Steve Lafleur: Does everything feel broken? Canada’s messy federalism is a big part of the problem

You might think subsidiarity is too dry a topic to care about. You’re wrong. It affects everything. 

The concept is simple: responsibility for policy issues should rest with the lowest level of government practical. In other words, if municipal governments are well-placed to address an issue, they should. If they’re not, the provinces should do it. Failing that, the federal government. It’s an approach that I generally support, but it’s often challenging in practice. 

This might seem like a stale, academic concern. Far from it. Canada is an unusually decentralized country. Canada’s federal government has controlled roughly 30 to 40 percent of government expenditures (net of transfers) for the last three decades. By contrast, the U.S. federal government controls around two-thirds of government spending. With more than 60 percent of spending by sub-national governments, we have an unusually large stake in ensuring that they’re well placed to undertake those responsibilities. 

A lot of things aren’t working in Canada right now. While I don’t subscribe to the idea that Canada is broken, there are signs of stress everywhere. We’re dealing with a nationwide housing crisis, decaying infrastructure, and a health-care system that feels like it’s on the brink of collapse. It’s understandable that people are frustrated, or even angry.

Part of the problem is our messy style of federalism often allows governments to pass the buck. Another is that subnational governments are often burdened with issues they don’t have the capacity to manage effectively—or, more perniciously, that they have no incentive to fix. Either way, we often let things corrode until they reach a breaking point.

But before we get too deep into my critique, some history. From the onset of the First World War until the 1990s, the federal government nearly always dominated total spending, peaking at 90 percent during WWII. Between the end of WWII and the creation of the modern welfare state, spending shifted towards provincial governments. For twenty years starting in 1970, federal expenditures hovered between roughly 40 and 45 percent of spending. Then came the 1990s and ensuing budgetary crises. One way that governments dealt with newfound fiscal pressures was downloading. In addition to privatizing large swaths of the economy, the feds downloaded many spending responsibilities to the provinces, for instance by cutting federal transfers. Provincial governments followed a similar path, in many cases pushing responsibilities for functions like social housing down to the municipal level.^{1In many respects, this decentralization was beneficial. For one thing, it was part of an unprecedented fiscal correction by the Chretien government—probably the most successful fiscal undertaking in the history of Canada. But it also rationalized Canadian governance by more closely aligning spending with the principle of subsidiarity.}

But there are three barriers that often get in the way of effective subsidiarity. 

First, responsibility rests with the wrong level of government. Take land-use planning, for example. It has been a truism for a very long time that zoning ought to be the purview of municipal governments. But their incentives are all wrong. They only answer to voters currently residing within specific boundaries, and primarily to homeowners. This means that prospective and future residents are not considered. In theory, this problem could be self-correcting. NIMBY cities could simply lose population to more dynamic cities. In practice, there is a strong economic pull towards a small number of economic centres.

Even in the post-COVID world, location matters. A home in North Bay isn’t a substitute for a home within commuting range of Toronto. Given the strong pull towards a few large cities, there are provincial and national implications from zoning restrictions. City halls in the GTA in particular have acted as a brake on Canada’s economy for a very long time while the federal government, which has traditionally had the smallest role in housing of any order of government, takes the biggest share of the blame. 

Second, the boundaries of a jurisdiction can be too large or small. Context matters a lot. Take Toronto, for instance. When the Government of Ontario smashed together six municipalities to create the new Toronto megacity, it was meant to create efficiencies. Not only did those efficiencies not materialize, but it means that responsibility is now too diffuse. 

The idea of subsidiarity is to ensure that the people best positioned to make decisions are empowered to do so. Ironically, the megacity has meant that people in the old city of Toronto have very little control over their communities. Getting anything done in there requires consent from five other municipalities that have wildly different priorities.^{2Anyone who has been to a family dinner knows it’s not easy to get everyone on the same page. Some people don’t like mashed potatoes, some have food allergies, and others are just allergic to joy. If the whole family tree got an equal vote on what to eat, it would be a catastrophe. In other words, it would be like a Toronto City Council meeting.}

Third, responsibility might be an illusion. Take health care, for example. Health care is a provincial responsibility—in theory. In practice, provincial governments need to follow the letter of the Canada Health Act (CHA). That isn’t a legal requirement, but a practical one. Failure to do so would lead the federal government to withhold Canada Health Transfer funding. While there is much to like about the CHA—such as the requirement for portability (so people changing provinces don’t lose coverage) —there are other parts that might well be counterproductive, like the “public administration” requirement or the prohibition on user fees. Whether or not one supports the CHA in its entirety (and as currently interpreted), it’s clear that provincial governments don’t have full control over health-care policy in Canada. 

Fortunately, we’re seeing some rebalancing. The highest profile example is in housing policy. 

It started with former Conservative Party leader Erin O’Toole. His platform included a provocative idea: the federal government should withhold infrastructure funding to municipalities that don’t build enough housing. This made sense not only because housing was becoming a national crisis, but because if the federal government is going to fund infrastructure projects that are justified based on population growth, the population proximate to those projects should grow. Otherwise, they don’t make sense. The term common sense gets tossed around a lot, but this was a pretty common sense idea. 

The next big move came from the Ford government. Under enormous pressure to get housing built, the province started to directly intervene in local land-use policy. While the moves look modest in light of recent developments, they eliminated the taboo against upper levels of government getting involved in land-use policy. 

Then came the big one: the Carrot Stick. The federal government started to really feel the pressure from rising housing prices this year, particularly as interest rates increased. The Trudeau government decided that they wanted to “work with” municipalities, in contrast to the Conservatives who wanted to impose conditions. In other words, carrots, not sticks. Then along came Sean Fraser. He was having none of this. 

Fraser realized, as I’d hoped when the program was announced, that the carrot could be used like a stick. There’s no reason why the minister needs to sit back and hope that municipalities volunteer to do more on housing. Instead, he’s used the bully pulpit to badger municipalities into strengthening their applications. For the most part, it’s worked. Cities across the country are moving to allow four units per lot, which seemed unthinkable eighteen months ago. The idea of provincial, let alone federal governments being involved in housing policy was contentious up until very recently. But it’s a necessary corrective, albeit late. 

Another high-priority example comes from Toronto. The city has been grappling with what to do with the Gardiner Expressway for years. It’s in the middle of a massive refurbishment project putting enormous pressure on the city budget. Toronto has tried to deal with this by imposing tolls, but the province said no. Given that it serves the whole region and isn’t especially popular with locals who were being forced to fund the rebuild themselves, uploading it to the provincial government to fund through provincial taxes only made sense. Another necessary rebalance.

Subsidiarity is a good principle in the abstract, but a hard one to implement in practice. As a decentralized federation, Canada is grappling with the challenges of dispersed responsibilities. Happily, we seem to be correcting some of our missteps. Decentralization done wrong can be worse than centralization. Principles are a good starting point, but we need to sweat the details.