Boadway Robin Paper 1 for Stablizaing Prov Revenues

There are a number of policy instruments available to the federal government to mitigate the effect of provincial fiscal shocks. [...] The most intractable one is the inability of the federal government to commit to a hard provincial budget constraint. [...] To the extent that provinces perceive that the federal government will come to their aid in the event that they put themselves in a financially difficult situation, the provinces will be less cautious in taking risky fiscal positions. [...] The federal government will understandably come to the aid of over-extended provinces ex post, given the interests the federal government has in the provinces’ programs and in avoiding capital market turmoil. [...] The federal government cannot commit to maintaining vertical fiscal balance: they may pass on the effects of fiscal shocks they face to the provinces.