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201 11 The Resilience of Canadian Federalism This volume explores the idea that federal or decentralized systems of government may pose special difficulties for countries experiencing a fiscal crisis of the sort that has disrupted North America and Europe in recent years. On the one hand, autonomous subnational units—states and provinces—may use their powers to tax and spend in ways that are fiscally undisciplined and even irresponsible, exacerbating the crisis at the national and the international level. On the other hand, in responding to a crisis central governments may employ controls, regulations, and reductions in intergovernmental transfers that seriously limit the ability of subnational governments to make choices and manage their own affairs. The result may be a heightened level of conflict between central and state governments and increased tension between the regions that fare reasonably well and those that experience the greatest economic stress. This chapter explores the case of Canada. It challenges the idea that high levels of fiscal decentralization necessarily lead to fiscal irresponsibility or incapacity or to unmanageable conflict. That is not to say that there has not been tension or disagreement between the federal and provincial governments in Canada but that it has been limited and has not had serious ramifications in wider markets. That may come as a surprise. Canada is among the most decentralized federations in the world.1 Canadian provinces have very broad fiscal autonomy to impose almost any form of tax—income, consumption, corporate, and so forth. Provinces have unlimited power to borrow, in both domestic and international markets. There are no provisions for federal monitoring, regulation, or control of provincial taxing, spending, and borrowing. Intergovernmental transfers are central to Canadian federalism, but relative to those of other federations, the amounts are small and come with few conditions attached.2 So it could be argued that it might be especially difficult to manage and coordinate the actions and policies of Canadian governments in the face of the richard simeon, james pearce, and amy nugent 11-0487-4 chap11.indd 201 10/7/13 8:35 PM 202 Richard Simeon, James Pearce, and Amy Nugent international fiscal crisis, but generally that has not been the case. Canadian federalism responded to the crisis in a broadly coordinated way. Federal and provincial policies were well linked, and there was relatively little tension between the federal and provincial governments. The post-recovery period from 2011 onward has seen somewhat greater interregional tension, basically between the oil- and gas-producing provinces (Alberta, Saskatchewan, and Newfoundland and Labrador) and other provinces, notably Ontario and Quebec, whose economies are much more rooted in traditional manufacturing. Balancing the differing economic challenges of the provinces is difficult, with increasing economic disparities (once wealthy Ontario is now an equalization recipient) adding further strain. But those disparities are not a creature of the economic crisis— they long predated it—nor are they a cause of it. All of this presents a puzzle. Canada—highly decentralized, regionally and linguistically divided—seems to have done relatively well. Why? In an effort to answer that question, we first provide a brief overview of the structural, political, and institutional forces that have shaped Canadian federalism and its political culture. We then map the contours of fiscal federalism in Canada, in terms of both formal powers and changes in Canadian governments’ relative shares of tax revenues, expenditures, and debts. We assume that the legacies of the past cast a strong shadow over current policy and policymaking. Accordingly, we briefly explore some previous episodes of fiscal crisis in Canada during which the ability of governments to respond would have been similarly challenged. In the 1930s, the Great Depression brought several provinces close to bankruptcy. It also led to a set of fundamental policy changes that laid the foundation for much of the Canadian welfare state and for the Equalization Program, which is one of the most fundamental features of the Canadian federal bargain. The energy crises of the early 1970s and the early 1980s dramatically shifted the Canadian political economy toward western Canada,triggering a regional and intergovernmental battle over control of energy policy and revenues—exemplified by the National Energy Program—that reverberates to this day. Finally, draconian federal spending cuts in the 1990s, including substantial reductions in federal transfers to the provinces, generated much protest but paradoxically laid the foundation for a more ideologically and fiscally coordinated approach when the current global crisis developed.3 Overall, the lessons learned and policies adopted in these...

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