The Politics of Conditional Grants in Federal Systems

Can provinces and states influence the conditions attached to federal grants? In federations such as Australia, Canada, and the United States, federal transfers earmarked for specific purposes have been identified to be the main instruments used by federal governments to shape policies run by the constituent units. There is a strong consensus in the literature on fiscal and dynamic federalism that the use of conditional grants thus leads to centralization. In this paper, we argue that the extent to which conditional grants really shift power to the center depends on the impact federal grant programs have on the constituent units’ autonomy, on the one hand, and on their capacity to provide public services, on the other. We consider this impact to be a function of disagreement over and influence on funding levels and policy objectives and expect it to vary between the constituent units of a federation. To scrutinize the centralizing effect of conditional grants, the paper examines the genesis of major policy programs funded through earmarked grants in education and health care in Australia, Canada, and the United States. It identifies the extent to which individual constituent units disagreed with funding levels and conditions announced by the federal government; establishes whether these disagreements could be reduced in intergovernmental negotiations; and measures conditional grants’ impact on constituent units’ autonomy and capacity. By tracing the establishment and major reforms of these grant programs, the paper examines the conditions under which conditional grants are more or less centralizing. By focusing on the real impact conditional grant programs have on individual constituent units’ autonomy and capacity, it sheds light on the political asymmetries that shape intergovernmental relations in multilevel systems.