The recent approach to federal-provincial fiscal initiatives is not encouraging, according to a new report from Scotia Economics.

“Our national fiscal architecture needs to be realigned to deal with current economic realities,” says Warren Jestin, chief economist, Bank of Nova Scotia.

Jestin recommends a two-step approach to resolving Ottawa’s increasingly complex financial dealings with its provincial and municipal counterparts.

“Step one would be to redefine the core objectives of federal-provincial fiscal arrangements. Step two would involve rebuilding delivery systems to effectively achieve agreed-to targets. The challenge will be to accommodate the recent spirit of federal-provincial agreements in an updated framework. The end result should be a less expensive, more responsive structure replacing the current top-heavy, multi-jurisdictional mechanism.”

To get the ball rolling, Scotia Economics says Ottawa should greatly broaden the mandate of the independent panel already appointed to assess the allocation of Equalization payments.

Jestin emphasizes, “Two aspects of government policy must not be on the table. There can be no backsliding on the commitment to achieve balanced budgets or to make our tax system more competitive. Both of these obligations have the potential to provide an important source of strategic advantage in the years ahead.”

“Taken together, the configuration of net federal payments – what Ottawa contributes net of what it extracts from each jurisdiction – has been an important factor helping British Columbia, Saskatchewan, Manitoba, Quebec and Atlantic Canada move towards their fiscal objectives,” says Jestin. “On the payment side of the ledger, Ontario and resource-rich Alberta have carried a large share of the funding load for federal transfers.”

Ontario’s recent five-year, $5.75 billion agreement with Ottawa may partially staunch the outflow. Yet to the extent that other provinces negotiate similar agreements with the federal government, Ontario’s net national contribution will remain very high, Scotia Economic says.

“There is an urgent need to simplify the whole gamut of federal/provincial arrangements. While our governments have talked about reform, the process must move to the centre of the public policy agenda,” concludes Jestin.