Health transfers: More on flat tires and etiquette

I discover, as I go over the year’s columns and blog posts, that I predicted all of this health-transfer business in April, at the height of the federal election campaign. The argument then was pretty close to the argument in Monday’s flat-tire federalism post; here’s the bit of my April column you should read if you’re only reading one:

Harper’s plan is to continue shrinking the federal government. It’s not a hidden agenda. He’s announced every part of it. Health care transfers will actually help. They’re just blank cheques to the provinces, good mostly for getting money out of Ottawa…
On the other end of the ledger, he’ll keep squeezing his revenues. That process began with the GST cuts after the 2006 election. It will continue with two policies Harper announced in this campaign’s first week. [Both, you'll recall, are to be introduced after the budget balances - pw] Income splitting will allow a higher-earning taxpayer to transfer part of his salary to a spouse for tax purposes—and cost $2.5 billion a year in foregone revenue. Doubling contribution room to tax-free savings accounts (TFSA) will cost even more. Economist Kevin Milligan has estimated a “revenue cost” of $6.6 billion a year once the TSFA increase is fully phased in.
Add the cost of those growing health transfers and the foregone revenue from Harper’s new tax promises, and you get more than $10 billion a year in reduced fiscal capacity for the federal government. And if Ottawa is locked into a few multi-year spending increases—on military equipment and prisons—there’s progressively less room for everything else. Economist Frances Woolley has said that to reach Harper’s projected savings without cutting defence, public safety or the Canada Revenue Agency, he’d need to cut everything else by one-third.
“Everything else” here includes departments like Environment, Fisheries and Oceans, Industry, Transports and Veterans Affairs.

The main obstacle to making my point comprehensible is all the garment-rending over the “cuts” in transfers from a 6% escalator to a nominal-GDP-plus-inflation escalator with a 3% floor. Tom Walkom is pretty sure that reduction from 6% increases to 4-ish or 5-ish per-cent increases will destroy everything. With John Geddes, I prefer to see it as a lot of money. 

Now. On to the whole unilateralism thing — the vexed dismay at news that the provinces weren’t allowed to make a counter-proposal to Flaherty’s proposed fiscal envelope. I’ve poked through about 35 years of transfer politics, and what emerges is a pretty robust trend: Ottawa never offers to negotiate when preparing to cut or limit transfers to the provinces. It does propose a negotiation when promising to increase transfers.

The reason isn’t quite obvious in either case, but it’s easy to understand in both. When increasing its investment, the federal government has usually sought greater control over health- and social-program outcomes; the increased federal investment becomes the leverage for increased federal control. When cutting, there’s nothing to negotiate, no leverage, and no reason to seek “permission” from a baker’s dozen of provincial and territorial governments, since they’ll never give permission anyway.

The first modern transfer system was Established Programs Financing in 1977, which included a clause that Ottawa could not change the terms of the transfer without provincial approval for five years. So when did Trudeau get around to unilaterally cutting the federal role? Literally as soon as he could — five years later, in 1982. He restricted the rate of growth again before he was done, and Brian Mulroney did so again, in 1986, and yet again after that. And Chrétien introduced actual cuts in the amount of transfers with his 1995 budget.

That’s more than a decade of reduced growth and actual cuts, always unilaterally imposed by Ottawa — and each of those cuts, incidentally, more draconian than what Flaherty tabled on Monday. (They called for transfer growth to lag behind GDP growth by set amounts. He is planning for transfer growths to stay just ahead of GDP growth.)

Things change after that, because Chrétien seeks to get Ottawa back into the health-funding game, tentatively in 2000, more vigorously in 2003. Paul Martin goes whole hog in 2004. Every time, they invite the premiers to Ottawa — not out of the goodness of their hearts, but because each time, Chrétien and Martin seek to impose conditions on their increased new transfers.

Harper’s handling of the file represents a middle case. After the restraint and cuts of the 1980s and 1990s, and the very rapid growth in transfers under a Paul Martin who was eager to “fix health care for a generation,” we’re entering an era of more modest growth. But even that rate of transfer growth will represent continued pressure on all other federal spending. And it will join a host of other long-term spending and taxing commitments that will add more pressure. Hence flat-tire federalism.

Original Article
Source: Maclean's