Ministry of Finance and Corporate Relations Joy K. MacPhail, Minister	This electronic version is for informational purposes only. The printed version remains the official version.

Report F:
BRITISH COLUMBIA’S FINANCIAL RELATIONS
WITH THE FEDERAL GOVERNMENT:
PROGRESS AND CONTINUING CHALLENGES

NEW FEDERAL FUNDING FOR HEALTH CARE

In its 1999 budget, the federal government responded positively to long-standing requests by provinces to devote a significant portion of its budgetary surplus to Canada's number one programming priority: the health care system. Through its increases to the Canada Health and Social Transfer (CHST)¹, the federal government is addressing two major federal-provincial issues.

The first is that years of restrictions and reductions to the CHST (and its predecessor transfers) had greatly reduced the federal government's significance as a contributor to provincial programming (see Chart F1).

	CHART F1 FEDERAL CONTRIBUTION TO B.C.’S SOCIAL PROGRAMS

A consequence has been to increase the onus placed on the provinces to continue delivering key social programs, like health care, at the high standard expected by Canadians. Chart F2 shows that British Columbia has exceeded other provinces in its commitment to social programs². However, there has been a price to pay both in terms of support for non-social programming and in terms of increased debt.

	CHART F2 REAL PER CAPITA TOTAL SOCIAL SPENDING

Chart F3 shows how increases to the health care component of the basic CHST announced with the 1999 federal budget will partially reverse recent declines in federal transfers.

Additionally, the federal government is transferring to provinces a one-time CHST supplement of $3.5 billion which provinces will be able to access as needed over a three year period beginning in 1999/00 (British Columbia's share of this supplement is $471 million).

However, it should be noted that the level of transfer support for all provinces was cut by $6.2 billion since 1994/95. When population growth and inflation are taken into account, it is unlikely that CHST transfers for British Columbia in the year 2002/03 will reach 1994/95 levels.

The second major federal-provincial issue related to the CHST was that this transfer had incorporated a 1990 mechanism from the Canada Assistance Plan³ which had the effect of restricting funding to provinces not in receipt of Equalization⁴ (British Columbia, Alberta and Ontario). By 1998/99, the maximum difference in the CHST cash transfer — from the province with the highest transfer to the one with the lowest — was close to $200 per capita.

	CHART F3 THE 1999 FEDERAL BUDGET’S INCREASE IN CHST CASH — ALL PROVINCES

The 1999 federal budget is changing the CHST to produce an equal per capita result by 2001/02. However, provinces will not be receiving the same amount of CHST cash on a per capita basis because the federal government will continue to include the current value of historically-transferred income tax room as part of the CHST "transfer". It is this combined cash and tax point "transfer" that is to be allocated on an equal per capita basis. Some provinces have richer income tax bases than others and the cash portion of the transfer, which is a residual amount, is relatively smaller for these provinces.

 
FAIRNESS: CONTINUING CHALLENGES

A CHST which is more adequate and more fairly distributed indicates a federal policy change toward improved financial relations with provinces. The federal government should continue this positive direction with respect to other aspects of the federal-provincial fiscal relationship.

In particular, attention should be turned to ameliorating a long-standing situation caused by the way the federal government allocates its expenditures, programs and benefits across Canada.

Inter-regional differences in federal expenditures are appropriate only where these differences flow from legitimate program objectives. For example, it is appropriate for the allocation of funding for seniors' public pensions to be weighted toward those provinces with higher proportions of seniors.

Chart F4 illustrates the wide disparities in federal spending on goods and services. One of the main causes of inadequate spending in British Columbia is the scarcity of major federal government operations here.

	CHART F4 DISPARITIES IN FEDERAL SPENDING ON GOODS AND SERVICES — 1996

The distorted locational distribution of goods and services spending is mirrored in the distribution of benefits from some more specific federal programs. Chart F5 presents three of the more prominent examples of the level of support for programming in British Columbia⁵.

• Culture
  For 1996/97, the federal government spent $2.8 billion on culture. The allocation to British Columbia was $147 million, or 5.3 per cent of federal expenditures. British Columbia ranked last among provinces with a federal expenditure of just $38 per capita.

• Highways
  For 1997/98, British Columbia was allocated $6.1 million, or 2.3 per cent of the $271 million in available federal funds. Based on its population share, British Columbia should have received $35 million.

• Science and Technology
  British Columbia received considerably less than its 13 per cent population share of 1996/97 science and technology spending (both federal in-house and federally supported).

	CHART F5 B.C. RECEIVES LESS THAN ITS POPULATION SHARE OF MANY FEDERAL EXPENDITURES

 
British Columbia's Negative Fiscal Flow in Support of Federal Operations and the Low Return to B.C. Taxpayers

Chart F6 illustrates the reduced federal spending share and increased federal tax revenues in British Columbia. These two factors have produced a steadily increasing net "fiscal flow" away from this province — a flow that grew from $3.8 billion in 1992 to $5.0 billion in 1996⁶.

Some of this fiscal flow is understandable. One part reflects the federal government's heavy reliance on personal income taxes; this generates a relatively higher proportion of revenues from provinces such as British Columbia with higher-than-average personal incomes. Another portion is attributable to the federal Equalization program. However, excluding both the effect of the larger-than-proportionate tax contribution from this province and the share of Equalization costs paid by British Columbia taxpayers, there remains a net outflow of almost $3 billion to support federal operations.

The distorted federal allocation of program benefits is an important reason why British Columbians' return on their contribution of tax dollars to the federal government has been very low. Chart F7 shows that this return is only about 58 cents per dollar — third lowest in the country⁷.

	CHART F6 B.C.’s RISING CONTRIBUTION TO FEDERAL OPERATIONS

	CHART F7 RETURN FOR FEDERAL TAX DOLLARS, 1997/98

 
DIRECTIONS FOR THE FUTURE

New Federal Fiscal Potential

The federal government greatly benefits from both the two-thirds share of personal income tax revenues it has gained over the years, and its largely successful efforts to off-load programs with high cost pressures.

• 1998/99 program spending was 12.6 per cent of GDP and is expected to decline further, to its lowest level in 50 years.

• Budgetary revenues have been rising quickly, due largely to growth in personal income tax revenue.

Chart F8 illustrates these trends.

	CHART F8 EXPANDING FEDERAL FISCAL POTENTIAL

While much of this wide gap between revenues and program expenditures is currently used by the federal government to cover debt service charges, there is a steadily increasing portion that represents discretionary federal fiscal resources. Some of these resources may be needed for tax and debt reduction, but there is also ample scope to:

• build on the new funding for health care in the 1999 federal budget and secure adequate future funding for Canada's most valued social programs; and

• address federal spending fairness issues in the federation.

 
Possibilities Afforded by the New Social Union Framework

The future evolution of the fiscal relations between British Columbia and the rest of the federation will be influenced not only by the changing federal fiscal situation but also by the Social Union Framework Agreement concluded on February 4, 1999. This agreement could ease the potential for federal-provincial confrontation over spending issues.

The Social Union Framework Agreement will enable the federal government to play a constructive role in the funding of new Canada-wide initiatives through transfers to provinces and territories for health care, post-secondary education, social assistance and other social services. The agreement stipulates that:

• the federal government must first work with provincial and territorial governments to identify priorities, objectives, and an accountability framework;

• the support of a majority of provinces will be required to implement new programs funded by transfers; and

• participating provinces and territories will have to respect the objectives and accountability framework developed for a new program, but they will be able to:
  • determine the detailed program design best suited to their own needs and circumstances; and
  • reinvest the funding in a related priority area if they already have a program meeting the objectives of the Canada-wide initiative.

With respect to new Canada-wide initiatives funded through direct transfers to individuals or organizations, the agreement contains provisions requiring the federal government to give provinces and territories at least three months' notice of its intentions, and to consult them.

 
CONCLUSION

A measure of tension in the Canadian federation is created by the federal government's having access to the most robust revenue sources, while many of the programs and benefits with the highest cost pressures are provided by provinces.

Accordingly, an adequate balance needs to be found between provincial programming responsibilities and provinces' access to the revenue resources — tax room or federal transfers — required for adequate funding. Where transfers to provinces are used as the main balancing mechanism, there is a need to handle allocations in such a way that provinces have a sense of fair treatment. This need for fairness is also applicable to federal spending in general.

It is hoped that the positive steps taken by the federal government in its 1999 budget to increase transfers for health care reflect a federal direction which will continue and expand, so that distributional fairness and adequacy become increasingly salient federal goals in relation to both transfers to provinces and other federal spending.

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