I have a few affiliations to get out of the way first. As you know, I'm a professor at Carleton University. I'm co-editor of the Finances of the Nation feature in the Canadian Tax Journal, and I'm a member of the editorial boards of Canadian Public Policy and Canadian Public Administration. I'm published in some areas of federal spending, tax and transfer policy, and I should also disclose that, many years ago, I was an adviser in the intergovernmental affairs portfolio. My employer, of course, would like me to remind you that I'm here today as an individual and that my testimony reflects only my own views.
As you begin this study, I'll make a couple of comments that I would like to share with you for your consideration.
First, Canada is a federation and has generally demonstrated a very flexible approach with areas of effective responsibility shifting over time, sometimes towards greater decentralization, such as workforce development and immigration programs, and at other times towards greater centralization, such as income security and environmental protection. By international standards, Canada remains one of the more decentralized federations in the world. This may seem like an anodyne statement to begin with for this study, but I think that the study of spending power should always be grounded in the question of “spending power to do what?” in a federation.
Federal and provincial governments maintain separate and independent powers to raise revenues. Of course, spending has to come from somewhere. However, Canadians benefit substantially from efficiency gains in intergovernmental collaboration on the collection of income taxes, taxes that provide an important revenue source for public spending. I don't want to dwell too long on the question of fiscal capacity within the federation, but I do want to note that, while the federal government's annual income tax revenues exceed those of all provinces combined, when we look at total revenue sources for all the provinces combined, total combined provincial revenues from all sources exceed those of the federal government, whether we look at nominal dollars, real per capita dollars or percentage of GDP.
Federal and provincial legislatures also maintain separate powers to spend money and to attach conditions for recipients of that spending. With regard to the federal spending power, the focus of the committee's study today, there are competing arguments regarding the scope or limits of that power. Courts in Canada, provincial and national, have recognized the legitimacy of a federal spending power, including the right of this Parliament to impose conditions on spending so long as those conditions do not amount to the regulation of an area of policy in provincial jurisdiction. I suggest that this limitation requires the conditions not to be so directive as to amount to a regulatory intent in pith or in substance and that the recipient jurisdiction can voluntarily agree to the conditions, making them a shared policy aim of two independent orders of government in the federation.
I'd like to close with three brief observations for consideration by the committee in this study.
First, the last decade has seen an important increase in the share of federal funding flowing through transfers outside of transfers to persons and outside of the major block transfers to provinces, territories and municipalities. These other transfers are the grants and contributions programs most likely to impose conditions on the recipients—at times, I would say, stretching reasonable interpretations of the federal spending power of this Parliament. When those conditions are excessive and overly directive, and particularly when they attempt to leverage provincial or municipal policy changes unrelated or only tangentially related to the stated purpose of the federal allocation in Parliament, I would suggest that they are—and rightly so—open to challenge by provinces. However, I would emphasize that even when problematic conditions do exist, this Parliament has continued to approve supply. Issues in the federal spending power are not simply a question of executive overreach. Parliament has power to exercise.
Second, aims to buy or nudge subnational policy change, however well intentioned—whether on provincially regulated early learning and child care or in rates of municipal housing approvals—are likely to be a source of strain on the fabric of the federation. From my own research and analysis, they may not be effective over the longer term unless it is policy change that the province is already prepared and interested in making. Recall that federal shares of conditional contributions—