Reforming fiscal federalism must address intergovernmental entangling of services and policies. The Council of the Federation could play a key role.
COVID-19 has contributed to unprecedented deficits for Canadian governments and heightened concerns about the long-term fiscal sustainability of several provinces. In response, Canada’s premiers are calling for increases to Canada Health Transfer and policy scholars are starting to raise questions about the sustainability of Canada’s broader system of fiscal federalism.
Canadian fiscal federalism – that is, the fiscal relationships between different orders of government – hasn’t been subjected to systematic review in a long time and it’s showing. A combination of aging demographics, a growing service delivery role for cities, and the erosion of the long-term fiscal sustainability of several provinces was already putting pressure on the system prior to the pandemic. These underlying changes have only been exacerbated over the past several months.
Yet, as much as there may be a need for fundamental reform to Canadian fiscal federalism – including rethinking federal transfer payments and the revenue-generating capacities of our major cities – there’s a risk that over-ambition ultimately collapses under the weight of intergovernmental, regional and ideological differences. Canadian history is replete with examples of good intentions about reforming our federalism that failed to translate into meaningful reform.
The risk, as we outline in a new paper for Ontario 360 (a project at the Munk School of Global Affairs and Public Policy), is that a narrow focus on fundamental reforms risks forestalling political support for smaller-scale improvements to the functioning of Canadian federalism.
In particular, the paper highlights the growing problem of what we refer to as “intergovernmental entanglement.” The basic idea here is that our different orders of government have slowly and almost imperceptibly become entangled in different areas of public policy and service delivery. This process of entanglement wasn’t due to design or bad intentions but is mostly the consequence of a series of one-off decisions made in response to a combination of policy and political considerations. Many of these were no doubt justified in isolation. However, the net effect is a labyrinth of intergovernmental overlap and duplication across the three orders of government.
For example, according to an Ontario 360 study, there are no fewer than 280 provincial statutes and countless regulations, policies and service standards that affect how Ontario municipalities deliver services. And given municipalities’ subordinate constitutional position, provincial governments can continue to impose statutes and regulations on them. This level of entanglement is only multiplied when one accounts for federal laws and policies that touch on provinces and municipalities.
This can have various consequences including:
- undue costs on governments, businesses and households – a now dated estimate from the Library of Parliament found that intergovernmental entanglement costs the federal government as much as $5 billion per year alone. This would obviously significantly increase if one accounts for the broader costs to the provinces and municipalities and the economy as a whole, including the “deadweight loss” that results from businesses navigating multiple taxation, regulatory and project approval regimes.
- a lack of coordination between the different orders of government across the same policy fields, which can create confusion for businesses and households and ultimately harm policy effectiveness.
- an erosion of transparency and political accountability when no one order of government is responsible for financing and implementing policies or projects.
- And top-down mandates (often associated with “strings-attached” funding) can act as an impediment to policy-makers’ capacity to experiment with regional or localized policies and be more responsive to local policy preferences and needs.
For these reasons, we believe that Canada’s different orders of government ought to pursue a dedicated, ongoing process of intergovernmental disentanglement. This would improve accountability and permit greater scope for experimentation. It would also reduce burdens on businesses and ultimately lower costs for taxpayers.
To these goals, we propose that Canadian governments pursue an evidence-based process to make judgments about how to solve for disentanglement in different policy and operational areas. This might start with areas such as skills training, consumer safety regulations, immigration settlement and law enforcement and work towards more complex questions such as the tax and transfer system, capital market regulations and innovation-related programs. The Council of the Federation, which is a forum for provincial and territorial dialogue, can play a key role in this process, in conjunction with the federal government and the newly-constituted Intergovernmental Fiscal Relations Commission, to draw on a common set of principles and evidence to decide “who does what” and “who pays for it.”
The purpose of such an exercise wouldn’t be fiscal savings per se. It would be primarily about judging which level of government is best placed to execute certain functions or deliver particular programming and services based on various considerations – namely, accountability, efficiency, effectiveness, experimentation, fiscal sustainability, and subsidiarity. Funding could flow up or down based on where the policy and service delivery responsibilities ultimately resided.
There’s reason to believe that such an agenda could find political support across the provinces and with the federal government. Every government is running large budgetary deficits due to the pandemic and is keen to streamline and modernize their programs, services and operations. Even if there isn’t significant fiscal savings for any one order of government, there’d definitely be a reduction in the overall cost of government. And although it is a bit cliché, there’s ultimately only one taxpayer.
Of course, this disentanglement agenda is not a substitute for major fundamental reforms to Canada’s system of fiscal federalism. But there’s opportunity for actionable reforms in the short-term that can possibly build momentum for a broader agenda to reconceptualize Canadian federalism following the COVID-19 pandemic.