Municipalities and Fiscal Federalism: What’s Next Post-Budget 2022?

Canada’s municipalities play a unique role in the delivery of services and have an outsized place when it comes to being part of the solution on issues like housing availability.  More than ever, the municipal level of government is closest to citizens, yet sometimes has the hardest task at advocating for federal dollars with governments that, in the past, have used constitutional constraints to avoid putting money on the table.

But given that municipalities will always have outsized financial ‘asks’ of a federal government, what did the recent federal budget actually deliver for them, and what does the path ahead look like?

The ‘Ask’

The evergreen challenge for municipal leaders in dealing with “Ottawa” is the reality that the two levels of government fundamentally operate in different ways, especially in how the mechanics of funding and governance work at the two levels.  In some ways, while both levels might be talking the same language of support for municipalities, governance can often create an “oil and water” reality that both sides have trouble overcoming.  For example:

• Ottawa doesn’t really understand the planning processes that municipalities deal with or have created for themselves over time.
• Many in the federal government may assume allocating dollars equals housing on the ground, while municipalities puzzle-it-out.
• A federal budget and provincial housing plans often fail to break down silos between the levels of government and with the private sector.

As a result, the need for an increasing housing supply can get bogged down in political and jurisdictional silos and decision-making.  In addition, municipal priorities often compete unsuccessfully with pressing demands from health care, education, economic development, social policy, the needs of Indigenous communities and national defence.

Municipalities are struggling with an imbalance between their wide range of responsibilities and their limited revenues — exacerbated by the collapse of transit revenues and the absence of municipal tax revenues from the booming digital economy that benefits from municipal services.   As a result, it is only natural that Canada’s municipalities looked for fiscal relief from the Liberals and their NDP supporters in the recent 2022 Budget.

Despite interim transit support announced in February for 2022, a more permanent commitment to fund a range of municipal activities was also high on the municipal agenda for the 2022 Federal Budget.   This included calls for more housing supply and affordability in major urban centres from Canada’s mayors, speaking through groups such as the Ontario Big City Mayors, the Federation of Canadian Municipalities’ Big City Mayors’ Caucus and the Association of Municipalities of Ontario.

Unlike many of their counterparts in other provinces, Ontario’s municipalities play a large part in operating and funding health and social services (e.g., long-term care, land ambulance, child care, social housing and public health).  So, it was not surprising to see Ontario mayors call for help with those costs.

Municipalities across Canada also advocated for more money for the so-called gas-tax fund, climate-related initiatives, and the popular rapid housing program, which produces affordable ‘modular’ units and other quick and innovative housing solutions.  Cities continued to seek Federal financial help with the local impacts of the opioid crisis, immigration and refugee resettlement, homelessness, and the justice system’s ability to deal more effectively with urban crime rates and gun violence.

The good news is that recognition of the importance of municipal needs may be growing, perhaps as a result of the key role municipalities played during the pandemic.

Did the Municipal Agenda Achieve What It Asked For?

How did the municipal agenda fare in competition with the many other demands on Finance Minister Freeland?

• Previously announced financial support to cover 2022 transit-revenue shortfalls, homelessness, infrastructure projects, and the new Canada/Ontario child care program were confirmed.
• Ongoing funding for a gun buy-back program was promised, perhaps as an adjunct to the largely ignored initiative to allow municipalities to implement local handgun bans.
• The long-awaited Canada/Ontario $10-per-day child care program will help; but will it increase demand for municipal child care spaces?
• Previous funding commitments for long-term care, including municipal homes, were confirmed.
• Measures to deal with the rising cost of housing and the scarcity of lower-income housing, such as down-payment boosting tax measures, rent-to-own programs, co-op housing projects, “boutique” housing initiatives, and restrictions on foreign and ‘flipper’ speculation in residential properties, will all be welcomed by municipal leaders. An announced array of ‘green’ programs may also help.
• The multi-billion-dollar program to ‘reform’ municipal by-laws and approval processes is evidence of the government of Canada’s eagerness to increase housing supply, but will that subsidy make a difference?
  • ‘Updating’ and accelerating municipal regulations presupposes that municipal councils will be willing to assume the financial burden of building and operating the infrastructure to support more housing. Adding a nudge, the budget says that some Federal infrastructure funding will now be tied to producing new housing.
  • The budget also presumes that councils will able to navigate the recurrent community opposition to intensification and greater urban density.
  • Provincial approval requirements — an important part of the ‘permitting’ thicket — will need to be similarly relaxed, expedited or delegated to municipalities.

Whether these measures will, in combination, alter the trajectory of housing markets in major cities, only time will tell.  As Minister Freeland candidly admitted, there is no ‘silver bullet’.  Rising mortgage rates may well do more to cool housing price-inflation.  In addition, the political heat is also rising on all levels of government to “do something”, with Conservative Party leadership candidate Pierre Poilievre making housing affordability a key plank of his platform.  The issue will also no doubt make its way into the upcoming provincial election in Ontario.

The federal budget also contained two other provisions that should be of interest to municipal politicians:

• The 2022 budget outlines progress in global efforts to tax digital businesses more effectively. Part of the plan will “will ensure that the largest and most profitable global corporations, including large digital corporations, pay their fair share of tax in the jurisdictions where their users and customers are located.”

Municipal leaders could certainly make the case that what is true for national governments is equally true for local governments.  Local governments supply many of the services that make those enterprises and their workforces competitive.  If realized, this new source of tax revenue will be significant; it should be shared with the local governments that make digital enterprises prosperous.

• The budget also proposes money for Canadian media, including a small fund to revitalize local media and its coverage of community issues. As De Tocqueville famously observed, local self-government is the foundation of a healthy democracy; more fulsome and objective coverage of municipal issues is a key ingredient.  The question still remains whether previous funding for local journalism initiatives has achieved these goals, with some still questioning whether independent media should receive government funding at all.

Looking Down the Road…

Overall, the federal government is looking to transition away from the type of pandemic-level spending towards a post-COVID recovery. While any federal government will always be in financial conflict in some respects with municipalities, the Trudeau Liberals have built a much more durable relationship at the municipal level than its predecessors.

This is a combination of a Prime Minister willing to pay less heed to constitutional constraints that have traditionally divided the two orders of government, along with an assist from a number former big-L Liberal Ministers and MPs (and some of their progressive counterparts in city halls across the country).  As a result, flashpoints between the two orders of government will probably be less public and more “behind closed doors” over the coming two or three years.

The challenge will be that the pandemic likely provided the greatest opportunity for direct infusions of dollars to municipalities, partially out of need and partially out of political alignment.  The reality is that if municipalities were looking for a continuation of pandemic-level financial support from the government of Canada, the reduced scope and targeting of the 2022 Federal budget towards municipalities are their answers.  The good news is that Canada’s municipalities appear to have political stability in Ottawa for the next three years as Prime Minister Trudeau’s minority government looks to be secured through his confidence and supply agreement with the NDP.

Even with this stability, municipalities and their supporters will have to advocate more creatively and continue to be vigorous in their search for a greater municipal share of the Canadian taxpayer’s dollar.  There is no easy answer, and it will be important to keep up advocacy and engagement on these issues going forward.