2008 WORKING PAPERS
The Federal Spending Power
Nadia Verrelli
Institute of Intergovernmental Relations
Queen’s University
May 2008
Institute of Intergovernmental Relations
School of Policy Studies, Queen’s University
Working Paper 2008 - 10
Verrelli, Nadia The Federal Spending Power 1 At a time when “fiscal imbalance” and “open federalism” have become terms of daily usage
in the contemporary world of Canadian politics, it is not surprising that the Harper government is
considering limiting the federal spending power. In fact, in the Speech from the Throne
delivered on October 16, 2007, the federal government in reference to this power stated:
Our Government believes that the constitutional jurisdiction of each order of
government should be respected. To this end, guided by our federalism of openness, our
Government will introduce legislation to place formal limits on the use of the federal
spending power for new shared-cost programs in areas of exclusive provincial
jurisdiction. This legislation will allow provinces and territories to opt out with
reasonable compensation if they offer compatible programs (Federal Government of
Canada).
Prime Minister Harper has always strongly believed in watertight compartments – the idea
that each order of government is autonomous in their jurisdiction and one order ought not, under
any circumstance, legislate in the other jurisdiction. It is not surprising, therefore, that he is
promoting the restriction of the use of the federal spending power. This idea of watertight
compartments, however, has proven to be a political myth. The language of Canada’s
Constitution is so broad that more often than not, an overlapping of jurisdiction and ability to
legislate on a particular matter not necessarily falling within the jurisdiction of the federal
government has resulted. Further, the federal spending power muddled and continues to muddle
the line between what falls within the jurisdiction of either the federal or the provincial
governments. Because of the ambiguity of this power and because the federal government,
regardless of which party is in power, continues to spend funds in areas falling outside its
jurisdiction, controversy over the legitimacy of this power continues. In fact, it has been a
source of contention between the two orders of government for over six decades. The debate
over the use and legitimacy of the federal spending power rests on different visions of the nation
and the purpose served by the use of this power. For example, does it unite the nation by creating
national standards and providing a pan-Canadian vision? Or does it usurp the powers and the
autonomy of the provinces by enabling the federal government to legislate in areas exclusively
belonging to the provincial governments?
The purpose of this paper is to shed light on the federal spending power. With that in
mind, I begin with a brief discussion on how the power is defined and how its use is justified by
way of the Constitution. I then look at how the power has played out both in the political and
judicial arena. Finally, I provide a brief overview of the controversy associated with the federal
spending power and its use and/or misuse by the federal government.
WHAT IS THE FEDERAL SPENDING POWER?
The federal spending power refers to the ability of the federal government to spend the
money it legitimately raises through its powers of taxation in any way it deems necessary. In
other words, the federal spending power enables the government of Canada “to make payments
to people, institutions or provincial governments for purposes on which Parliament does not
necessarily have the power to legislate” (Watts 1). This includes providing funds for health,
welfare, and education programs.
Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 2 IS THE FEDERAL SPENDING POWER RECOGNIZED IN CANADA’S
CONSTITUTION?
Though the federal spending power enables the federal government to legislate either directly
or indirectly matters falling within provincial jurisdiction as understood by the division of
powers enumerated in the Constitution Act, 1867, the power is not specifically enumerated in the
Constitution. However, according to various academics and federal political leaders, the
constitutional basis of the federal spending power derives from sections 91(1A),1 91(3),2 102,3
and 106.4 Recently, both Thomas Courchene (2006) and Marc-Antoine Adam (2007) have
proposed that section 945 can and ought to be advanced as a legitimate constitutional
justification for the federal spending in provincial jurisdiction. According to Adam, “section 94
allows the federal government to legislate in relation to property and civil rights so long as the
legislatures of the provinces where this federal legislation is to apply agree to it” (Adam 33).6
This is supported by Courchene, who argues that s94 “allows provinces other than Quebec to
transfer to Ottawa matters related to “property and civil rights,” thereby enabling them to opt into
a more uniform approach to selected social programs” (Courchene 2006 49). F.R. Scott, in his
attempt to justify the federal government’s use of its spending power, argues that the power
derives from the “royal prerogative and common law” (Telford 28), as well as the residuary
power of Peace, Order, and Good Government (POGG). Thus, the power is implied. Also,
according to Meekison (1968), the reality that a particular issue is of vital importance may be
used to justify the federal government spending in provincial jurisdiction. This is based on the
assumption that the issue is so important to the Canadian people that Ottawa must take action
1 Section 91(A): The Public Debt and Property 2 Section 91(3): The raising of Money by any Mode or System of Taxation 3 Section 102: All Duties and Revenues over which the respective Legislatures of Canada, Nova Scotia, and New Brunswick before and at the Union had and have Power of Appropriation, except such Portions thereof as are by this Act reserved to the respective Legislatures of the Provinces, or are raised by them in accordance with the special Powers conferred on them by this Act, shall form One Consolidated Revenue Fun, to be appropriated for the Public Service of Canada in the Manner and subject to the Chargers in this Act provided. 4 Section 106: Subject to the several Payments by this Act charged on the Consolidated Revenue Fund of Canada, the same shall be appropriated by the Parliament of Canada for the Public Service. 5 Section 94: Notwithstanding anything in this Act, the Parliament of Canada may make Provision for the Uniformity of all or any of the Laws relative to Property and Civil Rights in Ontario, Nova Scotia, and New Brunswick, and of the Procedure of all or any of the Courts in those Three Provinces, and from and after the passing of any Act in that Behalf the Power of the Parliament of Canada to make Laws in relation to any Matter comprised in any such Act shall, notwithstanding anything in this Act, be unrestricted; but any Act of the Parliament of Canada making Provision for such Uniformity shall not have effect in any Province unless and until it is adopted and enacted as Law by the Legislature thereof. 6 For a more detailed exposition of the section 94 argument justifying the federal spending power, please see Adam, Marc‐Antoine. "Federalism and the Spending Power: Section 94 to the Rescue." Options Politics March 2007: 30‐34. Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 3 (Meekison 74). In addition, there is the “gift theory,” which purports that the federal government
is able to spend money as it sees fit with or without conditions. When the government gives
money in the form of transfers or grants to the provinces, it is a benevolent gesture; it is not
legislating or regulating provincial matters. Provinces can choose not to accept the money.
It should be noted that there is not necessarily a consensus on whether the Constitution
justifies the use of the federal spending power in provincial jurisdiction. Webber (1994) and
Petter (2007) seem to think that the constitutionality of the federal spending power remains
ambiguous. Kellock and LeRoy (2007), relying upon the work of Kathy Brock, argue that “far
from providing constitutional authority to the federal spending power, s94 could be invoked as a
constitutional barrier to it” (Kellock and LeRoy 10). According to Brock, s94 is “an affirmation
of [provinces’] ability to stave off unwanted federal intrusion into provincial jurisdiction” (Brock
quoted in Kellock and LeRoy 10). In short, the Constitution Act, 1867 is essentially silent on the
federal spending power and whether the federal government can legitimately spend in areas
falling within the jurisdiction of the provinces.
WHAT DO THE COURTS HAVE TO SAY?
Despite this lack of constitutional explicitness, the Constitution has been interpreted by the
courts in such a manner that the federal government is held to have the power to spend the
money it legitimately raises through its powers of taxation on areas outside its jurisdiction as
long as “the legislation authorizing the expenditures does not amount to a regulatory scheme
falling within provincial powers” (Watts 1). In the Employment and Insurance Act case, 1937,
Lord Atkin of the JCPC did not recognize that the spending power can be inferred from the
Constitution. So while the federal government can collect money in any mode possible, the
federal government would be acting beyond its scope of power if it legislates outside its
jurisdiction; the legislation therefore would be ultra vires. However, as Laskin(1960) states,
“this statement has not had any noticeable effect upon Dominion spending” (Laskin 655). In
fact, when the federal spending power was put to the Court in Angers v Minister of National
Revenue [1957] Ex C.R. 82, where the constitutionality of the Family Allowance Act, 1944 was
challenged, the Act was found to be intra vires based on the POGG power. According to Laskin,
this decision “lends emphasis to the view that the Courts have no concern with the disbursement
of public funds which have been validly raised” (Laskin 655). Further, in the Canada Assistance
Plan (CAP) Reference, 1991, the Court acknowledged the federal spending power. It did not,
however, discuss or determine the limitations, if any, of this power (Telford, 27). In this
reference, the government of British Columbia challenged the funding cuts to the CAP. Note, it
did not challenge the use of the spending power by the federal government in provincial
jurisdiction. Relying upon the principle of parliamentary sovereignty, the Supreme Court of
Canada (SCC) ruled that the federal government is able to repeal or amend legislation passed by
the federal government. Two implications flow from this opinion: first, as already mentioned,
the Court implicitly acknowledged the federal spending power; second, the Court indicated the
independence of the federal government in exercising this power: the federal government cannot
be forced to spend money, even if it committed to doing so in the past.
The federal spending power, it should be noted, has not been directly challenged in the
Supreme Court by the provinces. Meekison speculates that it is because the “federal spending
now supports so much of the established political, social and economic structure of the country
Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 4 that prudent men hesitate to take steps that might wipe it out” (Meekison 62). As a result, the
“federal spending power sits in a legal vacuum” (Telford 30) and this continues to feed the
political controversy associated with the power.
WHY SPEND IN PROVINCIAL JURISDICTION?
The initiative of past and present federal governments to spend in areas of provincial
jurisdiction is not merely an attempt to establish and promote the Canadian national interest. It is
also an attempt to deal with the seeming contraction created by the Constitution—mainly, the
division of powers on the one hand and on the other, the way in which the federation has
evolved—most importantly, the increasing importance of expenditures in areas of provincial
jurisdiction, including health, welfare, and education. The judicial interpretation of the British
North America Act (primarily by the JCPC) has also been a contributing factor. As Laskin
points out, “the provinces have substantive legislative authority (especially in respect of social
services) that far exceeds their financial resources and their money raising power, while it has
left the Dominion with financial resources through an ample taxing power overshadowing its
regulatory authority.” (Laskin 653). In short, the provincial governments cannot financially meet
their constitutional obligations due to their insufficient sources of revenue. According to Telford
(2003) however, “this reasoning is specious. The provinces have access to the income tax, which
is the largest source of revenue in the country. The problem is the federal government has
commandeered a majority of this revenue for itself” (Telford 32). Though Telford is correct in
pointing this out, today the reality remains that the provinces do not raise enough revenue
themselves to meet their obligations vis-à-vis social and cultural programs.
To deal with this disparity between the revenues raised by provinces and the fiscal
implications of their ‘constitutional obligations,’ the federal government developed grants in aid
to the provinces, which had first been used in 1912. The use of the federal spending power
through conditional grants began to take shape in the post war period, facilitated by the
amendment of the BNA Act in 1940 to add s94 (a).7 During this period, the federal government
“elaborated a complex social program based on the notion that all Canadians were entitled to
certain minimum public benefits wherever they may live” (McRoberts 25). This was coupled
with the federal government’s push to finance and support Canadian cultural production. Both
were aimed at reinforcing the Canadian national identity and ensuring a federal role in such
reinforcement. In order for the federal government to advance these aims, it had to legislate in
provincial jurisdictions.
HOW DID THE FEDERAL GOVERNMENT CIRCUMVENT JURISDICTIONAL
BARRIERS?
To overcome the constitutional roadblock preventing the federal government from being
active in Canada’s social welfare programs, the federal government in 1945 proposed a
7 Section 94(A): The Parliament of Canada may make laws in relation to old age pensions and supplementary benefits, including survivors, and disability benefits irrespective of age, but no such law shall affect the operation of any law present or future of a provincial legislature in relation to any such matter. Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 5 substantial program of fiscal intervention. Through the Green Book presented to the Premiers at
the 1946 Dominion-Provincial Conference, the federal government suggested that it retain the
taxing powers it had acquired during the war. The government argued that, in order for it to have
sufficient funds to pursue its goals of building strong national social and cultural programs, it
must continue to be the sole collector of income tax, a role the provinces had ceded to the federal
government for the period of hostilities. “The federal government would then draw upon this tax
base to implement, and to push provincial governments to implement, a postwar agenda of social
and economic reform” (Petter 3). The Green Book proposals presented a clear attempt on the
part of the federal government to circumvent the division of powers by promoting jurisdictional
overlap, administrative integration, and federal spending in provincial jurisdiction. In fact,
“spending was the means by which federal authorities would exert influence over social and
economic spheres previously denied them by the division of legislative powers” (Petter 3).
Despite the failure of the 1946 conference, by 1947, with the exception of Ontario and
Quebec, all provinces agreed to “stay out of the three tax fields [personal and corporate income
taxes, and death duties] in exchange for tax rental agreements” (Petter 3). Soon after securing
these funds, the federal government began to involve itself in provincial jurisdiction in the areas
of highways, education, health and other social services. The necessary federal funding was
provided through direct financial assistance to individuals, corporations, and universities. From
such scheme was borne shared-cost programs, which included Trans-Canada Highway, health
and welfare. The three combined “accounted for more than 90 percent of the federal share of all
joint programs in 1959” (Black quoted by Petter 4). Black states “the federal government was
able to achieve most of its social policy aims in piecemeal fashion through its conditional grants
projects of the late forties and early fifties” (quoted in Petter 4). Since this period, federal
spending in provincial jurisdiction has continued to increase.
“Since the Second World War, Ottawa has initiated over 100 shared-cost programs,
most of them of a continuing nature. In 1945, conditional transfers from Ottawa to the
provinces stood at $46 million annually, less than one per cent of federal budgetary
expenditures. By 1965, such transfers had grown to $1.2 billion, over thirteen per cent of
federal expenditures. And by 1975, conditional transfers had reached $6.7 billion, almost
twenty per cent of federal expenditures” (Petter 4).
In 2006-2007, $42.5 billion was provided to the provinces and territories by the federal
government (Finance Canada).
HOW DID THE FEDERAL GOVERNMENT USE ITS SPENDING POWER?
Following is a list of some of the major programs established by the federal government
through the use of the federal spending power:
•
The spending power was first used in 1912 when the first conditional grant in the
field of agriculture education was established.
•
In 1927, grants were offered to the provinces to help finance old-age pension; the
first major shared-cost program.
•
Family Allowance was established several years later.
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Verrelli, Nadia The Federal Spending Power 6 •
During the Great Depression, additional grants were paid out to the provinces to
help lessen their financial burden.
•
In 1937, an allowance for the blind was established.
•
In the post World War Two period, the federal government continued to spend in
provincial jurisdiction, establishing shared-cost programs where the federal
government would pay for half of the cost of the program and the provinces would
pay for the other half.
•
In 1948, the federal government established the National Health program in nine
areas: health survey, hospital construction, professional training, crippled children,
mental health, tuberculosis control, health research, cancer control, and general
public health (Stevenson, 160).
•
In 1951, the pension legislation was revised to include both Old Age Pension and
Old Age Assistance. Also, in 1951, the Constitution was amended to include a
provision indicating that old age pension is a joint responsibility. In addition,
grants to universities were made available by the federal government.
•
•
In 1954, an allowance for disabled people was set up.
In 1955, Unemployment Assistance (for those who did not qualify under the
already established contributory scheme) was established.
•
In 1957, Hospital Insurance was adopted.
•
Also in 1957, equalization payments (unconditional transfer payments) were
established and constitutionalized in 1982.
•
In 1966, the Canada Assistance Plan (CAP) was established, which combined
welfare programs and the Old Age Pension. Additional programs were also set up,
including, child welfare, mothers’ allowances, medical expenses of welfare
recipients, rehabilitation and preventative welfare services, and certain special
programs for native peoples (Stevenson 161).
•
In 1968, medical insurance (Medicare) was introduced.
•
In 1976, an agreement—the Established Programs Financing (EPF)—was finally
reached. In 1977, the EPF replaced the previous cost-sharing arrangement for
health insurance and post-secondary education. Under the new program, the cost
of health and post secondary education programs “would escalate in accordance
with the population and gross national product” (Stevenson 169). This new
program had two implications: first, it removed detailed conditions on the grants;
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Verrelli, Nadia The Federal Spending Power 7 and second, the federal government no longer felt obliged to cover 50 per cent of
the cost of social programs.
•
As the 1970s continued, the federal government proceeded to retreat from the
programs it established in the preceding years.
•
In 1984, in an attempt to address the problems that arose with the EPF (diminished
quality of services and diminished contributions on the part of the provinces), the
federal government divided health and post-secondary education into two distinct
programs. It also adopted the Canada Health Act, making health care grants
“genuine conditional grants” (Stevenson 172). The Act prohibited hospitals from
imposing user charges and prevented doctors from extra billing. Further penalties
were also placed on the provinces if they failed to comply with the five outlined
conditions attached to the health care transfers: public administration,
comprehensiveness, universality, portability, and accessibility.
•
In 1996-1997, the EPF was finally replaced with the Canada Health and Social
Transfer (CHST). The new program, however, did not restore the funding
reductions that had been effected through the EPF. Rather, the new program had
the effect of further reducing federal contribution by $7 billion. The provinces
essentially were left to “foot the bill.” This resulted in the provincial Premiers
deciding to join forces and pressure the federal government to consult with the
provinces prior to initiating new cost-shared programs. Such pressure eventually
led to the Calgary Declaration, the Framework for Improving the Social Union for
Canadians, and the Health Care Accord. (See below)
•
In 2000, the Millennium Scholarship Fund came into effect. This federal program
involved the awarding of funds directly to university students based on merit and
need.
•
In 2004, the CHST was divided into two parts, the Canada Health Transfer and the
Canada Social Transfer. Health costs were henceforth separated from the costs of
other programs.
•
The Health Accord between the federal government and the provinces was signed
in September of 2004;
o The federal government agreed to:
ƒ Transfer $41.3 billion for health over 10 years;
ƒ “restore equalization territorial formula financing to 2000-2001
levels and index this by 3.5 per cent per annum;” (T. Courchene
2004 27)
ƒ $5.5 billion for Wait Times Reduction; and
ƒ $500 million towards medical equipment.
o Provinces committed to Ottawa that they would:
ƒ Address waiting periods;
ƒ Increase supply of health professionals;
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Verrelli, Nadia The Federal Spending Power 8 ƒ
ƒ
Increase short term acute home care and end of life home care; and
Establish a task force on developing and implementing a national
pharmaceutical program (Quebec’s pharmaceutical program would
continue).
™ No provision was put in place whereby the provinces would be penalized if
they did not comply with the agreement, rendering the provinces
accountable to their citizens and not to the federal government.
™ Finally a side deal was struck between Ottawa and Quebec. It established
that Quebec would determine its objectives, standards, and criteria. With
this new agreement struck between the provinces and the federal
government and between the federal government and Quebec, Canadians
witnessed, according to Courchene, a re-emergence of asymmetrical
federalism (Courchene 2004 27).
•
Also, in 2004, the federal government in its Budget speech announced a $2 billion
health care transfer to the provinces and a GST exemption to municipalities worth
$7 billion over ten years. Furthermore, the federal government established the
External Advisory Committee on Cities and Communities and pledged a role for
Municipalities as partners in future making of federal budgets. This led to the
federal gas-tax sharing in the 2005 Budget.
•
In 2005, the federal government announced a sharing of the federal gas tax with
municipal governments; more funding for infrastructure projects through the CSIF;
more funding for municipalities through the Municipal-Infrastructure Fund and
Border Fund; and $300 million towards the Green Fund. It was estimated that
these initiatives would transfer in excess of $9 billion to Canadian communities
over five years. Courchene has labeled this as “hourglass federalism, namely the
growing range of federal government initiatives that bypass the provinces and deal
directly with citizens and cities, leaving the provinces as the squeezed middle of the
division-of-powers hourglass, as it were” (Courchene 2006 12).
•
Also in 2005, the federal government announced $5 billion over five years for
Early Learning and Child Care (ELCC) Initiative.
•
In 2006, the ELCC was replaced with the Universal Child Care Benefit (UCCB).
Parents were given a monthly allowance of $100 for each child under the age of
six. The government also committed $3.3 billion to provinces and territories to
deal with various matters including post-secondary education, affordable housing,
Northern affordable housing, off-reserve affordable housing and public-transit
capital.
•
In the March 2007 budget, the government committed to increase funding to the
Canada Social Transfer (effective 2007-2008) and the Canada Health Transfer
Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 9 (effective 2014-2015). It also extended the federal gas-tax sharing to 2013-2014,
resulting in an additional $8 billion. Consequently, municipalities are expected to
receive an estimated $11.8 billion in gas-tax funding over the next seven years.
During the federal government’s pursuit of building Canada’s social welfare state, it faced
little provincial opposition except from Quebec, which, under the premiership of both Tashereau
and Duplessis, pursued policies of resisting federal attempts to be active in exclusive provincial
jurisdiction. In fact, Duplessis, recognizing the encroachment of provincial jurisdiction, forbade
universities in that province from accepting federal funds. As a result of continued Quebec
objection, in 1965 the federal government under Pearson gave the provinces the option to opt out
of federal shared-cost programs with compensation either in the form of tax abatement or cash
compensation. According to Telford, this system of opting out with compensation mainly gives
the illusion of sovereignty because the province, in order to receive the compensation, must
continue to comply with those standards set by the federal government (Telford 36). However,
the fact remains that with this system in place, it is the province that sets up and administers the
social program, thereby rendering the financial role of the federal government invisible to the
citizen of the province which chooses to opt out.
When the federal government proposed Medicare in 1965, the passivity towards conditional
grant programs soon disappeared. The provinces, with the exception of British Columbia and
Saskatchewan, began to resent such programs. They began to feel that the federal government
was forcing them to spend money they did not have on programs they did not wish to fund, at
least to the required degree. Coinciding with this rising provincial hostility, the federal
government itself began to lose enthusiasm for the conditional grants programs. As a result,
beginning in 1966, the federal government began to reduce its contributions, starting with ending
its direct relationship with universities. The federal government introduced a program whereby
it “would pay the provinces an annual subsidy equivalent to half of university operating costs.”
(Stevenson 167). It also introduced a program limiting its contribution to health insurance. Its
contribution “would be allowed to increase no faster than the per capita GNP,” while it would
make available $640 million towards improving health services. (Stevenson 197). The provinces
unanimously opposed this initiative. Eventually various alternatives were introduced by both the
federal government and the provinces to constrain the federal spending power.
WHAT ARE THE PAST ATTEMPTS AT CONSTRAINING THE FEDERAL
SPENDING POWER?
As it is today, the federal spending power “offers the federal authorities considerable
opportunities to extend their activities beyond the enumerated headings of sections 91 and 95”
(Meekison 25). The only real limitations on the federal spending power are financial and
political, not legal. That is, limitations relate to “availability of federal revenues; urgency
Ottawa has about influencing matters within provincial jurisdiction; and how much opposition
from the provinces it is willing to tolerate in so doing” (Meekison 25).
Throughout the years the federal government was building up Canada’s social programs
“shared-cost programs represented a significant shift in the distribution of powers within the
federal system.” (Banting 58). In fact the use of the federal spending power continues to be a
shift away from the classical self-rule shared-rule idea underpinning classical federalism. As
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Verrelli, Nadia The Federal Spending Power 10 Courchene states, “federal-provincial fiscal transfers are tantamount to de facto changes in the
division of powers themselves, with unconditional transfers enhancing provincial autonomy and
conditional transfers enhancing the federal government’s influence in areas of provincial
jurisdiction.” (Courchene 2006 46). The potential effects of such a shift in favour of the federal
government has not escaped provincial political leaders and has resulted in demands to regulate
or at least involve themselves in the federal government’s use of its spending power.
Following is a list of the attempts of regulating the federal spending power:
In 1969, at a Federal-Provincial First Ministers’ Conference, Pierre Trudeau introduced a
federal plan to restrict the use of the federal spending power. Under the failed proposal the
federal government proposed:
(i)
the federal spending power should be formally entrenched in the constitution;
(ii) Parliament should have an unrestricted power to make conditional grants to provincial
governments for the purpose of supporting their programs and public services; and
(iii) Parliament’s powers to initiate cost-shared programs involving conditional grants in
areas of provincial jurisdiction should require both a broad national consensus and
per capita reimbursement of the people (not the government) of a province whose
legislature decided not to participate (Watts 2).
During the 1980-81 constitutional conference which eventually led to the patriation of the
Constitution, the issue was on the table. In fact, the “gang of eight” in their proposal to the
federal government regarding the patriation of the Constitution, included a provision whereby
a province was able to opt out from federal programs with full compensation.
Attempts to restrict the federal spending power were once again raised during the
constitutional negotiations of 1985-1987. Upon gaining office in 1985, Quebec Premier
Bourassa listed the restricition of federal spending in provincial jurisdiction as one of the
requirements which needed to be addressed for Quebec to sign on to the Constitution. In the
1987 document, known as the Meech Lake Accord, such an issue was in fact addressed.
Section 106A of the Accord affirmed that any provincial government deciding not to
participate “in any new shared cost program established by the federal government in areas of
exclusive provincial jurisdiction would receive reasonable compensation” (Watts 3). This
commitment to opting out with full compensation was to be added to the Constitution Act,
1982 had the Accord been ratified. The Meech Lake Accord represents the first real attempt to
constitutionally limit the federal spending power through the constitutionalization of opting
out with compensation. Recognizing this, critics feared that the proposed section would lead
to unsatisfactory new national programs. In fact, Clyde Wells, then Premier of Newfoundland
and Labrador, cited this section and the section acknowledging Quebec as a distinct society as
the reasons his government did not ratify the Accord. In the end, the Accord died and the
section was not implemented into the Constitution.
The issues raised in the Meech Lake Accord, especially the one concerning the federal
spending power, reappeared in the 1991 document released by the federal government:
Shaping Canada’s Future Together. In it, the federal government proposed a scheme whereby
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Verrelli, Nadia The Federal Spending Power 11 the federal government would obtain the consent of at least seven of the provinces making up
50 per cent of the population prior to introducing and implementing Canada-wide shared-cost
programs as well as making conditional grants in areas belonging exclusively to the provinces.
The federal government also included a provision ensuring provinces the ability to opt out and
receive compensation on the condition that a program similar in principle was established in
that province.
By 1992, after consultation with the public and negotiations with the provinces, the
Charlottetown Accord was put to the electorate in a nation-wide referendum. The Accord, if
it had been accepted by the public, would have constitutionalized a revised version of what the
federal government proposed in 1991. In addition to proposing a scheme of opting out with
full compensation similar to that seen in the Meech Lake Accord, section 25 of the
Charlottetown Accord also stipulated:
A framework should be developed to guide the use of the federal spending power in all
areas of exclusive provincial jurisdiction. Once developed, the framework could become
a multilateral agreement that would receive constitutional protection. The framework
should ensure that when the federal spending power is used in areas of exclusive
provincial jurisdiction, it should:
(a) Contribute to the pursuit of national objectives;
(b) Reduce overlap and duplication;
(c) Respect and not distort provincial priorities; and
(d) Ensure equality of treatment of the provinces, while recognizing their different
needs and circumstances.
The section also proposed a much more integral role for the provincial governments in
helping to establish this framework and in reviewing the progress pursuant to it at annual First
Ministers’ Conferences. An additional provision which became Section 106A(3), was also
added ensuring that the proposed limits to the federal spending power will not affect the
federal governments commitments set out in s36 of the Constitution Act, 1982. The Accord,
however, was rejected by the electorate and the issue of the federal spending power remained
in political limbo.
Since the 1992 failure, the nature of the debate, as Watts points out, has changed. Other
provinces, specifically the richer ones, have begun to raise their concerns with the federal
spending power. Essentially, they are preoccupied with the ability of the federal government
to create new shared-cost programs without provincial consent; unilateral changes and
reductions of programs as witnessed with the cut backs of the 1980s and 1990s; and conditions
retained on transfers with the CHST. Quebec remained firm in its commitment to entrench in
the Constitution a provision guaranteeing the ability of a province to opt out with full
compensation and one ensuring a limited role for the federal government in the jurisdiction of
the provinces (Watts 4).
Considering this, it is not surprising that the federal spending power was central to the
provincial negotiations leading to the Calgary Declaration in 1998. Though not entrenched
Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 12 in the Constitution, the seventh principle of the Declaration “acknowledged the
interdependence of governments and called for more cooperation between the different orders
of government in their respective jurisdictions, pointing implicitly to the significance of the
federal spending power” (Watts 4-5). The Calgary Declaration reflected the provincial and
territorial insistence on playing a role in the establishment of new Canada-wide shared-cost
programs and the views expressed in the two working papers released by the Ministerial
Council on Social Policy Reform calling for a “new approach to the use of the federal
spending power” (Watts 4), one where the provinces play more of an integral role.
In 1996, the federal government in its Speech from the Throne announced that it would
only create new shared-cost programs once it obtains an agreement from a majority of the
provinces. It also promised to permit provinces to opt out with compensation if they set up an
equivalent program.
In February 1999, a Framework for Improving the Social Union for Canadians was
signed by the federal government and the provinces, with the exception of Quebec. The
agreement established a role for the provinces and territories in the use of the federal spending
power. The federal government would only introduce a new Canada-wide shared-cost
program or commitment to intergovernmental transfers in the form of conditional or
unconditional grants in areas belonging exclusively to the provinces upon consultation with
the provincial governments. Further, if a province or territory has an existing program similar
to that which the federal government was considering, they would receive fiscal compensation.
Additionally, the federal government promised not to introduce a new program or changes to
an existing program without giving the provinces and territories at least three months notice.
In return, the provinces tacitly acknowledged and recognized the federal spending power and a
role for the federal government in social policy. The agreement also enabled the federal
government to continue to spend in provincial jurisdiction. At the same time, however, the
provinces secured a more profound role for themselves in establishing new social programs.
Quebec, however, did not sign on to the Agreement, citing that it did not include a provision
for opting out with full compensation.
In 2004, 2004 Health Care Accord (reviewed above), the provinces were able to secure a
role in the federal government’s involvement in the area of health. As Courchene argues, this
“was indeed a defining moment in the evolution of our federation” (Courchene 2004, 28).
In the Speech from Throne delivered in October of 2007, the federal government promised
to introduce legislation that would restrict the federal spending power in provincial
jurisdiction. The government also indicated that it would allow for provinces opting out with
“reasonable compensation.”
SO WHAT’S ALL THE CONTROVERSY ABOUT?
Essentially, the debate over the use of the power concerns areas of jurisdiction. In other
words, can the federal government use the money it legitimately raises pursuant to its powers
enumerated in the Constitution Act, 1867, in areas assigned by the Constitution exclusively to
the provincial governments? On the one hand, there is the argument that the federal
government’s ability to spend money is confined to those areas that fall into federal jurisdiction.
This position, underpinned by the theory of fiscal responsibility, is based on the idea that the
Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 13 power to raise money through taxing is limited to the “legislative objectives of the federal
Parliament or legislative government,” so the ability to spend is also limited to the legislative
objectives of that government. (Hogg 148). In short, this position embraces the idea that the
government should only raise what it needs and the provincial governments should be given the
tax powers necessary to fund their programs and fulfill their obligations under the Constitution
Act, 1867. According to Peter Hogg, this theory of fiscal responsibility overlooks the disparity
amongst the provinces and limited ability of some of the provinces to raise enough money to
fulfill their constitutional responsibilities (Hogg 148). In reality, the poorer provinces (the havenot provinces) need federal funds in order to maintain a reasonable level of taxation while
providing a comparable level of social services (Hogg 148). It is this reality that underpins the
logic of equalization payments in Canada.
On the other hand, there is the argument that the federal government can spend or lend its
funds, with or without conditions, directly or indirectly to the provinces, however it sees fit.
Acceptance of the money and the associated conditions is voluntary. The provinces do not
necessarily have to comply with the stipulations: they can choose not to accept the money (Hogg
149). Two points challenge this argument. First, it is questionable to assert that the provinces
have a choice to accept or refuse the federal funds; they cannot in good conscience deny their
citizens social programs by refusing to accept money, at least some of which had been collected
from them by the federal government. Second, the argument ignores that the use of the federal
spending power in provincial jurisdiction “weakens the accountability of governments to their
respective legislatures and electorates and gives politicians plausible constitutional justifications
for their failure to act when public action is clearly required” (Smiley 53). Further to this,
Kellock and LeRoy argue “any power that purports to transfer federal tax revenues to provincial
governments or spending on matters falling beyond the federal Parliament regulation or control
breaks the clear line of accountability that supports Canada’s system of responsible government”
(Kellock and LeRoy 6-7). The argument advanced by these authors, however, does have its
flaws. It is not necessarily a truism that transferring funds or spending outside its jurisdiction
automatically leads to less accountability. While it may blur the accountability lines, such a
government continues to be accountable both to the electorate and to its parliament or legislature.
Indeed, it may be argued that it is this accountability that has caused the federal and provincial
governments to enter into the various agreements identified above, most notably the Health
Accord of 2004. Canadians expect their governments to ensure the social union provides
services of acceptable quality and quantity, even if this requires some blurring of jurisdictional
and accountability lines.
The legitimacy of the federal government’s use of its spending power rests on how the nation
is perceived and the role the federal government plays in this nation. Is Canada a nation with a
strong central government unilaterally determining national standards and the national interests?
Is it a nation with strong provincial governments which play a role in establishing and defining
national goals? Or is Canada a plural nation where some form of asymmetrical federalism is
established? The manner in which these questions are answered undoubtedly shapes one’s views
on the legitimacy of the federal spending power. The governments of Quebec have never been
able to fully accept the legitimacy of federal encroachment upon provincial jurisdiction. The
other provinces, however, though passive at first, began to become concerned once realizing the
minimal role they played in establishing and shaping the programs through which the federal
spending power was implemented and the significant role they played in financing and
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Verrelli, Nadia The Federal Spending Power 14 administering them. The federal governments have always seemed to concern themselves with
the idea of building a strong nation with a strong national identity based on equality of the
individual. In short, the debate over the federal spending power has been and will probably
continue to be a debate on whether the federal government’s use of its spending power is, as
Telford points out, nation-building or nation-destroying. In other words, do the federal
government’s initiatives in social policy pull the nation together by ensuring equality of
treatment and a strong unified social welfare state or do they create friction between the two
orders of government resulting in constant and divisive bickering?
Works Cited Adam, Marc‐Antoine. "Federalism and the Spending Power: Section 94 to the Rescue." Options Politics March 2007: 30‐34. Banting, Keith. "Federalism, Social Reform, and the Spending Power." Canadian Public Policy Vol 14 Supplement: The Meech Lake Accord (1988): S81‐s92. Courchene, Thomas. "Pan Canadian Provincialism‐The New Federalism and The Old Constitution." Options Politics November 2004: 20‐28. Courchene, Thomas. "Variations on the Federalism Theme." Options Politics September 2006: 46‐54. Federal Government of Canada, the. Speech from the Throne. October 2007. 17 October 2007 <http://www.sft‐ddt.gc.ca/eng/media.asp?id=1364>. Finance Canada, the Department of. A Brief History of the Health and Social Transfers. 2007. 13 October 2007 <www.fin.gc.ca/FEDPROV/hise.html>. Hogg, Peter. Constitutional Law of Canada Fourth Edition. Toronto: Carswell THompson Professional Publishing, 1996. Kellock, Burton and Sylvia LeRoy. "Questioning the Legality of the Federal "Spending Power"." The Fraser Institute: Public Policy Sources October 2007: 1‐26. Laskin, Bora. Canadian Constitutional Law: Cases, Texts, and Notres on Distribution of Legislative Powers. Canada: Carswell Co, 1960. McRoberts, Kenneth. Misconceiving Canada: The Struggle for National Unity. Toronto: Oxford University Press, 1997. Meekison, J. Peter. Canadian Federalism: Myth or Reallity. Toronto: Metheun, 1968. Working Paper 2008 – 10 © IIGR, Queen’s University
Verrelli, Nadia The Federal Spending Power 15 Petter, Andrew. "Federalism and the Myth of the Federal Spending Power." Mondo Politics. 13 October 2007 <http://www.mondopolitico.com/library/myth/mpintro.htm>. Smiley, D.V. Canada in Question: Federalism in the Eighties Third Edition . Toronto: McGraw‐Hll Ryerson Limited, 1980. Stevenson, Garth. Unfulfilled Union: Canadian Federalism and National Unity. Canada: Gage Educational Publishing Company, 1989. Telford, Hamish. "The Federal SPending Power in Canada: Nation‐Buildong or Nation‐Destroying." Publius: Journal of Federalism 33 (Winter 2003): 23‐44. Watts, Ronald. The Spending Power in Federal Systems: A Comparative Study. Kingston: Institute of Intergovernmental Relations, 1999. Webber, Jeremy. Reimagining Canada:Language, Culture, Community and the Canadian Constitution . Montreal: McGill‐Queen's University Press, 1994. Working Paper 2008 – 10 © IIGR, Queen’s University