COVER

DUSTUP OVER DOLLARS

Federal transfer payments are now a hot election issue

MARY JANIGAN May 19 1997
COVER

DUSTUP OVER DOLLARS

Federal transfer payments are now a hot election issue

MARY JANIGAN May 19 1997

DUSTUP OVER DOLLARS

Federal transfer payments are now a hot election issue

MARY JANIGAN

On the surface, it hardly sounds like a hot election issue. But, to the astonishment of the politicians themselves, the Canada Health and Social Transfer has become one of the pivotal topics of the federal cam paign. There, last week, was Ontario Finance Minister Ernie Eves, tabling his 1997-1998 budget—and bolstering his federal Tory counterparts by taking Ottawa to task for its cuts to the CHST. There, one day after his April 27 election call, was Prime Minister Jean Chrétien, proudly depicting himself as the savior of medicare and proclaiming that the Liberals would “strengthen health-care funding” by cancelling their own planned cuts to the transfer. Earmarked for provincial health, welfare and postsecondary education programs, the CHST has become high-stakes political drama—and everyone is edging onto the stage. The Tories and the Reform party have vowed to boost payments for health and education. The NDP would add billions to just about everything. And the Bloc Québécois claims that Quebec has been especially hard hit by federal cuts.

But what does it all mean? For decades, few Canadians paid much attention to the money that Ottawa sends to the provinces for health, education and welfare. After all, the federal government itself does not run those crucial programs; it merely foots part of the bill. That situation suited Ottawa just fine—because provincial governments took the blame for cuts to universities or long waiting lists for bypass surgery. And although most Canadians now make the connection between federal payments and provincial services, the formulas are so complex that only an accountant could love them. “These areas of government are so important that they need to be transparent, they need to be accountable and they need to be simple,” declares Queen’s University economist Tom Courchene. “We have none of these.”

That is a pity—because transfer payments are the very lifeblood of the Canadian federation. Although Ottawa has contributed to provincial social programs since the 1920s, it was only in the mid-1960s that it used its formidable financial resources to fund massive transfers for health care, welfare and education.

The provinces used the money to build universities, to strengthen social assistance and to extend medicare.

And as they forged the social safety net, which many would have been unable to pay for without matching federal funds, they created a national birthright. Today, transfer payments are at the centre of the real debate over national unity. While Ottawa and the provinces may publicly squabble over the ramifications of recognizing Quebec as a distinct society, their private discussions focus on who gets what share of the nation’s wealth.

Those talks have become increasingly heated as the federal government tackled its deficits. Ottawa first imposed large-scale limitations on the growth of transfers in 1982—and it has main-

tained varying limits in every subsequent year. It clamped extra restraints on the richer provinces of Alberta, British Columbia and Ontario in 1990. Last year, it tossed the previous programs together, gave it all a new name—the Canada Health and Social Transfer—cut the overall value and imposed a new distribution formula. The situation has become so complex that federal Liberals are now brazenly attacking Ontario’s Conservative government for cutbacks to social services that were prompted, in part, by Ottawa’s own reductions in transfers. As federal Trade Minister Art Eggleton recently told Maclean’s, “In Ontario, the cutback to hospitals is because of the province’s decision to do tax cuts.”

The numbers have flown like feathers. Estimates of what would have been and what should been can hit tens of billions of dollars. Worse, the transfer itself is a combination of cash, which Ottawa pays directly to the provinces, and so-called tax points, which is money that Ottawa used to collect through its income taxes but which the provinces now collect for themselves when they levy their income taxes. Sometimes politicians talk about the cash. Sometimes they talk about the cash—and extra tax points that Ottawa gave to Quebec in 1967. Sometimes they talk about the total value of the transfer. Sometimes, they talk about money that would have come—if Ottawa had not capped the transfer. Sometimes they talk about actual cuts. And even though the transfer is a block grant that the provinces can spend on anything, politicians usually pretend that its only purpose is to support popular medicare.

The confusion is so great that when Ottawa sliced another $1.8

A PAINFUL DROP

FEDERAL CASH TRANSFERS TO THE PROVINCES*

(in billions)

19881989 19891990 19901991 19911992 19921993 19931994 19941995 19951996 19961997 19971998

$15.1 $15.9 $16.4 $17.4 $18.4 $18.8 $18.7 $18.2 $14.9 $12.5

billion from the transfer on April 1, few Canadians were even aware of it. Ottawa likes it that way. “For most people, transfers are just an abstraction,” says former Ontario premier Bob Rae. “The real issue is: is there going to be money for my hospital?

And the people who make those decisions are at the provincial level. The provinces have ended up carrying the can for this very significant shift in federal spending.”

They have also been hard hit. Between the fiscal years 1990-1991 and 1997-1998, the total value of federal transfer payments—tax points and cash—has fallen $1.36 billion, or 5.2 per cent. Because the value of the tax points has gone up, the value of the cash transfer declined even further: it plummeted $3.9 billion—or 23.7 per cent. During that same period, Canada’s population has grown by more than 10 per cent. And inflation has taken its toll: it takes $1.13 to exercise the same purchasing power that a dollar wielded in 1990. The brutal truth is that the provinces are serving more people with less money— and each dollar that remains buys less.

In response, the provinces are cutting services. Preliminary estimates from the Canadian Institute for Health Information indicate that health-care spending dropped one-fifth of a percentage point between 1995 and 1996—or $77 million—even though the population grew by about 1.4 per cent and the inflation rate was two per cent. Provincial spending on universities fell an estimated eight per cent between 1995-1996 and 1996-1997. And the federal human resources department estimates that welfare spending declined 4.7 per cent between 1994-1995 and 1995-1996. Since then, every province has made further cuts to welfare rates or services, such as Manitoba’s 10-percent paring of payments to employable singles and childless couples in May, 1996. “Social assistance has been the hardest hit because there was no political will to support it,” says Lynne Toupin, executive director of the National Anti-Poverty Organization. “Provinces have only tinkered with health care because that is sacrosanct.”

The view from the start of the decade provides a slightly different picture—largely because welfare payments increased massively in the early 1990s. Those payouts mounted because some provinces, especially Ontario, increased their basic rates—and because the recession threw more people onto welfare rolls. As a result, social assistance spending soared. Although that spending has declined sharply, it means that, between 1990-1991 and 1995-1996, welfare spending went up an estimated 59 per cent—to $13.7 billion.

The situation is equally painful in other sectors. Provincial healthcare expenditures between 1990 and 1996 were up only 15.4 per cent—when an increase of almost 25 per cent was required to keep pace with population growth and inflation. “The health-care system is stretched to its limits,” says Dr. Mary Ellen Jeans, executive director of the Canadian Nurses Association. “The health of Canadians is at risk.”

The cutbacks have been more severe in postsecondary education. The Association of Universities and Colleges of Canada estimates that provincial spending on universities actually decreased 17 per cent during that same period. (That figure does not include community colleges.) Tuition fees, meanwhile, are climbing in many provinces as universities scramble for funds. As a result, the association predicts that student debt is likely to triple between 1990 and 1998 from $8,700 to $25,000—which could put the dream of a university education beyond the reach of many lower-income families. “The danger,” warns AUCC president Robert Giroux, “is that over the long term, it will just turn a lot of students off and they will not go to university.”

Few would question the fact that Ottawa had to pare back transfer payments in order to get its deficit under control. Such large chunks of money—the cash portion alone was $16.4 billion in 1990-1991—simply could not escape the knife. Even today, cash transfers constitute about 10 per cent of federal program spending. There is also little question that Ottawa had to change the formulas: previous ones often ensured that transfers grew generously—and automatically—whenever the provinces decided to spend more money, or whenever the economy and the population grew.

But it can also be argued that the provinces have carried a far greater share of Ottawa’s war on the deficit _ than the federal government itself. Between 1993-1994 o (when the Liberals took office) and 1997-1998, the cash that Ottawa actually sends for social programs has fallen 39 per cent. In contrast, Ottawa’s spending on its own programs has dwindled by only 13 per cent. (The Liberals did cut more than that—but then spent the savings on other programs.)

How did the system become so complicated? Ottawa first compensated the provinces for a social program in 1927 when it agreed to reimburse 50 per cent of their expenses for old-age assistance. In 1948, it offered matching grants for hospital construction and cancer control. By the mid-1960s, flush with cash and heady with nationalist fervor as the nation geared up for its 100th birthday party, Ottawa gave an open-ended commitment to pick up fixed percentages of each province’s social spending tab.

Although the formula was changed in 1977 and then adjusted in 1982, transfer payments have remained the mechanism through which Ottawa promoted its vision of a strong, central government. Its control over the cash often thwarted the aspirations of successive Quebec provincial governments for more powers and more tax dollars. “The federal Liberals used the transfer system to try to buy off the Quebec nationalist agenda,” argues Simon Fraser University economist John Richards. “There was this high-flowing rhetoric about individual rights and official bilingualism—and there was this low political route of doling out the cash.”

The problems began as the money ran dry. Prior to 1996, there were two types of transfers for those social programs—each with its own pitfalls. One was called Established Programs Financing, which paid for health and education.

EPF was composed of cash, which Ottawa sent each year, and tax points: that is, Ottawa lowered its corporate and personal income taxes by a total of 14.5 percentage points in 1977—and the provinces filled their coffers by raising their taxes by an equivalent amount. (Since 1967, Quebec has had an extra 8.5 per cent in tax points for health and education, instead of cash.) As its deficits mounted, Ottawa continually clamped new restrictions on the growth of this transfer. Ontario has estimated that the provinces would have received an extra $57 billion, in total, between 1982 and 1995 if such limits had not been imposed.

But, in retrospect, there was one specific limitation that ensured that EPF would eventually vanish: in 1990, the Conservative government decreed that the total EPF transfer could only grow when the population increased. The total amount of the transfer for each person was fixed. As the economy grew, the value of the tax points increased: a one-per-cent tax brings in one dollar when a taxpayer is earning $100; it brings in $1.10 when a taxpayer earns $110. As a result, the amount of cold, hard cash was declining.

Eventually it would have dwindled to nothing.

And because Quebec had more tax points, its cash transfer would have hit zero first. That would have reduced Ottawa’s political clout with Quebec City—and Quebecers—as the province pondered its place in Confederation.

The second transfer was the Canada Assistance Plan—which paid 50 per cent of each province’s eligible welfare tab. In 1990, horrified by this everescalating bill, Ottawa limited the annual growth of CAP payments to five per cent—but only in the three wealthy provinces of Alberta, Ontario and British Columbia. Between 1990 and 1996, because of Ottawa’s limit, its increased welfare rates and its burgeoning welfare rolls, Ontario was forced to come up with an extra $8.2 billion—because Ottawa was eventually paying only 28 per cent of its tab. Alberta lost $113 million. (Its losses were small because it quickly restrained its welfare costs.) British Columbia lost $1.8 billion—because in that province Ottawa’s share sank to 31 per cent.

Between the prospect that EPF cash transfers, and thus Ottawa’s clout, would eventually dwindle to nothing, and the glaring CAP discrepancies, the situation was rapidly deteriorating. In 1996, desperate for a solution, the Liberals tossed CAP and EPF together into a single program, the Canada Health and Social Transfer. They cut $5.7 billion from their cash contribution in two stages between 1995-1996 and 1996-1997. Because the value of the tax points was still growing, the overall value of the transfer dropped only $4.5 billion. But the Liberals were crafty. As the cash transfer dropped and nationalist critics bemoaned Ottawa’s diminishing presence in social programs, they tucked a so-called cash floor under the CHST of $11 billion. Then, in

Every province has made cuts to welfare or services

this election, they upped that floor, vowing that the cash portion of the transfer will never dip below its current $12.5 billion. Such moves have bemused many experts. As economist Courchene notes: “They made all those cuts, then they installed a cash floor—and then they managed to sell successfully to Canadians the idea that they are saving medicare.”

Such tactics took care of the problem of the ever-dwindling cash. But the inequalities in CAP left Ottawa with a serious dilemma: the richer provinces had received far less for each citizen than the poorer provinces. Unwilling to annoy Quebec, and gambling that most taxpayers would never understand, Ottawa decided to divide the 1996-1997 CHST transfer pot in the same proportion per province as it had divided the CAP. As a result, the poorer

provinces still get more money per citizen than the rich provinces: Ontario, for instance, now receives $797 per citizen to pay for health, welfare and education—while Quebec gets $914.

For the Liberals, the alternatives were unpalatable: taking more money from the poorer

provinces, including Quebec, to ensure equality— or throwing billions of extra dollars into the CHST pot to increase transfers to the three wealthier provinces. The inequality has rankled the richer provinces—because they also contribute to equalization payments that allow the poorer provinces to provide similar levels of service at similar levels of taxation. Worse, Ottawa is taking its own sweet time to solve this massive disparity in per capita CHST payments: over the next decade, CHST transfers will be gradually adjusted to reflect each province’s share of the population.

It is easy to see why voters have usually avoided the tricky topic of transfers. And it is equally easy to see why the issue should become the focus of election rhetoric. The terms may be complicated. But the results of every adjustment in Ottawa’s arithmetic can be seen whenever voters look around their local communities. That is not to say that Ottawa is responsible for the closure of every hospital bed, every cut in welfare services, every hike in tuition fees. But when the federal political parties talk transfers in this election, when the Liberals brag about their record, voters should take every figure with the proverbial grain of salt. Politicians should not promise the moon—when they have already dimmed the stars. □