Premiers have voiced their objections on a number of occasions. The substance of the grants, however, has made their form tolerable for all but Quebec. Premier Duplessis often chose to forego the benefits rather than subject his Province to the humiliation of accepting direction from Ottawa on matters where it had the constitutional right to govern itself. Mr. Lesage was no more enamored of conditional grants than his predecessor, but his unwillingness to forego the benefits first brought him to participate and later was the main factor leading to the opting-out arrangements of 1964-65.

The current interim provisions covering Quebec's opting out of shared-cost programs will expire during the course of the next 5-year arrangements (if indeed 5-year arrangements any longer exist) and successor provisions must form part of the overall fiscal plan. The role of conditional grants in the overall Federal-Provincial relationship, as distinct from the purely fiscal relationship, will probably loom greater in the forthcoming negotiations than ever before. Shared-cost programs have been viewed by some as ideal Government cooperationthe coordination of the resources of two government levels for the provision of badly needed services. Others have regarded them only as Federal legislation regulating provincial activity in fields that are the Provinces' own constitutional responsibility. One thing does seem certain-shared-cost programs have enabled the Federal Government to accomplish a combination of objectives that otherwise would not have been possible.

CANADA-A MODEL FOR PROGRESS?

The Canadian experience in financing the federal form of government is being examined closely by both emerging and highly developed Federal States around the world. (The American "Heller Plant," for example, would utilize tax-sharing arrangements similar to those developed in Canada.) More than ever before, cooperation at every stage from research to legislation is necessary if success with the federal form of government is to be achieved. And, at this important juncture of the history of federalism in this country, the very existence of the Tax Structure Committee and the joint studies it is conducting are evidence of an increasing awareness in Canada of the need for cooperation.

"It is a matter of some interest to note that the conditional grant in Canada has developed more in isolation than as a conscious part of joint fiscal policy.

Programs tend to be developed at the level of operating_departments. It would not be too much to say that up until fairly recently in most cases Treasury control has been more honored in the breach. However, regardless of our views of their place in fiscal policy, there can be no doubt that a tremendous amount of national development has taken place through these programs that would not otherwise have been possible, and provincial standards of performance (and not only in the less wealthy areas) have benefited to a very substantial extent."-"Inter-governmental Relations in Canada-Further Developments"R. M. Burns. National Tar Journal, March 1965.

This was a proposal advanced by Walter W. Heller, Chairman of the U.S. Council of Economic Advisers from 1961 to 1964, that a share of Federal income tax receipts be transferred to the States (or to State and local governments).

THE HISTORICAL BACKGROUND AND DEVELOPMENT OF FEDERAL-PROVINCIAL FINANCIAL RELATIONS (IN CANADA)*

BY J. HARVEY PERRY

To give a brief dissertation on the historical background and development of Federal-Provincial relations is not an impossible task, but it is very difficult to do except in rough and ready fashion. However, it is worth trying, because our Federal-Provincial arrangements at any point of time when taken out of their context usually look pretty strange. Often it appears that we are moving convulsively in one direction or another, whereas only a fairly modest shift has been made in a prior course.

The basic problem of Federal finance of course is that all governments need funds to carry on. This is not particularly a characteristic of governments in federations, since in this respect governments are the same in any form of political organization, and the battle for the revenue dollar is fairly fierce. The difference in a federation, however, is that with so many more governments engaged in the struggle there have to be ground rules. These rules are quite evident in the Canadian federation, and I propose to examine our history largely in the light of them.

What are these rules?

First-the competition among the stronger governments must not become so disorderly that it wrecks the economy. This we can call tax organization.

Second-in the process of dividing the available revenues, a conscious effort must be made to see that the weaker members of the family of governments are given special consideration. The experts refer to this as fiscal need.

In our long history of experience with Federal financial arrangements, the first rule avoiding chaotic competition in taxation-is of relatively recent origin. The other rule-help for the less prosperous Provinces has been there from the beginning.

It should also be mentioned that there have been at least two addiional factors that have conditioned the application of these rules. One of these might be termed an assumption, or presumption, that "Ottawa Knows Best." Even in a federation there has to be some element of leadership, and this has frequently appeared in the inauguration by Ottawa of new programs alleged to be for the benefit of the whole country, or the proposal of fiscal arrangements for reasons of economic control.

*Reprinted from Canadian Public Administration, March 1962, vol. V, No. 1. This paper was presented to the 13th Annual Conference of the Institute of Public Administration of Canada, Sept. 6 to 9, 1961, Ste. Foy, Quebec.

The other conditioning factor has been the historic imperative of paying regard to provincial autonomy and in particular for the special interests of Quebec. In a sense this has offered a counterpoise to the "Ottawa Knows Best" assumption. We are more fortunate than we realize in having a hard core of provincial autonomy that simply will not be assimilated into a uniform pattern of government inspired from Ottawa. The pull of the center is now so strong that we are lucky to have some continuing strong element of resistance to it. Otherwise in no time we would have one big government.

Given this general background, how have things worked out in actual practice?

We can divide our history into three broad periods since 1867 which show one or more of the distinctive characteristics I have mentioned. In fact, one could sum up the evolution as an increasing attention to all the basic rules and conditions postulated. At the outset the emphasis was primarily on one condition, that of fiscal need, but now all fourtax integration, fiscal need, Ottawa leadership and provincial autonomy-are given prominent recognition. No wonder the formulas became more and more complicated each decade.

Going back to the beginning, we can see signs of tax organization and fiscal need in the original arrangements.

Tax organization appeared in the surrender of provincial customs duties to the Federal Government and the allocation of tax sources between governments-provincial direct only-Federal any source. To my mind this is just as sensible an arrangement now as it was then. Fiscal need appeared in the establishment of what are now statutory subsidies, under which, despite superficial effort to give equal treatment, some provinces were favored relatively over others.

The succeeding half century-say until the introduction by the Federal Government of the Excess War Profits Tax Act in 1916-was characterized by intense activity on the fiscal need front and relative calm regarding tax organization. Nearly every 2 or 3 years some adjustment was made in the statutory subsidy grants from Ottawa, usually in favor of the weaker economic areas. These were quite inadequate toward the end of the century to meet increasing pressure on provincial budgets, and some provinces began to use their tax powers. This was tactily encouraged by Ottawa by its abstention from direct taxation, but after 1916 this period ended. The war forced Ottawa into direct taxation, and it has been in it ever since. In fact, even the Premier of British Columbia recently conceded that Ottawa was probably in to stay-from that Province a notable admission.

The second general phase I should say extended roughly from the end of World War I to the beginning of World War II. It was characterized by a growing disorganization of the tax structure, ending in the almost chaotic conditions of the late years of the depression, some rather striking signs of recognition of special provincial needs, and some small beginnings of the "Ottawa Knows Best" philosophy. The fact that half this phase was in a period of boom, during the twenties, and the other half in a period of depression, during the thirties, concealed the nature of fairly fundamental changes that were taking place.

During this phase it became amply apparent that the revenue sources given the provinces would be quite inadequate unless exploited

on a scale not foreseen at Confederation. All during the twenties, new provincial taxes were being imposed, and this was tolerable because Federal taxation was gradually being reduced and had almost disappeared by 1929. But came a challenge like the depression, with all governments raising rates and exploiting new sources, tax organization virtually broke down. It is probably this experience of the depression years that is still the prime factor in making our governments so conscious today of the dangers of letting the tax system run riot.

The striking instances of fiscal need recognition, during this period, were the additional subsidies paid to the Maritime Provinces under the so-called Duncan and White awards. These are the direct predecessors of the present Atlantic Provinces grants, and incidentally are still being paid, buried away now in the maze of the statutory subsidies. Special assistance also had to be provided the Western Provinces during the drought years, which are back with us again. There is very little new under the sun in Federal-Provincial relations.

The one feature of this phase between wars that was relatively new was the introduction of the first large scale shared-cost social security measure. This would come under the Federal leadership heading, and took the form of old-age pensions on a means test basis commencing in 1927 on a 50-50 basis, later raised to a 75-percent Federal contribution. A precedent for shared-cost programs was vocational education inaugurated before World War I, but the old-age pension plans was the real forerunner of our present array of social security measures.

The third broad phase of development started with the RowellSirois Report of 1939 and the Wartime Tax Agreements and has been in progress ever since. It is for us, of course, the most interesting and in many ways the most instructive. In this era, now completing its third decade, almost every major premise of Federal finance has reached full flower-indeed at the present time they can all be identi fied more clearly than ever before.

Take tax organization, for example. The wartime tax agreements were the ultimate in tax planning and integration, because they simply froze all parts of the system but the Federal, which was given free scope to expand to meet wartime requirements. The subsequent Tax Rental Agreements and the Tax Sharing Arrangements were also ingenious devices for maintaining a well-managed tax system while leaving one or two Provinces relative freedom of action. The new arrangements for 1962-66 only superficially abandon the basic concept of the tax rental system. It is very doubtful if the pattern that emerges in the next few months will be much different in substance from that which has prevailed now for three decades.

The largest change has come about in the realm of fiscal need. Where all previous efforts to recognize the special disabilities of some sections of country were rather rough and crude, in recent years we have approached something like a scientific formula, even though a partial one. The leveling up effect of the equalization payments, which raise the per capita revenues of all Provinces from certain taxes to a common standard, are a far cry from any previous crude measures. In addition, the Atlantic Provinces' special grants, while in a familiar pattern, are more significant in amount than any previous grants of the same type.

The "Ottawa Knows Best" premise has had a checkered history during this time. Even during the war some brave steps were taken, such as the inauguration of unemployment insurance, and immedi ately after the war we had family allowances. Much of the argument in support of continuing central control of the main taxes following the war was based on the proposition that Ottawa's plans for stabilizing the economy required such control. The reasons this position was abandoned are obscure and involved, but the fact is that nothing has been heard of the gospel in some time. The most probable reason is the discovery that the massiveness of a budget as large as the Federal neither allowed nor required the sort of tinkering with taxes that was thought scientific immediately after the war. Now the Federal budget acts like the gyro deep in the bowels of the ship, taking the shock of the big rolls in the economy, rather than as a rudder by which it can be steered from place to place.

There is also the point of course that even the new tax arrangements with the Provinces will fairly well stabilize the main direct tax elements in the tax system for another 5 years. Despite the increase in its financial liabilities to the Provinces and the fairly inflexible areas of taxation being guaranteed to the Provinces, it is still the Federal Government that will enjoy the greatest latitude in its taxing powers--which of course is as it should be in view of its enormous responsibilities in these times.

Finally, on the matter of provincial autonomy, I think we have made some progress in recent years. As much by oversight as anythingcertainly I do not believe it was by design-the tax rental agreements had drifted into a position where a Province could only stay out at considerable financial sacrifice. This was bad, because it meant that there was undue pressure to conform. The 1957 agreements overcame this feature completely, and the new arrangements go even further toward autonomy by forcing the Provinces to levy their own taxes. Based on previous experience any tax of which it can be said that it is being levied as the result of the actions of the Federal Government gets by a provincial legislature fairly easily, but the exercise will be a salutary one in any event. At least Mr. Fleming will derive some comfort in knowing that he and Mr. Lesage will now be joined by nine other Treasurers in having to explain the intricacies of a modern Income Tax Act.

Summing up, in my opinion we are closer to giving recognition to all the fundamental requisites of a Federal system of finance at the present time than we have been ever before. There are still many shortcomings, but in a world in which relations between governments are often highly irrational, our own Federal-Provincial relations are a bright spot.