Julien Doris is a PhD student and a Part-Time Professor in Public Administration at the University of Ottawa. He is affiliated with the Centre on Governance as an early career researcher. His ongoing doctoral thesis explores diversity management practices and tools in ministries and agencies of the federal government. His research interests are governance and management issues in public and cultural organizations.
Since the beginning of the pandemic, the federal government has had to resort largely to its spending power to support the provinces and territories. In opening the first panel of the Conference on Fiscal Federalism, Gilbert Charland, Quebec’s Deputy Minister for Canadian Relations, highlighted two central issues for the future: the anticipated imbalance in health care spending (Conseil de la Fédération, 2021) and the updating of equalization parameters (The Globe and Mail, 2021). While discussing the constitutional elements and historical advancements of fiscal federalism, the following sections will also highlight some short- and longer-term economic issues.
A Legally Framed Spending Power
According to the jurist Peter Oliver, the spending power has historically been defined as a prerogative of Parliament, and not of the Executive (Trudeau, 1969), although in practice this prerogative is used first and foremost by the Government. This spending power also allows the federal government to intervene financially on issues on which Parliament cannot necessarily or directly legislate. This may act as a subterfuge to support the provinces in their own areas of jurisdiction. Although there is no explicit mention of this power in the Constitution Act, 1867, there are sources in Part VII that confirm its legal basis. For example, section 118, amended in 1907 and repealed in 1950, provided for annual payments by Canada to the provinces “for the maintenance of their governments and legislatures” or for “special local purposes”. Section 119 set forth semi-annual payments and advances to New Brunswick for a period of 10 years from the date of Union. Finally, section 36(2) of the Constitution Act, 1982 enshrines equalization in the constitution and states that Parliament and the federal government are responsible for making “own-source equalization payments” to provincial governments for “the provision of public services”.
As of April 9, 2021, according to the calculations by the Ministry of Finance, the fiscal response to Covid-19 has committed almost $624.2 billion. 82.1% of this amount would have been borne by the Federal Government (Tombe, 2021). While the massive and unanticipated nature of these expenses does not appear to pose a long-term threat to the sustainability of the federal government’s finances (Parliamentary Budget Officer, 2020, p. 12), the same does not appear to be true for the provinces. The provinces’ request for increased health transfers in future years will thus have the effect of strengthening the federal spending power.
Equalization, the Keystone of Horizontal Fiscal Federalism
Historian Mary Janigan reminded us in her presentation that the principle of equalization would historically have saved the Canadian federation and would continue to be the cornerstone for sustaining fiscal federalism in the years to come (Béland et al., 2018).
Tax Fairness, the Common Denominator in the History of Confederation?
“Fiscal fairness became possible only because the richer provinces and the poorer provinces recognized that it was in their mutual interest to help each other” (Janigan, 2021). Although equalization is historically recent, the first debates on the concept of interprovincial fiscal equity date back to the early days of confederation. At the time, the wealthy Maritime colonies felt it was to their disadvantage to enter confederation in the face of a highly indebted Dominion (Bedard, 2017). This led to compensatory financial arrangements and special payments that were incorporated into the Constitutional Act of 1867. Twenty years later, under the impetus of Honoré Mercier, the first interprovincial conference was held, which adopted a number of resolutions aimed at defending provincial autonomy and increasing federal subsidies to the provinces, in the absence of Ottawa at the negotiating table (de Montplaisir, 2019, p. 341). It was not until 1906 that Wilfrid Laurier agreed to increase overall subsidies and to grant an additional special payment to British Columbia in response to its increased development expenditures (Université de Sherbrooke, 2021). In the 1920s, Mackenzie King decided to create new subsidies to address the fiscal inequities created by the exodus and population decline in the Maritimes (Forbes, 1983). Later, in 1937, the bankruptcy of Alberta and Saskatchewan prompted the federal government to propose a national adjustment fund modelled on the Australian Commonwealth Grants Commission, developed in 1933 (Struthers, 2020). For Mary Janigan, these successive developments have gradually forged a horizontal fiscal federalism in which interprovincial equity is the golden rule.
The Emergence of Equalization
While the issue was first raised during the Rowell-Sirois Commission in the late 1930s, it was not until 1957 that equalization was legislated before it was finally enshrined in the Constitutional Act of 1982 (Courchene, 2013). The historian explained that this legislation was not only the result of a spillover effect from previously defined programs but was also a ready-made response by the federal government to the findings of the Tremblay Royal Commission, which had, a year earlier, detailed the major imbalances and tensions in the fiscal relationship between Ottawa and the provinces (Durocher and Jean, 1971). The Equalization framework was thus legally created to reduce the differences in tax-raising capacity between provinces and to ensure that all Canadians have similar access to public services.
And Today, New Challenges or a Repeat of Past Compromises?
Recalling the significant difference in fiscal sustainability between the federal government and the provinces, whose debts could be subject to deterioration in the future, economist Trevor Tombe presented in his intervention some thoughts on the governance of fiscal federalism in the decades to come.
Emerging Economic Issues
The University of Calgary economist began his talk by noting that the 2021-2022 federal budget is one of the most expensive and ambitious in Canadian history. The budget not only addresses the short-term fiscal shock of the pandemic, but also the longer-term challenges of an aging population in the eastern provinces (Radio Canada, 2021), predictable and sustainable economic revenues in the western provinces (Government of Alberta, 2021, p. 45), and the inevitable increase in health care spending in all provinces. He also highlighted the problem of the glaring lack of a permanent corrective fiscal mechanism to deal with unforeseen economic shocks, despite an exception in the area of natural disasters.
In the Face of These Fiscal Uncertainties, What Are the Possible Mechanisms?
First, the provinces have made extensive use of the fiscal stabilization program since the beginning of the pandemic. In November 2020, the federal government raised the thresholds, and the extension of the pandemic management seems to make this program particularly attractive to the provinces, to the extent that future reforms cannot be ruled out to allow them to access it more easily and more sustainably (Tombe, 2020). Second, the formula and qualification criteria for equalization will certainly have to be reviewed to ensure fiscal convergence among provinces in the face of future uncertainties. Estimates of the sustainability of the federal debt in relation to provincial debts would therefore open the door to additional arrangements between levels of government (Finances of the Nation, 2021). To anticipate the increase in provincial debts, an increase in transfers’ amount could also constitute another avenue of adjustment that would be added to the previous ones and that is already being demanded by the provinces in the context of health transfers. This share of total transfers could increase from 3.5% to 5.5% of the national GDP in 2021 (Finances of the Nation, 2021).
In sum, this is not the first time fiscal federalism has been tested, but the management of the ongoing pandemic, as well as the economic and demographic challenges ahead, will be no less critical. As in past episodes, the art of compromise will rest on a delicate balance between the principle of interprovincial fiscal equity, the framing of the federal government’s spending power, and the provinces’ search for autonomy (Noël, 2021). Could the recent budget decisions to establish a pan-Canadian childcare program with full compensation from Quebec (Department of Finance, 2021) be a pathway to future compromises?
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Special Series: Fiscal Federalism in Canada
This article is part of a special series of reflections on contemporary Canadian fiscal federalism. The pieces in this series are inspired by the discussion and debate at the April 2021 Fiscal Federalism in Canada Conference, organized the University of Ottawa Centre on Governance in partnership with the Forum of Federations.