grew by less than 1 per cent and federal transfers almost halved.

Table 7.3 Revenue sources, Canada, 1997-2001 (C$'000)

Canadian local governments must maintain separate current and capital accounts and their budget for current expenses must not be in deficit (Graham et al. 1998, p. 221). Thus new local revenue streams must be found to fund new recurrent expenses. This protects provincial governments from exposure to council debt. Local governments have responded by increasing rates and user charges. Urban local governments have sought to apply user charges to new areas such as water metering and tip fees and 'collection of garbage, various licensing and inspection services, and even for police and fire services when attending traffic accidents in which non-residents of the municipality are involved' (Graham et al. 1998, p. 217).

In Canada and Australia, local governments deliver property services. But in Canada property services includes police and fire services.

In Canada, protection of property and persons accounts for 15.2 per cent of local government expenditure whereas in Australia, these account for just 2 per cent of local government expenditure. Transport and communications (mainly local roads) is the dominant role of Australian local governments, accounting for 28 per cent of local government expenditure in 2001-02: in Canada roads account for 21.4 per cent of local government expenditure (see Table 7.4).

Table 7.4 Expenditure, 1997-2001, Canada (C$'000)

Canadian local government revenue increased by 18.2 per cent over the four years to 2001, while expenditure increased by 20.1 per cent. Social services expenditure grew by 42.9 per cent and health expenditures by 57.3 per cent. Housing expenditure almost trebled. The growth in these expenditures appears to be unsustainable. Overall local government finances slipped into deficit in 2000-01.

The high level of indebtedness of all levels of governments in Canada is a source of immense stress for Canadian local government and has a profound effect on intergovernmental relations and the durability of intergovernmental agreements (see below). The Canadian Federal Government had net debt of $574 billion in 1999-2000 (almost 60% of GDP) and the provinces had net debt of $256 billion (27% of GDP). In 1995-96, the Federal Government spent 36 per cent of its revenue on debt charges. By 1999-2000 debt service charges still consumed more than a quarter of all federal revenues. For provincial governments in 1999-2000, debt service accounted for 12 per cent of expenditure (Department of Finance 2000, pp. 18-19). For Canadian local government, debt repayment accounted for about 5 per cent of expenditure. Some provinces were deep in debt while others were debt free. Among the provinces, Quebec's local governments had the highest net debt - $12.7 billion at 31 December 1999, down 16 per cent from its 1997 peak (Statistics Canada's Financial Management System).

Debt is less of an issue in the Australian federation. Australian Government general-purpose revenues are forecast at $210 billion in 2003-04; net debt is $29.8 billion and interest paid is $4.2 billion or just 2 per cent of revenue (2003-04 Federal Budget paper No. 1 Statement no. 9, Tables 1 and 2 at www.budget.gov.au/2003-04/bp1/html/bst9.htm). Australian State general government net debt is expected to be 0.6 per cent of GDP in 2002-03 and State non-financial corporation net debt is expected to be just 4.6 per cent of GDP in 2002-03 (2003-04 Federal Budget paper No. 3 at www.budget.gov.au/2003-04/bp3/html/chapter2.htm). Australian local governments have no net debt and in fact have had a net worth of $1.7 billion at 30 June 2002 (see Chapter 1 of this report).

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Changing roles and responsibilities

Paul Hobson observed that:

The principal responsibilities of local governments include the provision of municipal services such as police, roads, by-law enforcement, parks and recreation, street lighting, garbage collection, water and sewer, public transit, and to varying degrees, public health and welfare. In addition, local governments are responsible, again to varying degrees...for such things as public housing and municipal airports...In many cases, however, the role of local government is more one of decentralised administration of a provincial area of jurisdiction than it is one of autonomous decision making (1991, pp. 216 & 238).

In Canada, each level of government has taken steps to reduce its level of debt. During the 1980s, federal cost cutting in areas like urban policy and programs, health care and education affected the provinces. They in turn shifted some of the costs to the municipalities or they outsourced services to the private sector or voluntary sector. According to the Policy Statement on the Joint Federation of Canadian Municipalities/Canadian Association of Municipal Administrators Task Force on the Future role of Municipal Government (FCM/CAMA 2002, p. 2), there has been 'widespread acceleration of federal, provincial and territorial delegation of duties and responsibilities to municipal governments (for example, airports, ports, harbours, policing, health, welfare, highways, bridges, economic development, public transportation, affordable housing, and environmental protection)'. The task force says this has 'occurred without sufficient consultation and without an appropriate expansion of municipal government powers, resources and autonomy' (p. 2). According to the Federation of Canadian Municipalities, many municipal governments are now 'teetering on the brink of fiscal unsustainability' (Peloquin 2002, p. 30).

The concerns of Canadian local government appear similar to those of Australian local government. Canadian local government's role has expanded in response to local needs and also in response to 'downloading' (the Canadian term for cost-shifting). While citizens expect that councils should act as though they constitute a level of government, the Canadian constitution does not recognise municipal governments as a level of government. Many municipal governments consider they do not have the autonomy, powers or resources required to meet local needs or expectations. Canadian municipalities see some of their major concerns as being:

• the need for constitutional recognition
• obtaining a more reliable funding base, for example, through more revenue sharing, and allowing municipalities to set their own taxes by accessing fuel excise, personal income tax and the GST
• improving consultation arrangements with the Federal Government
• upgrading infrastructure, such as improving urban transportation, extending affordable housing programs and improving water supply. Canadian local governments estimate their cumulative infrastructure shortfall at C$44 billion and they are seeking direct federal infrastructure grants (Peloquin 2002, p. 31).

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Constitutional recognition of municipalities

The growth of cities has resulted in many municipalities, such as Montreal, Vancouver and Toronto, having greater populations than many of the provinces. Likewise, in the Australian context, councils such as Brisbane City (population 882 259), Gold Coast (405 392) and Blacktown (260 332) have populations comparable with or greater than the ACT (322 638) and Tasmania (473 257). This strength in numbers fuelled ambitions in Canada for more autonomy and flexibility in decision making.

At the same time, the big municipalities have taken on a much broader portfolio of responsibilities than mere infrastructure services.

In the late 1970s and early 1980s Canadian municipalities sought constitutional recognition. They wanted their law making, and fiscal and institutional autonomy protected. Specifically, they wanted the 'power to improve real property, licenses, amusements, and rental taxes; and, subject to appropriate provincialÃmunicipal tax sharing arrangements, income tax.' They also wanted the power to provide 'housing, job opportunity programs, fire protection, education, public health, social welfare, air quality, water services, sewage service and treatment, policing, environmental protection and recreation' (Young 1991, pp. 13-14). It is clear from this list that local government could assume many provincial tasks and that winning the provinces approval for such changes could prove difficult.

In the 1970s, leading up to the enactment of the Constitution Act 1982, there were many opportunities for local government to press its case for constitutional recognition. The main reasons Canadian local government sought constitutional recognition were:

• to establish stronger revenue-sharing agreements between the three levels of government so municipalities could match growing expenditure needs with revenue sources that keep pace with economic growth. Property taxes were seen as inadequate to fulfil this need
• to establish a tripartite division of powers between governments that would prevent the delegation of functions without resources
• to entrench consultation and coordination mechanisms on issues of joint concern.

In October 1991, in a background paper called Municipalities, the Constitution, and the Canadian Federal System, Canada's Library of Parliament discussed the constitutional status of Canadian local government. The paper noted that:

The Constitution Act 1867, 124 years ago, established the parameters of the federal and provincial relationships with municipalities. Section 92 of the Act sets out the exclusive powers of provincial legislatures in 16 areas with section 92(8) giving the legislature of each province exclusive responsibilities for making laws relating to that province's municipal institutions. Of the other sections of the Constitution Act 1867 with implications for municipalities section 92(2) grants the provinces the power to impose direct taxes to carry out provincial responsibilities (Young 1991, p. 3).

The paper also itemised some of the motives for and threats to constitutional recognition of local government:

The provinces will jealously guard the constitutional arrangements that give them exclusive control over their municipalities...

The municipalities' quest for constitutional recognition has been largely motivated by their search for practical ways and means to meet increasing demands upon their fiscal resources. They are not inherently interested in constitutional recognition (unlike aboriginal people) but see it as one means to solve their financial problems...

As a result of their lack of focus on constitutional issues, the municipalities have never been able to formulate a comprehensive and specific set of constitutional proposals...

Discussions have not even explored the question of whether constitutional provisions for municipalities might add another dimension of inflexibility to the Canadian federal system.

Until June 1991, the Federation of Canadian Municipalities (FCM), the national lobby organisation, had not become involved in current constitutional discussions...

One case for involving municipalities in constitutional discussions is based on the argument that their exclusion ignores the fact that the vast majority of Canadians live in cities and that the problems of Canada's large cites are no longer merely local or municipal (Young 1991, pp. 1-2).

While a few cities are recognised separately in provincial legislation, most municipalities rely on a provincial municipal Act for their powers and responsibilities. Provincial departments exercise control through laws, regulations, policy statements and guidelines. Municipal by-laws are subject to appeal and approval by a provincial board. For example, the Ontario Municipal Board or the Alberta Local Authorities Board oversee aspects of municipal finance or resolve disputes about municipal planning, municipal assessment and municipal boundaries. Councils are also constrained in their actions by the court's narrow interpretation of the role of local governments.

Canadian municipalities also wanted to strengthen relations with the Federal Government. A wide range of federal policies, in areas such as transport, immigration and industry, have an impact on local communities. Likewise, local decisions on environment and urban planning affect federal interests. While there were ad hoc federal-local dealings on these issues, provincial governments resisted any ongoing and formal relationships between the Federal and local government, particularly those involving establishment of a federal department responsible for municipal affairs, federal-local intergovernmental agreements or any direct funding of local government. It is likely that the provinces were sceptical that constitutional recognition might cement the power and authority of the municipalities at the provinces' expense and might see municipal governments supplanting provincial services, putting at risk federal funding of provincial functions. With the exception of federal grants to municipalities in lieu of property taxes on federal buildings, most federal funding was funnelled via the provinces.

According to Young (1991), in 1971, the Federal Government established a Ministry of State for Urban Affairs to develop urban policies and integrate them with other federal initiatives and to improve intergovernmental relations. A lack of funding and a lack of authority hampered the Ministry. It convened three tri-level meetings on intergovernmental finance, but the provinces were cautious about an alliance between local government and the Federal Government.

In 1976, the provinces boycotted the third meeting of a taskforce examining all levels of public finance after the taskforce reported that the system of public finances prevented Canadian municipalities from meeting their responsibilities. At the time, the Canadian Federation of Mayors of Municipalities described their subordination to the provinces as 'puppets on a shoestring'.

In the face of provincial opposition, the fight to gain constitutional recognition for municipalities was unsuccessful and, with the enactment of the Constitution Act 1982, the issue lapsed. At the same time, the municipalities were making plain their principal concern was to gain access to more adequate financial resources, particularly income tax.

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Financial concerns

While constitutional recognition would be welcome, it is financial constraints that affect Canadian local government most. Three revenue sources provide more than 90 per cent of local government revenue - property taxes (52%), user charges (23%) and intergovernmental transfers (17%). The main revenue source - property tax - is not adequate to fund the services local communities need and demand. Provincial grants tend to be short term and reflect provincial priorities. User charges have helped to bridge the gap, but even so Canadian local government remains under fiscal pressure. Professor Melville L McMillan (2002) suggests that a local personal income tax and the sharing of fuel taxes and vehicle license fees have particular merit as additional sources of revenue for local government. In Western Australia, the five-year State Road Funds to Local Government Agreement 2000-01 provides 25 per cent of the State's road-related revenue (for example, vehicle registration charges and fuel franchise fees) to councils for local roads.

There is ongoing debate in Canada about the purposes for which property taxes should be used. There is a some consensus that property taxes should be used to fund infrastructure and property protection services, such as roads, water and sewerage, waste disposal, footpaths, street lighting, police and fire services. There does appear to be a role for local government in police and fire services. According to Thomas (1997, p. 70) community policing provides an avenue for communities to restore public safety by providing local intelligence. There is also a trend towards private policing, in the form of gated residential communities.

There is some reluctance in the Canadian local communities to use property taxes to fund social services, for example, libraries, museums, social assistance and better housing for low-income earners. In the 1970s, despite the availability of federal and provincial subsidies, some municipal governments chose not to participate in providing welfare housing because of the high ongoing costs of providing associated local services and because of resident's opposition to welfare housing. This appears to have fostered a trend towards big income and wealth gaps between neighbourhoods. Ontario is the only province ever to have required all municipalities to include 'affordable' housing in new residential developments as it did in 1989. The policy was rescinded in 1995. Social housing appears to be a particularly vexed area of intergovernmental policy in Canada.

Cost shifting and simplifying the roles of government

Driven partly by the need to cut government debt, the early 1990s saw an intensification of the trend towards federal and provincial 'downloading' of unfunded mandates to local government. There were also attempts to redefine roles and responsibilities between levels of government (known in Canada as 'disentanglement'). Faced with a downturn in the economy in the early 1990s, the cost for many municipalities of contributing to income support was becoming unmanageable. The resulting fiscal squeeze reignited the desire of the municipalities for constitutional recognition.

The Federal government's constitutional reform proposals outlined in Shaping Canada's Future, would provide an opening for the municipalities. However, this time the municipalities took a more cautious approach. They sought an agreed position with their provinces on the constitutional issue, but left open the option that provincial legislation could instead give municipalities more explicit and permissive powers and more clarity in roles and revenues between provinces and municipalities. The attempts at constitutional recognition faltered but there was progress in some provinces on the issue of provincial controls and on revenues. For example, the Alberta Municipal Government Act 1994 identified the broad roles of municipalities, consolidated the legislation governing them into the Act, replaced three local government boards with one Municipal Government Board, eliminated regional planning commissions, improved the municipal revenue base and limited intervention in municipal affairs. These fiscal reforms gave municipalities 'greater autonomy to establish user fees and...subject to provincial approval, Alberta municipalities can now levy entertainment, bicycle sales, and gasoline taxes, just to name a few'. Many other provinces followed a reform process but the outcomes were different for each province. The disentanglement reforms instituted by the province of Ontario in 1997 sparked a renewed attempt to shift extra responsibility for costly social services to the municipalities. For more details on downloading and disentanglement individual provinces see Graham et al. 1998, pp. 181-4.

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Infrastructure

Infrastructure financing is one area where federal, provincial and local government relations have strengthened. The Federation of Canadian Municipalities' most recent achievement was lobbying to establish the Canada Infrastructure Works program.

In 1992, the Federation of Canadian Municipalities estimated that the cost of repairing local infrastructure was around $20 billion. More recent estimates put Canadian municipalities' cumulative infrastructure shortfall at C$44 billion (Peloquin 2002, p. 31). Canada's 4000 municipal water treatment facilities and 3000 municipal wastewater systems urgently needed expansion, upgrade or repair. In 1993, the Federal Government signed agreements with all 10 provinces to implement an infrastructure program costing C$6 billion (C$2 billion of which was federal money). Sixty per cent of the funds were spent on water, sewerage and transportation projects. In 1997, the Federal Government provided an additional C$600 million.

On 5 February 2002, the Federal Government established a C$2 billion Canada Strategic Infrastructure Fund to fund major projects (for example, highways, rail and local transport systems, sewage and water treatment works and tourism and urban development initiatives). In 2003, an additional $3 billion was announced in the federal budget. The pre-existing Infrastructure Canada Program is expected to focus on smaller-scale projects. Local government welcomed the new program, but wanted a permanent program to bridge the 'severe infrastructure gap'.

Review/evaluations

There have been many reviews of the provincialÐmunicipal relationship, particularly on the issues of finances and disentanglement. Examples include:

• The Byrne Commission in New Brunswick (1963)
• The Michigan Commission in Manitoba (1964)
• The Report of the Royal Commission on Education, Public Services and Provincial-Municipal Relations in Nova Scotia (1974)
• Task Force on Local Government in Nova Scotia (April 1992)
• Provincial-Municipal Exchange: A Discussion Paper in Nova Scotia (December 1993)
• The Report of the Provincial-Municipal Social Service in Ontario (1990)
• The Report of the Advisory Committee to the Minister of Municipal Affairs on the Provincial-Municipal Financial Relationship in Ontario (1991).

For example, in the 1980s Quebec funded a greater share of school board costs directly and school boards reduced their claims on property taxes. This enabled municipalities to increase property taxes to offset a reduction in provincial transfer payments to the municipalities. In the 1990s the province then transferred school maintenance costs to the school boards, which had to recover the costs from increased property taxes. The province then shifted the costs of public transit, roads and policing to the municipalities.

In 1993, Ontario agreed to follow the lead of most provinces and assume responsibility for social welfare funding from its municipalities and, in exchange, municipalities would assume responsibility for certain provincial highways and pay for rating services provided by the province. However, this agreement collapsed because of last minute cuts to provincial transfer payments to the municipalities.

In 1993 the Nova Scotia Government, in its Provincial-Municipal Exchange: A Discussion Paper, offered to absorb full responsibility for social welfare, justice and health from municipalities in exchange for municipalities accepting responsibility for certain local roads and particular police services and sharing of the costs of provincial property assessment. However, by April 1995 the proposal had stalled because of the high cost to the province of funding social assistance.

Quebec and New Brunswick did implement measures to simplify government. Elsewhere proposals have foundered because of the requirement they be fiscally neutral, because of council fears of cost-shifting and fear that centralisation of services could gradually make local government obsolete. For more details on these intergovernmental agreements see Tindal & Tindal 1995, pp. 203-4.

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Summary observations

Australia and Canada are both federations with many similarities in law and culture. Federal constitutional recognition has eluded local government in Canada just as it has Australia. As a result Canadian local governments are 'creatures of the provinces' just as Australian local governments are 'creatures of the States'.

Canadian local government faces many challenges that are similar to local government in Australia. In particular, the dominant property tax is not adequate to fund local services. In both countries, growth in user charges has helped to a degree to fill the breach. As in Australia, Canadian local government infrastructure is in need of repair and in both countries the Federal Government has provided significant funds to help address the backlog. Here the similarities end.

Canadian local government has significant debt (unlike Australia), which cramps its flexibility. In Canada, there has been little growth in transfers from the federal and provincial governments over the last four years. Apart from the infrastructure program, federal transfers in Canada are small and are mainly in the form of payment in lieu of rates for federal property. Canadian municipalities, particularly the bigger cities, have a significant role in social services and local revenues are insufficient to fund ballooning expenditures on social services, health and housing. The Federation of Canadian Municipalities claims that many municipal governments are 'teetering on the brink of fiscal unsustainability' (Peloquin 2002 p. 30).

In Canada's federation, power is highly decentralised amongst 10 Canadian provincial, three northern territory and 3700 local governments. Canadian provinces have much greater financial strength and autonomy than Australian State governments. Canadian provinces have specific rather than residual powers and they do most of the revenue raising and service delivery. Canadian provinces have specific constitutional authority over local government and over their revenue sources. It is the provinces that provide the main tax transfer to local government. These transfers are highly conditional and fluctuate according to the financial fortunes of individual provinces, many of which have a significant debt burden. According to the Federation of Canadian Municipalities, Canadian municipalities are 'puppets on a shoestring' (Young 1991).

In Australia, the Australian Government raises the bulk of revenue and it is a major source of tax transfers to local government. In its submission to the Senate inquiry into the structure and distributive effects of the Australian taxation system, the Municipal Association of Victoria observed that:

analysis of pre-budget papers released by the Ministerial Council for Commonwealth-State financial relations showed that for 2001:

• the Commonwealth raised 70 per cent of taxes (after distribution of GST revenues to the States) but Commonwealth outlaid only 35 per cent of the national total
• the States raised 27 per cent of taxes but were responsible for 54 per cent of outlays
• local governments raised 3 per cent of taxes and were responsible for 11 per cent of outlays (sic).

The issue of vertical fiscal imbalance is most pronounced for local governments with outlays at 2.4 times the level of tax revenues ... Another clear limitation on local government revenue is that the State legislation controls what is rateable. Legislation at the State level provides for 'non-rateable status' for a range of rate exemptions for privatised infrastructure and services such as water, electricity and transport. This is a clear distortion of the rating system. The challenge is to address the growing incompatibility between a property-based tax system and population driven demand for service provision (pp. 6-7).

For almost 30 years, Australia's local governments have received a large, relatively secure and predictable untied funding source in general purpose Local Government Financial Assistance Grants. Since 1991-92, this has been supplemented by untied local road grants.

In 2003-04 these two grants alone amount to $1500 million or about 9 per cent of council revenue. Since 2000-01 they have been supplemented by $1200 million over five years in Roads to Recovery funding.

Local Government in Canada has sought, but not won, constitutional recognition. The main reason for local government seeking constitutional recognition was the need to secure a more adequate revenue base. The provinces were worried that constitutional recognition of local government could see services transferred to local government at the expense of the provinces and they have reasserted their constitutional powers that give them full control over their local governments. Issues over constitutional recognition and intergovernmental agreements have been divisive for the Federation of Canadian Municipalities and for federal relations with the provinces. The Federation's interest in constitutional recognition for local government has now lapsed and the Federation is seeking better outcomes for local government within the existing constitutional framework.

Negotiations to establish inter-governmental agreements on rationalising roles and responsibilities have been protracted and difficult in many provinces. When in place, agreements have been dogged by dispute over the boundaries of responsibilities established in the agreements. It has been difficult to sustain commitment to the agreements in the face of ad hoc provincial budget cuts.

The Canadian experience suggests that there is a niche role for local government in community policing and fire services. As some property crime is local it is appropriate that some measures to contain it are funded locally through property tax.

In Canada, some provinces (for example, British Columbia) provide property assessments for the whole province, enabling greater comparability between assessments in adjoining municipalities, greater specialisation and establishing a closer link between market value and property taxes.

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