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COVID-19, Fiscal Federalism and Provincial Debt: Have We Reached a Critical Juncture?

  • Kyle Hanniman (a1)

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In 2019, Canada's gross subnational debt to GDP was well over 40 per cent, easily the highest in the world (see Figure 1). This level will only grow as the provinces grapple with the pandemic and its fiscal effects. Some believe surging provincial debts have brought Canadian federalism to a critical juncture: they have greatly increased the odds of federal measures to stabilize provincial finances. This article assesses this claim. The cleanest and most balanced path to fiscal sustainability is a combination of enhanced federal transfers, which would bolster provincial fiscal capacity, and national fiscal rules, which would constrain provincial borrowing. But the former is unlikely to restore sustainability on its own, and the latter would require a severe provincial debt crisis, which Canada's existing fiscal federal structures can avoid. COVID-19 has increased the odds of certain reforms, and it is difficult to predict their long-run effects. But any obvious paths to fiscal sustainability remain hidden.

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Copyright

This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.

Corresponding author

*Corresponding author. Email: kyle.hanniman@queensu.ca

References

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Béland, Daniel, Lecours, André, Paquet, Mireille and Tombe, Trevor. 2020. “A Critical Juncture in Fiscal Federalism? Canada's Response to COVID-19.” Canadian Journal of Political Science. Advance online publication. doi: 10.1017/S0008423920000323
Capoccia, Giovanni, and Daniel Keleman, R.. 2007. “The Study of Critical Junctures: Theory, Narrative, and Counerfactuals in Historical Institutionalism.” World Politics 59 (3): 341–69.
Hanniman, Kyle. 2018. “Is Canadian Federalism Market-Preserving? The View from Credit Markets.” In Federalism and the Welfare State in a Multicultural World, ed. Goodyear-Grant, Elizabeth, Johnston, Richard, Kymlicka, Will and Myles, John. Montréal and Kingston: McGill Queen's University Press.
Hanniman, Kyle. 2020. “Backstopping Provincial Debt: How the Bank of Canada Made Its Move.” CD Howe Intelligence Memo. https://www.cdhowe.org/sites/default/files/IM-Hanniman-2020-0428.pdf (June 23, 2020).
MacKinnon, Janice. 2003. Minding the Public Purse. Montréal and Kingston: McGill-Queen's University Press.
Poitras, Jacques. 2018. “What Happens if New Brunswick Defaults on Its Debt.” CBC, March 1. https://www.cbc.ca/news/canada/new-brunswick/nb-what-happens-default-debt-1.4555976 (June 23, 2020).
Rodden, Jonathan. 2006. Hamilton's Paradox: The Promise and Peril of Fiscal Federalism. New York: Cambridge University Press.
Wibbels, Erik. 2005. Federalism and the Market: Intergovernmental Conflict and Economic Reform in the Developing World. New York: Cambridge University Press.

COVID-19, Fiscal Federalism and Provincial Debt: Have We Reached a Critical Juncture?

  • Kyle Hanniman (a1)

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