Provinces accept federal money at their peril

The Trudeau government plans to significantly ramp up spending for day care, dental care and pharmacare to cover the cost of prescription drugs. But all three of these policy areas fall under provincial jurisdiction, not federal. And as history has shown, future federal governments can easily and unilaterally reduce or even eliminate funding, leaving provinces with a heavy financial burden.

Consider the 1990s when the federal government reduced health and social transfers to the provinces amid a fiscal crisis fuelled by decades of unrestrained spending and persistent deficits (and worsened by high interest rates). Gross federal debt increased from $38 billion in 1970/71 to $607 billion in 1993/94, at which point debt interest costs consumed roughly $1 in every $3 of federal government revenue.

In response to this debt crisis, the Chrétien Liberal government reduced spending across nearly all federal departments and programs in Budget 1995. And in 1996/97, health and social transfers to the provinces were $41.0 billion (or 51 per cent) lower over a three-year period than what the provinces expected based on previous transfers. In other words, the provinces suddenly got a lot less money from Ottawa than they anticipated.

This should serve as a warning for the provinces who may find themselves on the hook for Ottawa’s big spending plans. For example, the Trudeau government has earmarked $43.1 billion for the provinces in an attempt to deliver $10-a-day daycare, an area of exclusive provincial jurisdiction, from 2021/22 to 2027/28. Any change in federal priorities or federal finances could swing the financial burden on the provinces to maintain the program.

Indeed, in Ontario, there’s already a federal funding shortfall of $1.2 billion (approximately 30 per cent) in 2026/27. If the federal government reduces its commitment for the entire program at the same degree as in Ontario, the provinces and territories must increase their collective spending from an estimated average of $161 million annually (from 2022/23 to 2025/26) to an estimated $3.7 billion in 2026/27—equivalent to increasing their annual share from 2.6 per cent to 31.6 per cent.

Such a massive change would have huge financial implications for the provinces. In Ontario, for example, based on budget projections, the province would slip from a projected budget surplus to a deficit in 2026/27, simply to cover Ottawa’s spending reduction.

The current state of federal finances only heightens the risk to the provinces. The federal government has run uninterrupted deficits since 2007/08, with total federal gross debt climbing from $692 billion in 2007/08 to a projected $1.9 trillion in 2023/24. Rapidly rising interest rates will put additional pressure on the federal finances. As a result, the current government—or perhaps a future reform-minded government focused on balancing the budget—could reduce transfers to the provinces at a heretofore unknown rate.

The Trudeau government has committed to significant new funding in areas of provincial jurisdiction, but provincial policymakers should understand the risk to their finances when entering into such agreements. Ottawa can unilaterally reduce or eliminate funding at any point, leaving provinces to either assume the unexpected financial burden through higher taxes or additional borrowing, or curtail the programs. Ignoring these risks for “easy” money will likely lead to serious problems down the road.