Social programs: the cuts to come

The politicians have failed to tell voters the whole truth about the looming crisis in program funding

MARY JANIGAN October 11 1993

Social programs: the cuts to come

The politicians have failed to tell voters the whole truth about the looming crisis in program funding

MARY JANIGAN October 11 1993

Social programs: the cuts to come

The politicians have failed to tell voters the whole truth about the looming crisis in program funding


With zealous fervor, federal politicians battled last week over the strength of their dedication to save medicare. Prime Minister Kim

Campbell pledged to throw herself “across the railroad tracks” to protect it. Reform party Leader Preston Manning declared that the provinces should assume all responsibility for the design of health-care systems—to preserve them. Both Liberal Leader Jean Chrétien and New Democratic

Party Leader Audrey McLaughlin contended that they alone can be trusted to protect the present plan.

The fact is that no leader has told the whole truth to Canadian voters. No leader, with the exception of Manning, has informed Canadians that under the current funding arrangement, Ottawa is paying a smaller proportion of the tab for health care

and postsecondary education every year. Around the turn of the century, unless the arrangement is changed, the federal cash contribution for those social programs will be reduced to zero. Nothing. The whole social safety net is shifting as the politicians Speak—sometbjng-lhflf pyprv politician should ackjrtfiMedge. Inste3ti>many argue thatthadystem is too complicated and the fssues/ire too complex to be examined in dept]/ Maclean’s has assembled the following Handbook on the subjects that the politician 4are trying to avoid.

The eñ^e^ogiak^afety nafr-4he very sjeof Confederation, is out-of-date and/ver budget Its programs were designedJor the rich socïetyi of the 1960s when alm^t everyone who wanfeEhto '«offla work, and low-skilled workers could find high-paying jobs with ease. Canada’s natural-resource revenue effortlessly generated enough wealth to bankroll such generous programs as health care, welfare, unemployment insurance and old age pensions.

Times have changed. Many people who want to work cannot find work. Low-skilled workers are lucky to find low-paying jobs. High-paying jobs require high skills. But the

social safety net is not designed to foster those skills in the only resource that matters in the 1990s: people. As New Brunswick Premier Frank McKenna told Maclean’s last week: “It is in everybody’s interest to see people exit from dependency into the workforce. But the present program rules and red tape have really provided very little incentive to make that transition.”

Compounding those problems, no government has the money to maintain benefits at their present levels. Ottawa estimates that the gap between what it spends and what it collects in taxes will be $32.6 billion in 19931994. The sum of such annual deficits—the debt—will hit $491.2 billion this year. Almost four years ago, to save money, Ottawa curbed the growth of its massive annual payments to the provinces for health, welfare and postsecondary education. But

the total bill for such services in the 1990s kept growing. Ottawa simply shifted a greater portion of the tab to the provinces—especially Ontario, British Columbia and Alberta.

As a result, the gap between what the provinces spend and what they collect will be an estimated $20 billion in 19931994. The sum of those annual deficits— the provincial debt—will hit almost $190 billion this year. All governments are spending an ever-increasing portion of their revenues to pay interest on those debts. No government can afford to keep the safety net at its current level. “Canadian federalism is in fiscal crisis,” says Queen’s University political scientist Peter Leslie. “A moment of impending change, a turning point, has arrived.”


No matter what any federal politician or any political party promises, there are going to be major changes to Canada’s cherished social programs. The politicians know this. But very few have the stomach to address it. With every passing year, Ottawa is paying a smaller share of the provincial tab for health care and postsecondary education. Similarly, Ottawa’s contribution to the welfare bill in the three wealthier provinces is dwindling. In Ontario, for example, Ottawa’s share of the welfare tab has plummeted to less than 28 per cent in 1993 from about 50 per cent in 1989.

Federal politicians may promise to preserve the current system—but they are too late. The cost crunch is already changing programs—and Canadians can see the difference. University tuition fees are rising. Medicare covers fewer procedures. Provinces are increasingly scrutinizing their welfare rolls for fraud. But the bills are still growing faster than Ottawa’s contributions, straining the system at its seams. Says Simon Fraser University economist John Richards: “Nobody is addressing the reality of social policy in this election. All of us, including the politicians, are inside Plato’s cave, looking at shadows on the wall.”

Ottawa divides the social safety net into two categories: transfers to other governments and transfers to people. The transfers to other governments pay for services that the provinces administer. The transfers to people are direct payments. Any examination of the system must consider both categories—because both touch individual Canadians and both face major changes over the next few years.


1. Equalization. These grants are cash payments from Ottawa to the provinces. In theory, they allow provinces to provide similar levels of service at similar levels of taxation. Three provinces do not receive equalization: Ontario, British Columbia and Alberta. The remaining seven provinces receive payments that depend on their ability to raise tax revenues and on their population size. Equalization is the very thread of Confederation and will cost, this year, $8.3 billion. But the current seven-year federalprovincial agreement on equalization expires on March 31, 1994. Ottawa and the provinces have agreed to examine all trans-

fer payments when they cobble together another deal on equalization. That means that the governments could—and probably will—redesign much of the entire social safety net over the next 18 months. But voters are hearing little about those plans.

2. Established Program Financing (EPF). This program provides support to the provinces for health care and postsecondary education. The funding formula is complicat-

‘A moment of impending change, a turning point, has arrived’

ed—so few politicians explain it. But the formula is a key reason that medicare is now in trouble. Under the current arrangement, each province’s entitlement is based on its population. Ottawa provides that entitlement in two ways: tax revenue that it used to collect (and that it now allows the provinces to collect) and cash grants. That tax revenue was first handed over in 1977 when Ottawa lowered its tax rates—and the provinces increased their tax rates by an equivalent amount. The EPF entitlement is first met through the value of that tax revenue. If that sum is not enough, Ottawa pays the balance in cash. This year, the cash grants will total about $9.3 billion.

There is a big problem with EPF that no federal politician wants to address. According to the 1977 formula, a province’s EPF entitle-

ment increased when its population grew— and when the Canadian economy grew. But in 1990, faced with growing deficits, Ottawa unilaterally restricted the increase in its contribution to increases in population: that is, the entitlement per person was frozen. That means the very nature of the entitlement has changed. The value of the tax revenue portion has grown because the economy has grown, albeit slowly. As a result, the cash portion of the entitlement is shrinking. But because of Ottawa’s financial troubles, even this lower cash share is difficult to pay. Ottawa cannot unilaterally force the provinces to lower their tax rates—and return the difference. So, eventually, the entitlement will be met totally by the tax revenue portion. Ottawa will not have to pay a penny to meet its commitment. It will be contributing no cash to two of the nation’s most prized programs: medicare and postsecondary education.

That result would likely change one of the essential characteristics of Canada as a nation. Since EPF funding is the stick that Ottawa uses to force the provinces to meet national standards, those standards could vanish. Under the Canada Health Act of 1984, for example, the provinces lose $1 of EPF funding for every dollar that they collect through user fees or extra billing. Ottawa has also insisted that provinces charge the same tuition fees for their own students as they charge for students from other provinces. What happens when the federal cash runs out? As political scientist Leslie noted: “Former health minister Monique Bégin said it best: no cash, no clout.”

3. Canada Assistance Plan (CAP). In

theory, this program ensures that Ottawa pays half of the eligible provincial and municipal welfare spending. This year the tab will hit $7.2 billion.

But CAP has become a political battleground. In 1990, Ottawa limited the annual growth of its CAP payments to five per cent in the three wealthier provinces—Alberta, Ontario and British Columbia. But the recession has swollen welfare rolls in all provinces, especially hard-hit Ontario, and driven up welfare costs at rates much higher than five per cent. As a result, the wealth-

ier provinces are picking up an ever-increasing share of their annual welfare tab: Ottawa now pays only 28 per cent of Ontario’s bills, 36 per cent of British Columbia’s and 44 per cent of Alberta’s. The three provinces have lost about $1.3 billion this year alone. They

charge that CAP now discriminates against the very regions that produce most of the nation’s wealth. And they are becoming increasingly resentful about the cost of Confederation.

But there is a deeper problem with the CAP that affects all governments. Welfare was designed in the 1960s for the so-called unemployable person: that is, it was meant to provide long-term assistance for the small percentage of the population that was unlikely to join the labor force. In the 1990s, however, many unemployed Canadians have been forced onto the welfare rolls as their unemployment insurance ran out. Last March, there were three million Canadians on welfare. The total 1993-1994 welfare tab is $21 billion.

To add to those problems, there are few financial incentives or opportunities to get off welfare. Most provinces have instituted rules that penalize welfare recipients for income that they earn above relatively minimal amounts. As well, Ottawa stipulates that CAP funds cannot be used to pay for training programs—even though it does allow recipients on welfare to take training. Ottawa also insists that the provinces cannot force welfare recipients to perform

The cost-crunch is already changing programs and Canadians can see the difference’

make-work jobs or to take training as a condition of welfare. Many experts believe that Ottawa and the provinces must redesign the entire system to provide more incentives to work—and more funds for training. Says economist Paul Hobson at Acadia University in Wolfville, N.S.: “Services available under CAP to help individuals return to the labor force are either insufficient or inadéquate.”


1. Old age pensions. Ottawa will distribute $20 billion this year in pensions to the elderly. That astonishing amount constitutes one-eighth of all federal spending—and it will likely grow as the baby boomers age.

About $2.4 billion goes to households where family income exceeds $53,000. Ottawa has made an attempt to recover more money from wealthier recipients: in 1989, it introduced a surtax to “claw back” an additional proportion of pension payments. This year, that surtax affects individual Canadians who earn more than $53,215; in theory, when in-

come exceeds $83,170, the surtax will recover the whole amount.

But the central problem remains: Ottawa is still concentrating scarce resources on wealthier pensioners when the very nature of poverty in Canada has changed. In a recent study, the Economic Council of Canada estimated that two decades ago 40 per cent of the elderly lived in poverty; in 1989, only nine per cent were poor. The new poor are largely single-parent families, single youths and older singles. Says Patrick Johnston, executive director of the Canadian Council on Social Development: “I believe that it is inevitable that we will lower our spending on old age pensions simply because of the amount that is paid out—and the demographics of the population.” But few federal politicians want to face the ire of Canada’s well-organized senior citizens during an election.

2. Unemployment insurance (UI). When unemployment insurance was introduced in July, 1941, it was designed to assist workers who had lost their jobs—and who were looking for new work. It was a temporary economic safety blanket. Today, the program is a regular annual income supplement for many Canadians. The Fraser Institute in Vancouver estimates that 90 per cent of the recipients

who work the minimum number of weeks to qualify are repeaters. And the program has become a large source of wealth transfer among provinces: in 1990, Newfoundlanders tapped UI for $651 million more than its employers and employees contributed; by contrast, Ontario employers and employees contributed $2 billion more than its employees used.

High unemployment is adding to the UI bill. Technically, the program is supposed to pay for itself: premiums from employers and employees should sustain it. But at the end of 1992, the fund was about $4.7 billion in debt—which, in turn, constitutes a portion of Ottawa’s debt. This year it will move another $400 million into the red: Ottawa will collect $19 billion but pay out $19.4 billion. Such costs are staggering: UI premiums constitute almost 15 per cent of Ottawa’s revenues—and almost one-eighth of its spend-

ing. And they are an enormous tax burden on Canada’s employers and employees.

For decades, few provinces objected to the transfers. Now, net contributors such as Ontario are bitterly complaining that the system is unfair and inefficient. The length of benefits varies according to the unemployment rate in the claimant’s region. Workers in areas of high unemployment must work fewer weeks to qualify for UI, and can receive benefits for a longer period of time. That ensures that there is little financial incentive for

‘This system is unsustainable economically and untenable morally’

workers to move in search of a new job. In fact, recipients can survive for a lifetime in high unemployment areas with only 10 weeks of work each year. There is also little opportunity to learn new skills: only $2.2 billion of the $19.4 billion is spent on benefits and course costs for individuals in retraining. “Despite massive expenditures, we have not solved the problem of regional inequality,” notes Simon Fraser’s Richards. Instead, he says, a “pattern of generous intergovernmen-

tal transfers has created transfer dependency: continued low earned incomes, high unemployment and high poverty rates.”

There are no easy answers. The nationwide unemployment rate is 11.3 per cent, leaving almost 1.6 million people actively looking for work. Nor is there any guarantee that recipients who move or retrain will find jobs. Still, it is almost certain that Ottawa and the provinces will reform both UI and CAP over the next 18 months. Unemployment insurance will likely go back to its original pur-

pose of providing temporary support between jobs. Recipients in different regions will likely receive similar benefits because Ottawa will probably lengthen the number of weeks that all recipients must work—and shorten the number of weeks of benefits. More spending will be dedicated to retraining and apprenticeship programs. But these issues are not being addressed in the campaign be-

cause certain regions—especially Atlantic Canada—and certain industries, such as fishing, forestry and construction, are highly dependent on UI. “We cannot blame the victim: these guys are reacting rationally to a bunch of stupid incentives,” says Queen’s University economist Thomas Courchene. “But this system is unsustainable economically and untenable morally. It has taken about two generations to really affect the whole nature of society.”


This year Ottawa estimates that its child tax benefit credit will cost $5 billion: that is, without it, Ottawa would have collected an additional $5 billion in taxes. The tax credit replaced a patchwork of child benefits, including the family allowance, last January. It goes to low-income and middle-income families: those that earn $10,000 receive $2,540 this year; families that earn $50,000 receive $836. The credit is deducted from income taxes. If the family does not pay sufficient taxes, it receives the balance in cash. Few federal politicians discuss the credit in a recession—or at election time—because it represents a substantial transfer to lower-income Canadians. But if politicians want to ease the plight of Canada’s new poor, they will likely use the credit to funnel more funds to them.

Social programs are already changing and will almost surely continue to do so. Politicians who are campaigning for office may want to avoid this fact—but they are doing voters a disservice. Says Courchene: “Straight spending cuts in social policy won’t help us at all. We have got to make social policy into a positive force to enhance people’s skills—and our competitiveness.” Canadians cannot support and assist their governments in that task if no one tells them what is happening. □