Understanding the tensions in Canada’s federal-provincial relations

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December 9, 2020

Understanding the tensions in Canada’s federal-provincial relations

Co-authored by Tom Sweeting and John Whitehead.

Federal-provincial negotiations are a fact of political life in Canada. These negotiations are often confrontational and, not surprisingly, seen by some as nothing more than government squabbling over who does what and who pays for it – when it is all the same taxpayer.

But tension between the two levels of government is deeply imbedded in the constitutional authorities allocated to each level. The Constitution of Canada contains the division of revenue and spending authorities originally laid out in the British North America Act. At a risk of over-simplification, this division gave the lion share of responsibility for building a nation and protecting it from harm to the federal government; the lion share of attention to the well-being of the individual was allocated to the provincial level. While the framers of the federation saw revenue-raising authority was needed for both levels, the relative size of the federal task meant it was allocated larger revenue raising capacity.

The practical implications of this division have evolved over the years. What started out as a distribution of authority consistent with the demands on each level became, over time, an imbalance in revenue and expenditures between the levels of government.  Boiled down to its simple terms, the provinces increasingly have responsibility for more of the high-cost, fast growing spending programs, yet the federal has maintained its larger revenue raising capacity.

Federal fiscal transfers to the provinces have become a go-to answer to these tensions baked into the business of governing Canada. The federal government, using its capacity to raise revenue to fund programs that support provincial spending, has been an effective, if not always satisfactory, way to temper the imbalance.

Fiscal transfers are federal policy tools that meet enough provincial objectives to elicit provincial cooperation. The federal government has long seen part of its responsibility to be pursuing a policy objective of, if not ensuring, at least encouraging similar service levels across the country. At the same time, it sees political opportunity in being more engaged in programs to which people feel closest. Provinces’ objectives reflect their need to bring more taxpayer dollars to the programs for which they are accountable and in ways that are consistent with what they see as the particular circumstances of their jurisdictions.

All is good when both the levels see sufficient reflection of their priorities in fiscal arrangements. The years have seen durable programs emerge and a normalization of a large federal role through what have primarily been unconditional transfers.

But even so, arguments around the size of the existing transfer programs, or changes proposed to them, regularly reveal the conflicts in the objectives of the two levels – conflicts that are always just beneath the surface.

Certainly, recent years are evidence of the confrontation that the competing objectives produce, particularly around financing health care. The federal government has been chafing at the inability to achieve national objectives or place accountability requirements on the provinces.  Provinces have consistently opposed federal overtures that involve, in their view, more interference in political priority-setting.  They argue  that the federal priority should be beefing up the level of the existing federal transfers that they see as insufficient.

Then the pandemic hit, bringing with it a new dynamic of federal-provincial cooperation, and a unity of purpose, while also reinforcing longstanding grievances.

The federal government has, by virtue of its spending decisions, taken on a national role that transcends the normal relative power balance between the two levels of government. Ottawa has assumed virtually the entire immediate fiscal burden and the long-term debt that involves. That role has provided for a level of consistency of support to individuals, businesses and health programs and services that could not have been accomplished without an aggressive use of the federal spending power.

The provinces, for their part, have generally accepted the massive increase in the federal presence. Clearly, they value the limits this puts on their own fiscal exposures without challenging provincial prerogative. They have aggressively rejected any extension of federal emergency powers into how provincial governments are handling the emergency or the imposition of enforceable criteria or standards on how they expend the federal funds.

In every instance where the federal government has suggested the need for national standards to govern COVID-19 expenditures, it has had to accept lip service artifices or back away entirely.

The question that is begged: are differential outcomes in the handling of the pandemic across the provinces, and the confusion felt by many, likely to have the kind of lasting impact that would alter the federal-provincial dynamic into the future?

A few considerations:.

The pandemic programs are temporary. While pandemic-battling expenditure will continue for a period of time, most of what has been and is being done will end. Will any lessons learnt during the fight end as well?

The federal government will have to pull back from the unprecedented and unsustainable 90/10 distribution of spending we have seen in the new measures over the past several months. For the most part, reduced federal emergency programming is unlikely to be a controversial issue, apart from the provincial belief that ongoing grievances can be partly addressed by maintaining unconditional injections of federal cash for more health care resilience. It is also likely that economic recovery efforts, while not without specific friction points, will feature much continued cooperation.

The real test of relations going forward will be the disposition of major gaps in government programming that the pandemic has identified or reinforced.

Finding long term and expensive solutions to those gaps is muscling its way into federal-provincial discussions as the pandemic response declines in significance.  The gaps are mostly within provincial jurisdiction and beyond the fiscal capacity of most provinces to deal with fully.   Some signals as to the tone and approach to this reality could appear as early as the First Minister’s Meeting on December 10th.

Appallingly, the pandemic revealed major failures in the system of supports for our elderly in long-term care settings. The federal government put $1b on the table in the Fall Economic Statement to deal with the issue, in addition to funds it allocated to the Safe Restart program this summer. This time, however, it appears that the release of these funds will depend on negotiating a program that satisfies federal expectations of problem resolution and some national commonality.

The pandemic has also brought the issue of paid sick leave to the forefront. There are rising expectations that the next major disruption – in the minds of many, the next pandemic – cannot see a program hodgepodge cobbled together on the fly to alleviate the impacts on household finances, business solvency and personal wellbeing. Provinces have accepted a leadership role for the federal government for ensuring a minimum support level across Canada for those out-of-work.  A view is solidifying that the pandemic has shown the lack of paid sick leave provisions to be a big, missing piece of an adequate employment support network. The federal government has taken a step to respond with a CERB-like sick leave program. That has sparked resistance in some provinces to the potential for entrenching paid sick leave.

One widely recognized outcome of the pandemic is the disproportionate impact on women, – most often the family primary caregiver.  The role of child-care in a modern economic world and discussions about what steps to take in this regard have been an ongoing aspect of federal-provincial discussions for years. Some progress has been made at the federal-provincial table, but differences in views between the two levels have made for difficult negotiating. COVID-19 has brought a stark reality to the debate – with numbers on how far female workers have been lagging behind male workers in the recovery of employment.  What is unclear is whether COVID-19 impacts will lend more urgency to the political compromises involved in resolving the differences.

Introducing national pharmacare also remains on the federal agenda.  While the federal government is responsible for approving drugs for use and in some cases distributes drugs to federal clientele, the bulk of pharma programming is provincial. Which drugs are available in a province and who pays for access is up to provinces. A path to any national standards must overcome the extent to which drug costs are not only an expensive part of provincial health spending, but have become a well-established part of the exercise of provincial authority over health care spending. Indeed, drug plans vary from province to province perhaps more than any other aspect of health care spending, It is also unclear as to the extent to which the lack of Canadian vaccine manufacturing will be cloud the discussion, especially from the provincial perspective.

Offering predictions as to what will happen as these pandemic-bred and reinforced issues exert themselves on federal-provincial relations is a tough call. The potential exists for new paths to be opened up in federal-provincial fiscal relationships. The patchwork of services, rules and outcomes across provinces may be worrisome enough to create some political momentum for more national standards and accountability in the use of federal transfer dollars.  But we should not dismiss the potential that arrangements generated by recent compromises will continue to guide the nature of steps taken to resolve these overall issues. The need for unfettered provincial access to federal revenue to meet regional differences and local circumstances is a well-established principle for creating workable fiscal arrangements.

Uncertainty is reinforced by two significant obstacles to a practical workaround to the traditional resistance to national standards and conditionality over the spending of federal dollars.

First, unsynchronized electoral calendars create ongoing political incentive to exacerbate, not ameliorate, federal/provincial difficulties. Running against other levels of government of different partisan stripes is a norm in Canadian politics – and both federal and provincial governments do this.

Secondly, the fact that federal transfers – their scope and size – are entirely within federal control has led provinces to systematically mistrust Ottawa on fiscal matters. The unilateral cuts to provincial transfers in 1995 to balance the federal budget are not only remembered, but will be reinforced in the minds of provincial decision-makers given the size of the task the federal government has in getting the pandemic-driven federal deficit down to sustainable levels.  At this point, it isn’t at all clear that the opposite impulse exhibited this year, when the federal government assumed 90% of pandemic response spending, will alter that long-term suspicion or make the provinces any more inclined to take direction on standards from Ottawa.

Tom Sweeting and John Whitehead joined Earnscliffe following long careers providing advice at senior levels within the Ontario government. Both held Assistant Deputy Minister positions in the Ministry of Finance with responsibility for advising the Minister of Finance and the Premier on federal-provincial fiscal arrangements.