The soon-to-be two years of this pandemic represent one of the most intense periods of intergovernmental relations in Canadian history. There is little sign that things will ease in 2022. The pandemic is not over, and the discussions required to manage it in a decentralized federation like ours will continue. But even aside from the management of the pandemic, the Liberal minority government now faces a series of important challenges in its relationship with the provinces. While some of what lies ahead has been thrown at the government because of the financial repercussions of the pandemic, many core challenges to federal-provincial relations are of the Liberals’ own making and central pieces of their agenda.

Provincial finances and health care

The first challenge for federal-provincial relations in 2022 will be the economic situation in the provinces and health care funding more specifically, given that it represents their most important expenditure. The good news: the provinces are in a much better situation than most had anticipated when the pandemic hit. For instance, as figure 1 shows, the deficits anticipated by the four largest provinces in their spring 2021 budgets were all revised in their recent fall 2021 economic updates. This much-less-dire-than-anticipated state of affairs is also true for the federal government. The fiscal update released by Ottawa on December 14th also revised budget forecasts for the better.

Crucially, Ottawa started this pandemic in a better fiscal situation then the provinces. And it is important to highlight how much of the reversal of fortune for the provinces is in large part due to the help they received from the federal government. In a very informative piece published in November, economist Trevor Tombe described how transfers and income support programs coming from Ottawa during the pandemic contributed to provincial finances.

Taken together, these transfers represented 5 per cent of Canadian GDP in 2020, the highest it has ever been. Put differently, figure 2 shows federal transfers to each province as a share of the province’s GDP. Notice the uptick for all provinces at the end of those time-series for 2020.

So, while it is good news that provinces’ finances are better than expected, the situation is still precarious. Some of these transfers were one-offs, like the $19 billion Safe Restart Agreement to help provinces restart their economies in the face of COVID. Transfers are unlikely to remain at this level for long, and if they do, it will be with conditions.

All of this is important to keep in mind as the battle for health care funding roars back in 2022. The safest bet for the number one issue in federal-provincial relations in early 2022 will be the provinces clamouring again for the federal government to increase the Canada Health Transfer (CHT) from 22 per cent to 35 per cent of health care costs – a $28-billion increase.

The current federal government has repeatedly refused to go that way. The reason is simple: the CHT goes into provinces’ general revenues and comes with very loose strings attached. The provinces only need to respect the Canada Health Act. That’s it. But the federal government wants to see results in specific areas.

This means targeted funding and “tighter” strings. The federal Liberals campaigned on more funding for health care but clearly outlined their priorities, such as the hiring of new doctors and nurses and eliminating waitlists. And this is aside from the Liberals’ desire for a more “national” approach to long-term care and mental health, which was again front and centre in the recent mandate letter to the Minister of Health posted on December 16.

With the federal government and its provincial counterparts firmly entrenched in their positions, how will we move past this stalemate? In an illuminating piece in Policy Options, Geoff Norquay recently described how the battle over health and social programs is likely to play out. In short, we should watch for cracks on the provincial front, because provinces will need the money.

This might take the form of new bilateral agreements, like the recent ones on childcare. There is an added difficulty here, however. While it might have been possible for the federal government to sell the idea of a separate deal with Quebec for childcare to other provinces, the provinces might not be as willing to accept asymmetric agreements on health care funding this time around. It will not be an easy file for the prime minister to navigate.

And for those looking for a more refreshing look on health care funding, perhaps a redesign of the CHT from per-capita funding to a needs-based approach, do not hold your breath. With Alberta likely to be on the losing end of such a change – proposals for needs-based formulas often consider aging populations, and Alberta’s is young compared with Quebec’s and those of the Atlantic provinces – the proposition is a no-go.

Equalization and Alberta

Speaking of Alberta, this will be another interesting dynamic to watch for in 2022, but one that is rather unpredictable. Alberta Premier Jason Kenney claims that the 62 per cent of Albertans who voted “yes” in the October 18th referendum to remove the principle of equalization from the Canadian Constitution give him a strong mandate to renegotiate with Ottawa. It’s still unclear what exactly is up for negotiation.

The referendum was about removing section 36(2) of the Constitution, which would require other provinces to want to enter in these negotiations. Factor in the reality that only 38 per cent of eligible voters cast a ballot (for comparison, the turnout in the 1995 Quebec referendum was 93.5 per cent), and Kenney is not in that strong a position.

Still, Kenney argues that the result demonstrates the need to address the fundamental unfairness in federal transfers. But here, the federal government could argue that it has already reformed another program, the Fiscal Stabilization Program, and that three-quarters of the total amount for 2020-2021 (slightly above $1 billion) will likely go to Alberta. Others will also argue that the largest federal transfer, the CHT, uses a per-capita formula that favours Alberta compared with other provinces that have older populations.

Whatever happens with the discussions about a “fair deal” for Alberta, the underlying malaise and the sense of alienation that inspired the province’s equalization referendum are more than just fads – although the recent change in oil prices might alleviate them for a time. At the same time, with Kenney polling at historic lows and newly elected Liberal MPs in Calgary and Edmonton, the prime minister is in a better position to navigate this file than he might have been in the past.

A stable landscape?

Sometimes, forecasting what the next year holds in store for relationships between provinces and the federal government is made more complicated by looming provincial or federal elections that could completely change the landscape. We know that the situation is set at the federal level for the foreseeable future. Provincially, two big players will have elections in 2022 – Ontario on or before June 2nd and Quebec on October 3rd.

At this point, one would have a hard time coming up with a scenario in which Premier François Legault does not win a resounding majority in Quebec – he would currently win close to 50 per cent of the popular vote and 97 of the 125 seats in the National Assembly. In Ontario, Doug Ford is not coming out of the pandemic unscathed, far be it, but is looking likely to retain power, owing more to the weakness of his opposition than to his own actions. He also currently has the honour of being the only provincial premier to not have signed a deal with the federal government on childcare, something that the approaching election should help fix early in 2022.

The election that is more likely to have an impact on the tone and substance of federal-provincial relations will come in 2023: the rematch between Rachel Notley and Jason Kenney in Alberta. Until then, if things evolve in 2022, it will not be because the players at the table have changed, it will be because the current players changed their minds.

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Charles Breton
Charles Breton is the executive director of the Centre of Excellence on the Canadian Federation at the Institute for Research on Public Policy (IRPP) and the former research director at Vox Pop Labs. He holds a PhD from the University of British Columbia. Follow him on Twitter: @charlesbreton

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