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:
Property and civil rights
Administration of justice (including policing)
Municipal institutions
Education
Health and welfare
Natural resources
So a short-term federal disruption might not have much of an impact on most Canadians’ day-to-day activities. Federal employees and UI recipients would have to figure out how to survive without their paychecks and border entry points would shut down. But great news! Your criminal prosecution can go ahead on schedule because, while criminal law is controlled by the feds, lower criminal courts are provincial.
On the other hand, consider how federal transfers contribute between around 15 percent (Alberta) and 40 percent (Atlantic provinces) of provincial budgets. And Toronto’s municipal budget, for instance, includes around 15 percent in transfers from the province, and another five percent from the federal government. So it wouldn’t take long before all levels of government begin to feel the heat.
I’m not suggesting we change Canadian federalism (good luck trying). But a province that’s reduced or eliminated its own budget deficit and successfully weaned itself from incoming federal transfers would probably enjoy a smoother trip through a shutdown. Exploring the legality of temporarily taking over the payroll for critical federal roles (like Border Services), for instance, might also pay dividends when push came to shove.
I would suggest that thinking formally about these issues would be an important part of any government’s emergency planning preparedness. Yesterday was the best time to start. But today is the next best option.
Post-COVID, the claims of Modern Monetary Theory proponents didn’t age well.
David, I like the general thrust of what you are doing here. Now, having said that, I have a question.
You note that provincial governments receive transfer payments from the feds. As it happens, I am an Albertan so I will use my province as an example in this question. You note that Alberta receives about fifteen per cent of it's budget from the feds. I presume that you are speaking of items such as medicare transfers and similar sorts of programs - am I correct?
Now, given that this is a valid exercise - in my opinion, anyway - it seems to me that any intelligent province would consider the consequences of such a possibility and game plan the results. Of course, in Quebec (and possibly other provinces) that might well take the form of, "Well, if the feds are broke, we might as well leave it all behind and go for actual independence, so what are the economics of that?" On second thought, it seems to me very likely that Quebec has dealt with that question and perhaps we in Alberta should as well.
Thanks for another interesting perspective, David. The paragraph at the top of page 2 confuses me in that neither the link nor the graph below seen to show the national public debt over the years.