How Resilient Are Canadian Provinces?

How would provinces and cities survive if the federal government collapsed?

Suppose one fine day the federal government was unable to show up for work. Perhaps it wasn’t feeling well. Or maybe it had borrowed so much money that it maxed out its line of credit, defaulted on its interest payments, and just couldn’t pay its bills. What then?

Let’s say - and I’m just spitballing here - let’s say that exploding, uncontrolled public debt is a bad thing. All the smart people tell us that taking on too much credit card debt won’t end well, right? Well I can’t think of any solid reason that such logic shouldn’t also apply to governments.¹

As you can see from the graph, our federal public debt climbed from $351 billion in 1990 all the way to $884 billion in 2024. The 50 percent leap between Q4 2019 and Q4 2021 was the generous gift of COVID. Things started to recover in mid-2023, but they’ve since nose dived once again.

Ah, but that’s just debt you say. It’s someone else’s problem.

Not exactly. You see, even if we’re not paying down the principle on the debt, you can be sure that we’re covering interest payments. Which, it just so happens, have become a lot more expensive ever since massive government borrowing drove up interest rates.

How much more expensive? As of Q1 2024, our annual interest payments totaled $11.7 billion, compared with $6.2 billion back in Q1 2022. Put differently, the interest we pay each year comes to seven percent of our total federal budget.

I’m certainly not going to confidently predict that the federal government will soon default on interest payments, lose access to capital markets, and begin laying off government workers and shutting down services. But I wouldn’t say that it can’t happen either.

Given that possibility, what can provinces and cities do right now to prepare for a sudden (hopefully brief) disruption? First off, though, what exactly is a province?

As defined by the British North America Acts, areas of the exclusive responsibility of the federal government include:

• Public debt and property

• Regulation of trade and commerce

• Criminal law

• Militia, military and naval service, and defense

• Navigation and shipping

• Banking, incorporation of banks, and the issue of paper money

• Bankruptcy and insolvency

• Naturalization and aliens

• Unemployment insurance

Provinces are responsible for: