Money for Nothing
How no-strings-attached transfers leave provincial budgets tied in knots
BY Ellen Russell and Hugh Mackenzie
Illustration by Joshua Leipciger
There is an intractable fiscal problem in Canada. Ottawa enjoys large annual budget surpluses (eight by the last count) while everyone else (with the exception of oil-land Alberta) copes with mounting budgetary pressures.
But it just may be that the February 2005 budget (and other recent announcements) foreshadows an ingenious new way of sidestepping the issue of fiscal imbalance between Ottawa and the provinces and territories. If you are a federal Liberal, the beauty of this stealth strategy for fiscal repair is that it masquerades as the great renaissance of Canada’s social programs.
The health of federal finances is intimately connected to provincial budget difficulties. In order to achieve its impressive string of budget surpluses, Ottawa had to cut spending. Annual transfers to the provinces were slashed from around the $20-billion mark in the early 1990s to as little as $12 billion in 2000–01. Exacerbating this large hole in their budgets, many provinces further reduced their revenue base by succumbing to pressure for tax cuts, which in turn produced dramatic cuts in social programs and reduced transfers to municipalities. The result: the increasingly untenable position of Canadian municipalities and widespread suffering among Canadians who rely on social programs.
After years of large federal budget surpluses, pressure has been building to address this fiscal imbalance. But how? Fixing the equalization formula has little political upside for Prime Minister Paul Martin. Well-publicized negotiations provide the first ministers with fabulous grandstanding opportunities to critique Ottawa’s fiscal misdeeds. And side deals with individual provinces only set the stage for endless squabbles over who can be the squeakiest of the squeaky wheels.
Ottawa needed a way to give cash to provinces to address their dilapidated fiscal situation without acknowledging any federal responsibility for helping to put them in this compromised position. Better yet, Martin could make a virtue of necessity if he could wrap this fiscal recalibration in proclamations of concern for social programs and local communities.
His solution: the no-strings-attached transfer. Since last year’s federal budget, the Liberals have announced transfers for health and equalization, and in this budget they added such things as transfers for childcare and a gas tax for cities. Between 2004-05 and 2005-06, that is almost $13 billion in new transfers (or about two-thirds of new federal spending over this period). And most of these transfers have few, if any, strings attached.
Now, this unconditional money is ostensibly intended to fund childcare, bail out municipalities and do other good things. But since there is no mechanism for accountability, other levels of government can do whatever they want with it— they could provide some additional childcare services, but then again they might not.
The only thing the feds have done to ensure that this (nudge nudge, wink wink) “childcare” money is used appropriately is to put the provinces in a situation where it will be politically embarrassing if no new childcare services are forthcoming.
These unconditional transfers will now force childcare advocates to run around to every jurisdiction in an effort to ensure this money is actually spent on childcare. We would prefer that these fine people put their energy into caring for children rather than being obliged to babysit politicians.
Childcare advocates and others concerned about social programs will have their work cut out for them. Cash without strings means these funds could be used to reduce spending deficits or pay down debt. Perversely, this money could even be used to fund new tax cuts! Even the gas-tax funding for municipalities may enable the provinces to substitute federal gas-tax money for money that they would have otherwise given to municipalities.
Neither social programs nor fiscal imbalances are repaired by these financial shell games. Concealing no-strings-attached transfers behind fancy labels that sound as if they are about social programs allows Martin to blame the premiers when this money doesn’t actually produce better social programs. Furthermore, it does not provide a long-term solution for the problems in fiscal relations between the various levels of government. If we continue down this road, the real and enduring issue of federal/provincial/local fiscal imbalances will be eclipsed behind ad hoc financial bailouts disguised as funding for social programs.
