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

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

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You wouldn’t believe how complicated distributing public money can get

Published on December 15, 2024

Todayville

David Clinton

Veteran Affairs: the Big Picture

While researching posts for The Audit, I’ll often confront massive datasets representing the operations of agencies with which I’m not in the least familiar. Getting to the point where all the raw numbers turn into a useful picture can take considerable effort, but it’s a satisfying process.

But my first attempts to understand Veteran Affairs Canada (VAC) felt a bit different. I wasn’t just looking at funding and costs, but at the frustrations and suffering of people who, to a greater or lesser degree, were harmed through their service to the country. Here, I hope, is part of their story.

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Veterans Affairs Funding

There are currently more than 460,000 living veterans of the Canadian military. The estimated 2024-25 spending allocation for Veteran Affairs Canada – whose mandate is to serve that population – is around $4.8 billion. The department employs less than four thousand people, which is actually around eight percent fewer than in 2010. Having said that, employment at the distinct Veterans Review and Appeal Board has grown from zero to 161 since 2017.

Besides VAC, the Office of Infrastructure of Canada will spend around $16.5 million on their Veteran Homelessness Program, and Department of National Defence has another $1.6 million budgeted for Community Support for Sexual Misconduct Survivors Program – something for which veterans will also be eligible.

In addition, nearly $2.5 million in grants from various government agencies (including Canada Mortgage and Housing Corporation) was given in 2023 to the Homes for Heroes Foundation, which provides housing and support for at-risk veterans.

Non-government agencies also work to support veterans. In 2023, for instance, the War Amps reported spending $2.7 million on “Service Bureau and Advocacy” and around $700,000 on “Veterans Issues – Special”. The Royal Canadian Legion Dominion Command spent around $1.15 million on veterans services in 2022.

The True Patriot Love Foundation is also a big player in this area, channeling nearly $2.7 million in 2024 to other charities working for veterans. At the same time, more than 30 percent of their own budget came from government sources.

One example of such flow-through funding was the $360,000 given by True Patriot Love to Veterans Transition Network in 2024. In 2023, Veterans Transition Network themselves received another $2.2 million from government along with a total of $1.7 million from other charities.

These kinds of ultra-complex relationships are common in Canada’s charitable sector. The complexity may provide benefits that outsiders can’t easily see. At the same time, knowing whether moving funds through multiple organizations leads to unnecessary inefficiencies and waste is something that would probably require a serious forensic audit.

Veterans Affairs Spending

The largest line items in this year’s VAC spending include $1.6 billion for pain and suffering compensation, $1.34 billion for the Income Replacement Benefit, and $990 million for pensions for disability and death.

In 2023, VAC awarded $41.6 million in external contracts. The largest of those was worth $13.8 million and went to 674725 ONTARIO LTD for “Other Business services not Elsewhere Specified”. 674725 Ontario Ltd. appears to be closely associated with a company called Agilec which, in turn, is a part of Excellence Canada. Here’s how Excellence Canada describes itself:

“Founded in 1992 by Industry Canada as the National Quality Institute (NQI), then rebranded as Excellence Canada in 2011, we are an independent, not-for-profit corporation that is dedicated to advancing organizational performance across Canada.”

In that context, it’s interesting that in 2022, VAC awarded a $159 million contract to a joint venture between WCG International Consultants Ltd. and March of Dimes Canada for “Other Health Services not Specified Elsewhere”.

What makes that interesting? Well, WCG also shows up on an Innovation, Science and Economic Development Canada (ISED) page related to compliance with the Investment Canada Act (ICA). The ICA exists to provide transparency relating to foreign investments in the interest of maintaining a fair and competitive marketplace

This particular page identifies a “U.S.” company called Ancora BidCo Pty Ltd as the new owners of a number of businesses under contract with the federal government. Those businesses include 674725 Ontario Ltd. and WCG International Consultants Ltd.

In fact, Ancora isn’t really a U.S. company at all. They’re actually Australian (as the Pty designation suggests). But their parent company – the private equity firm Madison Dearborn Partners, LLC – indeed operates in Chicago.

There’s no direct evidence to suggest there’s anything dark and nefarious happening here. But it is strange that so many discrete contracts turn out to be awarded to what now amounts to a single foreign for-profit company.

External Contracting Patterns

Has VAC been increasing their reliance on external contracts in recent years? Well, as you can see from this graphic, it’s complicated:

I don’t know what policy changes drove those two huge spikes in 2014 ($933 million) and 2021 ($2.25 billion). But I can tell you which specific vendors are responsible for most of the increase.

In 2014, three contracts worth a total of $803 million went to Medavie Inc for “Other Business services not Elsewhere Specified”. That was 86 percent of the sum of all VAC contracts from that year.

An eye-popping 98 percent of 2021’s external spending went to just six contracts worth $2.2 billion. Medavie Inc received one of those contracts – worth $228 million. But the other five (worth a total of $1.99 billion) were all joint ventures involving WCG International Consultants Ltd.

Lifemark Health Corp. (currently owned by Loblaw) partnered with WCG for three of those contracts, and March of Dimes Canada had the other two dance slots.

What Is Medavie?

Medavie Inc. is the owner of:

Medavie Blue Cross
Medavie EMS Inc.
Medavie health Services New Brunswick Inc.
Emergency Medical Care Inc.

Between them, those companies provide health insurance, healthcare training, and emergency management services. They also provide public health program administration – which would probably account for the majority of those contract amounts.

What’s not clear to me is why there’s no record of Medavie receiving any federal contracts of any sort since 2021 – despite the fact that the VAC website tells us that they’re still actively engaged in service provision through Partners in Canadian Veterans Rehabilitation Services (PCVRS).

What Is WCG International Consultants Ltd?

As we’ve seen, WCG is now owned by an American private equity firm and is most certainly no longer not-for-profit. Their website tells us that they’re part of the APM Group, which is an Australian company providing “services in early childhood, youth, employment, insurance, justice, veterans, health, disability, and aged care”.

You’re correct to assume the APM Group is more or less synonymous with Ancora BidCo Pty Ltd. More specifically: all of APM’s publicly-traded shares were bought out in the past couple of months on behalf of Madison Dearborn Partners.

Just one more detail: according to WCG’s website, they’re:

“Partners in Canadian Veterans Rehabilitation Services (PCVRS) coordinates and administers the Rehabilitation Services and Vocational Assistance Program on behalf of Veterans Affairs Canada (VAC).”

Curious about PCVRS? Since late 2022, they’ve been tasked with administering all medical, psycho-social and vocational assistance services on behalf of VAC. However, reports suggest that not everyone has been happy with either accessibility or responsiveness under the new system.

None of this is necessarily inappropriate. And if you’re willing to work at it, you’ll be able to use public information sources to uncover a wealth of related relationships and details. But the vast amounts of money involved, along with the operational complexity make abuse possible. Which means external oversight is a good thing.

Besides all that logistical stuff, what really matters is whether veterans themselves are receiving the support and services they deserve. And that’s a question only they can answer.

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Business

Does Income Inequality Matter?

Published on December 12, 2024

Todayville

David Clinton

Super-high income taxes don’t increase government revenues. But can taxes be “smart”?

Reducing poverty and its harms is among the most urgent responsibilities of any modern government. But despite the claims of some activists, this particular problem has no obvious and easy solution. I’m going to suggest that targeting income inequality in particular is a waste of time.

First of all, income in Canada is actually not all that unequal. Income inequality is often measured by the Gini Coefficient. A Gini score of zero would represent total income equality, where everyone earns exactly the same amount. A score of one (or, sometimes, 100) represents perfect inequality, meaning one person has all the income, and everyone else has none.

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Statistics Canada data shows changes to the Gini Coefficient in Canada between 1976 and 2022:

Relatively speaking, those numbers are quite low and – when you ignore the weird COVID years – they also haven’t changed much since 1976. For comparison, the U.S. Gini coefficient in 2023 was 0.47, while (Communist!) China’s was 0.465 – both significantly higher than ours. The worst and best scores are, respectively, claimed by South Africa (.63) and Norway (.23).

But the real reason that talking about income inequality is an unnecessary distraction, is because there’s nothing you can do about it.

As I pointed out in a recent article, the 2 percent of Canadians whose assessed taxable incomes are above $250,000 contribute nearly 30 percent of all personal income tax revenue. They’re already clearly – and for the most part willingly – carrying far more than their share.

Ok. But why not slap the super-rich with a 90 percent marginal income tax? Well that’s been tried. The Beatles even recorded an angry song about it. But as far as I can tell, such taxes have always led to decreasing tax revenues. That’s because the people you’re targeting will either decide to earn less or simply move their businesses and assets to more tax-friendly countries – that often come with the added bonus of good weather.

If you’d ask me for my opinion, I’d say that the federal government could easily free up billions of dollars to address poverty by cutting waste. And a good first step in that direction would involve sharply decreasing the size of our bloated civil service.

How those extra funds could be better spent in a way that actually helps the poor isn’t a simple question. And it’s something you’d definitely want to get right on the first shot. Not to mention that some problems just can be solved with more money.

But in the unlikely event that you did find an expensive solution AND money freed up by new government efficiencies wasn’t enough, one might consider an intelligently designed wealth tax. Wealth taxes – which can take the form of property and estate taxes – have been used for centuries. The catch is that, if they’re poorly designed, they can be destructive. Just imagine a tax on real estate worth more than a million dollars that ends up wiping out seniors counting on the value of their homes to fund their retirements.

An OECD report from a few years back identifies a long list of developed countries whose wealth taxes largely failed to deliver significant revenue boosts. Those included Spain, Austria, Denmark, and Germany.

Norway, with a wealth tax worth as much as 1.5 percent of net wealth, was one of the report’s few success stories. But even they now seem to be having serious problems with compliance. Apparently, rich and industrious Norwegians are leaving the country in such high numbers that the government has imposed a punitive exit tax. I’m sure that’ll work out just great. (The Free Press recently published a piece on Norway’s problem.)

Nevertheless, if there is a universe where the words “smart” and “tax” can happily co-exist in a single sentence, then it’s more likely to work when you also find a way to include “wealth”, “balanced”, and “focused”.

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