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

V. Constitutional Reform

The Meech Lake Accord marks the first concerted effort by Canadian governments to place explicit constitutional limitations on the federal spending power. Clause 7 of the Meech Lake Accord would amend the Constitution Act, 1867 by adding the following section:

106A. (1) The Government of Canada shall provide reasonable compensation to the government of a province that chooses not to participate in a national shared-cost program that is established by the Government of Canada after the coming into force of this section in an area of exclusive provincial jurisdiction, if the province carries on a program or initiative that is compatible with the national objectives.

(2) Nothing in this section extends the legislative powers of the Parliament of Canada or of the legislatures of the provinces.

What this section does, in essence, is to guarantee a provincial government "reasonable compensation" for opting out of future national shared-cost programs, provided the government in question establishes provincial programs that conform to "the national objectives". In this way, the Accord seeks to limit the power of Ottawa to use conditional grants as a mechanism for dictating the details of programs that fall within provincial legislative Jurisdiction.

The problem with the proposal is that it does not go nearly far enough. First, it applies only to future shared-cost programs, not to existing ones. Second, while purporting to guarantee a measure of provincial control over the details of such programs, section 106A would not impede the ability of the federal government to set spending priorities or to dictate general program objectives. Indeed, by formally recognizing Ottawa's power to set "national objectives", the section could actually encourage the federal government to tighten the conditions it imposes on existing shared-cost programs.76 Third, section 106A would do nothing to curb federal spending outside the context of shared-cost programs. Thus if Ottawa wished to avoid the new limits on shared-cost programs, it could establish spending programs of its own. Alternatively, it could use the device of tax expenditures in an effort to avoid limitations imposed upon it by the proposed amendment.77

At best, therefore, section 106A might marginally enhance provincial autonomy over policies falling within provincial legislative jurisdiction. At the same time, it would do little if anything to strengthen political accountability. By leaving political responsibility diffused between two orders of government, the Accord would continue to leave voters in doubt as to whether the deficiencies of a shared-cost program - even one initiated by a province - lie in the provincial or federal aspect of its design and implementation.

What is needed is a more radical and comprehensive approach. First, conditional transfers between governments should be constitutionally prohibited, and the tax room currently required to fund such transfers given over to the government with legislative jurisdiction. Second, federal and provincial governments should commit themselves to a joint initiative aimed at eliminating the use of other conditional grants, loans and tax expenditures for the promotion of policies that fall outside their respective legislative jurisdictions. Third, the federal government's commitment to regional equalization of tax revenues should be spelled out more specifically in the Constitution. Finally, formal procedures for constitutional amendment should be made more flexible.

Let us consider each of these proposals in turn. The first is directed at eliminating the spending mechanism that is most destructive of provincial autonomy and political accountability: the conditional transfer from the federal to provincial governments. Conditional transfers are particularly pernicious because they do not use federal spending to address social conditions directly; rather, they use it to influence the exercise of regulatory authority by the other level of government. The disruptive potential of eliminating these transfers would be great if not accompanied by specific guarantees ensuring the continuity of the programs that they fund. However, this danger would be substantially reduced if the federal government were required to turn over to the provinces the tax room it currently occupies to fund such transfers. As a further hedge against political disruption, provinces should be required to continue programs in accordance with federal conditions until after a provincial election. This would ensure electors an opportunity to express their views before any provincial government decided to abandon or substantially alter an existing program.

The second proposal seeks to place some political limits on the use of other conditional spending programs. It would entail the establishment of an intergovernmental agency with powers to prevent federal and provincial governments from employing such programs to influence policies beyond their respective legislative jurisdictions. Such an agency, for example, would require the phasing out of federal student loans and provincial foreign aid. Again, to minimize political disruption, the funding government would be obliged to transfer the necessary tax room to the government with legislative jurisdiction. In return, the latter would be required to assume responsibility for the program and to continue it in its present form until after a general election.

Why should this agency be political rather than judicial? The answer lies in the complexity of current fiscal arrangements and in the difficulty of distinguishing between spending that is aimed at a legitimate federal or provincial purpose and that which is not. Unlike conditional transfers, which invariably flow from the federal government and which relate to a discrete group of policy initiatives, other conditional spending initiatives comprise a complex web of federal and provincial grants, loans and tax expenditures. The task of disentangling this web requires political sensitivity and skill. It is a job that must be given to a body that is capable of comprehending the complexity of the task and that possesses the means to respond in a constructive and sophisticated fashion. Moreover, while programs funded by means of conditional transfers have been generally recognized as falling under provincial legislative jurisdiction, the jurisdictional pedigree of many other spending initiatives is problematic. This is especially true of tax expenditures. Is a particular expenditure aimed at promoting tax equity or a social policy that falls within provincial jurisdiction - or is it aimed at both? In many cases, the answer will turn on questions of political judgment. To leave determinations such as these to a detached adjudicative agency with limited remedial powers would be to invite ongoing political instability and disruption. The only practical solution is to entrust these determinations to a body that fully understands the practical implications of its actions and has the capacity to make decisions and recommendations that will produce jurisdictional disentanglement at the least political cost.

The third proposal is designed to ensure that the elimination of conditional transfers and other conditional spending programs does not diminish the federal government's commitment to equalizing tax revenues on a regional basis. It would require the inclusion in the Constitution of a specific formula guaranteeing that current levels of regional equalization, including those embodied within existing conditional grant programs, be maintained or enhanced. This requirement could be met by means of unconditional transfers to the provinces or other initiatives whose effect would be to equalize revenues on a regional basis.

These three proposals would go a long way to restoring provincial autonomy and political accountability to Canadian federalism while protecting the principle of regional equalization. But there is more to be done. If governments are to be deprived of spending as an informal means of constitutional adjustment, it is essential that formal amendment procedures be made more flexible. In this respect, the Meech Lake Accord marks a step backwards. First, it would impose a unanimity requirement on certain constitutional amendments affecting national institutions and on amendments providing for the creation of new provinces.78 Second, by providing greater compensation to provinces that opt out of other amendments, the Accord would make it more difficult to obtain the required measure of provincial consent under the general amendment formula.79 The inevitable impact of embracing such constitutional rigidity would be to increase the pressure upon governments to resort to spending and other expedients to overcome jurisdictional barriers.




An example of this tendency is provided by a Globe and Mail editorial which relied upon the wording of s. 106A to argue that Ottawa ought to attach specific conditions to the block funding it currently provides provinces for post-secondary education: Editorial, The Globe and Mail, Toronto, November 5, 1987, p. A6.


The section does not make clear whether tax deductions and credits that come out of federal and provincial coffers fall within the definition of "national shared-cost" programs. If they do not, the federal government would be able to propose a jointly funded tax credit to promote a particular policy that fell within provincial jurisdiction. Any province that refused to participate in the credit would not be entitled to compensation. .

78. Clause 9 of the Accord would amend ss. 41 and 42 of the Constitution Act, 1982 to require unanimous provincial consent for amendments relating to: the principle of proportionate representation of the provinces in the House of Commons; the powers of the Senate and the method of selecting Senators; the Supreme Court of Canada; and the establishment of new provinces. Under current arrangements, such amendments require only two-thirds of the provinces representing fifty per cent of the population.
79. Clause 9 of the Accord would amend section 40 of the Constitution Act, 1982 to require the federal government to provide "reasonable compensation" to provinces that opt out of constitutional amendments that transfer legislative powers from provincial legislatures to the Parliament of Canada. Such compensation is currently required only with respect to amendments "relating to education or other cultural matters".