The Global Zeitenwende
How to Avoid a New Cold War in a Multipolar Era
FOR the past two and a half years a Royal Commission[i] has been conducting an inquiry into the working of the Canadian federal system. The Report of this body has now been made public by the Dominion Government.
The inquiry had a very wide range. Public hearings were held in the various Canadian capitals, at which the provincial governments were given an opportunity to present their views and offer their suggestions; and research of the most varied kind was carried out by a staff of experts representing the best scholarship of Canada. The resulting Report is in three volumes. With its annexes and appendices containing studies made for the Commission by economists, accountants, historians, political scientists, and constitutional authorities, it includes some twenty-eight titles and forms a vast compendium of information about present Canadian conditions and their background. One of the three volumes comprising the Report itself gives specific findings and recommendations, makes suggestions as to alternative solutions, and candidly discusses conditions for which no solution is offered. The Report is supported by a book of statistics, tables and documents, and by another which reviews Canadian history since the Dominion was created in 1867.
The inquiry was planned in peacetime and for peacetime purposes. The Dominion Government which appointed the Commission hoped that the facts and documents collected by the Commission and the recommendations made by it would lay the groundwork for a conference between the Dominion and the provinces at which the relations between these governments, which have been accompanied with ever-increasing friction in recent years, could be put on a more satisfactory basis. Though the main findings of the Commission were reached before the outbreak of war, it was deemed unwise to try to adjust them to a wartime situation. Nevertheless, since the major recommendations were framed with the possibility of emergencies in mind, the Dominion and the provinces may possibly find in them some suggestions worthy of early consideration. Certainly, many of the difficulties dealt with in the Report will be aggravated by war conditions. But it is not possible at this writing to say whether the Canadian governments, Federal and provincial, will desire to deal with these large issues during the war.
The reasons for setting up the Commission were clearly stated in the Order in Council appointing it. The Commissioners were instructed to carry out inquiries along certain lines and thereafter "to express what in their opinion, subject to the retention of the distribution of legislative powers, essential to a proper carrying out of the federal system in harmony with national needs and the promotion of national unity, will best effect a balanced relationship between the financial powers and the obligations and functions of each governing body, and conduce to a more efficient, independent and economical discharge of governmental responsibilities in Canada." The Commission was also asked to look into present taxation methods to determine whether, as now allocated and imposed, they are "as equitable as can be devised;" to examine public expenditures and debts to find out whether the present division of the burden of government is equitable and efficient; to investigate Dominion grants and subsidies to the provinces; and above all "to examine the constitutional allocation of revenue sources and governmental burdens to the Dominion and provincial governments, the past results of such allocation and its suitability to present conditions and the conditions that are likely to prevail in the future."
These terms constituted an admission that the constitution of 1867 was, in Carlyle's phrase, refusing to "march," and that the frictions and divergencies of interest could no longer be dealt with by temporary expedients or by bilateral adjustments between the Dominion and an aggrieved province. A situation, long in the making, had been brought to a head by seven years of depression. These frictions and divergencies arose chiefly from the constitutional distribution of powers between the Dominion and the provinces, and from certain policies of the Dominion Government which so accentuated the natural inequalities of the provinces that some of them could be classified as "Haves" and others as "Have Nots."
These developments were very dimly foreseen, or not foreseen at all, by the Fathers of Confederation. In its first phase the Confederation had consisted of but four eastern provinces. It was then assumed that these provinces could -- and would -- share both the burdens and the advantages of the union. In time there came to be imbedded in the Dominion's attitude towards the provinces the doctrine that they had sufficient resources to meet their own needs, that they had equal sources of income, and that no province had a claim on the Dominion that could not also be put forward by all the other provinces. A stubborn adherence to this dogma of an illusory equality has formed a reef upon which the Canadian Confederation has frequently grounded during its seventy-three years of existence. Whatever validity this assumption may once have had was lost as the Dominion expanded. For the Dominion had hardly come into being before it was saddled with the enormous responsibility of extending Canada's boundaries to the Pacific by taking over Rupert's Land as a territory and admitting British Columbia, then a mere colony, into the Confederation as a province. The alternative was to see these British possessions sucked into the United States, then suffering from a particularly severe attack of Manifest Destiny.[ii] This westward expansion compelled the Federal Government to adopt policies designed to integrate this vast transcontinental area into a country with common political and economic interests. That is why the Dominion built transcontinental railways involving great public expenditures, settled the prairies by boldly conceived immigration projects, and imposed protective tariffs in order to compel the widely separated parts of Canada to trade with each other.
By and large these grandiose plans were realized, but only at great cost. One of the consequences was the concentration in a few provinces -- because of their strategic position -- of manufacturing facilities, of corporate bodies directing the larger business enterprises, of wealth derived from Dominion-wide operations, and therefore of an undue proportion of the country's taxable income. Since the provincial governments have unlimited tax powers, except in the field of indirect taxation (though this too has in fact been invaded by skillful flank manœuvres), these economic developments have brought the underprivileged provinces within the taxing range of the more fortunate ones. The assumption that there exists an equality among them with respect to the advantages and burdens of Confederation has thus become manifestly more and more unjust.
Yet all the provinces have suffered from the lack of vision of those who made the Confederation. The allocation of powers to the provinces was made at a time when the obligations of the state to the individual in terms of social services were at a minimum; but the powers thus allocated, as interpreted later by the courts, gave to the provinces responsibility for the whole range of social and welfare services. When these responsibilities came to mean rapidly rising costs, it was apparent that there was no provision for insuring a balanced relationship between the constitutional powers of the provinces and their taxation resources. The social welfare expenses of provinces and municipalities more than doubled between 1913 and 1921, and doubled again between 1921 and 1930. With a parallel rise taking place in education costs, the provinces were already finding it difficult to raise the necessary revenues even before 1929. When the depression broke, conditions became chaotic in even the strongest provinces. The Dominion held the provincial governments responsible for unemployment relief. In turn, the provinces sought at the outset of the depression to hold the municipalities responsible. But the absurdity of this position was soon demonstrated. Up to the end of 1937, out of the approximately one billion dollars spent on relief from all sources, only one-sixth was contributed by the municipalities. The Dominion, in order to keep the provinces from going bankrupt, was obliged to rescue them by grants representing a proportion of the provincial costs, and by loans for general purposes where these were necessary. Nevertheless, the Federal Government never accepted direct responsibility for dealing with unemployment. Deficit financing by provinces on an unparalleled scale became the order of the day; revenues were deflected from the ordinary purposes of government to relief; and a frantic search for new sources of taxation was begun, largely in the spirit of taking the money wherever it could be found.
The strongest statements made to the Commission, apart from the representations of the provincial governments, came from business organizations protesting against double taxation, against inspections and inquests by two sets of officials, against the multiplication of expensive returns, and against taxation which injured business. The Commission discovered that these charges were only too true. It found that taxes were increasing the costs of production, and as such were destructive to marginal businesses. The evidence showed this harmful taxation to be the result not merely of a mistaken policy but of the existing allocation of the burdens of government and of the sources of revenue between the Dominion and the provinces.
Confederation was not two years old before the provinces began protesting against the system by which the tax yield was apportioned between them and the Dominion; and this controversy has been going on ever since, rising at times to a high pitch. What all the demands of the provinces boiled down to was this: that they receive grants from the ampler revenue sources of the Dominion. These claims were put forward on various grounds: that the percentage relationship between the subsidies given to the provinces in 1867 and the total revenue of the Dominion should be maintained; that the customs revenue should be shared between the Dominion and the provinces; that the Dominion should abandon to the provinces certain taxes, such as that on incomes. But in recent years the provincial demands have more and more been based simply on fiscal need. On this basis, however, variations would be introduced into the criteria which govern the size of the Dominion's grants to the different provinces and it would thus be necessary to erect special machinery to determine these variations, as in Australia. The Dominion has not been sympathetic to the suggested innovations, especially when the Liberal Party has been in power. Efforts have long been made to create an immutable principle out of Sir Wilfred Laurier's dictum that: "It is a sound principle of finance and a still sounder principle of government that those who have the duty of expending the revenue of the country should also be saddled with the responsibility of levying and providing it."
There was, in the terms of reference, the suggestion that the solution to the problem might be found by making each governing unit "more independent," either by a reallocation of powers to bring its functions within the compass of its financial resources, or by a reallocation of revenue sources to match its needs. The Commission thoroughly explored the possibilities of an adjustment along these lines, and rejected them as not practicable. It found that any reallocation of sources of revenue on a uniform basis would vastly increase the existing inequalities between the provinces: those with aggregations of surplus taxable income would have their revenues unduly increased, while the poorer ones would not receive revenues adequate to cover their social, educational and developmental responsibilities. The alternative suggestion -- that functions be transferred from the provinces to the Dominion on a scale sufficient to stabilize income and outgo in the weakest provinces -- would involve a degree of centralization destructive of the Canadian Federal system. Such a transfer would go far beyond anything that the provinces were willing to concede or the Dominion to accept.
Here was an obvious deadlock. The problem could be solved neither by centralization of functions nor by transfer of taxing powers. A solution had to be sought elsewhere.
It was apparent to the Commission that the provision of social services constituted the heart of the problem. Early in the inquiry it decided that these services must be provided with the least possible disturbance of the constitutional status quo. With the exception of unemployment relief (and auxiliary services), all governmental activities relating to social conditions -- non-contributory old age pensions, poor relief (in the strict sense of the term), housing, mothers' allowances, workmen's compensation, public health and education -- were held to fall rightly within the ambit of provincial power. But relief of the employable unemployed, the operation of a nation-wide employment agency, unemployment insurance and contributory old age pensions should, in the judgment of the Commission, go to the Dominion.
In recommending sole Federal responsibility for relief of unemployed employables, the Commission disagreed flatly with policies to which the Dominion Government has stubbornly adhered since the beginning of the depression. This recommendation was, however, in keeping with the earlier finding of the National Employment Commission (1937) upon which no action had been taken. "The experience of the past decade," the Commission declares, "is conclusive that unemployment aid should be a Dominion function." It holds that since the economic structure of the country is now fundamentally national as far as opportunities for employment are concerned, it cannot be compartmentalized for the purpose of meeting unemployment needs. Conditions which produce unemployment are, it is pointed out, in no way local; they lie in national and international trade cycles, and to some extent in climatic cycles. Therefore, burdens do not fall with equal incidence on the different provinces; and attempts by the provinces to cope with them through Dominion grants-in-aid are held to be "a mockery of responsibility in public finance." These considerations, it asserted, justify this transfer of responsibility. "It is fundamental to our recommendations," says the Report, "that the residual responsibility for social welfare functions should remain with the provinces and that Dominion functions should be deemed exceptions to the general rule of provincial responsibility."
The Commission further decided that every province should be able to provide the average Canadian standards of social services for which it was responsible. The Commission also agreed that there are provinces, "whose financial position is not the result of emergency conditions," which are "unable to find the money to enable them to meet the needs of their citizens." It was therefore confronted with the question: How are these provinces to be put in a financial position to supply those average services which are the right of Canadian citizens regardless of the province they live in? The answer was inescapable: the funds have to come from the only source available -- the Federal treasury.
These findings shatter the financial conventions about the Federal system that have grown up during the seventy-three years of Confederation. The Commission nevertheless asserts that in reality they are not out of harmony with the original pattern of Canadian federalism. The principle that a province was entitled to enough Federal assistance to permit it to maintain its services was implicit in the plan of Confederation; it was purely accidental that in 1867 the fiscal need of each could be met by identical subsidies. Today fiscal requirements vary from province to province, and grants to meet them should vary too.
But this principle immediately begot other problems: How are the varying needs of the provinces to be determined, and where will the Federal Government find the money? The Commission therefore had to devise a fiscal plan, or, as it is stated in the terms of reference, to "effect a balanced relationship between the financial powers and the obligations and functions of each governing body." To do this the Commission naturally had to review the whole field of public finance to determine whether -- by extensive shifts in taxation, disbursements or responsibilities -- ways could be found to carry on the necessary social services and at the same time lessen the strain on the country's political and economic structure, thereby encouraging a much needed increase in the national income. Adjustments designed to attain these ends were worked out by the Commission and recommended for adoption by the Dominion and the provinces. This is the cornerstone of the Report.
Theoretically, alternative plans are submitted; actually, the recommendations are embodied in Plan One. Plan Two is only a makeshift to serve for a time if, from choice or necessity, the Government should wish a minimum of change in Canadian public finance. Plan Two would leave things as they are, except that the Dominion would assume the costs of unemployment relief and would grant fiscal-need subsidies to three provinces.
Under Plan One, the Federal Government takes over the entire debt of each province (or 40 percent of the combined provincial and municipal debt),[iii] it assumes full liability for the dead-weight (i.e., the non-interest bearing) debt and administers the balance, subject to the annual payment by the province of a sum equal to the annual interest received by it from these sources; it accepts complete responsibility for the relief and care of the unemployed employables, leaving poor relief, in the proper sense of that term, to the provinces (including the municipalities); it replaces the present subsidies to the provinces by National Adjustment Grants (irreducible but capable of enlargement following inquiry) to enable a provincial government to balance its budget, after maintaining its social service at an average standard, provided it is established that its rate of taxation conforms to an average Dominion level. Future borrowings by provinces are to be made on their own credit or through the Finance Commission on terms.
For their part, the provinces are called upon to withdraw from certain fields of taxation which the Commission defines as national in character. These include taxes on inheritances, incomes and corporations (with certain transfers to the provinces). Under the existing distribution of powers such taxes can be levied by both Dominion and province, and the result has been a great burden of double taxation except in the field of inheritance taxes, not yet invaded by the Dominion.
The essence of Plan One is, then, that the provinces surrender their right of direct taxation in certain fields now shared with the Dominion, in return for which the Dominion is to take over responsibilities now borne by the provinces. The Dominion would thereby assume an additional initial liability of some forty million dollars a year. However, this represents, not an added burden to the country, but a transfer incidental to setting up a new fiscal system which, in the judgment of the Commission, will enormously strengthen the nation's economy by putting the policies which affect the national income under Federal control.
The Dominion, thus given the basic instruments of taxation, can fashion a modern fiscal system which will fall much less heavily on the country's economy and far more equitably as regards taxpayers, classes and areas. The taxes on business which were imposed owing to the depression and which have had a deadening effect on marginal enterprises, will be replaced by taxes on the profits of business, and this change will in itself be a major contribution to increased prosperity. The provinces can balance their budgets; and the Dominion, with these national resources of taxation at its command, can deal with emergencies and with the dangerous features of the business cycle. The Commission strongly emphasizes the urgency of this rearrangement of taxation powers. "The situation is so serious," it declares in its Report, "that conflicts of policy between Dominion and provinces or between province and province have become a luxury which Canada cannot afford. Fiscal policies which have profound effects on the magnitude and distribution of the national income must be in a single hand and responsibility for action or inaction must be assigned with unmistakable clarity." If this language was justified in time of peace, it is all the more cogent in time of war.
Of equal importance are the National Adjustment Grants which the Plan suggests be given each province in order to replace the existing subsidy system. The Commission has computed for each province what the adjustment grant should be, if it is to provide normal services with no more than normal Canadian taxation. A permanent body of experts -- the Finance Commission -- will reëxamine these grants every five years; though it could increase them, the original grant would remain an irreducible minimum. These grants will not be conditional. The Commission opposes the use of conditional grants except under very special conditions. The National Adjustment Grant is to enable a province to provide services of a defined standard; but it is left to public opinion in each province to see to it that the money is not misapplied. "The freedom of action of a province," says the Report, "is in no way impaired." However, failure to supply the services for which the money is given would prevent a province from applying to the Finance Commission for an increased grant.
When computing the amount of the National Adjustment Grant for a particular province, account is first taken of the improvement in its financial position brought about by the Dominion's taking over the debt service and the costs of relief. After this, other factors are considered, including the need for a balanced budget and for a revenue enabling the province to make expenditures on education, welfare services and development, sufficient to provide services up to an all-Dominion average without compelling it to impose heavier than average taxation.
The revenue transferred to the Dominion -- in the aggregate, as well as on a per capita basis -- will be very unequal as between provinces; but this does not mean inequality of treatment, since new fiscal-need subsidies have been calculated after deducting these taxes. It is inherent in the Plan that the Dominion should be able to impose equal taxes on wealth wherever it may be found and on powerful corporations wherever their head offices may be situated. Since these levies are uniform for all Canadian citizens, the charge that the tax burden varies from one part of the Dominion to another would not be justified. Nevertheless, the variations in the grants to the provinces on the per capita basis are in some cases startling; and, if we bear in mind the traditional convention that Dominion grants must always be made to the provinces on this basis, we can predict that the battle as to whether the Report is to be accepted or rejected will be waged around this point.
The difficulties of the municipalities, especially of the larger cities upon which the care of the unemployed has fallen with crushing force, are dealt with as part of the provincial problem. The Commission recognized the exclusive jurisdiction of the provincial governments over the municipalities; and it left it to the provincial governments to distribute the benefits arising from Plan One, calculated on the basis of the combined provincial-municipal financial position. The Report does, however, deal with such special municipal problems as have been created by the impact of industrialism upon the old-fashioned municipal set-up and by the need for establishing metropolitan areas. The Commission puts considerable stress on the duty of the provincial legislatures to enact extensive municipal reforms.
Though the Commission's recommendations concerning taxation and finance constitute the heart of the Report, they by no means exhaust the questions affecting Dominion-provincial relations upon which it made findings. Some of these additional recommendations depend upon the implementation of the financial proposals; others are independent of them. For instance the Commission holds that Dominion-provincial conferences, which in the past have been ad hoc meetings, should take place at regular intervals and become a part of the machinery of the Canadian Federal system with a permanent secretariat. It also makes specific suggestions as to a division of services in various activities -- agricultural, health, fishery control, etc. -- in order to reduce overlapping to a minimum, though it discovered that there has been much less waste from this cause than had been believed. It censures the provinces for using various protectionist devices which impede the freedom of trade, supposedly safeguarded by the British North America Act. It suggests that tribunals be voluntarily set up to advise provinces on these matters and to adjust disputes without resorting to constitutional remedies such as employment of the power of disallowance. It found that concurrent legislation by Dominion and provinces and the delegation of powers (absolute or conditional) from one government to another -- something which, from court decisions, appears at present to be beyond the constitutional powers of either the Dominion or the provinces -- were essential if there is to be a division, desirable for commercial reasons, of the regulatory functions over grading and marketing. Conflicting jurisdiction in such questions as insurance, company law and the regulation of labor could also be adjusted in this way. The natural and convenient separation of function in all these matters is clearly indicated in the Report.
The Commission adhered steadily to the position that it was limited by its instructions to dealing with financial readjustments and to the functional rearrangements they would necessitate. Certain important and much-discussed problems brought before it by presentations from powerful representative bodies were not considered because they were beyond its scope of reference. On the vexed question of minority educational rights, it expressed the opinion that -- subject to the provisions in the British North America Act safeguarding the rights of minorities -- the provinces should continue to control education as something of vital importance to their social and cultural life. The Commission held that each province should continue to have the exclusive power to modify its existing system of education should it desire to meet requests by minorities for additional rights. Any departure from this rule, it stated, would excite opposition and provoke resentments detrimental to national unity.
Among other questions which were held by the Commission to be beyond the scope of the reference were these: the enlargement of Federal powers to protect alleged fundamental rights and liberties from infringement by provincial legislation; the claim that the French-speaking population in New Brunswick should have representation in the legislature proportional to its numerical strength; the contention that under a wide interpretation of Section 133 of the British North America Act (which, it was argued, simply confirmed natural rights) the French have bilingual rights throughout Canada, regardless of any division of jurisdiction -- which, if granted, would give them language rights in schools, provincial assemblies and provincial courts.
In studying the relationships between the Dominion and the provinces, the Commission gave prolonged consideration to the problem of competing transportation systems. A railway network created by the expenditure of Dominion money in nearly astronomical figures is now faced with serious competition from motor highways falling almost exclusively under the jurisdiction of the provinces. This competition not only divides tonnage but is destructive of the rate structure essential to railway solvency. In the judgment of the Commission, the greatest danger of ruinous overlapping between the two levels of government lies precisely in this field of transportation. It therefore makes various suggestions for coordinating transportation policies and providing joint planning which will retain the economy, efficiency and high developmental value of highway transportation but will allow the railways to continue performing those particular services for which they alone are adequately equipped.
Pressure was exerted on the Commission to make declarations on constitutional questions that had nothing to do with the actual business in hand. Though it resisted this pressure, many of its recommendations can only be implemented by changes in the constitution. The Commission said nothing about the controversial question as to how the constitution is to be amended in the future. It proceeded on the theory that the constitution's present provisions authorize any changes which may be found necessary to insure national unity and prosperity. The view that Canada is in fact, and not simply in name, a Confederation of sovereign states of which the executive agent is a federal government functioning under delegated and withdrawable powers, was presented to the Commission in its starkest form by the government of New Brunswick. There is not only an explicit repudiation of this claim in the Report, but in all its comments and declarations the Commission implicitly recognizes that Canada is a federal union in the Hamiltonian sense of that term.[iv] This, the Commission makes clear, was the kind of federal union the Fathers of Confederation believed they were creating, and it intimates that the changes it proposes merely restore the original constitutional pattern where it has been overlaid by later accretions of convention and interpretation.
If the Commission's recommendations are put into effect, the principle taxing powers will be returned to the hands of the Federal Government; the Dominion's grants to the provinces will again be based on fiscal need; the provinces will once more be assured of revenues adequate for their essential needs without unbalancing the budget; and the main burden of the country's finances will again rest upon the Dominion. "The Commission's financial proposals are," says the Report, "in terms of the economic life of 1939 very similar to what the provisions of the British North America Act were in terms of the economic life of 1867." It concludes with this assertion of confidence: "The Commission does not consider that its proposals are either centralizing or decentralizing in their combined effect, but believes that they will conduce to the sane balance between these two tendencies which is the essence of a genuine federal system and therefore the basis upon which national unity can most securely rest."
[i] The Royal Commission on Dominion-Provincial Relations as appointed August 14, 1937, was as follows: Hon. N. W. Rowell, Chief Justice of Ontario, Chairman; Hon. Thibaudeau Rinfret, Justice of the Supreme Court of Canada; R. A. MacKay, Professor of Government, Dalhousie University, Halifax; Henry F. Angus, Professor of Economics, University of British Columbia, Vancouver; and John W. Dafoe, President of the Winnipeg Free Press. While the public hearings were still in progress, Mr. Justice Rinfret and Chief Justice Rowell were forced by ill-health to retire; and the work of the Commission was completed under the Chairmanship of Joseph Sirois, Professor of Constitutional and Administrative Law of Laval University, Quebec. Alexander Skelton, Economist of the Bank of Canada, served as Secretary and Director of Research.
[ii] The relationship between the course of domestic policies in the United States following the Civil War and the enormous territorial expansion of Canada during the first decade of Confederation is not generally understood. See "American Foreign Policy in Canadian Relations" by James M. Callahan, and "Hamilton Fish" by Allan Nevins.
[iii] This provision was necessary to meet the case of Quebec, where the provincial debt had been kept at minimum levels by requiring the cities to render services that elsewhere were discharged by the provinces.
[iv] "A federal government is properly one in which the federal authority is independent of any of its component parts within the sphere of the Federal action." The Federalist, No. 36.