Hon. Ralph Goodale, M.P.
Minister of Finance
House of Commons
Dear Minister Goodale:
I am writing on behalf of the 540,000 members of the Canadian Union of Public Employees (CUPE) to outline our concerns about the federal/provincial equalization program as well as the Canada Health Transfer and the Canada Social Transfer.
There is a significant and growing fiscal imbalance between provinces, territories and the federal government that needs to be rectified as soon as possible. A recent study by the Conference Board of Canada (released by provincial finance ministers in early March) projected that, in the absence of significant reform of fiscal arrangements, the federal governments fiscal surplus will rise steadily over the next several years, reaching $78 billion by 2019/20, while provinces and territories will collectively face large deficits throughout that forecast period and a projected collective deficit of $11 billion by 2019/20.
The fiscal imbalance can be seen in the sharp contrast between the federal governments budget for 2004/05 and most of the provincial budgets tabled so far this spring. While the federal government is predicting a surplus of $5.5 billion last fiscal (actually likely to come in at $8 billion according to most forecasters) and a projected surplus of $4 billion for 2004/05, many provinces are facing deficits and implementing cutbacks.
- Newfoundland and Labradors deficit last fiscal (on a non-accrual basis) was $406.6 million and the projected deficit for 2004/05 is $ 361.6 million. Federal equalization payments are projected to decline $234 million this year.
- New Brunswick went from a planned surplus to a $21.3 million deficit last fiscal in the face of federal equalization payments that were $112 million less than anticipated.
- Quebec is implementing cutbacks and straining to reach a balanced budget this year after a $364 million deficit in 2003/04. That deficit was exacerbated by a drop in federal equalization payments which almost fully offset increased health transfers received last year. Quebec predicts overall revenues from the federal government will drop 9.6% in 2004/05 and a further 7.1% in 2005/06.
- Saskatchewan is aiming for another balanced budget, but this will be done by cutting public sector jobs, raising taxes and dipping into the provinces Fiscal Stabilization Fund. Saskatchewan received a one-time payment of $120 million from the federal government in response to concerns about the equalization formula, but the fundamental problems with the existing equalization system itself remain and will continue to pressure Saskatchewan in future years.
All four of these example provinces (as well as others) are responding to their fiscal pressures and the inadequacies of the equalization system by cutting public services, reducing public sector jobs and targeting public sector wages. This is unacceptable especially given that the federal government continues to rack up large surpluses year after year.
Equalization formula needs fundamental reform
Canadas federal/provincial/territorial equalization program is mandated by the Canadian Constitution. The objective is to ensure that all Canadians, no matter where they live, have access to the same quality of public services at comparable levels of taxation.
Until 1982, the Representative Tax System (RTS) formula was based on an average of revenue of all ten provinces. Since 1982, the formula has measured the average revenue for the five middle-income provinces instead. It is this change that is at the root of the problems facing federal/provincial equalization today.
All provinces and the territories are united in recommending a return to the ten-province formula. CUPE and our community partners support the recommendation by the provinces that a fair formula for equalization must be based on the actual fiscal capacity of all provinces, including provinces like Alberta that are blessed with great natural resource wealth.
Federal expenditures for fiscal arrangements fell 15% (or $1.6 billion) from $10.3 billion in 2002/03 to $8.7 billion in 2003/04, even though oil prices have been at record highs and Alberta has been able to generate several large annual surpluses in recent years. An equalization formula that does not take that revenue into account, yet responds to a slowing Ontario economy by sharply reducing equalization expenditures for the other provinces is an equalization formula in need of fundamental reform, not tinkering.
The announcement in the 2004 federal budget of an additional $1.5 billion for equalization over the next five years is welcome, but it is a real concern that the federal government is proposing only minor reform of the basic equalization formula itself. Given that the existing agreement had been set to expire March 31, 2004, Canadians enjoyed a historic opportunity for fundamental renewal of the equalization system. The federal governments decision to simply roll the existing formula over for another year is a delay of the changes that are essential to restore fairness and equity to the equalization system.
In addition to restoration of a formula that accounts for the real fiscal capacity of all provinces, a renewed equalization system should also remove the equalization floor, ensure that personal income tax is excluded from the RTS formula as personal income is not taxed consistently in all provinces, and crucially should ensure that equalization funding is not used to support the privatization of public services. Equalization funding should only support programs that are financed, owned, operated and delivered by the public sector.
Canada Health Transfer
Even though there has been much debate about Canadas Medicare system in recent years, it remains the subject of considerable pride and a model for the world rooted firmly in the principles of the Canada Health Act. Along with most other Canadians, CUPE members support a single payer, public health system with services that are publicly delivered. This consensus was reflected in the views expressed by so many to the Romanow Commission. If each level of government accepts responsibility for financing health care based on those principles, Canada will be successful in developing an even more effective health system.
The method of funding health care is critical to achieving that goal, yet the federal/provincial/territorial health funding partnership has changed constantly over the last few decades. Until the last year or two, the consistent trend has been a steady decrease of the proportion of overall health costs provided by the federal government.
In the early to mid-1970s, federal cash transfers accounted for 37.7% of overall provincial and territorial health expenditures. Since then, the federal share fell constantly until reaching only 9.8% in 1998/99. Recent budgets and health accords have resulted in that proportion creeping back up to approximately 16% in 2003/04.
By 2007/08, total provincial and territorial health expenditures are estimated to be $103.3 billion. According to the recent federal budget, total federal health cash transfers in 2007/08 will be $19.3 billion, or 18.7% of total provincial and territorial health expenditures. While this is an improvement, it is still far from historic levels of federal cash support and is only half of the proportion provided in the mid-1970s.
Even if one considers only physician and hospital expenditures, the trend is still the same. Federal cash transfers accounted for 46.7% of physician and hospital expenditures in 1976/77, but only 18.7% in 2001/02.
Over the last decade, the total of both public and private health care expenditures in Canada hovered at between 9 and 10 per cent of GDP. Public expenditures have been consistently in the 6 to 7 per cent of GDP range over the same period. The consistency of this contribution as a proportion of the countrys economic growth shows that Canada has the capacity to continue to invest in the good health of its citizens.
However, federal transfers for health need to keep pace with changing provincial and territorial obligations. This is especially important given that federal policies can have such a direct impact on provincial costs. For example, federal legislation (Bill C-94) created the context for increasing drug expenditures in recent years. Deep federal cuts to the Canada Health and Social Transfer in the mid-1990s were part of the imperative for health reforms that shifted patient care away from physicians or out of hospitals, yet provinces still bore the costs of replacement or complementary services such as home care and long term care. Drug costs through provincial formularies increased as reforms shifted patients out of acute care settings to other health venues.
Good quality, universal accessible public health care is a priority for Canadians. It is a project that must be shared fairly by all levels of government. As we approach the July First Ministers meeting, the federal government must make improved and predictable health care financing a priority. CUPE recommends that the federal government set out a detailed plan for moving back to historical levels of federal financing for health care. The federal government should commit to levels of ongoing health transfers to the provinces and territories consistent with those that the original architects of our Medicare system envisioned.
Canada Social Transfer
When the former Established Programs Financing (EPF) and Canada Assistance Program (CAP) were merged into the Canada Health and Social Transfer (CHST) in 1996, federal spending for these purposes was cut by $7.4 billion so that program spending was reduced from 16.2% of GDP to 13.1% of GDP in that very short period. The social system in Canada is still reeling from these sharp cuts in combination with federal retreat from financial support for affordable housing. The alarming growth of homelessness and poverty in Canadian cities in subsequent years are one obvious result. Now that the federal budget is in a consistent surplus position, we need a renewed national commitment to fighting poverty and homelessness, through restored investment in needed social and educational programs.
The federal government could begin by boosting federal transfers for social purposes back to the levels that were in place before the severe cuts of the mid- 1990s. Future transfers should then be indexed to match increases in the consumer price index.
The separation of the former CHST into two distinct transfers for health and social programs is a positive step forward in terms of transparency. However, the new Canada Social Transfer is still not sufficiently transparent, since it is a catch all for so many different social and educational purposes.
CUPE recommends that there be clear separate accounting of federal cash transfers for each of the categories of social assistance, social services, early childhood care and education and post-secondary education.
In addition, the federal government should lead discussions with the provinces and territories on common standards for social assistance and services. For example, the recent announcement by the Quebec government of a guaranteed minimum income appears encouraging and may be a model that can be built on across the country. As part of this process, the federal government should work with the provinces to discourage those that are clawing back the Canada Child Tax Benefit from families with children on welfare.
While CUPE welcomes the small increases in child care funding announced in the 2004 budget, Canada is still a long way from the national public child care system which has been promised for so long. We urge the federal government to commit to a fully inclusive, publicly funded, pan-Canadian child care system with funding of $3.8 billion by 2006/07.
Finally, CUPE would like to register its concern about the Voluntary Sector Initiative and the move towards the so-called Social Economy that are signaled in the recent Throne Speech and Budget. While we respect and are grateful to the citizens who serve voluntarily on numerous boards of non-profit organizations across the country, Canada cannot build a modern, equitable social system through an ad-hoc and under-funded patchwork of voluntary boards and agencies. We need adequate government investment, public administration, clear national leadership and pan-Canadian standards to ensure all Canadians have the opportunity to succeed.
Thank you for your attention to the points in this letter. Our country has a tremendous opportunity at this time to make a long-term improvement to the economic, health and social well-being of all its citizens, but this will only be achieved with a federal commitment to fundamental reform of equalization and increased levels of health, education and social support from the Government of Canada.
Canadian Union of Public Employees