Ottawa steps forward as COVID-19 crisis puts provinces in desperate straits

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In Canada’s history, great crises have invariably led to the concentration of power in Ottawa. It’s happening again.

Decades of decentralization have been reversed in a matter of weeks. Provincial governments are in desperate straits. Newfoundland and Labrador, the weakest of the lot, teetered on bankruptcy last month, unable to find anyone willing to lend it money.

“Our province has run out of time,” Premier Dwight Ball told Prime Minister Justin Trudeau in a letter first reported by CBC. The province, he said, faces an “immediate and urgent financial crisis.”

The coronavirus pandemic “is a major disaster for the provinces,” Philip Cross, a senior fellow at the Macdonald-Laurier Institute, an Ottawa think tank, said in an interview. “They don’t have the fiscal capacity to absorb a shock like this.” In the weeks and months ahead, Ottawa will be paying everyone’s bill. And whoever pays the bill calls the tune.

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In normal times, provincial governments are dominant players on the federal scene, responsible for the things that matter most in people’s lives: schools, hospitals, highways, welfare. But in times of crisis, the normally weak federal government takes centre stage, because of its greater ability to borrow money and levy taxes.

In the economic emergency caused by the pandemic, Ottawa is using its spending power to protect workers and businesses and to help out provinces as they struggle to develop the capacity to treat patients.

“In past crises, we’ve had major changes in the way we collaborate as a federation," Pedro Antunes, chief economist at the Conference Board of Canada, told me. “And this crisis might also result in changes.”

The biggest immediate challenge for provincial governments could be finding lenders to finance the staggering increases in the cost of health care and other emergency measures, even as revenues collapse, especially because many provinces are already carrying high levels of debt.

In such an environment, said William Robson, president and chief executive officer of the C.D. Howe Institute, a think tank, Ottawa could help the provinces out in three ways.

One would be for the federal government, which has plenty of room to borrow, to raise funds and transfer them to the provinces. But in the past that has led to finger-pointing and a lack of accountability.

“You’re diluting the ability of the citizen to know who’s responsible if they’re unhappy with the quality of their health care," Mr. Robson observed.

Another approach would be for Ottawa to guarantee a provincial bond issue. The third approach, and for Mr. Robson, the preferred one, is for the Bank of Canada to temporarily buy up provincial debt, which is exactly what the bank has started doing, through its Provincial Money Market Purchase program. With the bank’s help, Newfoundland and Labrador should be able to finance its operations.

These monetary moves have been supplemented by the federal government’s efforts to support businesses, workers and the unemployed.

But temporary programs have a way of turning into permanent entitlements. Through the Canadian Emergency Response Benefit, which pays suddenly unemployed workers $2,000 a month, “we might have backed ourselves into some sort of universal basic income,” Mr. Robson believes. We may have accidentally federalized welfare.

Something like this happened at least once before, when Ottawa took over responsibility for relief for the poor from bankrupt provinces during the Great Depression, creating what today we call Employment Insurance.

The problem with creating a basic income more or less by accident is that no one knows how to pay for it, or how it would adapt to regional realities.

“Things that you do in haste can turn out to be very hard to undo, or can become first steps along a road that leads to somewhere you don’t want to go," Mr. Robson warned.

When this crisis finally ends, we will need to remind ourselves that, first, provincial governments do a better job of delivering programs and services than the federal government, because they are closer to the people they serve.

Second, sometimes you should let a crisis go to waste. A pandemic is a bad reason for creating a guaranteed annual income.

Third, as Mr. Cross observed, all the money the federal government is borrowing will have to be repaid. “Some day they’re going to have to unwind this, and that’s when it’s going to get ugly.”

But for now, Ottawa is all-powerful as Canada goes to war against a virus.

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