Sean Speer: The federal government needs to back off—and the provinces need to step up

This week provincial premiers met to discuss, among other topics, their shared frustrations with the Trudeau government’s model of top-down federalism. They were right to call out Ottawa’s unprecedented use of the federal spending power to interfere in their jurisdiction. But they were wrong to call for timid reform in the name of so-called “cooperative federalism.”

After a near decade of extraordinary federal intrusion into childcare, health care, housing, and various other provincial and local areas, we need more fundamental reform of Canada’s system of fiscal federalism.

Now is an opportune time. Both Ottawa and the provinces are struggling to dig out of post-pandemic deficits. They also face various funding pressures, including meeting the NATO military spending target and addressing the costs of population aging on our health-care systems. And there’s a growing need to clean up the tangled web of conditional transfer payments that the Trudeau government has weaved during its near-decade in office.

Although Canadian federalism has never quite lived up to the notion of “watertight compartments,” what we’ve seen over the past decade is markedly different than the historic norm. The Trudeau government has defined itself by a set of policy issues outside of its exclusive jurisdiction. It has therefore systematically gone about increasing intergovernmental transfers and creating new ones in order to dictate and influence provincial and local policymaking. Consider that federal transfers to other orders of government have increased by two-thirds over the past decade.

The provinces and cities have criticized these developments at times but ultimately done nothing to resist them. They’ve acquiesced to the most expansive use of the federal spending power in Canadian history. The result is our relatively straightforward—and well-regarded model of fiscal federalism—has become unprincipled and unruly.

We need a disengagement agenda to restore a greater degree of constitutionalism to Canadian governance.

The basic principles that should inform such an agenda were reflected in Conservative leader Pierre Poilievre’s recent speech to the Assembly of First Nations. Just as he set out the case for subsidiarity for First Nations governance, the same principle ought to apply to provinces and cities. The federal government should limit itself to its own constitutional responsibilities rather than substitute its own preferences for those of provinces and cities. Why should we assume that Ottawa is better placed than them to conceive of health-care priorities or devise housing policies or determine the proper wages of childcare workers in communities across the country?

Disentangling Ottawa from provincial and local areas would not only reduce the inherent inefficiencies of duplication and overlap and therefore free up scarce public resources, but it would also better conform to the Constitution’s clearly delineated conception of the division of powers. Sections 91 and 92 of the constitution both refer to the exclusivity of provincial action in their enumerated areas of responsibilities.

If for whatever reason we want to revisit the division of powers—if we want to reassign which order of government does what to reflect modern circumstances or sensibilities—, that’s totally acceptable. There’s an amending formula for precisely that purpose. In 1940, for instance, the federal and the provinces agreed to amend the Constitution to upload unemployment insurance to Ottawa in the aftermath of the experience of the Great Depression. What shouldn’t be acceptable is using the federal spending power to effectively bypass this process and de facto change the Constitution through the power of the purse rather than a constitutional amendment.

What can be done to arrest these expensive and anti-constitutional trends?

The first step would be to convert various programmatic federal transfers—think childcare, housing, infrastructure, skills training, etc.—into block grants paid out on a per-capita basis with minimal conditions. This would simplify the growing mix of transfers, reduce the role of federal oversight, and grant provinces greater flexibility to set their own priorities. The new block transfer could sit alongside the Canada Health Transfer, Canada Social Transfer, and Equalization as the principal means by which Ottawa provides fiscal support to the provinces. They could then determine how to allocate it, including how much, if any, is transferred to municipalities.

Moving in this direction would require Ottawa to relinquish control over its transfer payments. But the upsides could be significant. Consider for instance that the federal Department of Infrastructure has more than doubled its headcount since the Trudeau government was elected in 2015. Why do we need another layer of infrastructure bureaucracy? What can federal infrastructure officials know or do relative to provincial and local ones?

A more radical move would be to start to swap tax room in exchange for cash transfers. Replacing the Canada Health Transfer with a federal withdrawal from the GST is a good example. It’s an elegant proposal because the CHT and GST almost net out: the former is projected to the federal government about $52 billion this year and the latter is projected to bring in about $54 billion in revenues.

It would presumably require some boost to Equalization to recognize that the GST points differ in value across the provinces. But it would otherwise be, in broad terms, fiscally neutral for both Ottawa and the provinces. There would be a need to rethink the Canada Health Act and what, if any, parts ought to be preserved under such a scenario. The principle of portability, for instance, would probably need to be codified in federal statute or an agreement with the provinces.

More generally, Ottawa could cut other taxes—including, for instance, its personal income tax rates—with the purpose of ceding the taxation room to the provinces in exchange for reducing its cash transfers to them. The level of ambition would be inherently scalable. But in principle it could involve a rebalancing of our fiscal federalism that would enhance the autonomy of provincial governments and refocus the federal government on its core responsibilities such as defence and national security.

After a decade of federal aggrandizement, there’s reason to be skeptical of a disentanglement agenda. But maybe the Trudeau government’s overreach itself can be a catalyst for change. If nothing else, a new federal government should call the provinces’ bluff. Do they really want more autonomy or more strings-attached dollars? There’s only one way to find out.