Andrew Petter ..................................

Federalism and the Myth of the Federal Spending Power, by
Andrew Petter

MP Intro. Introduction. 1. 2, 3, 4, 5, Conclusion, Postscript, End

IV. Realpolitik

The discussion thus far has focused on constitutional doctrine and values. Yet those who support the federal spending power seem less concerned with constitutionalism than with realpolitik. They suggest that, without the spending power, politics in Canada would regress: regional disparities would increase; there would be a lack of revenue for social programs; political advances would grind to a halt. These are the myths, but what are the realities?

One of the strongest political claims made on behalf of the federal spending power is that the power is required to promote the principle of equalization. This argument takes a number of forms. Its most common version maintains that conditional grants promote equalization both by guaranteeing all Canadians equal access to a minimal level of social services and by redistributing tax revenues from richer to poorer parts of the country. The problem with the argument is that it makes an unwarranted link between the principle of equalization and the need for federal interference in the delivery of particular social programs. If the federal government is concerned about the need to equalize the position of citizens across the country, it is free to achieve this goal through unconditional grants, either to provincial governments or directly to individuals.60 Given that the goal of equalization can be met through unconditional payments, equalization cannot provide the rationale for conditional grants. Conditional grants are necessary only if the federal government wishes to influence the way in which equalization payments are spent - in other words, if it wishes to use equalization as a pretext for influencing policies within provincial jurisdiction.

Some commentators have expressed concern that, if the federal government were unable to attach conditions to provincial subsidies, it would be less inclined to equalize regional disparities. This concern should not be discounted, but neither should it be exaggerated. The pressures that regional communities can bring to bear at the federal level serve as a strong inducement for Ottawa to provide equalization grants even on an unconditional basis. This is evidenced by the history of unconditional transfers provided to the provinces since Confederation61 and by the entrenchment in the Constitution Act, 1982 of a federal commitment to "the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation".62 It is further evidenced by the fact that, in recent years, federal governments have maintained their commitment to equalization while loosening the purse-strings on conditional programs (with the exception of medicare) and increasing the proportion of unconditional subsidies and tax transfers to the provinces.63 Moreover, this concern could be addressed by spelling out the federal government's commitment to regional equalization more specifically in the text of the Constitution.

It is also worth noting that conditional grants, because of their preoccupation with guaranteeing particular social benefits to Canadians in all parts of the country, serve as an inefficient mechanism for equalizing revenues on a regional basis. The degree of regional equalization achieved by such grants could be attained far less expensively by means of unconditional transfers. Thus even a lowered federal commitment in dollar terms to the provision of unconditional grants could produce the same degree of regional equalization that is currently achieved by means of conditional payments.64

A second argument commonly made in support of the federal spending power is even more problematic than the first. According to this claim, the spending power is necessary because the provinces lack the financial capacity to fund social programs themselves. Yet how can this be so? If a province's incapacity to fund social programs stems from regional disparities, these disparities can be redressed through unconditional equalization grants. On the other hand, if that incapacity stems from an absence of taxable revenues, then this absence should inhibit the delivery of federal programs as much as provincial ones. It is true that provinces can levy only direct taxes but, given that income taxes are direct, this limitation does not pose a major constraint on provincial revenue-raising.

Of course, it may well be that there is insufficient tax room at present to allow provinces to assume the full cost of funding existing shared-cost social programs. But, if so, this is because the federal government is currently generating revenues to fund provincial programs. In the words of Trudeau, the federal government is violating its duty "to ensure that it does not collect taxes for that part of the public interest not within its jurisdiction".65 If the federal government were to relinquish the tax room it now occupies to fund initiatives within provincial legislative competence, that room would provide the same revenue-raising capacity to the provinces.

A third argument commonly made on behalf of the federal spending power is that such a power is necessary to promote new, and to protect existing, social programs and initiatives. Underlying this claim is an assumption that the central government is better trusted with the social welfare of Canadians than are provincial governments. There are two responses to this argument. The first is to question the relationship between the assumption and the solution. If it were true that the central government is more trustworthy, surely the solution would be to seek a constitutional amendment transferring jurisdiction to the central authorities. The use of the spending power to overcome jurisdictional shortcomings is a poor alternative. As shown above, the spending power provides federal authorities limited control over the programs it funds, while compromising the ability of both regional and national majorities to influence policy and to hold governments politically accountable.

The second response is to challenge the centralist assumption on which the argument is based. Why should it be that the central government is more trustworthy in terms of social policy? The national electorate, after all, is simply the sum of the regional electorates. What reason is there for believing that voters, when they enter a federal polling booth, possess different attitudes about questions of social welfare than when they enter a provincial polling booth? Perhaps there is a view that central Canadians, who comprise the bulk of the national population, are more enlightened in their attitudes to social welfare than Atlantic or western Canadians. If so, there is no evidence to support this view. On the contrary, Poel's statistical study of the diffusion of legislation among the Canadian provinces shows that, in the period from 1945 to 1975, Saskatchewan was by far the most innovative province in terms of initiating social welfare programs.66 Besides, even if it were true that the population of central Canada is more strongly dedicated to a particular vision of social justice, what political justification would this provide for requiring that view to be imposed upon those in other regions who embrace a different vision?

Another ground for questioning the centralist assumption concerns the nature of national and provincial politics. In a country as large and varied as Canada, national politics are necessarily preoccupied with mediating among competing regional, cultural and linguistic interests. Preoccupation with these "traditional" political cleavages has tended to inhibit the development of class-based politics at the national level. It is within the smaller and less diverse provincial units that traditional cleavages are diminished and ideological cleavages are more likely to come to the fore.67 Thus it is no coincidence that, while the two mainstream political parties have dominated national politics since Confederation, ideological parties have fared much better at the provincial level. In the past twenty years, for example, social democratic parties have formed governments in four provinces and served as the official opposition in two others.68

There is also the question of size and numbers. Provinces provide special opportunities for social innovation simply because they are small and because there are ten of them. Given their limited and relatively homogeneous populations, it is generally easier to forge a provincial consensus on a given social issue than it is a national consensus. Moreover, even in conservative times, there are usually a few provinces whose governments remain sympathetic to a reformist agenda. And successful implementation of a reform by one provincial regime inevitably lends legitimacy to that reform and fuels political demand for its implementation elsewhere. As Breton and Scott have observed, federalism permits creative provincial governments to undertake "pilot projects" for the rest of the country while avoiding the political risks "implicit in large or national projects".69

This is a phenomenon that is familiar to most Canadians. Hospital insurance, medicare, labour codes, human right codes, even bills of rights, were pioneered by innovative provincial regimes before gaining political acceptance across the country. The same pattern continues today with initiatives such as public auto insurance, gay rights and pay equity. The implementation of public auto insurance in Saskatchewan fueled demand for a similar scheme in Manitoba; the example set by the two prairie provinces paved the way for voter acceptance of government plans in British Columbia and Quebec, and the track record of these four provinces has bolstered campaigns for public auto insurance in Ontario and elsewhere. Similarly, the move to amend human rights codes to prohibit discrimination on the basis of sexual orientation began in Quebec and has since spread to the Yukon, Ontario and Manitoba. The example set by these provinces will undoubtedly encourage other provinces, and eventually the federal government, to follow suit. The same process is likely to occur with respect to pay equity. Ontario's enactment of pay equity legislation applying to the provincial private sector is already placing pressure on other provincial governments to undertake similar initiatives.

The point is not that provincial politics is invariably preferable to national politics. There are many problems that, for a variety of reasons, may demand national as opposed to regional resolution. Moreover, just as provincial political units are more amenable to calls for social reform, they are also more responsive to demands for social retrenchment. The recent British Columbia experience with human rights codes, labour legislation and abortion stand as stark reminders. The point is simply that, for those concerned with social progress, there is nothing inherently reactionary about provincial politics. On the contrary, there is much to recommend provincial politics as a staging ground for social reform.70

Having confronted the myths it is time to deal with some realities. One such reality is that we live in a country that for the past four 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.71 For example, the validity of federal health grants, student loans and child tax credits would be undermined. Any proposal for reform that failed to anticipate and to counteract such political disruption would be doomed from the start.

A second reality is that Canada is no longer the same society that it was even four decades ago. Social relations have become increasingly interdependent and complex. Problems that were once of local concern today attract national attention. New issues have emerged that require innovative solutions or fall between the cracks in the constitutional order. These changes demand constitutional adaption and, in some instances, the spending power has served as a tool for such adaption. If that tool is to be taken away, formal mechanisms for constitutional adjustment must be made more flexible.

These two realities point to a third: there are limits on the ability of courts to use legal norms to control governmental behaviour. At some point, the requirements of constitutionalism must yield to the demands of political practice. To quote Trudeau once again: "There are areas in which even the courts cannot provide enlightenment: no matter how clear one's rights, the federal system must ultimately rest upon a basis of collaboration."72 While the authority wielded by judges may enable them to strike down particular programs, it does not permit them to dismantle the structure of modem government.73 It is simply beyond the capacity of courts to undo forty years of political development.74

And so we have come full circle. Having determined that the federal spending power cannot be supported on the basis of doctrine or constitutional values, we are confronted with the cold reality that courts are incapable of doing anything about it. Reform of the spending power can be accomplished only through political action. Such reform requires a carefully managed process of governmental collaboration aimed at producing maximum jurisdictional disentanglement and minimum social cost.

What are the chances of politicians rising to this challenge? The history of the past forty years would seem to suggest that they are not great. Yet the limitations on the spending power proposed by the Meech Lake Accord provide some cause to question this assessment. Even if the Accord fails to attract the unanimous provincial approval that it requires, the support it has already received from the federal Parliament and from the legislatures of more than two-thirds of the provinces is significant. This support demonstrates that a substantial number of politicians across Canada are now prepared to acknowledge a problem with the spending power, and to entertain proposals for constitutional reform. Moreover, it is a measure of support that, while insufficient to implement the Accord, would be sufficient to enact a constitutional amendment limited in scope to the spending power.75




Given that equalization of wealth among regions is a discrete function that falls beyond the scope of provincial legislative power, a federal law whose purpose is limited to equalization should be sustainable on the basis of the national dimensions component of the peace, order and good government power. Moreover, since 1982, the Constitution has explicitly acknowledged the right of the federal government to make "equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation": Constitution Act, 1982, s. 36(2).


See La Forest, op. cit., footnote 23, ch. 1 and pp. 150-15 1.

62. Section 36(2).
63. Hogg, op. cit., footnote 6, p. 129.
64. See Smiley, op. cit., footnote 2, pp. 59-60.
65. Trudeau, op. cit., footnote 49, p. 87.
66. D.H. Poel, The Diffusion of Legislation among the Canadian Provinces: A Statistical Analysis (1976), 9 Can. J. Pol. Sc. 605.
67. There is a whole body of literature concerning the impact of federalism upon class and power in Canada. The orthodox view among leftist writers appears to be that federalism, by reinforcing traditional political cleavages, has inhibited the development of class-based politics at the national level, thereby imposing "a conservative tone on the Canadian political system": J. Porter, The Vertical Mosaic: An Analysis of Social Class and Power in Canada (1965), p. 385. The difficulty with this view is that it underestimates the extent to which these traditional cleavages would exist absent federalism and, at the same time, discounts the impact of federalism on regional politics. What writers like Porter fail to note is that, while federalism serves to reinforce traditional cleavages at the national level, it creates a second tier of political decision-making at the regional level in which traditional cleavages are minimized and which therefore is more conducive to the development class-based politics.
68. In the past twenty years, the New Democratic Party has formed governments in Manitoba (1969-77; 1981-88); Saskatchewan (1971-82); British Columbia (1972-75), while the Parti Québécois formed the government of Quebec (1976-85). The New Democratic Party has served, and continues to serve, as the official opposition in both Alberta and Ontario.
69. Breton and Scott, op. cit., footnote 55, p. 18.
70. As Trudeau put it to Canadian socialists in 1961: "Federalism must be welcomed as a valuable tool which permits dynamic parties to plant socialist governments in certain provinces, from which the seed of radicalism can slowly spread.", The Practice and Theory of Federalism, in Federalism and the French Canadians, op. cit., footnote 49, p. 127.
71. It might also call into question the right of governments to control various Crown corporations, although a strong case could be made that, even in the absence of the spending power, government ownership of such corporations (including those outside its normal regulatory jurisdiction) is supported by federal authority over public property and provincial authority over property. It should be noted that this argument is quite different from the one that seeks general support for the spending power on the basis of federal jurisdiction over the public debt and property. That argument is based on the assertion that a law authorizing the expenditure of federal funds for any purpose should be characterized as a law in relation to public debt and property. The argument here is based on the narrower and more tenable proposition that a law authorizing the expenditure of federal funds for the particular purpose of acquiring a government interest in property ought to be characterized as a law in relation to public property. Similarly, the fight of provinces to acquire Crown corporations would be grounded upon the provincial power over property, which presumably includes provincial public property.
72 Trudeau, op. cit., footnote 49, p. 99.
73 Some may believe that judges, while incapable of assuming full responsibility for reforming the spending power, could still play an important role as catalysts for such reform. The Supreme Court of Canada has recently shown how this might be done. In Reference re Manitoba Language Rights, supra, footnote 53, the court believed that striking down all Manitoba legislation enacted only in English would be too politically disruptive. It therefore issued an order declaring such legislation to be unconstitutional but allowing the Manitoba government a period of grace in which to translate the laws in question. Presumably a similar order could be issued here, declaring the spending power to be unconstitutional but allowing governments time to adjust to this ruling. Such an order would place the burden upon governments to initiate the institutional reforms required to preserve existing programs. The trouble with this scenario is that the changes that would be required to preserve programs threatened by the elimination of the spending power are far more complex and contentious than the translation of laws. For this reason, the potential disruption that would be caused by such a court order would be far greater, making it improbable that any Canadian court would assume the political risks of even this form of action.
74 This assessment is supported by the cursory manner in which the Alberta Court of Appeal dismissed the recent constitutional challenge to federal health, education and welfare expenditures in Winterhaven Stables Inc. v. Attorney-General of Canada, supra, footnote 34, and by the subsequent decision of the Supreme Court of Canada to refuse leave to appeal in that case: Supreme Court of Canada, Bulletin of Proceedings, April 14, 1989, p. 905.
75 An amendment limited to restricting the use of the spending power would require the support of the federal Parliament and of the legislatures of two-thirds of the provinces representing at least fifty per cent of the population: Constitution Act, 1982, s. 38(1).