There is a very long answer to this, but I will try to stay brief. The short answer is that if it is of academic interest (broadly interpreted) then a graduate student researcher should be able to get the minimum funding package in order to study it.

This does not encourage low-impact research, although it does occasionally allow it. The reasons being:

1. External grants (OGS, NSERC, SHIRC) are competitive and based on the relevance and impact of the potential research. (These ensure that the high-impact research is getting more funding.)
2. Low-impact research will only get published in low impact journals, which greatly reduces your future employment.
3. Your conference attendance will be much lower if no one cares about what you're doing. (Which impacts your future employment.)

You're welcome to study a low-impact subject, but you run the risk of isolating yourself in the academic community.

Does the university need to pay for research on 14th century Balinese architecture?

I'm reminded of the scene from Ender's Game, where Ender is just poring over historical research in an attempt to become the best possible general. He studies ancient war technology in a very broad sense: battle formations, psychology, ancient architecture, anthropology, etc.. By setting his scope a bit broader, his picture is more complete.

The flip side of this is that we need to focus incoming undergrads a little bit more. Right now we're doing a very poor job of directing students into areas that (1) we need more people in, and (2) they want to be in.

For example, we have tons of people going into education, but not nearly enough of them are going in to French and Math. Some of those people need to be redirected.

Scotiabank (I think?) released a study on this about a year ago.