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.
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.
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
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.
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
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
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: