Silvana Gomes is a PhD student in Public Administration at the University of Ottawa. She holds a Master’s degree in Political Science and a Bachelor of Laws from Fluminense Federal University (Brazil). Her research interests include federalism, multi-level governance, digital government, and innovation in the public sector.
Balance, fairness, and equality are the key ideas behind the Canadian transfer system, which is structured around three main components: the Canada Health Transfer (CHT), the Canada Social Transfer (CST), and the Equalization program. These components are the building blocks of an intergovernmental framework that governs the federal-provincial flow of resources that supports funding for many policies.
Between April 21-23, 2021, some of the most prominent experts in the field gathered in an online conference that was organized by the Centre on Governance at the University of Ottawa in collaboration with other institutions to discuss major issues on fiscal federalism in Canada. In a panel dedicated to the components of the transfer system, Robin Boadway (Queen’s University), Michael Prince (University of Victoria), Jennifer Robson (Carleton University) and Marcelin Joanis (Polytechnique Montréal) illuminated important questions to understand the past, present, and future of the system.
Beyond Healthcare: The Three Major Roles of the CHT
Healthcare is one of the most pressing issues in governmental spending, as the current pandemic has clearly shown. Before the Covid-19 outbreak, health expenditures already represented a significant share of public spending in Canada: Not only does the CHT constitute the most robust program out of the three components of the transfer system, but, as Robin Boadway indicated, it also constitutes a significant share of federal expenditures and provincial health spending.
The importance of the CHT goes beyond the provision of funds for the health sector. In fact, Boadway attaches three major roles to the CHT: providing support for provincial health spending, contributing to vertical fiscal balance¸ and contributing to horizontal fiscal balance. While the first role may be the most evident of them, some questions deserve further attention. For instance, expenditure levels on health care outpace the resources that are available to fund them. The amounts that are transferred through the CHT and provincially-generated revenues can hardly keep pace with the increasing costs of health services, which are placed under even greater pressure amid the demands to expand provincial health coverage.
Along with this mismatch between expenditure and revenue, federal transfers have been declining as a share of provincial revenues over the past decades. Moreover, the demographic dynamics of an aging Canadian population adds further challenges to the health system.
These facts underscore the importance of the CHT to promote both vertical and horizontal fiscal balance. On the vertical side, two aspects stand out: the limited tax room at the provincial level, and the fact that the amount of transfers is determined by GDP growth instead of expenditure rates creates a gap in the resources that are handed over to provinces, since health expenses usually exceed GDP growth. When it comes to horizontal fiscal balance, the CHT plays a major role in propelling common goals and harmonization across provinces.
The Prominence of Early Childhood Education and Childcare Within the CST
The CST supports several programs that build up a safety net that is crucial to ensure the delivery of high-quality services and to protect the most vulnerable citizens. However, the distribution of resources across social policies is uneven. Michael Prince noted that investments in social assistance have been overshadowed by those in post-secondary education and early childhood development. This emphasis on childhood policies is linked to its relevance not only from an educational perspective, but also with an eye to promoting gender equality. Women – mainly those with children – have been particularly affected by the job market downturns amid the Covid-19 pandemic, often leaving their jobs and finding it more difficult to rejoin the workforce.
Early childhood education and childcare have recently gained new impetus with the federal budget that was presented in late-April 2021. The federal plan to invest $30 billion over the next 5 years on the creation of a Canada-wide system of childcare spurred great optimism, given its potential to provide financial relief for households in the face of significant costs with childcare, and to trigger positive economic impacts in the long-run.
Even if they may sound like good news, turning these provisions into concrete policies is something that depends on the ability of federal and provincial governments to reach agreements on the subject. As Minister of Finance Chrystia Freeland stated, “[w]e are building something that, of necessity, must be constructed collaboratively, and for the long-term”.
Building such agreements, however, is not an easy task. As Jennifer Robson emphasized in her intervention, provincial claims for flexibility and respect for jurisdictional boundaries may clash with the conditions that advocates and federal policymakers may seek to implement. Besides, the different expenditure reports across provinces are an obstacle to fostering transparency and cross-fertilization of successful practices.
Equalization and the Issue of Predictability
Equalization is an important component of the transfer system that is anchored in the idea that citizens across Canadian provinces should enjoy comparable levels of public services. To enable this equitable approach, the federal government transfers a certain amount to less prosperous provinces based on a representative tax system that is anchored in their fiscal capacity. Therefore, equalization is intertwined not only with equality, but also with the promotion of horizontal fiscal balance and decentralization.
However, these unconditional transfers do not come without pitfalls. For receiving provinces, predictability has been a long-known issue. As Marcelin Joanis pointed out, the Québec’s Commission on Fiscal Imbalance (set up in 2001) – known as the Séguin Commission –produced a thorough report that addressed the sources of uncertainty and unpredictability of equalization payments.
The formula that is deployed to determine such payments is commonly deemed as a black box that undermines the capacity of provinces to make accurate forecasts. This lack of transparency is worsened by a two-fold problem: the intricacies of rules themselves and sometimes unexpected technical changes. Coupled with the dynamics of business cycles and economic scenarios, these factors lead to a high level of variation in equalization payments that can affect the design and implementation of provincial budgets, especially amid the growing adoption of pluriannual fiscal planning.
Many years later, most remarks made by the Séguin Commission’s 2002 report still hold true. In an opinion on the 2018 pre-election report, Québec’s auditor general underscored that while other federal transfers could be reasonably forecast, resources stemming from equalization were instilled with a high degree of uncertainty due to the intrinsic complexity of the program.
What Lies Ahead for the Canadian Transfer System?
The Canadian transfer system has been and will continue to be a bulwark of fiscal balance and equality. The panelists that joined the Forum on Fiscal Federalism table on its components delivered a core message: it is necessary to push intergovernmental cooperation forward.
Throughout the presentations, it became clear that there is a mismatch between increasing expenses on the provinces’ side, and their limited capacity to raise revenues and borrow money. Two complementary strategies could pave the way to overcome this stalemate: engaging provinces in decisions about federal transfers and encouraging interprovincial exchanges to harness the potential for experimentation and learning that federal arrangements enable.
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Special Series: Fiscal Federalism in Canada
This article is part of a special series of reflections on contemporary Canadian fiscal federalism. The pieces in this series are inspired by the discussion and debate at the April 2021 Fiscal Federalism in Canada Conference, organized the University of Ottawa Centre on Governance in partnership with the Forum of Federations.