Back To The Centre

For the past thirty years, Canada has been decentralizing. The coronavirus has halted that trend. Our central government is now where the action is. John Ibbitson writes:

Decades of decentralization have been reversed in a matter of weeks. Provincial governments are in desperate straits. Newfoundland and Labrador, the weakest of the lot, teetered on bankruptcy last month, unable to find anyone willing to lend it money.

Our province has run out of time,” Premier Dwight Ball told Prime Minister Justin Trudeau in a letter first reported by CBC. The province, he said, faces an “immediate and urgent financial crisis.”

The coronavirus pandemic “is a major disaster for the provinces,” Philip Cross, a senior fellow at the Macdonald-Laurier Institute, an Ottawa think tank, said in an interview. “They don’t have the fiscal capacity to absorb a shock like this.” In the weeks and months ahead, Ottawa will be paying everyone’s bill. And whoever pays the bill calls the tune.

As was the case during the Great Depression, only the government in Ottawa has the resources to deal with this crisis:

In normal times, provincial governments are dominant players on the federal scene, responsible for the things that matter most in people’s lives: schools, hospitals, highways, welfare. But in times of crisis, the normally weak federal government takes centre stage, because of its greater ability to borrow money and levy taxes.

In the economic emergency caused by the pandemic, Ottawa is using its spending power to protect workers and businesses and to help out provinces as they struggle to develop the capacity to treat patients.

“In past crises, we’ve had major changes in the way we collaborate as a federation," Pedro Antunes, chief economist at the Conference Board of Canada, told me. “And this crisis might also result in changes.”

It's all about which governments can afford to take on mountains of debt:

The biggest immediate challenge for provincial governments could be finding lenders to finance the staggering increases in the cost of health care and other emergency measures, even as revenues collapse, especially because many provinces are already carrying high levels of debt.

In such an environment, said William Robson, president and chief executive officer of the C.D. Howe Institute, a think tank, Ottawa could help the provinces out in three ways.

One would be for the federal government, which has plenty of room to borrow, to raise funds and transfer them to the provinces. But in the past that has led to finger-pointing and a lack of accountability.

“You’re diluting the ability of the citizen to know who’s responsible if they’re unhappy with the quality of their health care," Mr. Robson observed.

Another approach would be for Ottawa to guarantee a provincial bond issue. The third approach, and for Mr. Robson, the preferred one, is for the Bank of Canada to temporarily buy up provincial debt, which is exactly what the bank has started doing, through its Provincial Money Market Purchase program. With the bank’s help, Newfoundland and Labrador should be able to finance its operations.

These monetary moves have been supplemented by the federal government’s efforts to support businesses, workers and the unemployed.

For thirty years, conservatives have been railing at the levels of federal debt. But they may be forced to reconsider their position -- particularly in the aftermath of this crisis.

Image: National Post