On December 19, 2011, the federal Minister of Finance announced that the federal government had decided that, beginning in 2017-18 and through to 2023-24, the annual increase in the Canada Health Transfer (CHT) would be linked to a three-year moving average in nominal Gross Domestic Product (GDP).  Funding would be guaranteed to increase by at least 3 per cent per year.  With potential growth of under 2 per cent and an inflation target of 2 percent, this suggests that annual increases in health transfers will likely fall into the 3 to 4 percent range.  

This announcement came out of the blue and caught the provincial Ministers of Finance completely by surprise.  Given that the federal government had promised to extend the present funding arrangement of 6 per cent annual growth for another two years (to 2015-16), provincial Ministers of Finance and Health were preparing for an extended period of discussion and negotiation with the federal government on a new agreement.  This was all dashed with the unilateral announcement. It also eliminated any hope by health care experts that future federal funding would be contingent of reforms within the health care system.  It is also surprising in that the Minister of Finance consults on nearly everything else (EI rate-setting, budget, Anti-Money Laundering, etc) but felt that renewal of health care funding didn't warrant any outside governemnt input.

The decision to announce the new funding arrangement now was astute political strategy.  With the 2011 election commitment to increase the CHT by 6 per cent per year to 2015-16, negotiations with the provinces would likely occur in the lead up to the next election – not a politically appropriate time. Announcing the new arrangement early in this mandate removes it as a future election issue.  In addition, it was announced when Parliament is in its Christmas recess.  By the time Parliament reconvenes in late January 2012, the issue will largely be forgotten.  Legislation to enact the new formula will be required and it is expected that this will be forthcoming early in the new session or most likely in the 2012 Budget Omnibus Bill.  With a majority and a tendency for closure, it will quickly be off the radar screen.  From this perspective, it is a brilliant political strategy.  However, it does show contempt for both Parliament and the provinces.

The decision to tie the growth in the CHT to the growth in nominal GDP – a rate of growth that will be less than the current 6 per cent per year – clearly indicates that the federal government recognizes that it is facing a “structural deficit”  that needs to be confronted now. The Parliamentary Budget Office (PBO), international organizations and we have argued that the federal government is facing a small structural deficit now but that it will increase rapidly after 2015 due to demographic pressures on potential economic growth and health related spending.  To date, the Minister of Finance has denied the existence of a structural deficit and has publicly ignored any discussion of the demographic pressures. This is the first indication that he has seen the numbers and is worried, although it is doubtful he will admit this in public and/or release any internal research done on this subject.

Compared to the current 6 per cent track, the new formula generates substantial savings over time, as shown in Table 1.  Panel A shows what the CHT funding would be if the 6 per cent escalator were continued to 2023-24.  The new funding arrangement ties the escalator to a three-year moving average in nominal GDP.  Panel B shows funding levels under three scenarios – annual increases of 5 per cent, 4 per cent and 3 per cent – the latter being the guaranteed floor.

 Panel C shows the differences in funding levels between each of the three scenarios and the 6 per cent “base” case.  As expected the “savings” from the base case grow significantly over time. The “savings” from a one-percentage point reduction (the 5 per cent scenario) grow from $361 million in 2017-18 to nearly $3.5 billion in 2023-24.  The Minister of Finance suggested that the annual growth rate would be around 4 per cent per year.  This would result in “savings” of over $6.5 billion in 2023-24. Over the entire period, there would cumulative savings of almost $25 billion. In the 3 per cent scenario, the “savings” grow to nearly $10 billion in 2023-24, with cumulative savings reaching just over $36 billion.

Table 1: CHT: Impact of New Funding Arranagement" $ millions

These “savings” to the federal government are not insignificant.  Given the impact of the demographic changes, the annual growth in nominal GDP will likely be somewhat less than 4 per cent but greater than 3 per cent.

It appears that this new funding arrangement was hastily put together.  Many of the details are not yet available.  For example, the moving average consists of a forecast of nominal GDP for the first year (t) of the budget plan, an estimate for the previous year (t-1) and a preliminary estimate by Statistics Canada for the first year of the moving average (t-2).  All of these projections/estimates will be revised over time, resulting in a new (either higher or lower) estimate of CHT funding for that year.  How will be under/over payments be handled? If these adjustments are large, this could result in serious planning issues for the provinces.  If the adjustments come at the end of the fiscal year, it will be difficult for provinces to manage their budgets accordingly.

The Minister of Finance boasts about CHT funding recording record levels.  As long as CHT transfers increase, as they will under the new formula given the 3 per cent floor, each year will be a record.  Be prepared to hear this claim each and every year.

With federal health transfers now established for the next decade, the federal government has basically opted out of health care reform. Health care is a provincial responsibility and this government clearly does not want to get involved.  Given regional economic disparities, this will present major challenges for some provinces.