The Politics of Chequebook Federalism: Can Electoral Considerations Affect Federal-Provincial Transfers?

Abstract

Canada’s equalization program is supposed to ensure that provinces that lack the same ability to raise revenue as other provinces, due to economic differences, are still able to provide their residents with roughly similar levels of public service. The equalization program itself is ostensibly based on a formulaic approach, with automatic equalization payments kicking in where and when they are needed, while federal social transfers to the provinces are, at least by name, purportedly intended to support the social spending needs of those provinces. This is how things are supposed to work, anyway. But both equalization payments and social transfers are, inevitably, arranged by federal politicians, and politicians have a natural tendency to behave politically. An analysis shows that, in many cases, the amount of money a province receives in federal transfers is correlated with the way that province voted during federal elections. In other words, when a province exhibited dominant support for the national party that controls the federal purse strings, that province often received a greater share of federal transfers. Where provinces were largely unsupportive in a federal election for the victorious party, they were more likely to see their share of federal transfers shrink. This dynamic ultimately defeats the real purpose of federal transfers, which are intended to assist based on need, not based on political support. When transfer programs are modified for reasons other than need, one might rightly worry about suboptimal use of scarce public resources, while publicly undermining the legitimacy of what may be, in principle, worthy federal programs. Protecting against the influence of politics in such programs is vital to maximizing their efficiency and retaining their credibility. These programs can be redesigned in ways that safeguard against political interference. Appointing an independent body to manage fiscal transfer programs could be an important first step, as would putting constraints on the ability of the federal government to impose sudden floors and ceilings on transfers, or to cut special side deals with individual provinces or regions. Politicians will always behave politically; it is important to find ways to keep them from letting politics distort the principles of federal-provincial transfers.