Trevor Tombe is a professor of economics at the University of Calgary. Daniel Béland is director of the McGill Institute for the Study of Canada and the James McGill Professor at the Department of Political Science at McGill University. Both are members of the Intergovernmental Fiscal Relations Commission.
Canada is among the most decentralized countries on earth, and so our federation is necessarily at the heart of any effort to secure our future prosperity.
After all, our country is not run by a single government in Ottawa, nor by 13 provincial and territorial capitals. Instead, thousands of individual governments spanning multiple levels, including municipal and Indigenous ones – each with distinct responsibilities, authority, governance structures, financial resources and connections to Canadians – all play a role. Each must work together for the country to succeed.
For fiscal federalism in Canada, however, the 2022 federal budget released Thursday mattered less for what it contained than for what it did not.
While it was rich in new spending and taxation initiatives, the budget does very little to renew our federation and sustainably address important, long-run challenges. And, rather than work with provinces on shared priorities, the budget appears largely indifferent to provincial demands.
To be sure, the budget does touch on key issues relevant to our federation, such as housing and health care. Helping boost the supply of new homes and supporting first-time buyers may well be warranted. But without joint provincial and municipal action, it is likely to come up short.
The proposed expansion of dental insurance to lower-income children, seniors and persons living with a disability is another major federal initiative. While this will no doubt benefit many Canadians, and may indeed be a worthwhile initiative, the lack of a shared federal-provincial vision to renew our health care system will exacerbate intergovernmental tensions. Indeed, Quebec Premier François Legault has already said “there will be a confrontation” over initiatives such as dental care that he sees as intrusions into provincial jurisdiction.
We aren’t arguing for less federal action in critically important areas. Far from it. But action should be co-ordinated across all orders of government, and focused on the clear long-term challenges that Canada’s fiscal arrangements will face in the coming years and decades.
Some pressures are fundamental, resulting from external sources. These include climate change, an energy transition that will alter the global demand for fossil fuels, rising economic volatility and a rapidly aging population.
It was also particularly notable that the budget appeared uninterested in reforming health care funding arrangements. It did highlight that the Canada Health Transfer will grow to $56-billion by 2026/27. (That’s one-third higher than 2019/20 levels, and roughly $4-billion higher than it would have been that year had the COVID-19 pandemic not occurred.) But this is not owing to any policy choice by the federal government; rather, it was an automatic and built-in feature of the transfer program that was in place before the Liberals took office. This funding will also be needed to help sustain an exhausted system, not rebuild and reform it.
More needs to be done in this area, especially as Canada, like many countries, experiences rapid population aging. The share of the population over age 65 is projected by Statistics Canada to be nearly one-quarter by 2050, and potentially as high as one-third in Newfoundland and Labrador. The implications for health care costs and economic growth are significant. Yet, no major federal transfer program currently incorporates demographics.
The budget also ignores rising levels of provincial debt, which raises long-term financial sustainability concerns. Recent moves by the federal government – accelerated by the pandemic and continued in this budget – to increase involvement in areas traditionally under provincial jurisdiction that also require provincial contributions may be adding to the pressure.
Finally, other difficult challenges reflect entrenched political dynamics that ebb and flow throughout Canada’s history and warrant special attention. The increasingly challenging grievances raised by governments of oil- and gas-producing provinces – such as Alberta’s equalization referendum and other Fair Deal initiatives – demand attention, yet receive none.
Our future prosperity depends on properly addressing these challenges, and will necessarily involve federal, provincial, municipal and Indigenous governments. Who should do what (and who should pay for it) are central questions that we need to get right.
In this rapidly changing world, Canada cannot effectively function as a disjointed federation, and efforts to sustainably reform federal arrangements behind closed doors will not be successful in the end. That’s why we need an open and collaborative process to rethink our intergovernmental fiscal relations, and strengthen our federation for the future – a process that was missing from the 2022 budget.
Keep your Opinions sharp and informed. Get the Opinion newsletter. Sign up today.