Prime Minister Justin Trudeau, with federal cabinet ministers, takes part in a news conference after touring a medical training facility in Ottawa on Feb. 7.BLAIR GABLE/Reuters
The multibillion-dollar health proposal announced this week by Prime Minister Justin Trudeau is much smaller than expected and won’t throw federal finances off track, say economists who have reviewed the plan.
While premiers and medical experts debate the potential impact on Canada’s health system, the scale of the funding is being viewed positively when it comes to the fiscal health of Ottawa’s bottom line.
The Liberal government has overseen a doubling of the federal debt, owing in large part to massive emergency spending during the COVID-19 pandemic. That prompted concern ahead of this week’s announcement that major new federal spending on health care could push Ottawa’s expenditures toward unsustainability.
Mostafa Askari, chief economist with the University of Ottawa’s Institute of Fiscal Studies and Democracy, said he was among those who initially feared that the Liberals would announce a plan that would hurt the government’s long-term finances.
“It looks like they are very, very careful and stingy on this thing, because it’s really not a lot of money that they’ve put on the table,” he said.
Mr. Trudeau presented the announcement as a 10-year, $196-billion plan. The government did say that only $46.2-billion of that is new money above and beyond what would have occurred under the existing formula that increases the size of health transfers in line with economic growth.
Economists question the government’s use of the $196-billion figure.
That number is based on comparing the difference between spending if health transfers were frozen at existing levels for 10 years versus the total value of currently planned additional spending ($142-billion), plus $7.8-billion related to existing bilateral agreements, plus the $46.2-billion in new spending.
“It’s very misleading to highlight the $196-billion figure,” University of Calgary economics professor Trevor Tombe said. “Comparing what is now going to happen to an alternative policy that was never going to happen doesn’t add much value to the conversation.”
Prof. Tombe published an essay before the deal’s release to express concern that Canada’s finances were on a “knife’s edge” and a hefty health-transfer increase could harm federal efforts to manage its debt.
After seeing the numbers, Prof. Tombe said the spending was “considerably more restrained” than he had expected.
“It’s a pretty modest effect overall,” he said. “Certainly not one that itself raises any sustainability concerns.”
Finance Minister Chrystia Freeland’s November fiscal update – which did not include the new health care funding – projected that the federal deficit will decline to $36.4-billion in the current 2022-23 fiscal year, from $90.2-billion the year before.
The update said the federal books could return to surplus in 2027-28. The update also said the federal debt-to-GDP ratio, which is the key metric Ms. Freeland uses to assess federal finances, will decline from 42.3 per cent this year to 37.3 per cent in 2027-28.
The update also presented a more pessimistic “downside scenario” in which the economy underperforms private-sector expectations. In that event, the books would not return to balance and the debt-to-GDP ratio would only decline to 40.6 per cent by 2027-28.
The full accounting of the health care plan’s impact on federal finances won’t be revealed until Ms. Freeland releases the 2023 budget, which has not yet been scheduled.
Rather than raising new debt concerns, one credit-rating agency said this week’s funding announcement will likely be a boost to provincial credit ratings and will have a minimal impact on federal finances.
“Although the additional funding is significant, it is unlikely to lead to a material deterioration in the federal government’s fiscal performance,” DBRS Morningstar wrote in a report this week. The agency lists Canada’s credit rating as triple-A and stable. “Incremental new spending of $46.2-billion over 10 years, or an average of $4.6-billion annually, is less than 1 per cent of total federal spending and thus should not significantly alter the federal government’s fiscal outlook.”
Economists say the way the plan is structured also avoids some potential long-term fiscal challenges.
The size of the Canada Health Transfer is projected to be $49.4-billion in 2023-24. Under the current formula, the CHT grows each year in line with nominal GDP and there is a guarantee that the base will always grow by at least 3 per cent.
Because nominal GDP accounts for inflation, there will be a 9.3-per-cent jump this year.
Economists have long expressed concern that perpetual significant increases in the CHT base would ultimately consume an unsustainable share of federal finances.
The new plan, however, reduces the impact of health-transfer increases on the long-term growth of the CHT.
Of the $46.2-billion in new spending over 10 years, only $17.3-billion will be delivered through the CHT, in the form of a guarantee over the next five years that it will increase by at least 5 per cent. The current formula is already expected to produce increases above 5 per cent over the next two years or so, limiting the impact of the pledge.
A majority of the $46.2-billion in new transfers will come through $25-billion in bilateral agreements, which are being delivered separately from the CHT and therefore will not contribute to the compounding size of the federal transfer program.
Desjardins economists Randall Bartlett and Marc Desormeaux released an analysis of Tuesday’s proposal that says federal finances will remain sustainable even after including the newly announced health care spending.
The economists said the federal debt-to-GDP ratio is still expected to remain on a downward trajectory over the coming years.
“However, it further chips away at the room the federal government has to introduce new measures in Budget 2023 and keep the debt-to-GDP ratio from moving higher,” they wrote.