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David Clinton

How would provinces and cities survive if the federal government collapsed?

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6 minute read

The Audit

 David Clinton

How Resilient Are Canadian Provinces?

Suppose one fine day the federal government was unable to show up for work. Perhaps it wasn’t feeling well. Or maybe it had borrowed so much money that it maxed out its line of credit, defaulted on its interest payments, and just couldn’t pay its bills. What then?

Let’s say – and I’m just spitballing here – let’s say that exploding, uncontrolled public debt is a bad thing. All the smart people tell us that taking on too much credit card debt won’t end well, right? Well I can’t think of any solid reason that such logic shouldn’t also apply to governments.¹

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As you can see from the graph, our federal public debt climbed from $351 billion in 1990 all the way to $884 billion in 2024. The 50 percent leap between Q4 2019 and Q4 2021 was the generous gift of COVID. Things started to recover in mid-2023, but they’ve since nose dived once again.

Ah, but that’s just debt you say. It’s someone else’s problem.

Not exactly. You see, even if we’re not paying down the principle on the debt, you can be sure that we’re covering interest payments. Which, it just so happens, have become a lot more expensive ever since massive government borrowing drove up interest rates.

How much more expensive? As of Q1 2024, our annual interest payments totaled $11.7 billion, compared with $6.2 billion back in Q1 2022. Put differently, the interest we pay each year comes to seven percent of our total federal budget.

I’m certainly not going to confidently predict that the federal government will soon default on interest payments, lose access to capital markets, and begin laying off government workers and shutting down services. But I wouldn’t say that it can’t happen either.

Given that possibility, what can provinces and cities do right now to prepare for a sudden (hopefully brief) disruption? First off, though, what exactly is a province?

As defined by the British North America Acts, areas of the exclusive responsibility of the federal government include:

  • Public debt and property
  • Regulation of trade and commerce
  • Criminal law
  • Militia, military and naval service, and defense
  • Navigation and shipping
  • Banking, incorporation of banks, and the issue of paper money
  • Bankruptcy and insolvency
  • Naturalization and aliens
  • Unemployment insurance

Provinces are responsible for:

  • Property and civil rights
  • Administration of justice (including policing)
  • Municipal institutions
  • Education
  • Health and welfare
  • Natural resources

So a short-term federal disruption might not have much of an impact on most Canadians’ day-to-day activities. Federal employees and UI recipients would have to figure out how to survive without their paychecks and border entry points would shut down. But great news! Your criminal prosecution can go ahead on schedule because, while criminal law is controlled by the feds, lower criminal courts are provincial.

On the other hand, consider how federal transfers contribute between around 15 percent (Alberta) and 40 percent (Atlantic provinces) of provincial budgets. And Toronto’s municipal budget, for instance, includes around 15 percent in transfers from the province, and another five percent from the federal government. So it wouldn’t take long before all levels of government begin to feel the heat.

I’m not suggesting we change Canadian federalism (good luck trying). But a province that’s reduced or eliminated its own budget deficit and successfully weaned itself from incoming federal transfers would probably enjoy a smoother trip through a shutdown. Exploring the legality of temporarily taking over the payroll for critical federal roles (like Border Services), for instance, might also pay dividends when push came to shove.

I would suggest that thinking formally about these issues would be an important part of any government’s emergency planning preparedness. Yesterday was the best time to start. But today is the next best option.

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1

Post-COVID, the claims of Modern Monetary Theory proponents didn’t age well.

 

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COVID-19

Vaccines: Assessing Canada’s COVID Response

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The Audit David Clinton's avatar David Clinton

I planned to be “first in line” for the shots as soon as my age cohort became eligible. By early March however, COVID itself dropped by the house, leading to the most uncomfortable (although non life-threatening) week of my life.

It’s been five years since COVID hit and one part of me wants to stuff it all in a closet somewhere and forget about it. But perhaps certain events – and especially government errors and overreach – should be documented. So this post will identify actions at all levels of government from those early days that, given our understanding of the threat available through the benefit hindsight, were both misguided and damaging.

I haven’t completely forgotten the mood through the early months in 2020. Politicians faced near-unanimous public demand for an aggressive response. Much of that sentiment was the result of messaging coming from foreign governments (mostly in the U.S.). But the local sentiment was definitely there.

To be fair, Governments got some things right and, taking into account the chaos and uncertainty of those early months, even some of their mistakes were understandable. But it’s the job of government to lead. And to avoid making choices – even popular choices – that will lead to predictable harms.

Vaccine mandates starting in 2021 were a case in point. Federal authority largely stemmed from the 2005 Quarantine Act and the Contraventions Act that allowed officials to issue tickets for non-compliance with the Quarantine Act. Provincial mandates were based on laws like Ontario’s Emergency Management and Civil Protection Act. The question isn’t whether the mandates and their enforcement were legal, but whether they caused more harm than good.

As the first vaccines started arriving in Canada around February 2021, I planned to be “first in line” for the shots as soon as my age cohort became eligible. By early March however, COVID itself dropped by the house, leading to the most uncomfortable (although non life-threatening) week of my life.

After recovering, my family doctor advised me to wait three months before getting the shots so my body could get back to normal. During those months, I got access to preprint results from the Israeli study into natural immunity which showed that:

Natural immunity confers longer lasting and stronger protection against infection, symptomatic disease and hospitalization caused by the Delta variant of SARS-CoV-2, compared to the BNT162b2 two-dose vaccine-induced immunity

Those results were later confirmed by CDC and NEJM studies, among others.

Given that context, I didn’t see any justification for exposing myself to even minimal health risks associated with vaccines. Which meant that, despite demonstrably posing no threat to public health, I would (at various times) be unable to:

  • Board domestic commercial flights, VIA Rail, Rocky Mountaineer trains, and cruise ships within Canada
  • Board international flights or trains departing Canada
  • Freely return to Canada through an overland point of entry
  • Upon return to Canada, bypass the 14 day quarantine under the Quarantine Act
  • Upon return to Canada via air, bypass the three day quarantine in (expensive) government-approved hotels
  • Engage in ‘non-essential” activities like restaurants, gyms, events (details varied from province to province)
  • Enter Parliament
  • Seek employment in federally regulated air, rail, and marine sectors

What should Canadian governments have done? Remove restrictions on individuals with natural immunity, obviously. Which, by the way, would have come with the valuable bonus of entirely avoiding the truckers protest and consequent confrontations.

If authorities were reluctant to take us at our word on immunity, they could have followed the European Union’s lead by emulating their Digital COVID Certificate for proof of recovery. Were they worried about people without immunity creating fake certificates? Hard to take that one seriously. There were more fake vaccine passports littering the streets of Ontario than abandoned Toronto Maple Leafs car window flags in a normal early May.

In the end, my own suffering was negligible. I didn’t really want to visit family in the U.S. all that much anyway. But for millions of other Canadians, the real-world stakes were far higher. And all that’s besides the billions of dollars wasted during those years’ government policies.

To be sure, resisting unscientific street-level calls for vaccine mandates would have required courage. But shouldn’t acts of courage be a source of pride for public officials?

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Business

Is Government Inflation Reporting Accurate?

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The Audit David Clinton's avatar David Clinton

Who ya gonna believe: official CPI figures or your lyin’ eyes?

Great news! We’ve brought inflation back under control and stuff is now only costing you 2.4 percent more than it did last year!

That’s more or less the message we’ve been hearing from governments over the past couple of years. And in fact, the official Statistics Canada consumer price index (CPI) numbers do show us that the “all-items” index in 2024 was only 2.4 percent higher than in 2023. Fantastic.

So why doesn’t it feel fantastic?

Well statistics are funny that way. When you’ve got lots of numbers, there are all kinds of ways to dress ‘em up before presenting them as an index (or chart). And there really is no one combination of adjustments and corrections that’s definitively “right”. So I’m sure Statistics Canada isn’t trying to misrepresent things.

But I’m also curious to test whether the CPI is truly representative of Canadians’ real financial experiences. My first attempt to create my own alternative “consumer price index”, involved Statistics Canada’s “Detailed household final consumption expenditure”. That table contains actual dollar figures for nation-wide spending on a wide range of consumer items. To represent the costs Canadian’s face when shopping for basics, I selected these nine categories:

  • Food and non-alcoholic beverages
  • Clothing and footwear
  • Housing, water, electricity, gas and other fuels
  • Major household appliances
  • Pharmaceutical products and other medical products (except cannabis)
  • Transport
  • Communications
  • University education
  • Property insurance

I then took the fourth quarter (Q4) numbers for each of those categories for all the years between 2013 and 2024 and divided them by the total population of the country for each year. That gave me an accurate picture of per capita spending on core cost-of-living items.

Overall, living and breathing through Q4 2013 would have cost the average Canadian $4,356.38 (or $17,425.52 for a full year). Spending for those same categories in Q4 2024, however, cost us $6,266.48 – a 43.85 percent increase.

By contrast, the official CPI over those years rose only 31.03 percent. That’s quite the difference. Here’s how the year-over-year changes in CPI inflation vs actual spending inflation compare:

As you can see, with the exception of 2020 (when COVID left us with nothing to buy), the official inflation number was consistently and significantly lower than actual spending. And, in the case of 2021, it was more than double.

Since 2023, the items with the largest price growth were university education (57.46 percent), major household appliances (52.67 percent), and housing, water, electricity, gas, and other fuels (50.79).

Having said all that, you could justifiably argue that the true cost of living hasn’t really gone up that much, but that at least part of the increase in spending is due to a growing taste for luxury items and high volume consumption. I can’t put a precise number on that influence, but I suspect it’s not trivial.

Since data on spending doesn’t seem to be the best measure of inflation, perhaps I could build my own basket of costs and compare those numbers to the official CPI. To do that, I collected average monthly costs for gasolinehome rentals, a selection of 14 core grocery items, and taxes paid by the average Canadian homeowner.¹ I calculated the tax burden (federal, provincial, property, and consumption) using the average of the estimates of two AI models.

How did the inflation represented by my custom basket compare with the official CPI? Well between 2017 and 2024, the Statistics Canada’s CPI grew by 23.39 percent. Over that same time, the monthly cost of my basket grew from $4,514.74 to $5,665.18; a difference of 25.48 percent. That’s not nearly as dramatic a difference as we saw when we measured spending, but it’s not negligible either.

The very fact that the government makes all this data freely available to us is evidence that they’re not out to hide the truth. But it can’t hurt to keep an active and independent eye on them, too.

1 After all, taxes are certainly a major part of our cost of living, right? And even though you could argue that tax payments deliver benefits like “free” healthcare, well transportation expenses also deliver benefits (like the ability to get to work).

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