Curbing health transfers could cripple provinces, watchdog says

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Provincial debt loads are on track to soar over the long term in the wake of Ottawa's decision to curb the rate of growth in health transfers, the Parliamentary Budget Officer warns in a new report.

While Ottawa's books will improve, Kevin Page concludes Canada's overall government debt is not sustainable for the long term in the face of economic and demographic challenges.

The Conservative government's decision in December to bring in a new provincial-territorial transfer formula means Ottawa's finances are now sustainable over the long term, says Mr. Page, who has long warned Ottawa that it faced a structural deficit problem.

However his latest report warns that by scaling back the rate of growth in transfers, the debt burden will shift to already troubled provincial governments.

Mr. Page's assessment comes in advance of next week's meeting of the Council of the Federation in Victoria, where provincial and territorial premiers will gather for the first time since Prime Minister Stephen Harper's government caught them off guard with a new formula for federal health and social transfers.

In December, Finance Minister Jim Flaherty announced that federal health transfers would continue to increase at 6 per cent a year until 2016-17, but would then switch to a moving average based on nominal gross domestic product growth until 2024. Mr. Flaherty also announced that the federal social transfer to the provinces would continue to increase at 3 per cent a year.

The PBO report estimates that the new health formula – which accounts for economic growth and inflation – will cause transfers to grow at 3.9 per cent annually from 2017-18 to 2024-25. In contrast, the watchdog projects provincial and territorial health spending will grow at 5.1 per cent over the same period. The PBO report also estimates what will happen if the formula is extended beyond 2024 and health spending growth continues to outpace transfer growth by a difference of 5.3 per cent to 3.8 per cent for the next 25 years.

Chisholm Pothier, a spokesman for Mr. Flaherty, disputed the PBO's claim that provincial and territorial health spending will grow faster than the growth in federal transfers.

"Independent observers recognize our long-term record investment as reasonable and necessary to preserve Canada's health system," he wrote in an email. "Now is the time for provinces and territories to focus on what really matters: delivering high-quality and timely health care to Canadians."

The budget officer states provincial-territorial net debt relative to GDP "is projected to increase substantially over the long term." While the ratio stood at 20 per cent of GDP in 2010-11, the PBO expects that will now climb to over 125 per cent in 2050-51 and to over 480 per cent by 2085-86.

Closing this gap, according to the PBO, would require provinces and territories to take a combination of actions such as higher taxes or lower spending that would amount to $49-billion in 2011-12 - an amount that will grow over time in line with nominal GDP - in order for Canada's finances to be sustainable.

The PBO report also analyzes the impact of Ottawa's new transfer arrangement in terms of what it will mean for Ottawa's contribution toward overall health spending. In 2010-11, the federal share of health spending was 20.4 per cent. The PBO projects the federal share will average 18.6 per cent from 2011-12 to 2035-36, then 13.8 per cent over the following 25 years and 11.9 per cent over the next 25 years.

Historically, the report notes that federal health cash transfers (not including tax points) were 36.1 per cent of provincial territorial health spending from 1968-69 to 1976-77. Federal cash transfers dropped sharply during the deep budget cuts of the Liberal government in the mid-1990s, hitting 16.3 per cent in 1995-96 and reaching an all-time low of 9.8 per cent in 1998-99.

In 2004, the Liberal government approved a 10 year plan to increase health transfers by six per cent a year. The Conservative government's December announcement covers the 10 year period from 2013-14 to 2024-25.