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Reality Check

Family feud: when the provinces want Ottawa's cash By Robert Sheppard, CBC.ca Reality Check Team | Jan. 6, 2006 | More Reality Check

It's not fun to watch mommy and daddy fight over money. And after nearly 25 years of witnessing Ottawa and the provinces do constant battle over balance sheets, Canadians can be forgiven for wanting to put a bag over their heads and wishing it all away. This was supposed to be the outcome of September 2004 when Paul Martin and the premiers concluded their mammoth $75 billion-over-10-years deal to fix health care for a generation. Alas, the nattering is back. It even has a trendy new name – fiscal imbalance – courtesy of the Bloc Québécois's official platform and, not to be outdone, the Liberal government of Jean Charest.

For many observers, the so-called fiscal imbalance exists largely as a Quebec issue, part of the peculiar Quebec accounting game – we are owed – that pops up whenever a national unity referendum hoves into view. But Ontario has now joined the fun: it says it is due a colossal $23 billion from Ottawa for its portion of cost-sharing programs. Saskatchewan, too, claims it is being finagled out of equalization payments by the special side deals Ottawa signed with Newfoundland and Nova Scotia over offshore resources.

All of this could be dismissed as provincial bleating had not Conservative Leader Stephen Harper said on the campaign trail that he agrees with the provinces and that, if he becomes PM, he would do something to rectify the fiscal imbalance, perhaps even to the point of offering federal tax points (a designated share of Ottawa's tax revenues) to the premiers. This of course set off huge alarms in Liberal Ottawa.

Martin accused the Tories of being willing to give away the store and denied categorically there is any kind of fiscal imbalance between the two levels of government which raises the question: who is right?

Well, Martin actually. Both Ottawa and the provinces have full authority to raise as much tax revenue as they like for their own purposes. The problem is that since the mid-1990s no government has wanted to actually raise taxes and the provinces prefer that Ottawa does this nasty job for them. But the bigger answer probably depends on how you see the Canadian federation – as a partnership of more or less equals (Harper, sort of); or as junior-senior scheme in which the provinces are pretty much the administrative agents of the federal government (Martin, mostly).

The history

Ottawa eventually emerged from the Second World War with a huge cache of new tax wealth which it eventually turned into a host of cost-sharing and provincial transfers in the 1960s (medicare, equalization, the Canada and Quebec pension plans). From there things kind of lumbered along until the cagey Allan MacEachern took a modest axe to provincial transfers in 1980. Liberal Ottawa was then mired in deficits while the provinces were (mostly) enjoying healthy surpluses. But the real fight didn't begin until 1995 when another Liberal finance minister, Paul Martin, took an even bigger axe to provincial transfers for health, social services, post-secondary education and equalization. The fact that the imposed cuts on the provinces were proportionally much less than the ones Ottawa made to its own programs and services was not a point that was universally appreciated.

The upshot: Ottawa was soon to embark on a string of eight consecutive budgetary surpluses (totaling $61.3 billion) and significantly reduce its debt and debt-servicing obligations. While the provinces found themselves closing hospitals, incurring, sometimes large, deficits and generally digging themselves a pit of structural problems.

The fiscal facts

  • Ottawa is currently looking at budgetary surpluses totalling a projected $54.5 billion over the next five years, this after combined spending increases and tax reductions totalling at least $300 billion over the past eight years.

  • Most economists say the provinces' fiscal health, save for Alberta and B.C., is much more tenuous. Still, the provinces, as a group anyway, posted budgetary surpluses in four of the past six years. (Last year, for example, only Ontario, P.E.I. and Newfoundland and Labrador had deficits.) What's more, provincial debt-servicing costs, at roughly 10 per cent of revenues, are much less than the feds, currently at about 18 per cent and dropping.

  • The provincial problem primarily is that health costs, which account for about 40 per cent of their spending, continue to grow at a faster rate than projected revenues, according to health-care economist France St-Hilaire of the Institute for Research on Public Policy. And even the big 10-year deal with the feds is not going to change that much. Ottawa's share is to grow at a rate of six per cent a year but that is still less than the seven per cent average annual growth rate in provincial health spending. Plus, the 10-year deal came with added obligations for home care, drug coverage and reducing wait times.
A full accounting

That is beyond even the ken of Reality Check. One thing to keep in mind is that in the past decade or so of Chrétien-Martin federalism, Ottawa has largely ended federal transfers to the provinces for welfare and post-secondary education. In their place Ottawa prefers to finance these items directly through tax benefits or such proposals as the new Liberal plan to cost-share a year of undergrad tuition directly with students.

At the same time, the feds are doing everything they can to get the provinces to take on new responsibilities on the health-care front, as well as for such potentially costly items as day care and pharmacare. It is a view, resented in provincial capitals, that sees the provinces largely as the administrative arm for Ottawa's grand ideas, many of them seemingly just shouted out in the midst of an election campaign without much consultation. Little wonder these guys want the money.

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