Peace with the Provinces?

Peace with the Provinces?

Stephen HARPER's admirers and detractors argue over most things about him, but they agree he's no pushover. To his fans, he's admirably resolute. To his foes, plain mean. Yet on a key dimension of federal politics that has traditionally brought out the pugnacious side in prime ministers, Harper has seemed to be neither. Five years into the job, and his approach to the provinces has been mostly conflict-adverse and conciliatory. He's bought peace by boosting transfer payments by billions, defused explosive issues, and avoided policy clashes. Only Newfoundland's Danny WILLIAMS was a persistent source of friction, and he helped smooth the waters late last year by quitting.

But the Prime Minister's unusual run of relative peace with the premiers might not last much longer. Among close watchers of federal-provincial relations, expectations that the two levels of government are headed for strife are nearly unanimous. The key reason: most of the major deals covering Ottawa's transfer payments to the provinces are slated to expire in three years. The terms are so contentious, and the money so vital to the provinces, that talks to replace them must ramp up soon. "This could very possibly be the most intense and challenging period in federal-provincial relations since the Charlottetown and Meech Lake period," says Matthew Mendelsohn, director of the University of Toronto's Mowat Centre for Policy Innovation, referring to the wrenching constitutional conflicts of the late 1980s and early 1990s.

If that sounds extreme, consider the stakes. The current relationship between Ottawa and the provinces rests on two fiscal arrangements, both of which left little reason for most premiers to do anything but smile broadly. In 2004, then-Liberal prime minister Paul MARTIN agreed to hike payments to the provinces to fund health care by $41 billion over 10 years. Harper's 2007 budget injected another $39 billion over seven years into a wide range of provincial transfers, under terms particularly welcomed in Quebec and Ontario. "Spread money around," says Mendelsohn. "It's a long-standing federal approach to regional conflict."

Paying for peace, however, isn't an approach the feds can easily afford now that they're back in deficit. And even when the money was flowing, Harper had to cave on hot-button issues, from foreign takeovers to pension reform. The question now is how parsimonious Ottawa will have to be, no matter what party is in power.

Harper and Finance Minister Jim Flaherty both declare they won't resort to the deep cuts to transfers that the Liberals relied on for a few years during their deficit-busting push in the mid-1990s. Indeed, Harvey Lazar, a public administration professor at the University of Victoria, says that period was a "running battle" only settled by the 2004 health accord "peace treaty." That treaty's expiration date now preoccupies both levels of government. Not only are the health transfers up for renegotiation, so are social assistance, training programs, and equalization. The rethink comes against a radically changed backdrop: Ontario will collect equalization this year, along with traditional "have-nots" Manitoba, Quebec and the Maritimes, while the "haves" include B.C. and oil-rich Alberta, Saskatchewan and Newfoundland.

Yet Harper and Flaherty rarely breathe a word about the possibility of a wholesale reworking of the deals, which must be finalized sometime in the fiscal year that starts April 1, 2013. To a minority government facing the likelihood of an election well before then - possibly even one triggered by a budget next month - that's eons into the political future.

To provinces that rely heavily on the transfers, though, that's tomorrow. They need certainty to plan for basic services like running hospitals and universities. "Clearly the provinces can't wait until 2014, or even 2013, to find out where this central piece of funding for health, education and social programs is going to come from," says Canadian Auto Workers economist Jim Stanford. If Flaherty isn't expected to offer any detailed outlook next month, "It sure better be in the next budget," Stanford contends.

Straight talk on the future of transfers is more likely after the next election. Any upbeat, campaign-friendly message about keeping up the pace of growth in transfers would sound suspiciously unrealistic. When Harper won his first election in 2006, Ottawa was sending $42 billion a year to the provinces. This year, those major transfers are forecast to total nearly $55 billion, close to 20 per cent of provincial revenues. Health transfers alone have risen by six per cent a year under Martin's 2004 deal with the premiers. If Harper has enjoyed an unusual degree of tranquility on the federal-provincial front, that quiet would surely end at his first clear signal that large annual increases were coming to an end.

And the Prime Minister has shown that he's willing to go to remarkable lengths to prolong the peace. For instance, his decision last year to block an Australian company's proposed acquisition of Saskatchewan-based Potash Corp. clearly cut against the economic grain of his ostensibly pro-foreign-investment Conservative government. Saskatchewan Premier Brad Wall's high-profile campaign against the takeover reminded federal Tories that they hold 13 of 14 ridings in the province. They had learned the hard way how a popular premier's disapproval could sting when they failed to win a Newfoundland seat in 2008, as Williams waged war against Conservative candidates over Harper's treatment of the province's offshore energy revenues in the equalization transfers formula.

Beyond short-term election calculations, though, Harper harbours a philosophical sympathy for the provinces in their perennial tension with Ottawa. He came to office in 2006 promising what he called "open federalism." The slogan basically meant that his government would respect provincial jurisdiction and end what was called the "fiscal imbalance," which saw Ottawa racking up surpluses while many provinces struggled to pay for basic services. The gusher of money for the provinces in his 2007 budget seemed to largely make good on Harper's pledge to foster federal-provincial harmony.

If he hoped the cash would also buy Ottawa some manoeuvring room on its own priorities, however, it didn't work. Although Harper has avoided intruding on areas of mainly provincial jurisdiction, his government has tried to advance files where the federal claim to a leadership role seems clear - and met with fierce provincial resistance anyway.

Flaherty faces a tough fight, for example, on his signature bid to create a single national securities regulator. It's an attempt to streamline the current hodgepodge of provincial stock market oversight. Although the concept was opposed from the start by Alberta and Quebec, he appeared to be supported by Ontario and British Columbia. But B.C. Finance Minister Colin Hansen told Maclean's that even though the province still supports the idea of a national regulator, it will likely oppose the federal government's constitutional arguments for creating one when the SUPREME COURT OF CANADA hears the case on the issue this spring. B.C. fears a court ruling might give Ottawa broad economic power, not just narrow approval for the securities regulator.

Another Flaherty initiative, reforming pensions, is also at risk of foundering. Last spring, he announced his support for expanding the CANADA PENSION PLAN. But at the end of 2010, he backed off when then-Alberta finance minister Ted Morton (who has since resigned to run for leader of the province's ruling Conservatives) mounted stiff opposition to CPP reform. The future of that initiative now looks doubtful at best. "Flaherty could have punched pension reform through against Ted Morton's objections," says University of Western Ontario political science professor Robert Young. "He had enough provinces on board. A lot of it comes down to the messiness of these issues."

So messy, in fact, that Harper has largely eschewed face-to-face talks where premiers might gang up on him. (Young regards the PM as more at ease among G8 leaders.) Aside from calling the premiers to Ottawa twice to deal with the economic crisis in late 2008 and early 2009, Harper hasn't held the set-piece first ministers' meetings that have often defined previous prime ministers' relations with their provincial counterparts. "The first ministers' meetings and other processes of consultation, dialogue and management have certainly fallen into disuse," says Mendelsohn.

Before founding the Mowat Centre, Mendelsohn was the top bureaucrat on federal-provincial affairs in the Ontario government. Under his former boss, Liberal Premier Dalton MCGUINTY, he expects the most populous province to turn up the heat on Ottawa in the coming months. Among the key issues is one particular to Ontario - the uncertain future of federally owned ATOMIC ENERGY CORPORATION OF CANADA LTD. The Harper government put AECL up for sale, only to find no eager buyers. Ontario's desire to expand its nuclear power generating capacity is closely bound up with somehow setting AECL on a new course.

Another sensitive issue - possible reform of federal Employment Insurance - could pit Ontario against other provinces. The EI system has long benefited seasonal workers in Quebec and the Maritimes more than many manufacturing and part-time workers in Ontario's industrial heartland. "I think Ontario is going to start pushing them so hard on EI," says Young, "that they are going to have to bend."

When it comes to the provinces, Harper's track record suggests that he's not really averse to bending. But in many cases, that involves spending. With his government entering a new period of deficit-shrinking austerity, he won't able to afford to do all that the premiers ask. If there's a next act in the Harper government, federal-provincial relations is bidding to resume its old prominence in adding unwelcome tension to the nation's political drama.

Maclean's February 21, 2011