Local governments serve a significant role in the daily operations of the Canadians. In Canada, there are several various levels of governments including the federal, provincial, territorial, and local ones. The local governments in the various cities are served with the responsibility of enforcing policies directly associated with the local people. These governments have complete leadership structures consisting of reeves, agencies, boards, and commissions (Swift, et al.). This paper provides an analysis of the financial problems and issues associated with the local governments in Canada and the causes of these problems. It also includes an analysis of the solutions that the Canadian government has in place to solve these problems.
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Finance in the local government
The local government obtains all their power from the provincial administration and is thus the lowest level of government in Canada. Although this has several advantages, it is a major weakness and cause of the financial problems in the local governments because the provincial authorities place strict budget requirements and limitations to the local governments. The provincial government only allows them to borrow on capital accounts thus limiting their finance sources. It is only in the most advanced local governments that more than 50 percent of their finances are derived from independent sources including tax and non-tax revenues (Advisory Commission on Intergovernmental Relations 2). Close to 15 percent of the local governments’ finances are sourced from non-tax methods. The local governments are experiencing significant fiscal pressures resulting from the fiscal restrictions of the governments by the higher authorities. Limitations in fiscal policies have forced the local governments to minimize transfers and hence enhancing a downloading aspect on them. This has created an environment that is unfavorable for revenue generation by the local governments. This is the cause of the financial problems in the local governments (Advisory Commission on Intergovernmental Relations 1).
Causes of financial problems and issues
Apart from the unfavorable revenue generation methods created by the fiscal constraints experienced by the country governments, several other factors are contributing to financial problems in the local governments of Canada (Coleman 11). Some of the problems are associated with the governing officials while others are natural causes. Some of these factors include:
One of the common issues that lead to financial problems in the local governments in major cities is improper management of the available funds. Some local governments have failed auditing and reporting procedures that lead to door management of resources. Coupled with the inability to generate enough revenues to run the local governments, poor management of finances poses a great challenge to the government officials. This normally affects the budget and at times, it leads to bankruptcy of the local governments (Cohen 62).
The population in a given city affects the local government’s financial management. When a city has a declining population, there is a reduction in the tax rates that a major contribution to the revenue of that local government. This implies that the officials will not collect as much revenue as they had anticipated when budgeting for the financial year. One of the major causes of population decline is the shifting of people to other cities where they can access quality services or where the level of criminal activities is low. This shift leads to several other problems including increasing per capital expenses, stunted revenue generation, and the low quality of services offered to the locals (Cohen 63).
Increasing Per Capita Costs
The decline of the population leads to an increased in per capita expenses. Cities with a reduced population will have a low employee-population ratio and an increased expenditure on employees compared to others with an increasing population. Cities will consequently have a minimized tax collection although the quantity or volume of services provided will not reduce. The cities will then have budget demands that do not match their revenues (Cohen 65).
Transformations in the economic structures
The local government’s financial statuses are affected when large-scale production firms or large retail enterprises shift to other areas. This shift of the firms leads to transformations of the economic structures that ultimately affect the local economy. The relocation of large firms leads to a rise in unemployment and a decrease in tax collection by the local governments. After losing these significant revenue sources, the local governments have trouble compensating for the lost revenue leading to advance financial problems (Coleman 14). Cities are compelled to initiate economic developments to retain and attract investors. This reduces the risk of large firms relocating to more developed cities. Another factor that leads to transformations of economic structures is the rise and development of regional shopping set-ups in the city out-scats. This also compels the cities to invest more in the economic development of the cities as failure to do so might result in the shifting of major investments to the emerging centers. If the local government fails to control the trend of the relocation of large firms, then they risk experiencing a reduction of the revenue collected. This is detrimental to the local government’s budgets and can even lead to bankruptcy (Coleman 16).
In extreme cases, natural disasters can cause financial problems to both the federal governments as well as the local governments. In the case of negative externalities like spillovers probably in the awarding of gas tax shares to the local governments, the governments will lose revenues. Natural disasters such as floods can also lead to loss of revenue in case businesses are destroyed or lives are lost. The governments should put in place measures to control the effects of natural disasters to prevent advance loss of revenues (Makarenko et al.).
Solutions to the problems
One of the proposals that the federal government is implementing to curb the financial problems affecting the local governments is to share a percentage of the gas tax with the municipalities. The volume of the shared tax has been increasing every year and on average the share is CAN$2 billion annually. This is expected to have an effect on the infrastructure fund and compensate Goods and Services Tax (GST) the levied by the federal governments from the local governments. The proposal was viable because it was within the objectives of the Kyoto Protocol to reduce the emission of greenhouse gases. This is because the government is using the huge city transportation structures to distribute gases. Some critics of this program argued that the transportation of gas tax finances would not achieve the five cents per liter target until 2010 (Local Government in Canada, MapleLeafWeb). This was however proved not true because the target was achieved within the first year of implementation of the project. Some of the largest cities in the country including Toronto and Ontario were the first to meet this target.
The program design
The major facilitator of the program was infrastructure Canada the top national infrastructure system. The program was involved in researching the most effective policies and structures to balance the tax division. The program also incorporated the private sector and particular regional and local development agencies to ensure that the proposal was appropriately implemented. The infrastructure and the locals’ representatives in the program included four Crown Corporations and the parliamentary representatives. Part of the tax division was given to the municipalities to transportation in a method that ensured that a balance of $2 billion was given in the final year of the expected 5-year span of the proposal (Local Government in Canada, MapleLeafWeb). The government awarded the tax benefit depending on the per capita of the various local governments. The central government used several approaches to allocate the funds fairly among the provinces and regions. Some of the structures that significantly benefited from the tax-share include public transport and the water structure structures and plans (Local Government in Canada, MapleLeafWeb).
The case of Toronto
Toronto is one of the cities facing financial problems. The local government has implemented economic development strategies aimed at enhancing the metropolitan dominance of federal government economies. The idea behind the project is to increase the city’s economy and make the city a significant force in the global market. The city has been able to attract and retain large investments that have facilitated a steady and consistent revenue collection.
Toronto’s financial challenges
The city is currently experiencing financial challenges that are risky to its international objectives. The city is experiencing restricted economic growth while its revenue collection is unable to meet the demand of the country’s largest municipality. The city’s financial problems are enhanced by the shift of more duties to the region. The city has a worn-out infrastructure that requires renovation that dates back to the 1970s. Some of its constituents that require renovation include subway tunnels and the Expressway. The metropolitan is experiencing demanding financial commitments because virtually all of the constituents of the infrastructure require renovation. Due to the significance of income and consumption taxes about the economic structures, federal and local government revenues have increased by more than 30 percent (Reese and Rosenfeld 35).
Causes of financial problems
Apart from the increased financial demands of Toronto, there are other causes behind its financial challenges. Despite the increased financial demands of the City, other structures such as laws and financial programs that affect revenue collection have not been changed to conform to the changing styles. The federal government, for instance, transformed the Employment Insurance program. This was significant to the applications for welfare because, in other cities such as Ontario, the expenses are shared with the local government. This kind of transformation is an additional expense to the municipality. Another issue is that the City’s statistics on the homeless indicated that the failure of the provincial and federal authorities to invest in social housing coupled with the reduction in wellbeing rates are related to the notable raises in homelessness (Reese and Rosenfeld 40). This is a justification of the increased municipal responsibilities to cater for housing and welfare issues. Other issues contributed to Toronto’s financial issues include the complete removal of the top governments including the national government from house provision commitments while leaving the same to the local governments. The national government has also left transportation matters to the local government.
Solutions to these problems
The local government is making efforts to ensure that the city’s assets and the standard of life are maintained. The resources the local government has in possession are however limited and can hardly control the situation. The local government has thus requested the federal government to chip in and provide the necessary tools to control the situation. The federal government thus provided the appropriate revenue sources to the local government to cater to its increased responsibilities (Reese and Rosenfeld 38). The federal government agreed to take its earlier responsibilities of meeting the housing needs of the people and maintaining the transportation systems in the city.
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It is thus clear from the example of Toronto that most of the local governments are experiencing serious financial problems resulting from both natural and artificial causes. The federal government is blamed for some of the financial problems affecting Toronto because of delegating sensitive and weight issues to the local government. The federal government should not have left the housing and transportation issues to the local government because its resources were limited and could not appropriately meet these demands. The local government should deploy strict audit and reporting mechanisms to prevent mismanagement of funds, as this would further strain the city’s resources (Reese and Rosenfeld 40).
The federal government is the core of the financial issues in the entire country. The federal government should always support the local governments in controlling financial issues. The federal government should not leave housing and transportation issues to the local governments because these are too sensitive and demanding for them. The roles of the local governments should be redefined based on individual cases to ensure that each local government serves the responsibilities that it can manage (Reese and Rosenfeld 40). Every local government should be encouraged to implement economic development strategies to ensure that it maintains and attracts investors. Investors are the backbone of the local governments’ revenue collection because they employ the locals. Employed people will pay taxes and contribute to the revenue generated by governments. The local governments should avoid mismanagement of funds because this significantly affects the control of funds. The federal government should lift some restrictions that limit the revenue sources for the local governments.
Various local governments are experiencing significant financial problems in Canada. Some of the problems are arising from the increasing demands of the local government services. Some of the causes of the financial problems that the local governments include unfavorable revenue-generating methods, natural disasters, decreasing populations leading to Increasing Per Capita Costs, and relocation of large investments. Another significant cause of the problems is the mismanagement of funds by those in control. The local governments are thus compelled to maintain a favorable investment environment to attract and retain investors and large firms. The relocation of firms to suitable places leads to loss of revenue due to unemployment and loss of tax collection opportunities (Makarenko et al.). The federal government should always support the local government in financial issues because the local governments are limited in terms of access to resources. Some of the national projects that the federal government has implemented to control financial problems in the local governments have proved viable. The national government should thus invest in research to find out other methods in addition to gas tax divisions to control financial problems in local governments.
Advisory Commission on Intergovernmental Relations. Bankruptcies, Defaults, and other Local Government Financial Emergencies: A Commission Report. Washington, DC: Author, 2005. Print.
Cohen, Noah. “Understanding Municipal Bankruptcy.” Municipal Finance Journal, 62 (1): 62-69.
Coleman, John. Community Conflict. Glencoe, IL: Free Press, 2007. Print.
Local Government in Canada. MapleLeafWeb. 2009. Web.
Makarenko, Jay. Local Government in Canada: Organization & Basic Institutions. 2007. Web
Municipal Government Act”. Office of the Legislative Counsel, Nova Scotia House of Assembly,Crown in right of Nova Scotia. 2006. Web.
Reese, Lyon and Rosenfeld, Rose. The Civic Culture of Local Economic Development. Thousand Oaks, CA: Sage Publications, 2002. Print.
Swift, Nick. Canadian government announces more details of new deal for cities. 2004. Web.