Law and Government Division
13 November 2007
PDF (219 kB, 26 pages)
The federal spending power in Canada has been defined as “the power of Parliament to make payments to people or institutions or governments for purposes on which it [Parliament] does not necessarily have the power to legislate.”(1) In practice, the exercise of this power has taken the form of grants to provincial governments, the creation of shared-cost programs, and direct spending in areas of provincial jurisdiction.
The purpose of this paper is to provide an overview of the debate surrounding the use of the federal spending power, its constitutional foundation, and its significance within the larger context of federalism. This paper will also outline both historical and recent developments, and discuss the advantages and disadvantages of the use of the federal spending power.
Federal grants to the provinces can be either conditional or unconditional. In the case of unconditional grants, such as the equalization program, the federal government has no control over how the money is spent by the provinces. Conditional grants, however, come with certain “strings attached,” as provinces are required to meet federal standards in order to receive the federal transfers. Since 2004, the main conditional federal grants have been the Canada Social Transfer (CST) and the Canada Health Transfer (CHT), which are known as “block transfers.” These two block transfers replaced the Canada Health and Social Transfer (CHST), which had been introduced in 1995. Although block transfers do not require the provinces to account for how the money is spent, they must comply with federal standards, namely the requirements of the Canada Health Act(2) for the CHT, and the stipulation that social assistance be provided to all residents without imposing minimum residency requirements for the CST.(3)
Shared-cost programs are typically initiatives proposed by the federal government to the provinces in which the federal government undertakes to cover a portion of the cost of the program (usually 50%). Historically, the major shared-cost programs were the post-secondary education program, the Canada Assistance Plan, the hospital insurance program and the medical care program. Over the years, as conditional block transfers gained favour over traditional shared-cost programs, funding for these programs has been rolled into the modern conditional grants discussed above. Shared-cost programs are also associated with the notion of “opting out,” which was introduced in 1965 to allow provinces to refuse to participate in a national program but nonetheless receive financial compensation from the federal government, as long as the province agrees to establish a similar program with comparable standards.(4)
Finally, direct spending takes place when the federal government allocates money directly to individuals, agencies or municipalities.(5) Direct spending by the federal government in areas of federal jurisdiction is to be expected, but direct spending in areas of provincial jurisdiction has proven to be somewhat more contentious. Direct spending imposes no conditions on the provinces, but this exercise of the federal spending power has been criticized for promoting a form of “hourglass” federalism that bypasses the provinces by going directly to individuals or to organizations under provincial jurisdiction.(6) Two early examples of direct spending by the federal government in areas of provincial jurisdiction are unemployment insurance and old age pensions. However, it must be noted that jurisdiction over these two areas was officially transferred to the federal government through constitutional amendments.(7) Recent examples of direct spending initiatives include the Canada Foundation for Innovation, the Millennium Scholarship Foundation, the agreement for the transfer of federal gas tax revenues to the municipalities, and the universal child care benefit.
It is worth noting that provinces also spend in areas of federal jurisdiction, although on a much smaller scale. The best example is the operation by a number of provinces of offices abroad, most of which are focused on promoting trade and, in the case of Quebec, culture.
Sections 91 and 92 of the Constitution Act, 1867,(8) the primary provisions governing the constitutional division of power between the federal and provincial governments, empower both orders of government to borrow money and impose taxes. The main distinction is that the federal government is entitled to raise revenues“by any mode or system of taxation,” whereas provincial governments are restricted to “direct taxation.” To the revenue-raising capacity of the provinces must also be added section 92A of the Constitution Act, 1867, which allocates exclusive rights over natural resources to the provinces and, as such, provides an important additional source of revenues for resource-rich provinces. In practice, both the provincial and federal governments raise most of their revenues from the same sources, namely income and sales taxes. That being said, the ability to raise comparable revenues does not necessarily translate into the capacity to raise comparable revenues, as, clearly, there are wide variations in provincial tax bases.(9)
The discrepancy in revenue-raising capacity first became an issue in intergovernmental relations with the introduction in 1917 of the Income War Tax Act,(10) which marked the beginning of direct taxation by the federal government in Canada. The next important step occurred during the Great Depression, when both the federal and provincial governments came under increased pressure to deliver social programs and found themselves short of cash, partly because of the collapse of tariff revenues at the federal level. By the end of the 1930s, the fiscal situation was one of joint occupancy of the major tax fields, and the federal government had established a dominant position in the area of general income and sales taxes.(11)
The situation changed again during World War II with the introduction of the 1941 Wartime Tax Agreements, the result of negotiations in which the provinces agreed to temporarily give up their right to collect personal income taxes, in return for transfer payments from Ottawa. These agreements were renewed twice and then replaced in 1957 with the Federal-Provincial Tax Sharing Arrangements Act, which restructured the system of tax rentals in such a way that the federal government now returned to the provinces a fixed percentage of personal income tax revenues and corporate income tax revenues collected within their jurisdiction. This was known as the “standard abatements.”(12)
Further changes were introduced in 1962 with the Federal-Provincial Fiscal Arrangements Act,(13) which replaced the tax rentals system with the tax collection agreements that remain the norm today. Under these agreements, the federal government continues to effectively collect taxes on behalf of the provinces. All provinces have signed a collection agreement with the federal government for personal income taxes, except for Quebec(14) which collects both its own personal and corporate income taxes. Ontario and Alberta also collect their own corporate income taxes instead of relying on the collection mechanism of the federal government. Through the tax collection agreements, the provinces resumed levying their own income taxes at their own rates, but in a way that was coordinated with the federal government. To accomplish this, the federal government agreed to lower its rate schedules, allowing the provinces to make up the difference by raising their own rate schedules.(15)
The concept of a federal spending power emerged along with the welfare state from a series of federal government initiatives undertaken mostly in the wake of World War II; it is closely linked with efforts to centralize the taxing power, as described above.
Under the division of powers assigned by the Constitution Act, 1867, the provinces are granted the legislative responsibility for delivering many of the key public services, including health, education and social welfare – areas that have gained tremendously in importance since the advent of the welfare state. What this means is that enormous resources need to be allocated by the provincial governments to these spending priorities; however, such resources may be beyond the provinces’ means. To make up the shortfall in revenues, provinces have had to rely on transfers from the federal government, and this in turn has allowed the federal government to exercise its spending power in areas of provincial jurisdiction.
In the 1940s, the federal government began to exercise this spending power in areas of provincial jurisdiction by developing a shared-cost program for the coordination of vocational training and by instituting payments of family allowances. The federal government also established the Department of National Health and Welfare, which would eventually administer a number of spending programs, ranging from the administration of disability benefits to the construction of hospitals. The federal government also became active in the area of education and research, through grants to universities and the establishment of the National Research Council.(16)
These initiatives were generally accepted by the provinces or, at the very least, did not foster much criticism, except from Quebec, which feared the impact these programs might have on its legislative authority. As such, Quebec was not only vocal in requesting more access to taxation revenues, but also sought to limit federal intrusions in areas of provincial jurisdiction. This divide between Quebec and other jurisdictions within Canada was clearly illustrated by the debate surrounding the creation of a national pension plan, which resulted in a constitutional amendment and the establishment of two separate pension plans: one for Quebec, and one for the rest of Canada. This accommodation of Quebec’s desire to go its separate way also led to the more formal recognition by the federal government of the right of any province to “opt out,” with compensation, of federal programs in areas of provincial jurisdiction.(17)
Starting in the mid 1960s, opposition to shared-cost programs also began to emerge outside Quebec. Responding to this change in attitude, the federal government, at the 1969 Federal–Provincial First Ministers’ Conference, proposed two limitations on conditional grants for shared-cost programs: 1) the existence of a broad national consensus in favour of a program; and 2) compensation on the basis of per capita reimbursement of the people of a province whose legislature decided not to participate in the program. However, the federal government’s proposal also included the formal entrenchment in the Constitution of the federal spending power and the recognition that the federal government had an unrestricted power to make conditional grants to provinces for the purpose of supporting their programs and public services.(18) Although this proposal never led to a constitutional amendment, it did influence the federal government’s approach to the use of the spending power.(19)
During the 1978 Constitutional Conference, the notion of imposing constitutional limits on the federal spending power was once again raised, but nothing concrete emerged from the discussion.(20) A decade later, the Meech Lake Accord of 1987 proposed to add section 106A to the Constitution, which would have provided for reasonable compensation to the government of any province that chose not to participate in a shared-cost program in an area of exclusive provincial jurisdiction, provided that the province carried on a program compatible with the national objectives. The 1992 Charlottetown Agreement also contained a similar provision.(21) Although the debate over the federal spending power has continued since the failure of the Charlottetown Agreement, it has moved away from constitutional reform and has been framed in terms of either a renewed social union or an attempt to redress the fiscal imbalance, both of which will be discussed below.
In Re Constitutional Question Act,(22) the British Columbia Court of Appeal spoke of the “fragile constitutionality” of the federal spending power. This fragility is reflected in the struggle of legal academics, which has been ongoing since the 1950s, to advance a theory that would solidly anchor the federal spending power in the Constitution.
Most legal academics agree that there is no such thing as an explicit federal spending power set out in the Constitution. Rather, such a power has been inferred from the powers to levy taxes (subsection 91(3)), to legislate in relation to public property (subsection 91(1A)) and to appropriate federal funds (section 106). As explained by constitutional law expert Peter W. Hogg, it is clear that “Parliament must have the power to spend the money which its taxes yield, and to dispose of its own property,” but the real issue is “whether this spending power authorizes payments for objects which are outside federal legislative competence.”(23) Hogg’s own answer to that question is that “the better view of the law is that the federal Parliament may spend or lend its funds to any government or institution or individual it chooses, for any purpose it chooses; and that it may attach to any grant or loan any conditions it chooses, for any purpose it chooses, including conditions it could not directly legislate.”(24) Hogg further explains his position by stating:
There is a distinction, … between compulsory regulation, which can obviously be accomplished only by legislation enacted within the limits of legislative power, and spending or lending or contracting, which either imposes no obligation on the recipient (as in the case of unconditional grants) or obligations which are voluntarily assumed by the recipient (as in the case of a conditional grant, loan or a commercial contract). There is no compelling reason to confine spending or lending or contracting within the limits of federal legislative power, because in those functions the government is not purporting to exercise any peculiarly governmental authority over its subjects.(25)
One theory that was advanced in the early days of the federal spending power is the “gift” theory, which holds that the federal government needs no additional constitutional authority to disperse its money as it wishes, so long as it does not effectively regulate areas within provincial jurisdiction. The jus tification for this argument is that when the federal government spends in areas of provincial jurisdiction, it is acting generously as a natural person. One of the first proponents of this approach, constitutional theorist F.R. Scott, wrote:
All public monies that fall into the Consolidated Revenue Funds of the federal and provincial government belong to the Crown. The Crown is a person capable of making gifts or contracts like any other person, to whomever it chooses to benefit. The recipient may be another government, or private individuals. The only constitutional requirement for Crown gift is that they must have the approval of Parliament or a legislature … [G]enerosity in Canada is not unconstitutional.(26)
The problem with this theory is that the “gift,” in the case of the federal spending power, usually comes with strings attached, and while provinces are free to refuse this gift by “opting out,” the consequence of this is that provinces that refuse the federal government’s generosity end up giving the tax revenues collected from their own citizens to fund programs in other provinces.(27) In other words, there are many who question the voluntary aspect of accepting conditional grants. As one critic writes:
No province is forced to accept federal conditional grants, but fiscal and political realties almost always compel the provinces to accept such grants … [A]lthough it is conceivable that a province might reject a new federal initiative, the sums involved for established programs are too great to forgo and too large to recover from other revenue sources.(28)
Another, more recent, argument that has been advanced to justify the use of the federal spending power is based on the introduction of section 36 of the Constitution Act, 1982,(29) which expresses a commitment from the federal and provincial governments and legislatures toward:
Although section 36 of the Constitution Act, 1982 expresses a commitment not to alter the legislative authority of the federal Parliament or the provincial legislatures, according to Hogg it also “seems to reinforce by implication a broad interpretation of the spending power.”(30)
In spite of the many attempts by constitutional theorists to offer support for the constitutionality of the federal spending power, there are others such as Andrew Petter, professor of constitutional law and former minister of intergovernmental relations in British Columbia, who maintain that none of the constitutional arguments advanced have been particularly convincing.(31)
There has never been a direct challenge to the constitutionality of the federal spending power before the Supreme Court of Canada. In 1963, noted political scientist D.V. Smiley wrote of the federal spending power that “the provincial governments … do not want to challenge it. Federal spending supports so much of the established political, social and economic structure that prudent men hesitate to take steps that might wipe it out.”(32) Writing three and a half decades later, Petter echoed that analysis, stating that “we live in a country that for the past four decades [now closer to six decades] has structured its political system around the assumption of a federal spending power. Terminating that power would pull the rug out from under a vast array of grants, programs and tax expenditures.”(33)
Despite the absence of a direct challenge to the federal spending power, there have been decisions by Canada’s highest court in which the federal spending power has been considered.
Even before the notion of a federal spending power became fully developed, the case of Canada (Attorney General) v. Ontario (Attorney General),(34) more commonly known as the Unemployment Insurance Reference, considered a federal law that created a fund for unemployment insurance benefits through a scheme of compulsory contributions from employers and employees. The Supreme Court of Canada struck down the legislation for being ultra vires the federal Parliament. It was not the federal spending that was found invalid, but the federal legislation that would have invaded a field of provincial competence. The case was appealed to the Judicial Committee of the Privy Council (JCPC), then the final judicial authority for Canada, which also concluded that the federal legislation was ultra vires. In the JCPC decision, Lord Atkin wrote the following:
That the Dominion may impose taxation for the purpose of creating a fund for special purposes and may apply that fund for making contributions in the public interest to individuals, corporations or public authorities could not as a general proposition be denied … [B]ut assuming that the Dominion has collected by means of taxation a fund, it by no means follows that any legislation which disposes of it is necessarily within Dominion competence.(35)
In the more recent case of Re Canada Assistance Plan,(36) the Supreme Court of Canada considered a reference from the government of British Columbia with regard to a decision of the federal government to limit its financial contribution under the Canada Assistance Plan, which set out the framework for federal contributions toward provincial social assistance and welfare costs. In his decision, Justice Sopinka, writing for the Court, addressed collateral arguments raised with regard to the federal spending power and stated that the simple withholding of federal money that had been previously granted to fund a matter within provincial jurisdiction does not amount to the regulation of that matter. The fact that a federal statute would have an impact upon an area within provincial jurisdiction was “clearly not enough to find that a statute encroaches upon the jurisdiction of the other level of government.”(37) The Attorney General of Manitoba also argued that the “overriding principle of federalism” should prevent Parliament from interfering in areas of provincial jurisdiction, and that the court should supervise the exercise of the spending power to protect provincial autonomy. On this point, Justice Sopinka replied that “supervision of the spending power is not a separate head of judicial review. If a statute is neither ultra vires nor contrary to the Canadian Charter of Rights and Freedoms, the courts have no jurisdiction to supervise the exercise of legislative power.”(38)
Two years later, in Finlay v. Canada (Minister of Finance),(39) the Supreme Court of Canada rendered another decision that dealt with the Canada Assistance Plan. Justice McLachlin, in a dissenting opinion, wrote: “In arriving at these conclusions, I have not considered the constitutional limits, if any, on the federal spending power. That issue was not raised before us and should, in my view, be left to another day.”(40) With this pronouncement, Justice McLachlin implied that there may be limits to the federal spending power that the Court might pronounce on, should the issue arise more directly.
The closest the Supreme Court of Canada has come to pronouncing directly on the constitutionality of the federal spending power is in the case of Winterhaven Stables Ltd. v. Canada (Attorney General).(41) In Winterhaven, the Alberta Court of Appeal upheld the constitutionality of the federal Income Tax Act, which the applicant had argued was ultra vires the federal Parliament because a portion of the revenues raised through federal income taxation was then transferred to fund provincial programs. In this decision, the Alberta Court of Appeal stated clearly that the power of Parliament to spend should not be equated with its power to legislate, which would be an overly restrictive approach to constitutional interpretation. Speaking on the conditionality of federal transfers, the Court stated: “To hold that conditions cannot be imposed would be an invitation to discontinue federal assistance to any region or province, destroying an important feature of Canadian federalism.”(42) The applicant was subsequently denied leave to appeal to the Supreme Court.
In light of the limited jurisprudence on this issue, one could reasonably conclude, as the Séguin Commission (discussed below) did, that “the constitutionality of the federal spending power in fields of jurisdiction of the provinces has not given rise to a favorable pronouncement having the scope of a precedent.”(43) However, one could also argue that the fact that there has been an indirect recognition of the federal spending power by the Supreme Court of Canada in past cases might weigh in favour of upholding its constitutionality in the event of a direct challenge.
To properly appreciate the debate over the legitimacy of the federal spending power, it is also important to situate it within the larger scheme of fiscal federalism. Gilles Paquet, Senior Research Fellow at the University of Ottawa’s Graduate School of Public and International Affairs, describes fiscal federalism as follows:
Fiscal federalism is the label used to refer to the wide array of processes and negotiated arrangements that defines some workable sharing of resources and responsibilities among jurisdictions and, therefore, a viable fiscal regime. This is a complex process haunted by considerable friction, disagreements, competing claims and political arithmetic.(44)
As discussed above, the federal spending power emerged in the context of a widening gap between the provinces’ revenue-raising capacity and the growing expenditures in their fields of jurisdiction. Those who reject the idea that the federal government should spend in areas of provincial responsibility usually subscribe to the notion of “fiscal responsibility,” which holds that each level of government should finance its own expenditures by its own taxation. This implies that each level of government can raise just the right amount of money that it needs and that each provincial government has comparable revenue-raising capacities.(45)
The problem with this approach is that, in practice, because the federal government occupies a large portion of the income-tax field, provinces have insufficient access to revenue to meet their constitutional spending obligations. Although provinces could theoretically raise taxes to generate all the revenue they need, because citizens are also heavily taxed by the federal government the key issue becomes the taxpayers’ ability to pay.(46) In addition, the wide disparity of wealth, and hence of revenue-raising capacity, among the provinces cannot be ignored.(47) In other words, there is both a horizontal fiscal gap between the fiscal capacities of each province, as well as a vertical fiscal gap between the provincial governments and the federal government.
The term that is most commonly used to describe the gap between provincial and federal revenues is “vertical fiscal imbalance.” However, some economists have noted that an important distinction is to be made between a “gap” and an “imbalance,” as the notion of imbalance “seems to imply that the gap is not being adequately filled” by the intergovernmental transfers.(48) Put another way, the existence of a vertical fiscal gap is considered to be a normal feature of a federal system and becomes a problem (i.e., an imbalance) only when the excess revenues of the federal government are not redistributed adequately so that provinces may meet their own spending obligations.(49) Others, however, such as political scientist Alain Noël, a member of the Séguin commission discussed below, have taken a broader view of the notion of fiscal imbalance. According to Noël, “there is a fiscal imbalance if the vertical fiscal gap is too wide, if transfers are inadequate, or if transfers are conditional.”(50)
Clearly, without this vertical fiscal gap or imbalance, there could be no federal spending in areas of provincial jurisdiction. Therefore, any attempt to address the vertical fiscal imbalance involving some form of permanent redistribution of revenue-raising capacity, such as the transfer of tax-points sought by Quebec in the past, would seriously limit future use of the federal spending power. At the same time, plans to curtail the use of the federal spending power would not be feasible without a reorganization of the current framework of fiscal federalism to enable the provinces to continue to access the revenues they need to meet spending requirements in their areas of constitutional jurisdiction.(51)
In the 1996 Speech from the Throne, the federal government signalled its intention to reduce its interventions in areas of provincial jurisdiction by stating:
The Government will not use its spending power to create new shared-cost programs in areas of exclusive provincial jurisdiction without the consent of a majority of the provinces. Any new program will be designed so that non-participating provinces will be compensated, provided they establish equivalent or comparable initiatives.(52)
However, at the same time, the federal government indicated that it had an “important contribution to make in preserving and modernizing Canada’s social union so that the caring society remains Canada-wide in scope.”(53)
At the 1998 first ministers’ meeting in Saskatoon, all of the provincial and territorial first ministers, including the Quebec premier, agreed on a framework for a draft agreement on a renewed social union. Subsequently, the federal government joined the negotiations, and the Social Union Framework Agreement (SUFA) was signed on 4 February 1999. However, the 1999 agreement differed from the agreement negotiated in 1998, and Quebec refused to sign it. Through the SUFA, the signatory governments agreed to work collaboratively to identify Canada-wide priorities and objectives. The federal government, for its part, agreed not to introduce new initiatives without the consent of a majority of provincial governments.(54)
One of the reasons for Quebec’s refusal to sign the SUFA was the opting-out formula, which did not reflect the agreement reached in Saskatoon. The Saskatoon agreement had provided that a province could opt out of a new initiative as long as it invested the transfer money in the same policy area. The final text of the SUFA was much more restrictive, stating: “A provincial/territorial government which, because of its existing programming, does not require the total transfer to fulfil the agreed objectives, would be able to reinvest any funds not required for those objectives in the same or a related priority area.”(55)
Another key problem with the SUFA from the perspective of the Quebec government was that it included a recognition, by the provinces, of the legitimacy of the spending power as an instrument that the federal government could use to achieve social policy objectives.(56)
As discussed above, Quebec has traditionally been opposed to the use of the federal spending power.(57) On 9 May 2001, the Quebec government created the Commission on Fiscal Imbalance (the Séguin commission) to identify and study the causes of fiscal imbalance between the federal government and the Quebec government, its consequences and the practical solutions that could be implemented to correct it.
The Séguin commission identified three main sources of this fiscal imbalance:
The Séguin commission relied on revenue projections prepared by the Conference Board of Canada to support the existence of a fiscal imbalance, as those projections revealed that the Quebec government would constantly post deficits over the coming years, while the federal government would realize increasingly large surpluses. To be precise, the Conference Board of Canada projected in 2002 that, by the year 2019-2020, federal surpluses would reach
$87.8 billion, while the Quebec government would post recurring deficits averaging $3 billion each year until 2019-2020.(59)
The Séguin commission also maintained that such an imbalance had important negative consequences: namely, it prevented adequate delivery of services to citizens, created confusion in the decision-making process, and reduced the overall efficiency and accountability of government spending while interfering with the budgetary autonomy of the province. To address these problems, the commission put forth a number of recommendations including:
The federal response was articulated by Stéphane Dion, then federal minister for Intergovernmental Affairs, who suggested that the figures arrived at by the Conference Board of Canada in their “hypothetical” exercise were unreliable, as these figures were based on an assumption that no new measures affecting revenues or spending would be undertaken, or, as he put it, “that governments would put themselves on auto-pilot and take a 20-year vacation.”(61) He also argued that the discrepancy in revenues between the federal and provincial governments were driven in large part by the decision of some provincial governments, such as the Ontario government, to implement tax cuts, or to spend more heavily on some social programs, as was the case in Quebec.(62) Dion concluded that the recommendation of the Séguin commission to abolish the health and social transfers and replace them with a transfer of tax points to the provinces would more than likely “plunge the federal government back into deficit for several years.”(63)
In the 2007 Budget, the federal government stated its intention to restore the “fiscal balance with provinces, territories and municipalities.” In this context, the federal government undertook to enhance the accountability of governments through the clarification of their respective roles and responsibilities and to limit the use of the federal spending power. The 2007 Budget included the following statement:
Budget 2007 reconfirms the Government’s commitment to limit the use of the federal spending power to ensure that:
- New cost-shared programs in areas of provincial responsibility have the consent of the majority of provinces to proceed.
- Provinces and territories have the right to opt out of cost-shared federal programs with compensation if they offer similar programs with comparable accountability structures.
To support the commitment to limit the use of the spending power, the Government will report, starting with this budget and in all future budgets, on new investments in areas of core federal and shared responsibility and in transfers to support provinces and territories.
The Government will continue to further clarify roles and responsibilities, and will explore with provinces and territories ways to formalize its commitment to limit the use of the federal spending power to ensure respect for provincial–territorial responsibility.(64)
Subsequently, in the Speech from the Throne delivered on 16 October 2007, the following statement was made:
Our Government believes that the constitutional jurisdiction of each order of government should be respected. To this end, guided by our federalism of openness, our Government will introduce legislation to place formal limits on the use of the federal spending power for new shared-cost programs in areas of exclusive provincial jurisdiction. This legislation will allow provinces and territories to opt out with reasonable compensation if they offer compatible programs.(65)
Critics were quick to compare this federal proposal to the 1999 Social Union Framework Agreement (SUFA) (discussed above) and to note that it fell short of Quebec’s traditional demands vis-à-vis restraining the federal spending power. Although there are clear similarities between the proposal articulated in the Speech from the Throne and the SUFA, insofar as both are meant to apply to new shared-cost programs, until the legislation is actually introduced no definite conclusion can be reached. It is nonetheless worth noting that legislation, unlike an administrative agreement such as the SUFA, would be easier to enforce in court and might also increase the likelihood of a direct legal challenge to a future exercise of the federal spending power. That being said, it remains true that federal legislation restricting the spending power, like any other federal legislation, could be repealed by this or a subsequent federal government, in accordance with the principle of parliamentary sovereignty.
Critics and supporters of the exercise of the federal spending power have identified both important advantages and disadvantages to its use. It should be kept in mind that one’s assessment of the desirability of the exercise of the federal spending power has much to do with one’s vision of Canadian federalism and of the role of the federal government within the Canadian federation.
The goal of federal spending in areas of provincial jurisdiction is often associated with the idea of providing national standards across the country, or of providing Canadians across the country with comparable levels of public services. Most clearly articulated in the equalization program, this program also applies to other forms of federal spending in areas of provincial jurisdiction.
The first argument to be made in favour of the use of the federal spending power is an economic argument. Economist Robin Boadway has argued that the federal spending power should be “nurtured as the only feasible policy instrument” available for the federal government to achieve “its legitimate objective of equity and efficiency in the internal economic union.”(66) Put a different way, one argument is that the federal spending power is a “national instrument of social development that also enables the federal government to reduce disparities among provinces within the federation.”(67) This in turn may help to enhance the mobility that an integrated common market requires, while at the same time reducing the need for “jurisdiction shopping” in social services.
There is also a strong argument to be made that, without the federal government’s intervention, some public services that we take for granted today might have been delayed or might never have come into existence at the national level. Hogg observes:
Shared-cost programs have assured Canadians a high minimum level of some important social services. Without the federal initiative, and the federal sharing of the costs, it is certain that some at least of these services would have come later, at standards which varied from province to province, and not at all in some provinces.(68)
As such, the idea of national standards for social programs is a corollary of the national interest justification for the spending power.(69) Given the importance of some of the programs created as exercises of the federal spending power (such as medicare) to Canadians’ sense of national identity, the spending power can also be seen as an important instrument of nation-building. Smaller provinces especially have tended to be more supportive of the federal spending power and of a centralized form of fiscal federalism, as their own fiscal capacity is more limited given their smaller tax-base. As such, it would have been difficult for them to put in place some of the more complex social programs that have arisen out of the exercise of the federal spending power.
However, on this question of nation-building, an important caveat exists in the case of Quebec, since a national consensus and national standards could be perceived to imply the existence of only “one nation.” As Hamish Telford writes:
This has been disconcerting to the government of Québec which finds the notion of national standards doubly offensive. First, in political practice, national standards means federal standards in areas of provincial jurisdiction. This, of course, is contrary to the federal principle, at least as understood by the government of Québec. Second, national standards are interpreted in Québec as the standards of the English Canadian nation. They are viewed as an imposition by the majority upon a minority nation.(70)
Given what has already been said of Quebec’s distaste for the use of the federal spending power and the imposition of national standards, it has also been argued that, in view of the tensions it creates within the federation, the spending power could be viewed as a “nation-destroying,” not nation-building, instrument.(71) Its most obvious disadvantage, as far as the provinces are concerned, is that the federal spending power, when it involves any form of conditional payment, interferes with the decision-making powers of the provincial governments and therefore allows the federal government to make policy in areas where it is not constitutionally competent to do so. Interestingly, this same argument is used by supporters of the federal spending power, who perceive this ability of the federal government to intervene in areas of provincial jurisdiction as a positive thing (see discussion on national standards, above).
According to Hogg, the use of the spending power, particularly in the form of shared-cost programs, has led to a “substantial shift in the distribution of power within confederation.”(72) As further explained by economist Thomas J. Courchene:
[C]hanges in the magnitude of, and in the incentives embodied within, federal-provincial fiscal transfers are tantamount to de facto changes in the division of powers themselves, with unconditional transfers enhancing provincial autonomy and conditional transfers enhancing the federal government’s influence in areas of provincial jurisdiction.(73)
Also, by participating in these programs, it has been argued that the provinces have been forced to spend money to meet what were essentially federal priorities, and thus these programs “locked a substantial portion of provincial budgets outside the normal provincial processes of priority setting and budgetary control.”(74) Furthermore, this interference with provincial budgetary priorities cannot be avoided by “opting out” of federal initiatives, since any opting out usually requires that the money transferred by the federal government be spent on establishing a comparable program. The Quebec government has also argued that the compensation received for opting out is usually not sufficient to cover the costs of establishing comparable programs. That is why Quebec has sought “full compensation” for opting out. Moreover, it has been argued by one critic that opting out only provides the province with “an illusion of autonomy” but does not “restore the province’s sovereignty in areas of provincial jurisdiction.”(75)
Most of the critics of the federal spending power focus on the negative effect of intergovernmental transfers on accountability, arguing that the use of the spending power blurs the lines of electoral responsibility. The problem is that when the money comes from the federal government and the legislative power rests with the provinces, implementing accountability becomes highly problematic, since it is difficult to tell whether insufficient resources provided by the federal government or bad administration of those resources by the provincial governments is to blame for any shortcomings in a social program. At the same time, it is difficult for citizens to lobby for change, since provinces may be wary of acting on their own for fear of losing federal money, and Parliament cannot enact legislation directly.(76) Another perspective on this is that the use of the federal spending power, rather than shifting political responsibility from one government to the other, “blurs the lines of accountability of both” and further contributes to Canadians’ lack of confidence in the political system.(77)
Finally, from a broader federalism perspective, the use of the spending power and the conditions attached by the federal government can be seen as distorting the federal system of governance by making the provinces subordinate to the federal government rather than sovereign and equal in their own sphere of jurisdiction.(78)
The debate over the use of the federal spending power is part of a larger debate in the context of fiscal federalism, and reflects in part different visions of Canadian federalism and of the roles of Parliament and the provincial legislatures. In Canadian Fiscal Arrangements: What Works, What Might Work Better, Professor Keith Banting, former director of Queen’s School for Policy Studies, has taken this reasoning one step further and noted that beneath the debate over the allocation of fiscal revenues are complex value choices on issues of social policy, democratic governance and our vision of community. He writes:
[O]ur fiscal arrangements reflect choices about the nature of political community: one vision which celebrates Canada as a community embracing all citizens from one side of the country to the other, and the second which celebrates Canada as an interlinked set of regional communities or a community of communities. Seen in this light, our fiscal arrangements represent one of the ways in which we define the social programs to which we are committed, the nature of democracy that we are going to practice, and the conception of community we are going to reinforce. The issues may be technical, and in some immediate sense the debates are inevitably about money and power. But our fiscal arrangements embody big choices about the kind of country we want to be.(79)
Looking at fiscal arrangements from this perspective, any future reform to the federal spending power takes on additional meaning as it carries with it the potential to transform the “nature of the country” and the manner in which its various communities relate to one another.(80)