The real fiscal challenge lies ahead

One of the main reasons why Daulton McGuinty was thrilled with the federal government’s new approach to provincial funding is that the feds have agreed to move to a ‘per capita’ model for health and social transfers. McGuinty and most Ontario pundits and policy makers thought it was outrageous that places like New Brunswick got piles of new money with no new population while Ontario was adding hundreds of thousands of population each Census period.

In her recent column, Chantal Hebert touches on this particularly about Medicare. She writes:

The generous 10-year deal struck by prime minister Paul Martin and the premiers three years ago and upheld since by Stephen Harper has dampened the provincial momentum to reorganize the system along more efficient lines. Yet, health care remains the fiscal elephant in the room of most governments, shrinking their capacity to manoeuvre in other policy areas.

That is particularly the case of the have-not provinces. For now, they are still benefiting from the enhanced transfers that resulted from the Martin accord. Over the mid-term, though, the only provinces that can realistically expect a significant increase in federal health funding are the richer ones.

When the current federal-provincial funding arrangement for health runs out in seven years, it will be replaced by a per capita formula, with Ontario the main winner of the exercise.

Now, to put this in some form of perspective, in the 2000-2001 budget, the New Brunswick government received $401 million for the Canada Health and Social Transfer payments. By the 2007-2008 budget, New Brunswick received $731 million in CHST payments. That’s an increase of $331 million (remember this is not the hundreds of millions in new Equalization – this is just the CHST).

Over that same period, the population essentially didn’t change. We know from the 2001 Census that the population of New Brunswick eeked out fraction of one percent growth from 2001 to 2006 but we also know that from 1999-2001, the population declined slightly – so let’s call it a wash.

So, under the new thinking around transfers (not including Equalization), New Brunswick would have gotten zippo.

And this is certainly not an insignificant figure. It represents 6% of the entire provincial budget each year.

So, esssentially, what I am saying is that Bernard Lord and the gang got a free ride. While population stagnated and ‘own source’ revenue grew far slower than expenses, this was more than made up with significant increases not only to Equalization but also to the CHST.

And those days are almost over. Equalization will remain in place but the CHST for New Brunswick will flatline under the current model.

So, the government has a few choices.

1) it will need to significantly cut spending (which it won’t – the provincial budget in New Brunswick has increased similar to provinces with fast population growth in the past eight years) or;

2) find a way to generate more ‘own source’ revenue

which, to put it another way, is ‘self sufficiency’.

So, the provincial Liberals got it right. This is not about self sufficiency because it sounds nice. This is about recognizing the changing landscape and realizing that the days of the federal $$ tap turned to full blast is coming to an end. Not of fiscal grounds – the feds have more money now than ever – but on ideological grounds.

Now, it’s time to get cracking.