New Transfer System Introduced in the 1995 Federal Budget

Since the early 1980s, the primary response of the federal government to its deficit and debt problem has been to reduce the growth of cash transfer payments to provinces.

The 1995 Federal Budget accelerated this process, with significant cuts to the major social program transfers. It did this while combining the two major existing social transfers - the Canada Assistance Plan (CAP) and the Established Programs Financing (EPF) transfers - into a single new block transfer called the Canada Health and Social Transfer (CHST).

The 1995 budget set out each province's 1996/97 CHST entitlement. It also set a global total for 1997/98 and indicated that a further federal decision on transfer amounts and allocation would follow discussions with provinces.

The 1996 Federal Budget Changes

The 1996 budget clarified the 1995 changes and announced federal CHST intentions for the years to 2002/03. Total CHST cash transfers are shown in Chart Fl. Compared to 1995/96 funding levels, federal funding for all provinces' social programs will be reduced by $3.6 billion in 1996/97 and a further $2.6 billion in 1997/98.

Chart F1

Impact on British Columbia

Chart F2 illustrates the negative impact of the CHST arrangement on British Columbia, projected to the year 2002/03.

In 1996/97, the province's major cash transfers will be $435 million less than the province received in 1995/96. The 1997/98 entitlement will be $731 million less - a reduction of 33 per cent over the two years.

Chart F2

The "Cap on CAP"

Under the original Canada Assistance Plan design, the federal government funded 50 per cent of eligible provincial income assistance costs. The program remained largely unchanged until 1990, when the federal government began restricting the annual growth of entitlements to the three "have" provinces not receiving equalization.

This action had little justification. A province's equalization status reflects the relative size of its revenue base; this bears little or no relationship to the income security needs of its population - needs which CAP was originally designed to meet.

While CAP funded 50 per cent of social assistance costs in most provinces, the proportion fell in British Columbia to 32 per cent by 1995/96. The federal government had promised to address this discrepancy, but the adjustment period announced in the 1996 Federal Budget is lengthy.

Moreover, the funding inequity will only be partially eliminated. In 2002/03, per capita CHST funding will still remain considerably lower for British Columbia, Ontario and Alberta than it will for the equalization receiving provinces.

Collapsing Federal Partnership

The offloading totals presented thus far do not include the ongoing effects of federal transfer restrictions prior to 1995. When these are combined with the 1996 federal budget measures, the federal government's long drift away from its social program funding partnership with the provinces is evident.

Chart F3 reveals that cash transfers once paid for a third of British Columbia health care, post-secondary education and income assistance expenditures. This share is projected to fall below 10 per cent by the turn of the century.

While they are not dealt with in this report, most smaller federal transfers to provinces have also been subject to significant reductions, or outright elimination, during the past several years. This process continues unabated.

Chart F3

Most Burden of Federal Restraint Borne by Provinces

In its deficit reduction efforts, the federal government is placing a far greater burden on the provinces than on itself.

Chart F4 compares the annual change in federal program spending (less transfers) to rates of change in spending on the CHST in 1996/97 and 1997/98. It reveals that spending on social transfers is poised to decline much more steeply than other federal program spending.

Chart F4

Implications for the Future

The federal government has announced its intention to begin escalating the value of the total CHST contribution at the turn of the century, although the escalator will remain below GDP growth. This signifies a federal commitment to continue funding social programs, but only at the minimum level that will enable it to have some ongoing policy influence.

This action highlights a weakness in the transfer system which has become only too apparent: any guarantee of stability for tomorrow's greatly diminished level of transfers will exist only at the pleasure of the federal government. Unfortunately, recent years have conclusively demonstrated that a federal government in fiscal difficulty cannot be counted on to respect the priority the Canadian people have assigned to the major social programs administered by the provinces. Nor can a way be found to bind future federal governments to maintain a "guaranteed" cash transfer. If the federal government's fiscal recovery plan falls behind schedule, transfer payments to the provinces will likely be the first casualty.

This insecurity of transfers calls into question the legitimacy of the federal spending power as it is being currently exercised. This power is not stated explicitly anywhere in the Constitution. It has flowed from the superior revenue raising capacity provided to the federal government by tax sharing arrangements imposed on the provinces in the 1940s. The spending power has enabled the federal government to attach conditions to its grants. By so doing, it has been able to regulate programs through fiscal means which it is constitutionally prohibited from regulating through legislative means.

Until recent years, the exercise of the spending power - while occasionally challenged on constitutional. grounds - has served the purpose of giving Canadians coast-to-coast access to public programs of reasonable cornparability in areas of provincial jurisdiction. Unfortunately, this advantage of the spending power has now been undermined by its chief drawback - a very weak federal accountability, which the federal government has exploited in its massive funding withdrawal from major social programs. It is no coincidence that federal programs for which the federal government is directly accountable have over the years been given much more protection from restraint measures.

In short, any national effort to revitalize the Canadian federation should involve a reconsideration of the spending power as part of a general reform of federal-provincial fiscal relations. The challenge will be twofold: