Federal-provincial economic relations always challenging


From the time Canada first became a nation in 1867, the federal government in Ottawa and the provincial governments across the country have been engaged in regular and sometimes vicious battles over money. The British North America Act established a federal system for Canada. That meant that control over issues was divided between the two levels of government. The division, in the Canadian case, was not equal. The national government was responsible for big items of national significance and the provincial governments were responsible for small issues of local significance.

In 1867, defense, finance and commerce seemed to be the big issues, so they were handed to the national government; health, education and insurance seemed to be less important, so provinces were made responsible for these more local concerns. In keeping with this division, the federal government could collect money any way it chose, while the provinces could only tax directly. Therefore the federal government’s capacity for income was limitless while the provincial access to money was severely limited. This made sense given the fact that Ottawa had what seemed to be costly responsibilities, while the provinces seemed to have control over inexpensive areas. But it meant that there would always be battles about which level of government could collect the money, and in which areas each level was responsible for spending money.

As the 20th century unfolded, the size of the provincial responsibilities seemed to grow. The issues under provincial jurisdiction increasingly seemed to be necessary, and they were invariably terribly expensive to provide. Government responsibility shifted from regulating services like health and education to actually providing them. The costs were huge.

At the same time that provincial responsibilities became more costly, the ways that were available for them to collect money became even more constrained. For example, both federal and provincial governments can impose direct taxes; a federal example of a direct tax is the income tax, while a provincial example is a sales tax. However, once one level of government begins to tax a particular area, it closes it off, for all intents and purposes, to the other level of government. When Ottawa moved into the income, corporate and estates tax fields during World War II, all direct taxes, the provinces lost a major source of income. The federal government compensated the provinces for leaving these fields, but the provincial governments lost important flexibility in accessing money for themselves.

Ever since the federal government moved aggressively into the direct tax fields during the 1940s, supposedly because of the very particular needs of wartime, Ottawa and the provinces have had to meet regularly to divide the tax fields. That first, supposedly temporary, federal grab of direct tax revenue was to last for the duration of the war. When the war was over the money was too good for the federal government to give up. Every five years since then, the two levels of government have met to discuss the formula for sharing the tax areas. The federal government has kept taxing in the direct tax fields, continuing to compensate the provinces in various ways.

But collecting the money isn’t the only problem plaguing the federal and provincial governments. They also argue about which level of government gets to spend money in particular areas. With more money, Ottawa had the ability to spend in areas that were actually within provincial jurisdiction. When the federal government introduced national health insurance in the 1960s, for example, and covered the costs of the doctor and hospital bills for Canadians, it was really working in an area that was the responsibility of the provinces. It could do this by offering to cover half the cost of health insurance in any province that passed legislation that met a set of national guidelines. Provinces that agreed could pay 50 cents for a dollar’s worth of services – a deal that they all found too good to ignore. But this allowed the federal government to dictate the terms of what ought to have been a provincial program.

Since 1956, governments have also recognized that some regions of Canada are chronically poor while other areas tend to be much more wealthy. Equalization – a system by which the federal government gives money to poorer areas in order to bring the region up to a national average – ensures that all Canadians, regardless of where they live in Canada, have access to the same level of services. Figuring out which provinces are eligible for equalization payments is another regular source of friction between the two levels of government.

In a federal system, the federal and provincial governments are in a near constant state of conflict over money. Negotiations over how to divide access to tax revenues occur regularly; arguments over how to spend the money are ongoing, as are debates about who needs more money and why. But in Canada, these sorts of conversations are an accepted, desirable and integral part of the way our government system functions.

Next Installment: A Miniature of Britain – Well, Not Quite

The Canadian Experience

is a 52-week history series designed to tell the story of our country to all Canadians. Sponsored by Multimedia Nova Corporation and Diversity Media Services/Lingua Ads partners, the series features articles by our country’s foremost historians on a wide range of topics. Past articles and author bios are available at http://www.cdnexperience.ca. The Canadian Experience is copyright © 2010-2011 Multimedia Nova Corporation.

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