On Monday, after Canada’s cities had spent weeks badgering him for help, Prime Minister Justin Trudeau finally had his response. He told municipal governments that $2.2-billion in gas tax money, promised in last year’s budget, would be sent out in one big cheque, rather than two smaller cheques. That’s it, that’s all.
The Federation of Canadian Municipalities has said its members are facing a collective fiscal shortfall of at least $10-billion; after Mr. Trudeau’s announcement, they are still at least $10-billion short.
While suggesting that Ottawa might do more in future, the PM also told reporters that it’s up to provinces to “step up,” since cities are constitutionally under provincial jurisdiction.
Mr. Trudeau is of course right that cities are – turn to section 92 of your pocket BNA Act – creatures of the provinces. But the federal government has long given funds to cities; Monday’s non-announcement was about just such a payment. Federal gas tax revenues have for years been flowing to municipalities, to assist with things such as public transit.
So the real question isn’t whether Ottawa is allowed to help cities, it’s whether it wants to.
Government deficits are a reasonable and necessary response to a recession, but unlike the provinces and the feds, cities aren’t allowed to run deficits. (Given their thin, property-based tax base, that’s probably a good thing.) To avoid a shortfall this year, Canada’s big cities will have to either bring in large tax increases or significantly cut services.
Toronto appears to be the city most affected. That’s because many public services (public health, for example) have been downloaded by the province, and Toronto runs the country’s largest public transit system, whose fare-box revenues have evaporated. Mayor John Tory recently said that his best-case scenario leaves his city with $1.5-billion gap; the worst-case estimate has the city short $2.8-billion.
Unless we assume that the economy is never going to come out of recession, the budget gap faced by Canadian municipalities is temporary. As the economy recovers, emergency spending will fall, tax revenues will rebound – and people will want and need the full suite of municipal services. But without bridge funding to get from here to there, a city like Toronto faces dramatically increasing taxes in the middle of a recession (bad idea) or eviscerating services such as public transit (also a bad idea).
So why can’t the provinces deal with all of this themselves, and leave Ottawa out of it?
An analysis done in late April by RBC Economics estimated that as a result of the pandemic, the combined deficits of the provinces will balloon sixfold this year, to $63.1-billion. The federal deficit is considerably larger, with the Parliamentary Budget Officer most recently pegging it as headed north of $260-billion, but as the PBO pointed out long before the recession, most provinces have markedly less fiscal capacity than the federal government.
So if more emergency borrowing is to be done, then all else equal, it should be done by the feds. That’s especially true given that the federal government, as a sovereign with its own currency, can borrow at rock-bottom rates. On Tuesday, the yield on Canada 10-year bonds was 0.54 per cent. It’s not free money, but it’s as close as we’ve ever seen.
To slide for a moment from high principle to low politics, the Liberal government’s voting base is in big cities – Greater Montreal, Metro Vancouver and the Greater Toronto Area. If municipal councils in those places start making cuts, the people feeling the squeeze will be mostly Liberal voters, in mostly Liberal ridings. We’re guessing the big brains in the Prime Minister’s Office have already figured that out.
For reasons of practicality and principle, the federal government should be offering municipalities an emergency assistance package. The bulk of this one-time-only money should go to big cities with big transit systems. And the package should be $10-billion, or more.
And what about the provinces? Yes, they’d also like short-term help, but let’s look beyond that. In the years to come, they need a more secure long-term fiscal partnership with the federal government, to finance better and broader public services, particularly in the area of health. That could be a win-win-win for Ottawa, provinces and citizens.
We’ll have more on how to make it happen, later this week.