Stop giving $36B a year to the provinces

In a speech at the Albany Club in Toronto on Wednesday, Conservative MP Maxime Bernier argued that federal transfers to the provinces — especially in health and education — are inefficient, if not simply unconstitutional. He proposed to replace them with a transfer of tax points, allowing the provinces to occupy the fiscal room thus vacated. This is a sensible proposal for more reasons that can be concatenated in 800 words.

The broadest reason is related to the economics of political institutions. The component jurisdictions of a federal country should levy the taxes necessary to provide the public services they offer. This fiscal responsibility is the only way whereby the provincial governments can hope to offer the mix of taxes and public services that the public wants. Otherwise, a provincial government and its voters are incited to always demand more from the centre, shifting a large part of the costs to the taxpayers of other provinces. All provincial governments end up with more busybody activities than their taxpayers are willing to finance.

The Canada health transfer (CHT) and the Canada social transfer (CST, which helps finance post-secondary education as well as social assistance) have negated this ideal of fiscal responsibility for several decades. The names and details of the programs have changed many times, but the dark reality has remained. Today, about $36-billion is paid annually to the provinces under the two programs — about 13% of federal government expenditures and about the same proportion of total provincial revenues.

Mr. Bernier argues that the CHT and CST are probably unconstitutional. They would be legally and politically easy to abolish in return for reducing the rates of the federal personal income tax (“tax points”), leaving provincial governments free to finance their own programs as they wish. Such a scheme has already been partly applied since the 1960s, when provinces were allowed to opt out of a number of shared programs in exchange for tax points — but only Quebec did.

Besides inciting taxpayers and their provincial governments to be directly responsible for provincial spending, decentralized federalism would promote innovation. Without the conditions and constraints that come with the federal government’s money, provincial governments could innovate. God knows that this is needed — think about our patched and re-patched centralized health-care system! They would also be under pressure to imitate the best innovations applied elsewhere.

There is no serious argument against abolishing the cash federal transfers to provinces. Nobody would lose anything, except for the federal government’s loss of powers that were probably unconstitutional in the first place. National unity would not be threatened. On the contrary, federal control over health, education and social services is a perennial source of politicization and discord.

It is true that the provincial governments would gain the money and power lost by their federal counterpart, but this is not a zero-sum game for the citizens. As Canadians can freely move between provinces, the governments of the latter face a more stringent market test than the federal Big Brother. Therein lies the ultimate argument for federalism and local autonomy: Competition between the jurisdictions allows citizens to escape being captive clients from the centre. It is not a perfect system, but it is much more efficient than centralization.

The day before Mr. Bernier’s speech, Finance Minister Jim Flaherty released the government’s fall economic update. He suggested that the federal transfers to the provinces or at least their rates of growth may be revised after the current agreement with the provinces expires in 2014. This is like saying nothing. Conservatives are often closer to pragmatic, irrational and authoritarian policies — which was one reason the late great free-market economist Friedrich Hayek wrote “Why I am not a conservative” as a postscript to his book The Constitution of Liberty.

The principled position defended by Mr. Bernier is refreshing. In a welcome departure from blind partisanship, he quoted Wilfrid Laurier who, before becoming Liberal Prime Minister of Canada, declared in the Québec Legislative Assembly: “The local legislature must especially be completely sheltered from control by the federal legislature. If in any way the federal legislature exercises the slightest control over the local legislature, then the reality is no longer a federal union ….”

Bernier’s proposal is not only principled, but practical and realistic. Its realization would constitute a much-needed first step in restoring the federal union.

Pierre Lemieux is an economist in the Department of Management Sciences of the Université du Québec en Outaouais and a senior fellow at the Montreal Economic Institute.

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