Finance Committee on May 7th, 2026

[Jean-Denis Garon, Bloc, Mirabel, QC]

Thank you, Mr. Chair.

I would like to thank the witnesses.

We always thank the witnesses for joining us at the committee, but this is our second meeting on the federal spending power, and at the last meeting, not a single witness knew what this power was. This was also true of some members on the other side. Today, I am pleased because we are right on topic. That makes me very happy.

Mr. Laplante, there is a vertical fiscal imbalance. The federal government has more revenue than it needs for its current expenditures and its strict constitutional responsibilities. The opposite is true for the provinces. Some people deny there is such a thing as a vertical fiscal imbalance and suggest that if Quebeckers are short on money, the Quebec government should raise its taxes.

What do you think of that? Is this denialist rhetoric? Or is this fiscal imbalance a real institutional problem within the current framework of transfers and responsibilities?

[Robert Laplante]

There is no doubt in my mind: This is a real problem.

Quebec already has several investigative reports on the subject, including from the well-known commission on fiscal imbalance, which operated from the late 1990s to the early 2000s and was headed by Mr. Séguin, who did a remarkable job.

This imbalance must be considered from two angles when it comes to governance. A technical approach uses a per capita calculation and the age pyramid to determine methods of resource distribution. Numerous parameters can be used—

[Jean-Denis Garon, Bloc, Mirabel, QC]

I apologize for interrupting, but we're running out of time.

Generally speaking, you agree that there is a fiscal imbalance and that we cannot just raise our taxes by 10% tomorrow morning without causing considerable damage to our economy.

[Robert Laplante]

That goes without saying, of course, because what's really at stake behind the debate over whether to raise taxes is the discussion about goals. We share resources, but we have to ask ourselves for what purpose.

[Jean-Denis Garon, Bloc, Mirabel, QC]

I will come back to that. I had cited the famous quote made in 1996 by Liberal Treasury Board president Marcel Massé, back when Ottawa had consolidated transfers as part of its efforts to reduce the deficit. It had created the CHST, the Canada Health and Social Transfer. We don't like acronyms, and we like this one even less.

After that, it made cuts, which somewhat forced the Quebec government to end the shift toward outpatient care and cut health care services. The Treasury Board president said, “When Bouchard has to make cuts, Ottawa will be able to demonstrate that we have the means to safeguard the future of social programs”—with a nice maple leaf at the top. The last part of that quote is my own, of course. It's my interpretation, but it's faithful to what the Treasury Board president said.

I'd like to know if you think the federal government is using its spending power to interfere in the political affairs of the provinces.

From a democratic standpoint, what is the problem? Does a voter who is not receiving adequate health care know which government to punish and in which election?

[Robert Laplante]

There is a real democratic deficit surrounding these various revenue-sharing formulas. When we speak of a lack of transparency, we are referring to the difficulty citizens have understanding how revenue-sharing is done; it is clear that they find it very difficult to draw conclusions about the desirable, intended or undesirable effects of this revenue-sharing.

The federal government, in its decisions, may disregard the trade-offs made by a province or between provinces and implement programs whose objectives are not even debated within the provinces. In the case of Quebec, this is a rather frequent occurrence. This happened with early childhood programs. We see it in the dental care program. We—

[Jean-Denis Garon, Bloc, Mirabel, QC]

We can revisit the list, because it can be quite long—

[Robert Laplante]

Indeed, it can be.

[Jean-Denis Garon, Bloc, Mirabel, QC]

You're getting a little ahead of me. There are various ways to address the issue of the vertical fiscal imbalance, but let's say we group them into two broad categories.

One involves Ottawa systematically increasing the number of conditional funding agreements. It is the federal government that tells the provinces they cannot legislate in a particular area of jurisdiction, but that they will not receive funding if they do not do as it wishes. However, over time, we could also have formalized and improved the payment of unconditional transfers. The Canada Health Transfer is not unconditional, but it is, let's say, less bad than many other new programs that have been instituted.

In your opinion, which direction has the federal government taken in recent years between these two options. Is this a problem or a solution?

[Robert Laplante]

I believe the federal government is acting in an increasingly unilateral manner. Furthermore, it may show interest in initiatives being implemented in one province or another. However, once it has drawn its conclusions, it is not interested in engaging in dialogue on the matter.

From this perspective, if there were an expert panel—as was mentioned earlier—it must have the mandate to examine the effects of the revenue-sharing formula on governance. That is extremely important. What are—

[The Vice-Chair (Jasraj Hallan), Conservative, Jasraj Singh Hallan]

Thank you. That's the round.

Next, we have Ms. Cobena for five minutes.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

Thank you, Chair.

My questions are for Mr. Robson.

Mr. Robson, I'm sure you know that the government has announced a sovereign wealth fund, which will be funded through the issuance of debt, and it actually invites the public to also invest in this fund. We also know that the government has a history of rough investment decisions.

For the benefit of the Canadian public, could you explain what generally happens to investors when investments go bad in a fund like that, and particularly when investors have borrowed money?

[William Robson]

I have concerns about what the federal government is doing with its balance sheet generally, and the sovereign wealth fund would be one more log on that fire, if that's a metaphor people will accept.

The federal government is borrowing new money, and if you look again at the fiscal reference tables, you'll see that the average interest rate on its debt is about 3% now. The return on investments that it is getting on its financial assets is lower than that. On the face of it right now, the federal government is borrowing and is paying interest at a higher rate than the returns on the investments it is making.

I am concerned that the same thing will happen with the sovereign wealth fund. I do not like to see the federal government's gross debt going up the way it is, because it's creating exposure. We see it in the interest payments, but there are also things going on, I think, with these investments and transfers that really ought to show in spending as opposed to the appearance of the federal government building up assets. I would like to see the federal government do less of that.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

Of course, we have seen similar spending by government in the past, in the 1990s. Can you describe to the committee what happened to Canadians' quality of life when this experiment was tried last time?

[William Robson]

The federal government has certain types of financial assets and investments in certain Crown corporations, such as the Bank of Canada, that are quite appropriate to the machinery of government, but I do not think the public sector has a very good track record of making financial investments. This is not the same as investing in hard infrastructure, such as ports, airports and so on, which governments can uniquely undertake. Perhaps it's time to unload some of those assets. Those are the types of investments that I think people usually have in mind when they think about things the public sector is uniquely able to do.

I do worry, as other people do, that when you have investment funds with unclear mandates—a mixture of financial return and nation building, regional development and that type of thing—you're going to end up making decisions that are not economically guided.

I worry about the expansion of the federal government's balance sheet. I would worry about that if it was occurring at the provincial level as well. I think it makes the public finances more risky and more opaque than they would otherwise be.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

Earlier this year, you authored an article titled “Ottawa’s fiscal guardrail is driving us toward the cliff”. Can you explain to the committee the essence of the article and why you titled it that?

[William Robson]

I admit that the guardrail terminology was a bit of a hook. We had that terminology come and go earlier in this decade. It inspired a bit of ridicule at the time because it didn't appear that guardrails were really any kind of effective constraint against the government doing what it wanted to do on a year-by-year or every-six-months basis.

The latest fiscal update seems to confirm that the federal government, when it gets an extra revenue dollar beyond what it was expecting in its fiscal projections, immediately increases spending. The difficulty with increasing spending is that when you do it this year, the program that you increased is likely to develop a constituency and the spending will continue in years to come.

If the implicit fiscal rule is that you will spend every revenue dollar, then we are not going to get to a situation where the budget is balanced. We are not going to get to a situation where the federal government's debt is declining as a share of GDP, which it has said in the past it would like to do.

The behaviour we're seeing is not consistent with prudent fiscal policy.

[Sandra Cobena, Conservative, Newmarket—Aurora, ON]

This is timely, because we are seeing that the Liberal government has abandoned its fiscal guardrails entirely.

Can you explain the significance of this abandonment and describe what must be done to return fiscal sanity to the country's budget?

[The Vice-Chair (Jasraj Hallan), Conservative, Jasraj Singh Hallan]

That's the time. You'll have time to answer in the next round.

Next, we have Mr. Sawatzky for five minutes.

[Jake Sawatzky, Liberal, New Westminster—Burnaby—Maillardville, BC]

Thank you to the witnesses for coming today.

Professor Béland, I have a few questions for you. Thank you very much for your opening remarks.

Much of the discussion of fiscal policy focuses on the total amount of government spending. The recent budget, in 2025, emphasized not just the level of spending, but also the quantity and quality of that spending.

In your view, how important is it to distinguish between the quantity of federal spending and the quality or effectiveness of that spending when evaluating fiscal policy?

[Daniel Béland]

It depends on how you define quality. I think experts will not necessarily agree on how to define quality.

When we talk about emphasizing the importance of, say, investing in the economic future of the country, I think it's a good idea to emphasize forms of spending that go in that direction, but the proof is in the pudding. Sometimes we can define something as an investment, but we don't know yet whether it will actually be good in the end and whether it will actually generate returns the way the government might anticipate.

It's important to not just look at the budget, but monitor over time how these investments are actually working on the ground and whether they have worked in the future—three, five or 10 years down the road. It's not just about the budget itself. We should evaluate the effectiveness of the measures and the investments we make over time in a systematic way. We don't always do that.

[Jake Sawatzky, Liberal, New Westminster—Burnaby—Maillardville, BC]

Thank you.

Would you consider investments in areas like skills training, housing supply or productivity superdeductions as examples of spending that can strengthen the economy and improve fiscal outcomes over time?

[Daniel Béland]

They might. Again, the devil is in the details. It's not just about what's in the budget. It's about how these measures are implemented. That's why implementation is really crucial and something that needs to be monitored in a systematic way. Budgets are incremental in nature. They change, but there's quite a bit of consistency over time, from year to year. If we want to be more effective with our own investments, we need to report back to Canadians on how these investments have fared. We need to measure exactly their impacts over time and see if we want to continue in that direction or invest in different ways.

The proof is in the pudding. We need to measure this over time.

[Jake Sawatzky, Liberal, New Westminster—Burnaby—Maillardville, BC]

Thank you.

I have another question.

A recent analysis by the International Monetary Fund indicated that Canada remains in a relatively strong position compared with G7 partners, particularly in terms of debt sustainability and fiscal capacity. How significant is it that an independent institution like the IMF continues to assess Canada as being in one of the stronger fiscal positions among its peers?

[Daniel Béland]

Look, I think there's a doomsday discourse, sometimes, about the fiscal position of Canada. We are in a much better position now than we were in, say, the early or mid-1990s. I think one of your colleagues mentioned earlier what happened in 1995-96. We are in a different position. We're in a stronger position, but things can change really rapidly in terms of the economy. We know the uncertainties regarding the trade war with the United States and other things.

We have to be prudent about our forecasts, of course, and the way we manage both expenditures and revenue raising. It's important to understand and to emphasize that controlling spending is important, but we also have to think about the revenue side and how to review tax expenditures that might be regressive and not necessarily that helpful. That's a form of spending, indirectly—tax expenditures and tax credits that might not be so useful from a broader standpoint.

Also, think about how we can generate more revenue. Don't just focus on controlling spending. Focus, also, on increasing revenues. A former U.S. Supreme Court justice said that taxes are the price we pay for civilized society. Of course, today, “civilized society” may sound a bit outdated as language, but we have to understand that taxation, including progressive taxation, is an important part of the mix.