Managing the Federation: A Mixed Bag

Back to articles
November 7, 2017

Managing the Federation: A Mixed Bag

Written by Geoff Norquay for Policy Magazine. Click here to read the original.

Former Prime Minister Brian Mulroney likes to say that the two most important files on a PM’s desk are Canada-U.S. and federal-provincial relations. Stephen Harper came into office in 2006 with a traditional view of managing the federation in which Ottawa and the provinces stayed out of each other’s backyards. As veteran political adviser Geoff Norquay writes, Justin Trudeau’s style of fed-prov management has been both more and less of a departure than some might have imagined.

Given the nature of Canada’s federal state and of our Constitution, leading the federation will always be one of the top responsibilities of the prime minister. Sections 91 and 92 of the British North America Act famously lay out the responsibilities of the two levels of government within three groupings—exclusively federal, exclusively provincial and joint between the two levels.

Elsewhere, the Constitution assigns revenues to the two levels, and, of course, a constitution written 150 years ago could not have envisioned the growth and cost of national social programs that are necessary in the modern state. Neither could its drafters have imagined today’s complexities of energy exploitation and transportation or the challenges of climate change that are commonplace in 2017.

Because federal-provincial-territorial (FPT) relations are a continuum, assessing Justin Trudeau’s management of the federation requires starting with the situation Stephen Harper, his immediate predecessor, left him.

Harper came to office in 2006 with distinctive views on governing Canada, and in the following decade, he brought profound changes to the balance of power within the federation. As Ed Whitcomb writes in his new book Rivals for Power: Ottawa and the Provinces, “(Harper’s) plan was to squeeze the (federal) surplus from two sides—reduce the amount Ottawa was collecting and allocate part of the surplus in ways that could not easily be reversed.”

Harper’s preference was for a much more classical federal model, in which the two levels of government kept to their knitting and stayed out of each other’s backyards. He disagreed profoundly with the federal government entering provincial jurisdiction to force its will on provinces through new programs. Once in office, he immediately took down two of Paul Martin’s signature initiatives, the child care agreements between Ottawa and the provinces and territories, and the Kelowna Accord, which Martin had negotiated with provinces, territories and First Nations leaders.

To address the fiscal imbalance between the federal government and the provinces and territories, Harper first cut the GST by two percentage points early in his mandate. The resulting tax room could be used by provinces should they wish. Budget 2007 went much farther: over the next six fiscal years, the federal government would increase its transfers by more than 41 per cent ($18 billion) for post-secondary education, infrastructure, labour market training and equalization. These transfers grew even larger post-2009, when the Harper government was forced to respond to the world economic meltdown with a huge federal stimulus program delivered largely by the provinces, territories and municipalities.

The Liberals’ federal-provincial commitments in their 2015 campaign platform spoke to at least four areas of fundamental disagreement with the Harper Conservatives in FPT relations:

• The Canada Pension Plan would be expanded, and federal funds were committed to the healthcare budget for home care and mental health.

• The platform promised “national leadership (to) join with the provinces and territories to take action on climate change, put a price on carbon, and reduce carbon pollution.”

• “Review Canada’s environmental assessment processes…to restore robust oversight,” and “ensure that environmental assessments include and analysis of upstream impacts and greenhouse gas emissions resulting from projects under review.”

• “We will immediately re-engage in a renewed nation-to-nation process with Indigenous Peoples to make progress on the issues most important to First Nations, the Metis Nation and Inuit communities…”

The first issue on the Trudeau agenda proved relatively easy to address. In June, 2016, Finance Minister Bill Morneau reached an agreement with the provinces and territories to enable the Canada Pension Plan in future to provide higher payouts to those who were currently not saving enough for their retirement.

Healthcare funding was not as easy to fix. Stephen Harper had inherited Paul Martin’s 10-year Health Accord, which guaranteed 6 per cent annual year-over-year increases in federal transfers to the provinces and territories. As the 2014 renewal date approached, Finance Minister Jim Flaherty in late 2011 unilaterally extended the Martin plan by two years, after which the annual increase would be reduced and tied to nominal GDP, but guaranteed to be at least 3 per cent every year.

Provinces and territories were outraged but there was nothing they could do, so they pinned their hopes on a possible Liberal government that had promised “collaborative federal leadership” during the 2015 election campaign. Once in office, Trudeau explicitly accepted Harper’s call on additional health care funding by flatly refusing to enrich the Flaherty formula. In addition, Health Minister Jane Philpott insisted that the provinces and territories sign agreements and be accountable for the new federal spending for home care and mental health services. After loud and protests, the provinces and territories agreed to the federal terms.

Ottawa’s leadership on the environment and climate change took some time to get rolling. With some provinces and territories having adopted carbon taxes, others opting for cap-and-trade, Nova Scotia using regulations to manage down emissions and Saskatchewan pursuing carbon capture and storage, the March 2016 First Ministers’ Meeting failed to bridge the differences and instead produced a plan to draft a plan.

In November 2016, as FPT environment ministers were meeting in Montreal to work on the plan, the Prime Minister unilaterally announced that putting a price on carbon was the only acceptable approach, and that if any province and territory did not, the federal government would impose such a tax and return the money to its government.

This was a surprising and peremptory approach from a PM who had promised consultation and negotiation towards a pan-Canadian climate change plan. A comprehensive plan was ultimately adopted in December 2016, in which the price of carbon will move from $10 per tonne in 2018 to $50 per tonne by 2022. Surprisingly, the Liberal plan retains the Harper climate change goals the Liberals had attacked in opposition as being far too lax. With the federal government refusing to grant equivalency to Saskatchewan’s investments in carbon capture and storage, it remains outside the Liberal plan.

The various review panels established by the Liberals reported earlier this year on the National Energy Board and the Canadian Environmental Assessment Act, with a view to creating more transparent processes, stronger consideration of greenhouse gas impacts and greater community and Indigenous participation. Legislation to effect these changes will likely appear this fall.

As major pipeline projects (Kinder Morgan) move forward slowly and others (Energy East and Petronas) are cancelled, the federal government’s challenge remains how to achieve its objectives while enabling major projects to be built on timetables acceptable to capital markets and provincial/territorial needs. Provinces and business are increasingly concerned that the federal institutional barriers to major projects have become insurmountable in Canada. The delays on Kinder Morgan seriously threaten the PM’s deal with Alberta to enable the building of access to tidewater for bitumen exports in exchange for that province’s adoption of higher environmental standards. At some point, the PM will likely be forced to make some tough calls to keep peace in the federation.

Separate and apart from the federal government’s laudable Aboriginal agenda, as the Prime Minister pursues his “renewed, nation-to-nation relationship with Indigenous Peoples,” he will likely face some tough reckonings with reality. There are some 620 Indigenous communities in Canada that share the “nation” fantasy, and their sheer numbers, combined with his adoption of their rhetoric, will make his ambitious goals all but unattainable.

In fairness, the PM has begun inviting some national Indigenous leaders to attend some FMC sessions, to further promote reconciliation and to demonstrate a government-to-government approach to Indigenous engagement. On the negative side, most provinces and territories have yet to put in place revenue-sharing agreements with Indigenous communities for natural resource projects. Only the Northwest Territories has such an agreement in place.

Things will likely be even more difficult on the consultation front. Canadian judges have already blocked resource projects over an absence of consultation with Indigenous groups. With the Supreme Court-mandated “duty to consult” still being defined, it is likely only a matter of time before a judge strikes down a federal, provincial or territorial budget or major legislation due to inappropriate consultation. Few Canadians are likely to accept the potential paralysis of government on such grounds that could result.

Like all incoming prime ministers before him, Justin Trudeau inherited the federation of his predecessor, and has added his own agenda items to the federal-provincial-territorial table. So far, he has not attempted to change the basic power relationships established by Harper. But while Harper largely stopped telling provinces and territories how to run their governments, the Trudeau Liberals have shown the ability to be quite directional and sometimes rigid in their approach to provinces and territories. Some will welcome Trudeau’s more aggressive approach as the normal exercise of “leadership” of the federation; others will see it as a return to the bad old days of FPT relations, in which “one size fits all,” and the federal government gets to pick that size.