Slow-growth fiscal reality bites Canadian health care

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Canada's health and finance ministers met prior to Christmas to discuss the next phase of health-funding transfers from the federal government to the provinces. After a decade during which transfers grew by 6 per cent annually, Ottawa's last offer was to increase them by 3.5 per cent a year. The offer would also provide an additional $11.5-billion in targeted funding over 10 years, focused in areas such as mental health and home care. However, no agreement was reached on a new overarching formula to determine federal funding levels, as a series of bilateral health funding agreements have become the substitute for a national agreement.

Why did the pan-Canadian negotiations fail to reach an agreement? Fundamentally, federal projections on available revenues did not line up with provincial expectations on transfers. Federal conditions on how specific funds would be used also complicated the negotiations. Regardless, a slow-growth fiscal reality is now biting in every Canadian jurisdiction, affecting health care and other priority programs. The prognosis is no better for the years ahead.

Government revenue growth is determined principally by income growth in the economy, which reflects the combination of real economic growth and inflation. As the Conference Board of Canada had warned for years, Canada's annual real growth potential has steadily dropped to below 2 per cent, down a full percentage point from a decade ago. Growth potential is even weaker in some provinces. Canada has been unable to reach even this modest growth rate in recent years, due to global turbulence, depressed commodity prices, limited productivity growth, and weak exports and private investment.

Meanwhile, Canadian inflation has been below the Bank of Canada's 2-per-cent target since the 2008-09 financial crisis. Low inflation combined with slow growth leads to a government revenue base that is growing much more slowly. The Conference Board expects nominal growth (real economic growth plus inflation) of only 3.4 per cent in 2017. Modest growth now and in the years ahead will constrain federal funding of many worthy programs.

The slow-growth reality bites especially hard on Canadian health-care spending. Health-care spending absorbs almost half of provincial budgets, crowding out other long-term priorities that are essential for a well-functioning economy and society. Following growth in health-care costs of nearly 6 per cent annually, many provinces are now stuck in a health-care spending trap.

It is now budget season. Federal and provincial finance ministers and their teams are working long hours in an effort to make their government's revenue projections and spending pressures add up to something the voting public will accept. The federal government shifted into fiscal deficit last spring and a stable public debt ratio was offered as the new fiscal anchor. A federal fiscal deficit in the range of $20-billion to $25-billion is now a likely outcome for 2016-17.

Maintaining a credible medium-term federal fiscal plan will be demanding. There will be limited spare federal cash available for existing programs, such as health care, or for new priorities. Increasing health transfers to the provinces in line with growth in the nominal-income economy is looking more and more like a realistic approach.

Among the provinces, British Columbia is balancing its provincial budget and received the highest scores in the Conference Board's report card on Canadian health-care performance. This results shows that provinces can maintain a healthy fiscal balance and a healthy population. Quebec has succeeded in balancing its books and is trying to slow health-care spending growth to just more than 4 per cent annually. But slower growth in federal transfers will place even more pressure on provincial governments to manage their health-care budgets prudently. They will need to seek out efficiency gains, find ways to boost productivity performance, share and scale up best practices, and innovate in the design and administration of their health-care systems.

A slow-growth fiscal reality is here in every Canadian jurisdiction, and health-care funding and delivery will not be spared. Provincial health-care system design and administration will have little choice but to respond to that reality.

Glen Hodgson is senior fellow at the Conference Board of Canada.