Overview and Summary

The 1995 federal budget announced the federal intention to introduce a single new block transfer, called the Canada Social Transfer (CST), that will replace the two existing major social transfers which fund health care, post-secondary education and social assistance.

The CST has been designed to effect a considerable reduction in provincial social transfer revenue. In 1996/97 and 1997/98, the province will receive $457 and $801 million less, respectively, than in 1994/95. The $801 million shortfall represents a 36 per cent reduction from 1994/95. These amounts build upon earlier federal transfer restrictions.

The cash transfers once paid for about a third of British Columbia health care, post-secondary education and income assistance expenditures. This will fall to 11 per cent in 1997/98.

Federal spending on social transfers to provinces will decline much more steeply than federal program spending when the actual cash transfers are considered.

The Government of British Columbia has not attempted to make local governments share in the added burden from the federal government.

It appears that the federal government wishes to drastically diminish its social policy funding relationship with the provinces. This poses difficult questions for British Columbia:


In the 1960s and 1970s, the provinces and the federal government worked together to create a comprehensive social network of jointly-funded health care, post-secondary education and social assistance programs. The federal government committed to sharing approximately half the cost of these programs, which were administered by the provinces, through transfer payments.

This system worked well until the early 1980s. Unfortunately, the federal fiscal position began to deteriorate rapidly at that time and the federal government reacted to its fiscal difficulties with the first of what would become a series of unilateral restrictions applied to its transfer payments.

This course of action was chosen even though social program costs (whether provincial or federal) were not the source of federal fiscal difficulties -- a reality recently acknowledged by the federal government. Rather, the problem was created by a persistent federal failure over many years to balance its budgets, creating a need to borrow during a period when the rate of interest was high in real terms. The result was a vicious circle of high debt servicing costs, budgetary deficits and ever increasing federal debt. However, even though they have not been implicated in creating the federal fiscal problems, the provinces have borne the brunt of the main federal response to its fiscal difficulties: offloading.


Federal transfer restrictions and reductions are called "offloading" because the federal portion of the "load" of financing health care, post-secondary education and social assistance programs is, in effect, transferred from the federal budget to provincial budgets. Because the provinces directly administer the major social programs, they are responsible for ensuring that specific social needs are adequately met. If there are fewer federal dollars to assist in providing this programming, provinces have to make difficult choices: reduce programming standards and benefit levels; reallocate their spending; raise revenues through increased taxation; or incur additional debt.

[ Chart G1 -- Estimate of Major Federal Cash Transfers for Social Programs -- All Provinces ]

Offloading Measures Initiated in the 1995 Federal Budget

The 1995 federal budget announced the latest in a long series of federal offloading measures. Beginning in 1996/97, the federal government intends that a single new block transfer called the Canada Social Transfer (CST) will replace two existing transfers, currently funded under the Canada Assistance Plan (CAP) and the Established Programs Financing (EPF) arrangement. EPF and CAP have funded provincial health care, post-secondary education and income assistance programs for many years.

As Chart G1 illustrates, the CST has been designed to effect a considerable reduction in provincial social transfer revenue. When combined with the impacts of transfer restrictions introduced in the 1994 federal budget (which have yet to take effect), federal funding for all provinces' social programs will be reduced by approximately $4 billion in 1996/97 and $6 billion in 1997/98. The magnitude of these reductions is much larger than had been suggested by the federal government prior to its budget.

Impact on British Columbia

Chart G2 illustrates the negative impact of the CST arrangement on British Columbia.

In 1996/97, the province's major cash transfers will be $457 million less than the province received in 1994/95. The 1997/98 entitlement will be $801 million less -- a reduction of 36 per cent from 1994/95.

[ Chart G2 -- Reduction in Federal Cash Transfers -- B.C. ]

Impact Combined with Previous Transfer Restrictions

The offloading totals calculated thus far build upon federal transfer restrictions introduced prior to 1994. Previous federal governments applied restrictions to provincial transfers beginning in 1982.

Chart G3 shows the considerable effect of all federal restraints, including those introduced in the 1994 and 1995 budgets, and illustrates the huge decline in the federal funding commitment to major social programs administered by the province.

[ Chart G3 -- Major Cash Transfers to B.C. Compared to Original "No Offloading" Amounts ]

If the transfer programs had not been altered from their original design (i.e., if the federal offloading measures since 1982 had not been imposed), British Columbia's major transfer entitlements would be higher by $1.5 billion in 1994/95, $1.7 billion in 1995/96, $2.4 billion in 1996/97 and $2.9 billion in 1997/98, than projected under current federal restraints(1).

It should be emphasized again that the cost to the federal government of these transfers -- as originally designed -- should not have provided a justification for the high level of restraint that was imposed over the years. The largest transfer, EPF, could by formula grow no faster than the growth of nominal gross national product. The social assistance expenditures that were cost shared under the Canada Assistance Plan were growing more quickly than this, especially as the 1980s progressed. However, a considerable portion of the greater need for social assistance resulted from federal economic and monetary policies as the economy made adjustments to new trading patterns and very high real interest rates.

Declining Federal Partnership

Chart G4 shows, from another perspective, that the federal government's 1995 budget measures have escalated the long federal drift away from its social program funding partnership with the provinces.

The cash transfers once paid for about a third of British Columbia's health care, post-secondary education and income assistance expenditures.

This percentage share will fall to 11 per cent in 1997/98 and will very likely continue falling thereafter.

[ Chart G4 -- Declining Federal Cash Transfers -- B.C. ]

Undue Federal Restraint Emphasis on Provinces

The federal government claimed in its 1995 budget that it is not placing a greater burden on the provinces than it is on itself.

However, when one looks at estimated changes to the social cash transfers -- the only real social transfers for provinces -- this picture changes dramatically.

Chart G5 compares federal projections of rates of change in federal spending on purely federal programs to rates of change in spending on major social transfers (EPF and CAP or the Canada Social Transfer). It reveals that spending on social transfers is poised to decline much more steeply than federal program spending.

[ Chart G5 -- Change to Major Social Cash Transfers (EPF/CAP or Canada Social Transfer) for all Provinces Compared to Other Federal Spending ]

Calculations which show only a small year-to-year decrease in federal transfers for social programs can only be made through the use of an accounting anomaly: counting each year as a federal "transfer" the notional value of a federal vacating of tax room two decades ago. The federal government's 1977/78 arrangement for the largest transfer -- EPF -- was not that of a typical federal cash transfer. Rather, the federal "contribution" comprised two elements: a tax point transfer and a residual amount to be paid in cash.

Ever since that time, the federal government has counted the notional current year value of these tax points as part of its "contribution" to EPF. This accounting is questionable:

[ Chart G6 -- Recapturing the Tax Point Transfer ]

Federal Offloading Not Mirrored in British Columbia Treatment of Local Governments

The weak public accountability of federal-provincial transfers has made it inviting for the federal government to pass on its fiscal troubles to the provinces. Chart G7 reveals that a parallel situation does not exist with regard to provincial-local relations in British Columbia. In contrast to the stagnant or declining levels of transfers received from the federal government, British Columbia's operating and capital contributions to local governments have been maintained at healthy levels.

[ Chart G7 -- Comparing Change in Federal-B.C. Cash Transfers With B.C. Grants to Municipalities & School Districts ]


The federal government is intent on forcing the provinces to bear an unduly large share of the spending cuts announced in its 1995 budget. What aggravates this problem is that these cuts are being superimposed on top of a decade of progressively tighter restrictions applied to transfers. Further, the adverse fiscal impact of federal offloading on the provinces threatens to grow significantly in the coming years following the introduction of the CST block fund arrangement in 1996/97.

British Columbia can only conclude that the federal government wishes to withdraw from its social policy funding partnership with the provinces -- a partnership that over the years has constructed a social programming mix that is highly appreciated at home and envied abroad. The breakdown of this funding partnership poses difficult questions for British Columbia:

(1) If federal restrictions to smaller transfer programs and the interest cost associated with previous offloading are added, the total negative fiscal impact of federal offloading on British Columbia rises to $2.4 billion in 1994/95, $3.2 billion in 1995/96, $4.0 billion in 1996/97 and $4.9 billion in 1997/98.

Budget '95 (Province of B.C.)

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