FEDERALISM AND THE MYTH OF THE FEDERAL SPENDING POWER Andrew Petter* Victoria This article examines the power asserted by the federal government to spend funds on programs within provincial legislative jurisdiction, and the influence of that power upon federalism and responsible government. The author main- tains that the existence of a `federal spending power" is inconsistent with Canadian constitutional doctrine and values, and that the political justifica- tions commonly offered in its support do not withstand close scrutiny. At the same time, he contends that the extent of governmental reliance upon the spend- ing power precludes the courts from curtailing its use . He therefore urges a program ofpolitical reform going beyond the modest limitations on the spend- ing power proposed in the Meech Lake Constitutional Accord. Dans cet article l'auteur examine le pouvoir que revendique le gouvernement1989 CanLIIDocs 109 fédéral de mettre desfonds dans des programmes qui relèvent de la compétence de la législature provinciale ainsi que l'influence qu'a ce pouvoir sur la nature du fédéralisme et de ce qu'on appelle le gouvernement responsable. Il affirme que l'existence de ce pouvoirfédéral est incompatible avec la doctrine et les valeurs constitutionnelles et que les justifications généralement avancées à son appui s'avèrent après examen n'avoir aucun fondement. Il soutient en même temps que ce pouvoir est si important pour le gouvernement que les tribunaux ne peuvent en limiter l'utilisation. II préconise donc un programme de réformes politiques qui iraient plus loin que les limites modestes proposées dans l'accord constitutionnel du lac Meech . Introduction The past forty years have seen a fundamental change in the practice of Canadian federalism. The political commitment to what Edwin R. Black describes as "co-ordinate" federalism has been supplanted by an "admin- istrative" vision of federal arrangements.' This change has been charac- terized by a breakdown of jurisdictional boundaries between the federal *Andrew Petter, of the Faculty of Law, University of Victoria, Victoria, British Columbia. This paper was delivered to the Legal Theory Workshop, Faculty of Law, Univer- sity of Toronto, on December 2, 1988. Excerpts from an earlier version were published in Meech Ado About Nothing? Federalism, Democracy and the Spending Power, in K.E . Swinton and C.J. Rogerson (eds.), Competing Constitutional Visions: The Meech Lake Accord (1988), pp. 187-201 . I would like to thank the many friends and col- leagues who provided me with helpful comments and suggestions throughout this proj- ect. I also wish to acknowledge the British Columbia Ministry of the Attorney General for providing research funds. ' E.R. Black, Divided Loyalties (1975) . "Co-ordinate" or "classical" federalism refers to a conception of federalism in which each order of government is supreme and 1989) Federalism and The Myth ofFederal Spending Power 449 and provincial orders of government and, particularly, by increased fed- eral involvement in matters of provincial legislative responsibility . What is remarkable about this change is that it has been achieved without constitutional amendment and without the blessing of the Supreme Court of Canada, the institution charged with legal guardianship of Cana dian federalism in the post-war period. Moreover, except in Quebec, it has generated little controversy within political and academic communi- ties. Most politicians and constitutional scholars outside Quebec seem to have accepted the shift from co-ordinate to administrative federalism as an innocuous developmentan inevitable step forward in the evolution of the Canadian state. The purpose of this article is to challenge this view. Administrative federalism, I shall argue, has been built upon a precarious constitutional foundation. Far from being innocuous, it threatens to weaken provincial autonomy and to undermine political accountability. If left unchecked, it could impair seriously both the federal and the democratic character of the Canadian state . My focus throughout will be on the federal spending power, the power claimed by Ottawa to spend funds on matters falling 1989 CanLIIDocs 109 outside its legislative jurisdiction . It is this power that has made the "new federalism" possible; it is the mortar with which the new consti- tutional order has been built. The inquiry will begin with an examination of the forces that have given rise to administrative federalism. It will then consider its constitu- tional basis and explore its political implications. Finally, consideration will be given to proposals for reform contained in the Meech Lake Con- stitutional Accord. The Accord marks the first concerted effort by Cana- dian governments to place explicit constitutional limitations on the fed- eral spending power; it therefore merits special attention. 1. The Demise of Co-ordinate Federalism From Confederation until the Second World War, institutional arrange- ments in Canada were shaped by a common belief among the courts, constitutional scholars and most political actors that a clear division of political responsibilities between two co-ordinate orders of government was an essential characteristic of the Canadian state. This co-ordinate vision of Canadian federalism was shared by centralists and decentralists alike. It influenced the recommendations of the Rowell-Sirois Report' as operates independently ofthe other within clearly defined spheres of responsibility. "Admin- istrative" or "co-operative" federalism refers to a conception of federalism in which jurisdictional boundaries overlap, giving rise to a high degree of shared responsibility and requiring inter-governmental co-operation between the two orders of government . z Report of the Royal Commission on Dominion-Provincial Relations (1940) . As noted by D.V Smiley, Conditional Grants and Canadian Federalism (1963), p. 6: "The general solution of the Rowell-Sirois Commission was. towards a situation in which 450 THE CANADIAN BAR REVIEW NO] . 68 much as it animated the constitutional jurisprudence of the Judicial Com- mittee of the Privy Council.' It so permeated Canadian scholarship dur- ing the same period that the leading constitutional treatise of the 1920s referred to "the generally accepted theory that Canada is a federation in which sovereign power is divided among co-ordinate governments, none of which are delegations and among which the provincial governments are not new creations, but retain `their independence and autonomy"' . 4 The demise of co-ordinate federalism can be traced to the social and economic initiatives undertaken by the federal government, and acceded to by most provinces, in the period of reconstruction following the Sec- ond World Wars The seeds of that demise, however, were sown during the war itself. Under wartime tax agreements, the provinces agreed to cease levying taxes on personal and corporate incomes. To compensate the provinces for relinquishing this tax room, Ottawa assumed all pro- vincial debts, agreed to pay the provinces unconditional grants based upon fiscal need, and took over responsibility for the welfare of unem- ployed employables . The wartime tax agreements, like the assumption of emergency pow-1989 CanLIIDocs 109 ers, were intended as temporary measures to enable the central govern- ment to deal with crisis conditions. Following the war, however, Ottawa exhibited little desire to relinquish the revenues and the authority that it had acquired. Instead, buoyed by the revitalized sense of national pur- pose instilled in Canadians by the war effort, and responding to the demands for social and economic reform which followed the war, fed- eral authorities sought to "continue to levy the major taxes in order to finance peacetime reconstruction and to use centralized fiscal policy as a tool of national economic management" . 6 the functional responsibilities of the federal and provincial governments were delineated in a relatively clear-cut fashion, with each level being assured adequate revenues to discharge the obligations conferred upon it." 3 Lord Watson's statement in The Liquidators of the Maritime Bank of Canada v. The Receiver-General ofNew Brunswick, [1892] A.C. 437, at pp. 441-442, typifies the view of the Privy Council: The object of the [British North America] Act was neither to weld the provinces into one, nor to subordinate provincial governments to a central authority, but to create a federal government in which they should all be represented, entrusted with the exclusive administration of affairs in which they had a common interest, each province retaining its independence and autonomy. 4 WPM. Kennedy, The Constitution of Canada (1922), p. 411 . $ It is true that federal efforts to overcome the rigidity of co-ordinate federalism were initiated following the First World War and that such efforts were renewed in response to the political pressures placed upon Ottawa during the Great Depression of the 1930s. However, it was not until the period following the Second World War that federal authorities mounted a sustained attack on the co-ordinate federalist model. 6 P.W. Hogg, Constitutional Law of Canada (2nd ed., 1985), p. 114. 19891 Federalism and The Myth ofFederal Spending Power 45 1 The major constitutional obstacles confronting the federal govern- ment in this enterprise were the division of legislative powers and the principle of co-ordinate federalism. The division of powers gave to the provinces jurisdiction over most areas of social