Why turning on the federal-money hose doesn’t always put out provincial fires 

OPINION: A new report from the Parliamentary Budget Office examines what the big provinces have done with funding from Ottawa. John Michael McGrath explains what the findings reveal about politicians’ promises
By John Michael McGrath - Published on March 18, 2019
Peace Tower building in Ottawa
The Parliamentary Budget Office released a report on Wednesday that tests the claim that a lack of federal funding holds back important provincial projects. (iStock.com/mrpluck)

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One of the basic facts of Canadian federalism is this: Ottawa has money, and the provinces want it. Much of politics in this country — including in Ontario — is concerned with finding more complicated and pious ways of expressing this grubby fact.

During the middle part of this decade, there was a multi-prong offensive, one that included political statements from Queen’s Park and sympathetic reports from such think-tanks as the Mowat Centre, aimed at convincing Ottawa that Ontario was paying more into federal coffers than it was receiving (despite the fact that, in some years, this province did, in fact, receive equalization funding). Specifically, given the infrastructure-building focus of the day, Ontario argued that its lack of a federal partner in infrastructure spending was holding back important projects.

Well, a new report from the Parliamentary Budget Office, released on March 13, tests that hypothesis, and guess what: when the federal-money firehose started spraying cash into provincial accounts under the Investing in Canada Plan (IICP), in 2016, big provinces slowed their own spending in response. Money from Ottawa didn’t supplement money from Victoria, Edmonton, Toronto, or Quebec City.

As the PBO report puts it: “This spending gap suggests that funding from the federal government probably displaced provincial investments after the IICP began. Another possibility is that provincial governments postponed or cancelled capital investments after the start of the IICP.”
Provincial spending still grew when federal funding was announced, but it grew more slowly than it had previously, and provinces spent less than they’d planned to (and budgeted for) before Ottawa’s cash was made available to them. Ontario alone accounts for more than half of the claw-back: according to the PBO report, we spent $8.2 billion less than planned from 2016 to 2018; all other provinces combined for just $7.3 billion in reduced spending.

The provincial government at the time was nominally committed to infrastructure spending, loudly touting its economic and environmental benefits. The province also, as it happened, was coming up against its own hard deadline for eliminating the fiscal deficit in the 2017-18 budget year.

Governing is choosing, and every government must set its priorities. But it’s worth emphasizing that some provincial governments made different choices, maintaining their capital-spending levels even as federal money became available. None made cuts on the scale that Ontario did.
Municipal governments also have choices to make, and for the most part, they responded to the availability of IICP money by increasing their capital spending, not decreasing it. (Calgary, in the face of a severe local recession, is the outlier here.) This despite the fact that municipalities, by definition, have less revenue — and less discretion over how to spend it — than provinces do.

This isn’t about partisan politics; at least, it doesn’t need to be: Ontario’s fall economic statement, which the Tories released last year, decries a lack of federal funding in more or less the same language that was used in similar documents under their predecessors. This issue might well be the only thing that the current and former Ontario governments could’ve agreed on.

It’s an issue that will likely become more contentious as the 21st century drags on: the PBO previously reported that the provinces all face mounting health-care costs while the federal government is sitting pretty, fiscally speaking. (The explanation for this is simple: the feds get to tax all the same people and businesses the provinces do, but they don’t have to deliver education or health care, which take up the majority of provincial budgets.)

The provinces will feel that they need more money from the feds, and the feds will have more money to spend than they do today. But big, imposing structural problems — daunting infrastructure deficits, an aging population, climate change — will always have to compete with (and will, more often than not, lose out to) provincial governments’ immediate political priorities, such as tax cuts, popular social programs, and eliminating stubborn budget deficits.

This will be a useful thing to keep in mind the next time you head to the ballot box: it’s not enough for a party’s policies to line up with your own ideological bent. You also have to make an educated guess as to whether its priorities are the same as yours — whether something you care about will end up taking a backseat to one of the party’s short-term goals.

As ever, governments make plans, not promises.

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