Premiers say Ottawa is shortchanging them on health care, but their complaints aren’t based on reality

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Premiers are complaining, once more, that Ottawa is shortchanging them on paying for health care.

In Victoria this week, the premiers reiterated their demand that the federal government increase its cash contribution to 35 per cent of health care costs from 22 per cent, a demand that comes with a $28-billion price tag.

For much of the past decade, that complaint about federal parsimony hasn’t had much basis in reality. The provinces were constraining health care budgets, while federal transfers rose more quickly, gradually increasing Ottawa’s share of expenditures.

But that trend is starting to reverse as provinces ramp up health care budgets in the wake of the pandemic, with the possibility of the federal share of health care spending – or at least the share represented by the Canada Health Transfer, or CHT – shrinking by 2027.

As the chart below shows, the CHT accounted for a smaller share of national health spending in 2022 than it has since 2014, apparently a validation of the provinces’ argument that Ottawa is not paying its fair share.

Like the chart, the premiers focus their critiques on the CHT, which rose to $45.2-billion for the current fiscal year. But in doing so, they ignore billions of dollars in other kinds of health-related payments that Ottawa regularly makes each year, and billions more that the federal government sent to the provinces during the pandemic.

Christopher Kuchciak, manager of national health expenditures at the Canadian Institute for Health Information, said the CHT is just “one bucket” of health care funding that flows into provincial revenues. (CIHI, the authoritative source for health care funding data, does not attempt to estimate the overall federal share of health care spending.)

For a start, there were a number of time-limited federal programs to bolster public health during the pandemic. Ottawa also has its own direct health care obligations, for Indigenous people, the military and the Royal Canadian Mounted Police.

More significant, however, is the exclusion of equalization payments sent to several provinces, amounting to $21.9-billion in the current fiscal year. That program is explicitly designed to help equalization-receiving provinces with the cost of services such as health care, although payments are not compartmentalized.

More significant still is the exclusion of the tax capacity that Ottawa handed over to the provinces nearly five decades ago. In 1977, Ottawa reduced its personal and corporate income-tax rates as part of a funding agreement for health care and postsecondary education, with provinces increasing their taxes by a like amount.

Those tax points are worth nearly half as much as the cash provided by the CHT, according to a recent Canadian Press report. CP, citing federal Finance officials, said the tax points were worth $20.9-billion in fiscal 2022. Including the value of the tax points, plus COVID-related programs, would push Ottawa’s share of health-care spending in 2022 to 39.8 per cent – well in excess of the 35-per-cent funding level sought by the premiers. Equalization expenditures, not part of that calculation, would increase Ottawa’s share of national health care expenditures even more.

Still, there’s no doubt that health care budgets in most provinces are rising fast – and more quickly than the increase of the CHT, which is based on a three-year moving average of the growth in nominal gross domestic product.

As this second chart shows, six out of 10 provinces are projecting that their health care spending will rise faster than the CHT. (Of those six provinces, four receive equalization payments.) Those figures are based on provincial budgets, and aren’t as precise as those that CIHI will eventually issue.)

Those increases appear to be a return to the high growth rates in health care spending of two decades ago, and a reversal of the relative austerity of the 2010s.

Mr. Kuchciak said the provinces were increasing health care spending by 7 per cent a year in the 2000s, when economic growth handed surpluses to governments across the country. In the wake of the financial crisis, however, those surpluses disappeared. Budget restraint was the order of the day, and growth in health care spending decelerated sharply, typically to between 2 per cent and 4 per cent a year, he said.

During most of the 2010s, cash transfers from Ottawa were growing at a legislated rate of 6 per cent a year, meaning that the federal government’s share of health care expenditures gradually rose.

Spending priorities are shifting again, Mr. Kuchciak said, with most provinces now abandoning the relative restraint of the previous decade. Indeed, provincial health care spending will increase on average by 5.6 per cent in the current fiscal year.

At the same time, those 6-per-cent annual increases have disappeared. Instead, as of fiscal 2018, the annual increase in the CHT has been based on the pace of expansion of nominal GDP, with a 3-per-cent floor. As the chart below shows, that has led to slower growth in those cash transfers.

The next couple of fiscal years are an exception, reflecting the high nominal growth in the Canadian economy in 2022. But those forecasts from this spring’s federal budget don’t fully incorporate current high levels of inflation – which would tend to increase CHT growth rates – or the possibility of a contraction in economic growth, which would pull in the opposite direction.

And after that, slower economic growth through the decade will gradually pare down the rate of increase in the CHT to prepandemic levels; the projected increase of 3.8 per cent in 2027 is in line with the 3.9 per cent increase in 2019.

Maria Lily Shaw, an economist with the Montreal Economic Institute, said the debate over Ottawa’s share of health care spending misses the mark. The discussion should centre on how to spend current budgets more effectively rather than “throwing more money at the problem,” she said.

The health care system’s problems are more structural than fiscal, she said, citing the lack of digital technologies as an example of potential cost efficiencies being ignored.

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